TESTIMONY OF
                               
                     BRIAN LANE, DIRECTOR
                DIVISION OF CORPORATION FINANCE
            U.S. SECURITIES AND EXCHANGE COMMISSION
                               
                     CONCERNING H.R. 3310,
   THE "SMALL BUSINESS PAPERWORK REDUCTION ACT AMENDMENTS OF
                             1998"
                               
                               
     BEFORE THE SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,
           NATURAL RESOURCES AND REGULATORY AFFAIRS
      OF THE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
                               
                               
                 U.S. HOUSE OF REPRESENTATIVES
                               
                        MARCH 17, 1998
                               
            U.S. SECURITIES AND EXCHANGE COMMISSION
                    450 FIFTH STREET, N.W.
                    WASHINGTON, D.C.  20549
                               


Mr. Chairman, Members of the Subcommittee:

My name is Brian Lane.  I am the director of the Division of
Corporation Finance of the Securities and Exchange Commission
("SEC" or "Commission").  The Division of Corporation Finance,
through its Small Business Office, is at the forefront of the
Commission's efforts to promote small business capital
formation.  I am very pleased to have the opportunity today to
testify on behalf of the Commission concerning H.R. 3310, the
"Small Business Paperwork Reduction Act of 1998."

We support the goals of H.R. 3310 -- to limit the burdens that
federal regulation imposes on small businesses.  It is
important that good faith, or inadvertent, first-time
violations not be the basis for routine fines.  The Commission
is extremely sensitive to the needs of small business and is
engaged in ongoing efforts to respond to small business
concerns.  Moreover, our examination program is geared towards
resolving informally compliance problems that are technical,
inadvertent, or do not threaten significant harm to investors
or the markets.  Thus, the theme and goals of H.R. 3310 strike
a resonant chord with the Commission.

However, we are concerned that the broad sweep of H.R. 3310's
penalty exception, as currently drafted, could inadvertently
protect intentional or serious misconduct that would harm
investors.

In our view, the bill could be improved by:

     expanding the existing exception for "public health and
safety" to include fines for violations that involve investor
protection or the integrity of the securities markets; and

     narrowing the penalty exception to apply only to "good
faith" violations.  This would permit fines (i) when the
conduct involves fraud, intentional wrongdoing, or destruction
of records, and (ii) when the owner or principal of the small
business is a repeat offender.

THE COMMISSION'S SMALL BUSINESS INITIATIVES

Before commenting more fully on the specifics of H.R. 3310, I
would like to describe the Commission's longstanding efforts
to assist small business.  The Commission understands the
importance of small business to the U.S. economy, and is
committed to addressing the special concerns of small
business.  Over the years, the SEC has worked to improve
communications between the SEC and the small business
community.

In its first Annual Report, in 1935, the Commission stated
that it would provide informal guidance to the securities
industry, both to foster improved compliance and to establish
a spirit of cooperation with the public.[1]  This spirit
continues to play an important role in the Commission's
programs.  The SEC works in partnership with industry, self-
regulatory organizations and the public to set standards that
protect investor and market confidence while reflecting
sensitivity to the realities of the business world.  Our
efforts specifically to aid small business fall into two broad
categories: (1) cutting through red tape and providing
compliance assistance, and (2) reviewing existing and proposed
rules for ways to reduce burdens on small businesses.

Cutting Through Red Tape and Providing Compliance Assistance.

* The SEC's Small Business Office:  The Office, which was
  created in 1979 and enhanced significantly in 1996, serves as
  a liaison between the Commission and small business.  The
  Office now directs the Commission's small business rulemaking
  initiatives and provides uniform review of small business
  filings and disclosures.

* The SEC's Annual Government-Small Business Forum:  Begun
  in 1982, this forum is the only annual government-sponsored
  national small business gathering that offers small business
  the chance to tell federal and state government officials how
  the laws, rules and regulations impact their ability to raise
  capital.

