99–006

107TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 107–283

EMERGENCY SECURITIES RESPONSE ACT OF 2001

NOVEMBER 13, 2001.—Committed to the Committee of the Whole House on the

State of the Union and ordered to be printed

Mr. OXLEY, from the Committee on Financial Services,

submitted the following

R E P O R T

[To accompany H.R. 3060]

[Including cost estimate of the Congressional Budget Office]

The Committee on Financial Services, to whom was referred

the bill (H.R. 3060) to amend the Securities Exchange Act of 1934

to augment the emergency authority of the Securities and Exchange Commission, having considered the same, report favorably

thereon without amendment and recommend that the bill do pass.

CONTENTS

Page

Purpose and Summary ............................................................................................ 1

Background and Need for Legislation .................................................................... 2

Hearings ................................................................................................................... 3

Committee Consideration ........................................................................................ 3

Committee Votes ...................................................................................................... 3

Committee Oversight Findings ............................................................................... 3

Performance Goals and Objectives ......................................................................... 3

New Budget Authority, Entitlement Authority, and Tax Expenditures ............. 4

Committee Cost Estimate ....................................................................................... 4

Congressional Budget Office Estimate ................................................................... 4

Federal Mandates Statement ................................................................................. 5

Advisory Committee Statement .............................................................................. 5

Constitutional Authority Statement ...................................................................... 5

Applicability to Legislative Branch ........................................................................ 5

Section-by-Section Analysis of the Legislation ...................................................... 5

Changes in Existing Law Made by the Bill, as Reported ..................................... 7

PURPOSE AND SUMMARY

The purpose of H.R. 3060, the Emergency Securities Response

Act, is to provide the Securities and Exchange Commission (SEC

or Commission) with enhanced authority to respond to extraordinary market disturbances. The legislation extends the duration of

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a Commission emergency order issued pursuant to section 12(k)(2)

of the Securities Exchange Act of 1934 (15 U.S.C. 78l(k)(2)) from

ten to 30 business days, and under certain circumstances, up to a

total of 90 calendar days.

BACKGROUND AND NEED FOR LEGISLATION

The terrorist attacks of September 11, 2001, inflicted great

human and physical loss in New York City, the financial capital of

the world. The damage to lower Manhattan, home of the world’s

largest stock market—the New York Stock Exchange—suspended

the operation of the U.S. equities markets for the longest period

since World War I. The U.S. securities markets reopened for trading on September 17, 2001. The markets resumed business without

incident, in part due to the emergency relief orders issued by the

SEC.

To facilitate the reopening of the equities markets, the Commission used—for the first time—its emergency powers under section

12(k)(2) of the 1934 Act to ease certain regulatory restrictions temporarily. Most significantly, the SEC action permitted public companies to repurchase their own securities without meeting the volume and timing restrictions that ordinarily would apply. Most commentators believe this measure served its intended purpose of increasing liquidity in the markets. Additionally, in order to limit the

impact of the market closure and settlement problems on securities

firms, the SEC issued orders allowing brokerage firms to disregard

the days the markets were closed in calculating their net capital.

The SEC also took action under other authority, such as relaxing

requirements applicable to mutual funds for in-person board meetings, which would have been impossible during the period in which

the Federal Aviation Administration grounded all flights.

Under current law, the duration of emergency orders granted by

the Commission pursuant to section 12(k)(2) of the 1934 Act is limited to ten days. The Commission also has general exemptive authority applying to all of the Federal securities laws under various

sections of each of those laws, including section 36 of the 1934 Act,

which it used in the wake of the September 11 attacks to extend

the duration of its emergency authority relief. The Committee commends the Commission for its responsive and appropriate use of its

emergency and exemptive authority to help ensure the smooth reopening of the securities markets.

