II

106TH CONGRESS

1ST SESSION S. 1189

To allow Federal securities enforcement actions to be predicated on State

securities enforcement actions, to prevent migration of rogue securities

brokers between and among financial services industries, and for other

purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 9, 1999

Ms. COLLINS (for herself, Mr. CLELAND, and Mr. GREGG) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing and Urban Affairs

A BILL

To allow Federal securities enforcement actions to be predicated on State securities enforcement actions, to prevent

migration of rogue securities brokers between and among

financial services industries, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Microcap Fraud Pre5 vention Act of 1999’’.
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1 SEC. 2. AMENDMENTS TO THE SECURITIES EXCHANGE ACT

2 OF 1934.

3 Section 15(b)(4) of the Securities Exchange Act of

4 1934 (15 U.S.C. 78o(b)(4)) is amended—

5 (1) by striking subparagraph (F) and inserting

6 the following:

7 ‘‘(F) is subject to any order of the Commission

8 barring or suspending the right of the person to be

9 associated with a broker or dealer;’’;

10 (2) in subparagraph (G)—

11 (A) in clause (i), by striking ‘‘has omitted’’

12 and all that follows through the semicolon and

13 inserting ‘‘omitted to state in any such applica14 tion, report, or proceeding any material fact

15 that is required to be stated therein;’’;

16 (B) in clause (ii)—

17 (i) by striking ‘‘transactions in securi18 ties,’’ and inserting ‘‘securities, banking,

19 insurance,’’; and

20 (ii) by adding ‘‘or’’ at the end; and

21 (C) in clause (iii)—

22 (i) by inserting ‘‘other’’ after ‘‘viola23 tion by any’’;

24 (ii) by striking ‘‘empowering a foreign

25 financial regulatory authority regarding

26 transactions in securities,’’ and inserting
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1 ‘‘regarding securities, banking, insur2 ance,’’;

3 (iii) by striking ‘‘has been found, by a

4 foreign financial regulatory authority,’’;

5 and

6 (iv) by striking the period at the end

7 and inserting ‘‘; or’’; and

8 (3) by adding at the end the following:

9 ‘‘(H) is subject to any order of a State securi10 ties commission (or any agency or office performing

11 like functions), State authority that supervises or ex12 amines financial institutions, State insurance com13 mission (or any agency or office performing like

14 functions), or an appropriate Federal banking agen15 cy (as defined in section 3 of the Federal Deposit

16 Insurance Act) that—

17 ‘‘(i) bars such person from association with

18 an entity regulated by such commission, author19 ity, agency, or officer, or from engaging in the

20 business of securities, insurance, or banking; or

21 ‘‘(ii) constitutes a final order based on vio22 lations of any laws or regulations that prohibit

23 fraudulent, manipulative, or deceptive con24 duct.’’.
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1 SEC. 3. AMENDMENTS TO THE INVESTMENT ADVISERS ACT

2 OF 1940.

3 Section 203 of the Investment Advisers Act of 1940

4 (15 U.S.C. 80b–3) is amended—

5 (1) in subsection (e)—

6 (A) by striking paragraphs (7) and (8) and

7 inserting the following:

8 ‘‘(7) is subject to any order of the Commission

9 barring or suspending the right of the person to be

10 associated with an investment adviser;

11 ‘‘(8) has been found by a foreign financial regu12 latory authority to have—

13 ‘‘(A) made or caused to be made in any

14 application for registration or report required to

15 be filed with, or in any proceeding before, that

16 foreign financial regulatory authority, any

17 statement that was, at the time and in light of

18 the circumstances under which it was made,

19 false or misleading with respect to any material

20 fact, or omitted to state in any application or

21 report filed with, or in any proceeding before,

22 that foreign financial regulatory authority any

23 material fact that is required to be stated in the

24 application, report, or proceeding;

25 ‘‘(B) violated any foreign statute or regula26 tion regarding securities, banking, insurance, or
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1 contracts of sale of a commodity for future de2 livery traded on or subject to the rules of a con3 tract market or any board of trade; or

4 ‘‘(C) aided, abetted, counseled, com5 manded, induced, or procured the violation by

6 any other person of any foreign statute or regu7 lation regarding securities, banking, insurance,