* SEC-Small Business Town Hall Meetings:  The Commission is
  conducting "town hall" meetings with small businesses around
  the country, and has held nine so far.  These meetings are
  designed to educate small businesses about the many
  opportunities to raise capital.  They also help the Commission
  learn more about the problems small businesses face in raising
  capital, and design programs that meet small businesses' needs
  while protecting investors.

* SEC Web Site:  The Commission operates a web site with
  special pages targeted to small businesses.  These pages
  provide access to proposed new regulations affecting small
  businesses, as well as information about specific issues of
  current interest.

* Public Inquiries:  Each major office of the Commission
  has staff who are available to answer questions from members
  of the public, including small businesses, by telephone and e-
  mail.

Notably, because of programs like these, when the Small
Business Regulatory Enforcement Fairness Act ("SBREFA")[2] was
passed, Congress recognized the Commission as one of several
agencies which "already have established successful programs
to provide compliance assistance."[3]

Reviewing Existing and Proposed Rules for Ways to Reduce
Burdens on Small Businesses.

* Plain English:  Nothing is more frustrating than trying
  to comply with regulations that are difficult to understand
  because they are written in jargon or legalese.  The
  Commission has made efforts to issue regulations and releases
  in "plain English" and has required registrants to use plain
  English in certain of their disclosures to investors.  At the
  end of the day, plain English disclosure is shorter and less
  expensive and should be particularly helpful for small
  businesses.

* Small Business Initiatives:  Beginning in 1992, the SEC
  launched a major regulatory initiative to make raising capital
  easier for small businesses.  Rule changes arising out of this
  initiative simplified the process for registering securities
  of small business issuers for public sale; increased the
  dollar threshold for exemptions permitting unregistered public
  and private sales of securities; and simplified ongoing
  periodic reporting requirements of registered small issuers.

In 1996 Congress enacted SBREFA, which required agencies to
publish small business compliance guides, to establish
programs of informal guidance for small businesses, and to
establish policies or programs to reduce or waive penalties
for small entities.  The Commission has undertaken these
steps, and will soon report to Congress about its experience
with these initiatives.

At the end of 1997, the National Ombudsman appointed under
SBREFA singled out the SEC as one of a group of agencies which
"deserve special commendation, as they are clearly moving
toward a more cooperative regulatory environment for their
small business customers."  He stated in his 1997 Report to
Congress on Regulatory Fairness that the Commission
"deserve[s] high marks."[4]

Limiting Enforcement Actions to the Most Serious Violations.

The Commission's examination and inspection staff attempts to
exercise its discretion to resolve compliance problems
informally, without enforcement action, when deficiencies are
technical, inadvertent or do not threaten significant harm to
investors, markets or the public.

When SEC examiners identify deficiencies, they generally
provide the registrant with a "deficiency letter" identifying
the problems and requiring appropriate remedial steps.  In
instances where examiners identify compliance failures that
appear numerous, more serious in nature, or systemic, but do
not appear to warrant enforcement action, they may also hold a
conference call or an in-person meeting with the registrant to
discuss the problems and the remedial steps the registrant
intends to take.  Most SEC examinations are resolved through
the deficiency letter process.[5]

When the registrant's compliance failures appear too serious
for informal resolution, such as when fraud is discovered or
when investor funds or securities are at risk, the examination
staff will refer the matter to the Division of Enforcement.[6]

In addition, when the Division of Enforcement intends to
recommend enforcement action, it is Commission policy
generally to provide notice to the proposed respondents,[7]
and to afford them an opportunity to present their side of the
matter.[8]  This process ensures that respondents have an
opportunity to directly inform the Commission, which
authorizes all enforcement matters, when they believe that a
violation was inadvertent and that formal enforcement action
is not warranted.

THE SEC'S INVESTOR PROTECTION AND MARKET REGULATION MANDATE

While the Commission has sought to address the needs of small
businesses, our commitment to limiting burdensome regulation
or unnecessary paperwork must be viewed in the context of the
overall size and complexity of the securities markets and the
goals of the federal securities laws.