The Committee wishes to underscore that the Commission was

entirely within its statutory authority to extend the duration of the

relief it granted pursuant to section 12(k)(2) of the 1934 Act beyond

ten days through use of its broad exemptive authority under section 36 of that Act. It is the Committee’s view that the exemptive

authority of section 36, as well as the corresponding provisions in

other Federal securities laws granted pursuant to the National Securities Markets Improvement Act of 1996 (Public Law 104–290),

were designed to provide the Commission with the maximum flexibility to reduce and otherwise alter regulatory requirements under

those statutes for emergency, as well as more quotidian purposes.

Nevertheless, granting the Commission greater flexibility to extend

the duration of emergency authority pursuant to section 12(k)(2)

will further ensure the Commission’s continued ability to respond

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as necessary to emergencies affecting our nation’s securities markets.

Accordingly, H.R. 3060 extends the time frame under section

12(k)(2) to 30 business days. The legislation also allows the Commission, in certain circumstances, to extend emergency orders

under section 12(k) for more than 30 business days, up to a total

of 90 calendar days. In order to do so, however, the SEC must find,

at the time of the extension, that the emergency still exists and determine that the continuation of the order beyond 30 business days

is necessary in the public interest and for the protection of investors to (i) maintain or restore fair and orderly securities markets,

(ii) ensure prompt, accurate, and safe clearance and settlement of

transactions in securities, or (iii) reduce, eliminate, or prevent a

substantial disruption of securities markets, investment companies,

or securities transaction processing.

HEARINGS

The Committee held a hearing on September 26, 2001 on the

state of the nation’s financial markets in the wake of the terrorist

attacks of September 11, at which SEC Chairman Harvey L. Pitt

testified with respect to the nation’s securities markets. Pursuant

to requests by Members of the Committee at that hearing, Chairman Pitt submitted a request for expanded emergency authority

under section 12(k)(2).

COMMITTEE CONSIDERATION

On October 11, 2001, the Committee met in open session and ordered H.R. 3060 reported to the House, without amendment, with

a favorable recommendation by a voice vote.

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion

to report legislation and amendments thereto. No record votes were

taken in conjunction with the consideration of this legislation. A

motion by Mr. Oxley to report the bill to the House with a favorable recommendation was agreed to by a voice vote.

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House

of Representatives, the Committee held a hearing and made findings that are reflected in this report.

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House

of Representatives, the Committee establishes the following performance related goals and objectives for this legislation:

The Commission will continue to use its emergency powers to ensure the effective functioning of the securities markets.

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NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the

House of Representatives, the Committee finds that this legislation

would result in no new budget authority, entitlement authority, or

tax expenditures or revenues.

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by

the Director of the Congressional Budget Office pursuant to section

402 of the Congressional Budget Act of 1974.

CONGRESSIONAL BUDGET OFFICE ESTIMATE

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House

of Representatives, the following is the cost estimate provided by

the Congressional Budget Office pursuant to section 402 of the

Congressional Budget Act of 1974:

U.S. CONGRESS,

CONGRESSIONAL BUDGET OFFICE,

Washington, DC, October 15, 2001.

Hon. MICHAEL G. OXLEY,

Chairman, Committee on Financial Services,

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 3060, the Emergency Securities Response Act of 2001.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Ken Johnson.

Sincerely,

BARRY B. ANDERSON,

(For Dan L. Crippen, Director).

Enclosure.

H.R. 3060—Emergency Securities Response Act of 2001

H.R. 3060 would lengthen the amount of time during which the

Securities and Exchange Commission (SEC) can exercise special

authority over securities markets in the event of an emergency.

The bill also would expand the definition of an emergency to include major disturbances that disrupt the functioning of securities

markets.

Based on information from the SEC, CBO estimates that implementing H.R. 3060 would have no significant budgetary effect. The

bill would not affect receipts or direct spending; therefore, pay-asyou-go procedures would not apply.

H.R. 3060 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA)

and would impose no costs on state, local, or tribal governments.

The CBO staff contact for this estimate is Ken Johnson. The estimate was approved by Robert A. Sunshine, Assistant Director for

Budget Analysis.

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FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office

pursuant to section 423 of the Unfunded Mandates Reform Act.

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the

Federal Advisory Committee Act were created by this legislation.