8 or contracts of sale of a commodity for future

9 delivery traded on or subject to the rules of a

10 contract market or any board of trade, or failed

11 reasonably to supervise, with a view to pre12 venting violations of any such statute or regula13 tion, another person who commits such a viola14 tion, if the other person is subject to its super15 vision; or

16 ‘‘(9) is subject to any order of a State securities

17 commission (or any agency or office performing like

18 functions), State authority that supervises or exam19 ines financial institutions, State insurance commis20 sion (or any agency or office performing like func21 tions), or an appropriate Federal banking agency (as

22 defined in section 3 of the Federal Deposit Insur23 ance Act) that—

24 ‘‘(A) bars such investment adviser or per25 son from association with an entity regulated by
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1 such commission, authority, agency, or officer,

2 or from engaging in the business of securities,

3 insurance, or banking; or

4 ‘‘(B) constitutes a final order based on vio5 lations of any laws or regulations that prohibit

6 fraudulent, manipulative, or deceptive con7 duct.’’; and

8 (2) in subsection (f)—

9 (A) by striking ‘‘(6), or (8)’’ and inserting

10 ‘‘(6), (8), or (9)’’; and

11 (B) by striking ‘‘paragraph (2)’’ and in12 serting ‘‘paragraph (2) or (3)’’.

13 SEC. 4. AMENDMENTS TO THE INVESTMENT COMPANY ACT

14 OF 1940.

15 Section 9(b) of the Investment Company Act of 1940

16 (15 U.S.C. 80a–9(b)) is amended—

17 (1) in paragraph (4), by striking subparagraphs

18 (A) through (C) and inserting the following:

19 ‘‘(A) made or caused to be made in any

20 application for registration or report required to

21 be filed with, or in any proceeding before, that

22 foreign financial regulatory authority, any

23 statement that was, at the time and in light of

24 the circumstances under which it was made,

25 false or misleading with respect to any material
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1 fact, or omitted to state in any application or

2 report filed with, or in any proceeding before,

3 that foreign financial regulatory authority any

4 material fact that is required to be stated in the

5 application, report, or proceeding;

6 ‘‘(B) violated any foreign statute or regula7 tion regarding securities, banking, insurance, or

8 contracts of sale of a commodity for future de9 livery traded on or subject to the rules of a con10 tract market or any board of trade; or

11 ‘‘(C) aided, abetted, counseled, com12 manded, induced, or procured the violation by

13 any other person of any foreign statute or regu14 lation regarding securities, banking, insurance,

15 or contracts of sale of a commodity for future

16 delivery traded on or subject to the rules of a

17 contract market or any board of trade;’’;

18 (2) in paragraph (5), by striking ‘‘or’’ at the

19 end; and

20 (3) in paragraph (6), by striking the period at

21 the end and inserting the following: ‘‘; or

22 ‘‘(7) is subject to any order of a State securities

23 commission (or any agency or office performing like

24 functions), State authority that supervises or exam25 ines financial institutions, State insurance commis-
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1 sion (or any agency or office performing like func2 tions), or an appropriate Federal banking agency (as

3 defined in section 3 of the Federal Deposit Insur4 ance Act) that—

5 ‘‘(A) bars such person from association

6 with an entity regulated by such commission,

7 authority, agency, or officer, or from engaging

8 in the business of securities, insurance, or

9 banking; or

10 ‘‘(B) constitutes a final order based on vio11 lations of any laws or regulations that prohibit

12 fraudulent, manipulative, or deceptive con13 duct.’’.

14 SEC. 5. CONFORMING AMENDMENTS.

15 (a) MUNICIPAL SECURITIES DEALERS.—Section

16 15B(c) of the Securities Exchange Act of 1934 (15 U.S.C.

17 78o–4(c)) is amended—

18 (1) in paragraph (2), by striking ‘‘act or omis19 sion’’ and all that follows through the period and in20 serting ‘‘act, or is subject to an order or finding,

21 enumerated in subparagraph (A), (D), (E), (G), or

22 (H) of section 15(b)(4), has been convicted of any

23 offense specified in section 15(b)(4)(B) within 10

24 years of the commencement of the proceedings under

25 this paragraph, or is enjoined from any action, con-
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1 duct, or practice specified in section 15(b)(4)(C).’’;

2 and

3 (2) in paragraph (4), in the first sentence, by

4 striking ‘‘any act or ommission’’ and all that follows

5 through the period and inserting ‘‘or omitted any

6 act, or is subject to an order or finding, enumerated

7 in subparagraph (A), (D), (E), (G), or (H) of sec8 tion 15(b)(4), has been convicted of any offense

9 specified in section 15(b)(4)(B) within 10 years of

10 the commencement of the proceedings under this

11 paragraph, or is enjoined from any action, conduct,

12 or practice specified in section 15(b)(4)(C).’’.