The United States' securities markets involve securities and
trades worth trillions of dollars.  Thousands of businesses
look to the capital markets for the funds needed to grow and
to compete in a global economy.  Millions of Americans invest
in these markets in their own accounts, through mutual funds,
or through employee pension funds and retirement accounts.
These millions of investors and their families count on their
investments to pay for education, to save for retirement or,
for those already retired, to meet current expenses.

The federal securities laws mandate the protection of
investors and the maintenance of fair, efficient and
competitive securities markets.  In enacting the federal
securities laws, Congress rejected a scheme of direct federal
regulation in favor of a system that provides information to
investors and gives them the opportunity to make informed
choices.  The SEC implements that mandate and protects
investors and markets by requiring full, fair and truthful
disclosure of material information to investors.  Companies
that sell stock or other securities to the public are
generally required to disclose information about their
businesses as well as ongoing information about their results.
Similarly, market professionals -- brokers, dealers, mutual
funds, other investment companies, investment advisers, and
transfer agents -- are required to make truthful disclosures
to clients or other market participants about their
activities.  They are also required to keep records necessary
to account for client funds and their own activities in the
market.

The Commission carefully weighs the impact of its rules on all
entities, including small businesses.  However, the
Commission's primary considerations as to the adoption and
enforcement of each rule must be the effects of the rule on
investor protection and market integrity.  As a general
matter, uniform rules must be applied to firms that are part
of a larger national market system to ensure fair, efficient
markets and the same level of protection for all investors,
regardless of the size of the firm to which they entrust their
funds.

ANALYSIS OF H.R. 3310

As noted above, the Commission supports the goals of H.R.
3310, which are to reduce paperwork burdens on small business
and to provide relief for inadvertent first-time paperwork
violations.  To summarize, H.R. 3310 has four central
requirements with respect to collection of information by
agencies.  It would limit an agency's ability to enforce
existing information collection requirements through the use
of civil fines.[9]  It would require agencies to publish
annually a list of requirements applicable to small business
concerns.[10]  It would require each agency to establish one
point of contact as a liaison to small business concerns.[11]
And it would create a task force to study and report to
Congress about ways to lessen paperwork burdens on small
businesses.[12]

The Commission's main concern with H.R. 3310 is its provision
to limit an agency's ability to impose civil fines.  The
language of the bill is so broad as to sweep within its "safe
harbor" serious or deliberate violations that could harm
investors or the securities markets.  The bill would be
strengthened in our view by amendments that distinguish
between minor violations and those recordkeeping violations of
a more serious nature -- which could harm investors or the
markets more generally.  We discuss this point in greater
detail below.

Limitations on Civil Fines for First-Time Violators.

H.R. 3310 would generally prohibit civil fines on a small
business "in any case of a first-time violation regarding
collection of information by the agency" if the small business
corrects the violation within six months of notice by the
agency.  A fine could be imposed only if the head of the
agency determines that the violation has caused actual serious
harm to the public health or safety.

Although the Commission generally seeks to resolve technical
recordkeeping violations informally (regardless of the size of
the company), we believe there may be instances where no
disclosure or partial disclosure was intentionally done to
advance a fraud.  The Commission would like the flexibility to
continue to seek fines in egregious cases, and we fear that a
"public health or safety" standard would be construed so
narrowly as to exclude economic harm.  Also, the six-month
"grace period" could be too long in a marketplace that depends
on immediate, accurate information.  Finally, repeat violators
(who relocate to open new firms) may abuse the first-time
exception from penalties.  Thus, this provision is troubling
for a number of reasons.

(1) There are first-time recordkeeping violations which are
serious, and should be subject to fines.  As currently
drafted, H.R. 3310 does not sufficiently distinguish
inadvertent or trivial violations that should not be
sanctioned with fines from more serious violations.