CONSTITUTIONAL AUTHORITY STATEMENT

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House

of Representatives, the Committee finds that the Constitutional

Authority of Congress to enact this legislation is provided by Article 1, section 8, clause 1 (relating to the general welfare of the

United States) and clause 3 (relating to the power to regulate interstate commerce).

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the

terms and conditions of employment or access to public services or

accommodations within the meaning of section 102(b)(3) of the Congressional Accountability Act.

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

This section establishes the short title of the bill, the ‘‘Emergency

Securities Response Act.’’

Section 2. Extension of emergency order authority of the securities

exchange commission

Section 2 modifies the authority of the Securities and Exchange

Commission to issue emergency orders under section 12(k)(2) of the

Securities Exchange Act of 1934 (15 U.S.C. 78l(k)(2)). The section

modifies section 12(k)(2) to grant the Commission authority to take

emergency action with respect to any matter or action subject to

regulation by the Commission or a self-regulatory organization

under the securities laws, not just under the Securities Exchange

Act of 1934. The Committee recognizes that emergency conditions

can necessitate emergency relief under securities laws other than

the Securities Exchange Act of 1934 and is broadening the emergency measures the Commission can take under section 12(k)(2) accordingly.

The section also modifies the findings required for the Commission to enter an emergency order by adding a third finding that

may support emergency action. Under new section 12(k)(2)(A)(iii),

the Commission may take emergency action if it determines that

action is necessary in the public interest and for the protection of

investors ‘‘to reduce, eliminate, or prevent the substantial disruption by the emergency of (I) securities markets, investment companies, or any other significant portion or segment of such markets,

or (II) the transmission or processing of securities transactions.’’

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The first of these two findings—in section 12(k)(2)(A)(iii)(I)—covers situations in which emergency relief is warranted to reduce,

eliminate or prevent the substantial disruption by the emergency

of securities markets broadly defined, including investment companies or any other significant portion or segment of the securities

markets (such as broker-dealers or investment advisers, or a class

thereof). As illustrated by the aftermath of the terrorist attacks of

September 11, 2001, the effects of transportation and communication problems, no less than market disruptions, can require emergency relief. If transportation or communication problems or other

circumstances substantially disrupt or threaten to substantially

disrupt the operation of investment companies, broker-dealers, or

any other significant portion or segment of the securities markets,

and constitute an ‘‘emergency’’ under section 12(k)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(k)(6)), section

12(k)(2)(A)(iii)(I) allows the Commission to take emergency action

under section 12(k)(2) even if the securities secondary-trading markets and the national system for clearance and settlement of securities transactions are not threatened or disrupted.

The second of these two findings—in section 12(k)(2)(A)(iii)(II)— covers situations in which emergency relief is warranted to reduce,

eliminate or prevent the substantial disruption by the emergency

of the transmission or processing of securities transactions. The

Committee is aware that certain market participants experienced

difficulties in transmitting and processing securities transactions,

including government securities transactions, in the aftermath of

the attacks of September 11, 2001. In the future, should these or

other circumstances substantially disrupt or threaten to substantially disrupt the transmission or processing of securities transactions and constitute an ‘‘emergency’’ under section 12(k)(6), section 12(k)(2)(A)(iii)(II) allows the Commission to take emergency

action under section 12(k)(2) even if the national system for clearance and settlement of securities transactions is not threatened or

disrupted.

The section modifies the statute’s definition of ‘‘emergency’’ to reflect the broader scope of findings that may support an emergency

order. Specifically, the definition of ‘‘emergency’’ in section 12(k)(6)

of the Securities Exchange Act (15 U.S.C. 78l(k)(6)) is modified to

include a major disturbance that substantially disrupts, or threatens to substantially disrupt, the functioning of securities markets,

investment companies, or any other significant portion or segment

of such markets, or the transmission or processing of securities

transactions. This modification of section 12(k)(6) mirrors the

changes to the findings under section 12(k)(2)(A) and, as discussed

above, is designed to account for emergencies that substantially

disrupt, or threaten to substantially disrupt, the securities markets

broadly defined, including the functioning of investment companies

or any other significant portion or segment of the securities markets or the transmission or processing of securities transactions,

even in the absence of a major market disturbance under section

12(k)(6)(A).