13 (b) GOVERNMENT SECURITIES BROKERS AND DEAL14 ERS.—Section 15C(c)(1) of the Securities Exchange Act

15 of 1934 (15 U.S.C. 78o–5(c)(1)) is amended—

16 (1) in subparagraph (A), by striking ‘‘or omis17 sion enumerated in subparagraph (A), (D), (E), or

18 (G) of paragraph (4) of section 15(b) of this title’’

19 and inserting ‘‘, or is subject to an order or finding,

20 enumerated in subparagraph (A), (D), (E), (G), or

21 (H) of section 15(b)(4)’’; and

22 (2) in subparagraph (C), by striking ‘‘or omis23 sion enumerated in subparagraph (A), (D), (E), or

24 (G) of paragraph (4) of section 15(b) of this title’’

25 and inserting ‘‘, or is subject to an order or finding,
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1 enumerated in subparagraph (A), (D), (E), (G), or

2 (H) of section 15(b)(4)’’.

3 (c) CLEARING AGENCIES.—Section 17A(c) of the Se4 curities Exchange Act of 1934 (15 U.S.C. 78q–1(c)) is

5 amended—

6 (1) in paragraph (3)(A), by striking ‘‘any act

7 enumerated in subparagraph (A), (D), (E), or (G) of

8 paragraph (4) of section 15(b) of this title’’ and in9 serting ‘‘any act, or is subject to an order or finding,

10 enumerated in subparagraph (A), (D), (E), (G), or

11 (H) of section 15(b)(4)’’; and

12 (2) in paragraph (4)(C), in the first sentence,

13 by striking ‘‘any act enumerated in subparagraph

14 (A), (D), (E), or (G) of paragraph (4) of section

15 15(b) of this title’’ and inserting ‘‘any act, or is sub16 ject to an order or finding, enumerated in subpara17 graph (A), (D), (E), (G), or (H) of section

18 15(b)(4)’’.

19 (d) STATUTORY DISQUALIFICATIONS.—Section

20 3(a)(39) of the Securities Exchange Act of 1934 (15

21 U.S.C. 78c(a)(39)) is amended—

22 (1) in subparagraph (B)(i), by striking ‘‘order

23 to’’ and inserting ‘‘order of’’; and

24 (2) in subparagraph (F)—
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1 (A) by striking ‘‘any act enumerated in

2 subparagraph (D), (E), or (G) of paragraph (4)

3 of section 15(b) of this title’’ and inserting

4 ‘‘any act, or is subject to an order or finding,

5 enumerated in subparagraph (D), (E), (G), or

6 (H) of section 15(b)(4)’’;

7 (B) by striking ‘‘subparagraph (B) of such

8 paragraph (4)’’ and inserting ‘‘section

9 15(b)(4)(B)’’; and

10 (C) by striking ‘‘subparagraph (C) of such

11 paragraph (4)’’ and inserting ‘‘section

12 15(b)(4)(C)’’.

13 SEC. 6. BROADENING OF PENNY STOCK BAR.

14 Section 15(b)(6) of the Securities Exchange Act of

15 1934 (15 U.S.C. 78o(b)(6)) is amended—

16 (1) in subparagraph (A)—

17 (A) by striking ‘‘of any penny stock’’ and

18 inserting ‘‘of any noncovered security’’;

19 (B) by striking ‘‘of penny stock’’ and in20 serting ‘‘of any noncovered security’’; and

21 (C) in clause (i), by striking ‘‘or omission

22 enumerated in subparagraph (A), (D), (E), or

23 (G) of paragraph (4) of this subsection’’ and in24 serting ‘‘, or is subject to an order or finding,
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1 enumerated in subparagraph (A), (D), (E), (G),

2 or (H) of paragraph (4)’’;

3 (2) in subparagraph (B)—

4 (A) by striking ‘‘an offering of penny

5 stock’’ each place it appears and inserting ‘‘any

6 securities offering’’; and

7 (B) in clause (iii), by striking ‘‘such a per8 son’’ and inserting ‘‘a person as to whom an