Under the Paperwork Reduction Act ("PRA"),[13] the term
"collection of information" is defined to include not only
recordkeeping and reporting requirements imposed on a business
by a government agency, but also any disclosures that an
agency requires a business to make to third parties, such as
clients or prospective client.[14]  Thus, the reach of the PRA
includes information provided to investors to protect them
from fraud, as well as enable them to make informed investment
choices.  For example, a company's prospectus, annual reports,
and customer confirmations of securities transactions are all
"collections of information" under the PRA.  Similarly, other
important "collections of information" include items such as
broker stock quotations -- which are required to be
transmitted accurately and rapidly to make the markets work
properly and fairly.

Under H.R. 3310, violations involving these important
documents are exempted from civil fines as well as those more
trivial "paperwork" violations that may be imposed for more
bureaucratic purposes.  Here are examples of some of the
"important" SEC paperwork requirements that would be subject
to penalty exemption under H.R. 3310.

* The Commission's penny stock rules, which were mandated
  by Congress, provide investor protections through both
  recordkeeping and disclosure requirements.  These rules
  require that certain disclosures be given, and that customers
  agree to certain types of transactions, before the
  transactions are effected.  Violations of this type of rule
  harm investors by denying them information necessary to make
  an informed decision, and in many cases, lead to the purchase
  of disastrous investments in speculative issues.

* Another example is in the reporting of a public company's
  earnings.  Virtually every accounting fraud by a public
  company involves a violation of the requirement to accurately
  keep the company's books and records.  Protection for
  companies that make inadvertent or innocent mistakes is
  already built into the law by the requirement that violations
  be material.

* Another type of serious recordkeeping violations involves
  the deliberate falsification of records and record
  destruction.  These kinds of violations can mask serious
  fraud.  For example, the Commission recently sued eight floor
  brokers of the New York Stock Exchange for conducting what the
  Exchange's chairman has described as a "massive falsification
  of books and records" to conceal illegal trading for their own
  account.[15] The Commission believes that cases involving this
  type of illegal conduct should not be trivialized or treated
  with leniency.  Often we find that misleading disclosure is
  used to draw investors into a fraud, and false recordkeeping
  conceals it from regulators long enough for wrongdoers to
  profit at the expense of innocent investors.

* Concerning a more time-sensitive matter, the Commission
  currently is engaging in a serious Year 2000 initiative which,
  in part, would require certain issuers and market participants
  to disclose material deficiencies in their systems' Year 2000
  readiness.  Any six-month grace period would not seem
  appropriate for failure to make such disclosures.

The Commission believes that fines are an important
enforcement tool.  The threat of civil fines deters unlawful
conduct by removing economic incentives to cut corners in
recordkeeping or compliance.  Congress recognized the
importance of civil fines to upholding the federal securities
laws when, in 1990, it gave the Commission new authority to
assess penalties in administrative proceedings against
regulated brokers, investment advisers and other regulated
persons.[16]  Congress also gave the Commission authority to
seek civil penalties in court actions against any violator,
whether or not registered with the Commission.

Notably, Congress created three tiers of possible Commission
fines, which link the amount of fines that can be imposed to
the type of violations found and the degree of harm caused or
the wrongful gain obtained.  Thus, the securities regulatory
scheme already provides for a penalty scheme that
distinguishes more serious violations from those that are less
important.  A case by case approach has many benefits over a
flat prohibition against civil penalties for first-time
violators.

(2) The six-month provision may become an excuse for delay in
correcting mistakes.  The securities markets rely on
immediate, accurate information that moves at the speed of
light.  As described above, the Commission has an active
inspections program.  When violations are discovered, the
staff works with registrants to resolve recordkeeping
violations with informal action.  In most cases, however,
violations should and can be remedied in 30 days or less.

The proposed amendments may inadvertently be subject to the
interpretation that Congress created a presumption that
wrongdoers have a six-month safe harbor to correct even the
most serious mistakes.  An individual investor may choose not
to balance their checkbook each month.  It is unacceptable,
however, to think that a broker could ignore customer
confirmation and other recordkeeping requirements, lose
customer funds, and be allowed up to six months to correct its
records and provide customers with relief.

(3) An exception for all first-time violators may be
unintentionally broad.  The grace period for first-time
violators allows an unscrupulous operator to regain protection
from civil fines each time he establishes a new entity.  In
our experience, when the SEC moves to shut down a broker-
dealer engaged in manipulating penny stocks, the rogue brokers
and scam artists from the firm named in our enforcement action
will quickly form a new firm and start up operations again.
Under H.R. 3310, the new firm would have another "free pass"
for a first-time violation.

A related difficulty under the proposed amendments will be
determining when there has been notice of a "first-time"
violation that triggers the grace period.  As described, the
Commission has a vigorous inspections program and a
longstanding policy of leaving to the staff to informally
resolve minor, technical or inadvertent deficiencies.  The
success of this program lies in large measure with the
understanding that continued inattention to the requirements
of the securities laws could result in formal action.  In the
event that informal resolution does not cure a problem,
violators should not automatically have the benefit of a safe
harbor.  The bill does not address whether a "first-time"
violation is established simply by agency notice, or whether
there must be any additional process.

Suggestions for Improvement.

Generally, the Commission believes that the concept of an
automatic exemption from civil fines for first-time violators
is not as effective as one tailored to prevent abuses.
Whether such a provision should be included in the PRA may
best be made a subject for study and consideration by the Task
Force also proposed in H.R. 3310.  If the provision is given
detailed consideration, we suggest the following:

* The exception that permits fines for violations that are
  found to pose an imminent and substantial danger to the public
  health or safety should be expanded to include violations that
  involve investor protection or the integrity of the securities
  markets.

* The penalty exception should be limited to "good faith"
  violations.  This would permit fines for violations (i) when
  the conduct involves fraud, intentional wrongdoing, or
  destruction of records, and (ii) when the owner or principal
  of the small business is a repeat offender.

* As a more technical point, we suggest that the bill's
  definition of "small business" conform to the definition of
  "small business" that is currently in the Regulatory
  Flexibility Act and used now by all federal agencies.

Task Force to Study Streamlining of Paperwork Requirements.

The Commission also would like to take this opportunity to
comment on the proposed task force to study the PRA.  The
Commission agrees that a task force should be established for
the purposes of studying the PRA, but believes that its
mandate should be broader, and should include problems with
the existing statute.  In addition, provisions should be made
for input by agencies such as the SEC.

Although the SEC has complied with the mandates of the PRA --
we have found it, in some situations, to be a roadblock to
informed regulation, or even efforts to reduce regulatory
burdens.  For example, the PRA keeps us from informally
surveying securities market participants regarding how our
rules are working.  To talk to more than nine firms, we must
obtain OMB approval, a bureaucratic process that can constrain
complete and timely discussion of regulatory issues.
Similarly, we cannot even survey firms for cost-benefit
analysis of proposed rules without going through an OMB
clearance process.  Even when a member of Congress asks us to
study a proposal -- such as disclosure of charitable giving by
public companies -- we have been constrained by the PRA in
collecting information necessary to complete the inquiry.

Finally, we would like to suggest that the PRA be amended to
reduce the OMB paperwork clearance process when forms are
being eliminated or streamlined.

We would like issues such as these to be considered in any PRA
study.

CONCLUSION

The SEC supports this Subcommittee's efforts to reduce
paperwork burdens on small business.  The securities laws
mandate full and fair disclosure to investors and the public.
Efforts to streamline paperwork burdens must distinguish with
care between "collection of information" requirements that
exist to verify regulatory compliance, but do not directly
reach the public, and those requirements that involve direct
communication by a business with the public or with other
market participants.  Great care must also be shown in
distinguishing immaterial, inadvertent or technical mistakes
from the deliberate falsification or destruction of records.