9 order under section 21(d)(5) or subparagraph

10 (A) of this paragraph is in effect’’; and

11 (3) by striking subparagraph (C) and inserting

12 the following:

13 ‘‘(C) For purposes of this paragraph—

14 ‘‘(i) the term ‘noncovered security’ means any

15 security other than those described in paragraphs

16 (1) and (2) of section 18(b) of the Securities Act of

17 1933; and

18 ‘‘(ii) the term ‘participation in an offering of

19 noncovered securities’—

20 ‘‘(I) means acting as a promoter, finder,

21 consultant, or agent, or engaging in activities

22 with a broker, dealer, or issuer for purposes of

23 the issuance of or trading in any noncovered se24 curity, or inducing or attempting to induce the

25 purchase or sale of any noncovered security;
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1 ‘‘(II) includes other activities that the

2 Commission specifies by rule or regulation; and

3 ‘‘(III) excludes any person or class of per4 sons, in whole or in part, conditionally or un5 conditionally, that the Commission, by rule, reg6 ulation, or order, may exclude.’’.

7 SEC. 7. COURT AUTHORITY TO PROHIBIT OFFERINGS OF

8 NONCOVERED SECURITIES.

9 Section 21(d) of the Securities Exchange Act of 1934

10 (15 U.S.C. 78u(d)) is amended by adding at the end the

11 following:

12 ‘‘(5) COURT AUTHORITY TO PROHIBIT PERSONS

13 FROM PARTICIPATING IN OFFERING OF NON14 COVERED SECURITIES.—

15 ‘‘(A) IN GENERAL.—In any proceeding

16 under paragraph (1), the court may prohibit,

17 conditionally or unconditionally, and perma18 nently or for such period of time as it shall de19 termine, any person that violated section 10(b)

20 or the rules or regulations issued thereunder in

21 connection with any transaction in any non22 covered security from participating in an offer23 ing of a noncovered security.

24 ‘‘(B) DEFINITIONS.—For purposes of this

25 paragraph—
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1 ‘‘(i) the term ‘noncovered security’

2 means any security other than those de3 scribed in paragraphs (1) and (2) of sec4 tion 18(b) of the Securities Act of 1933;

5 and

6 ‘‘(ii) the term ‘participation in an of7 fering of noncovered securities’—

8 ‘‘(I) means acting as a promoter,

9 finder, consultant, or agent, or engag10 ing in activities with a broker, dealer,

11 or issuer for purposes of the issuance

12 of or trading in any noncovered secu13 rity, or inducing or attempting to in14 duce the purchase or sale of any non15 covered security;

16 ‘‘(II) includes other activities

17 that the Commission specifies by rule

18 or regulation; and

19 ‘‘(III) excludes any person or

20 class of persons, in whole or in part,

21 conditionally or unconditionally, that

22 the Commission, by rule, regulation,

23 or order, may exempt.’’.
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1 SEC. 8. BROADENING OF OFFICER AND DIRECTOR BAR.

2 Section 21(d)(2) of the Securities Exchange Act of

3 1934 (15 U.S.C. 78u(d)(2)) is amended—

4 (1) by striking ‘‘of this title or that’’ and insert5 ing ‘‘, that’’; and

6 (2) by striking ‘‘of this title if’’ and inserting ‘‘,

7 or the securities of which are quoted in any

8 quotation medium, if’’.

9 SEC. 9. VIOLATIONS OF COURT ORDERED BARS.

10 (a) IN GENERAL.—Section 21 of the Securities Ex11 change Act of 1934 (15 U.S.C. 78u) is amended by adding

12 at the end the following:

13 ‘‘(i) BAR ON PARTICIPATION.—It shall be unlawful

14 for any person, against which an order under paragraph

15 (2) or (5) of subsection (d) is in effect, to serve as officer,

16 director, or participant in any offering involving a non17 covered security (as defined in subsection (d)(5)(B)) in

18 contravention of such order.’’.

19 (b) CONFORMING AMENDMENT.—Section

20 21(d)(3)(D) of the Securities Exchange Act of 1934 (15

21 U.S.C. 78u(d)(3)(D)) is amended by inserting ‘‘or relating

22 to a violation of subsection (i) of this section,’’ before

23 ‘‘each separate’’.

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