The nation's capital markets are a crown jewel.  We must be
cautious not to adopt changes that appear to weaken the
integrity of those markets or diminish investor confidence in
the safety of investing with or through any firm, whether
large or small.  The Commission has concerns that the "broad
brush" approach of the proposed amendments will inadvertently
diminish investor protection.

If small firms are to flourish, investors need to have
confidence in the honesty of the firms.  Small businesses have
earned the confidence of investors, large and small.  We must
not let this confidence be eroded by appearing to tolerate
intentional violations by small business.

The Commission looks forward to an opportunity to work further
with the Committee on these important issues.  The Commission
staff is available to consult with the Committee regarding
alternatives that will protect investors and the securities
markets.


ENDNOTES

1/   SEC, 1 Annual Report 9-10 (1935).

2/   Pub. L. No. 104-122, title II, 110 Stat. 857 to 874 (Mar.
     29,  1996),  codified at 15 U.S.C.  657, 5  U.S.C.   801-
     808.

3/   "Small  Business  Regulatory  Enforcement  Act  --  Joint
     Managers'   Statement   of   Legislative   History    and
     Congressional Intent," 142 Cong. Rec. S3234, S3243 (daily
     ed. Mar. 29, 1996).

4/   National   Ombudsman,  Report  to  Congress:   Regulatory
     Fairness at 24 (December 31, 1997).  See also id.  at  5,
     26, 34.

5/   In  1997,  the  Commission staff conducted  approximately
     2300   examinations.   Approximately  64%  of  investment
     adviser,  80% of investment company, and 47%  of  broker-
     dealer   examinations  were  concluded   by   issuing   a
     deficiency letter.

6/   In  1997, approximately 5% of investment adviser,  7%  of
     investment company, and 28% of broker-dealer examinations
     resulted in a referral to Enforcement.

7/   "Respondent"  is  used generically in this  testimony  to
     refer   either   to  respondents  in  an   administrative
     proceeding or defendants in a civil court action.

8/   See  17 C.F.R.  203.7(d) (Wells submissions).  Notice  is
     not  given, for example, when emergency relief is sought,
     or  if  warning  to  a  proposed  respondent  could  harm
     investors  or  the  public  through  the  dissipation  of
     assets,  destruction  of records, flight  or  other  such
     action.

9/   Sec. 2(b) [i)(1)(B)].

10/  Sec. 2(a)(6).

11/  Sec. 2(b) [(i)(1)(A)].

12/  Sec. 3.

13/  Codified at 44 U.S.C.  3501-3520.

14/  44 U.S.C.  3502(3).
     

15/  See Dean Starkman and Patrick McGeehan, "Floor Brokers on
     Big  Board Charged in Scheme," Wall Street Journal,  Feb.
     26, 1998, at C1.
     
     The Commission's complaint alleges that the floor brokers
     concealed their personal trading by creating false  order
     tickets and false monthly invoices, which showed that the
     trades  were executed for a co-conspirator client broker.
     The  Commission charged the floor brokers with  violating
     the recordkeeping requirements of the Securities Exchange
     Act  and  its  implementing regulations.  The  Commission
     alleges that, through this scheme, the floor brokers made
     almost  $9 million in illegal profits.  See Complaint  of
     the  Securities and Exchange Commission, SEC  v.  Oakford
     Corp. (S.D.N.Y.) (98 Civ. 1366).
     
     This scheme, if proven, will be a first violation for all
     of  the floor brokers charged.  Three of the eight  floor
     brokers   involved  in  the  scheme  qualify  as   "small
     businesses" under definitions applicable to the SEC under
     the  Regulatory Flexibility Act.  If H.R. 3310  had  been
     the  law  at  the  time, the Commission could  have  been
     forced to seek lesser penalties against the smaller floor
     brokers, although they were just as culpable as the other
     defendants.
     
16/  Securities  Enforcement and Penny  Stock  Reform  Act  of
     1990, Pub. L. No. 101-429, 104 Stat. 931 (Oct. 15, 1990),
     codified at 15 U.S.C.  78u-2, 78u-3, 78q-2.