The section also extends the duration of a Commission emergency order to 30 business days, from the current ten business

days. The section also allows the Commission to extend an emergency order for more than 30 business days, up to a total of 90 calVerDate 11-MAY-2000 08:06 Nov 14, 2001 Jkt 099006 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\HR283.XXX pfrm09 PsN: HR283
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endar days, based upon certain findings. Specifically, under new

section 12(k)(2)(C) (15 U.S.C. 78l(k)(2)(C)), the Commission may extend the duration of an emergency order beyond 30 business days

if the Commission finds, at the time of the extension, that the

emergency still exists, and determines that the continuation is necessary in the public interest and for the protection of investors to

attain one of the three objectives that may support the Commission’s initial emergency action. The calendar day, as opposed to

business day, limit on total extensions of an emergency order reflects the judgment that a total of approximately three months is

a reasonable limit on Commission discretion, while providing sufficient latitude for the Commission to provide appropriate immediate

relief.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the

House of Representatives, changes in existing law made by the bill,

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics,

existing law in which no change is proposed is shown in roman):

SECTION 12 OF THE SECURITIES EXCHANGE ACT OF

1934

REGISTRATION REQUIREMENTS FOR SECURITIES

SEC. 12. (a)***

* * * * * * *

(k) TRADING SUSPENSIONS; EMERGENCY AUTHORITY.—

(1) * * *

ø(2) EMERGENCY ORDERS.—(A) The Commission, in an emergency, may by order summarily take such action to alter, supplement, suspend, or impose requirements or restrictions with

respect to any matter or action subject to regulation by the

Commission or a self-regulatory organization under this title,

as the Commission determines is necessary in the public interest and for the protection of investors—

ø(i) to maintain or restore fair and orderly securities

markets (other than markets in exempted securities); or

ø(ii) to ensure prompt, accurate, and safe clearance and

settlement of transactions in securities (other than exempted securities).

ø(B) An order of the Commission under this paragraph (2)

shall continue in effect for the period specified by the Commission, and may be extended, except that in no event shall the

Commission’s action continue in effect for more than 10 business days, including extensions. If the actions described in subparagraph (A) involve a security futures product, the Commission shall consult with and consider the views of the Commodity Futures Trading Commission. In exercising its authority under this paragraph, the Commission shall not be required

to comply with the provisions of section 553 of title 5, United

States Code, or with the provisions of section 19(c) of this

title.¿

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(2) EMERGENCY ORDERS.—(A) The Commission, in an emergency, may by order summarily take such action to alter, supplement, suspend, or impose requirements or restrictions with

respect to any matter or action subject to regulation by the Commission or a self-regulatory organization under the securities

laws, as the Commission determines is necessary in the public

interest and for the protection of investors— (i) to maintain or restore fair and orderly securities markets (other than markets in exempted securities);

(ii) to ensure prompt, accurate, and safe clearance and

settlement of transactions in securities (other than exempted securities); or

(iii) to reduce, eliminate, or prevent the substantial disruption by the emergency of (I) securities markets, investment companies, or any other significant portion or segment of such markets, or (II) the transmission or processing

of securities transactions.

(B) An order of the Commission under this paragraph (2)

shall continue in effect for the period specified by the Commission, and may be extended. Except as provided in subparagraph

(C), the Commission’s action may not continue in effect for more

than 30 business days, including extensions. If the actions described in subparagraph (A) involve a security futures product,

the Commission shall consult with and consider the views of

the Commodity Futures Trading Commission. In exercising its

authority under this paragraph, the Commission shall not be

required to comply with the provisions of section 553 of title 5,

United States Code, or with the provisions of section 19(c) of

this title.

(C) An order of the Commission under this paragraph (2)

may be extended to continue in effect for more than 30 business

days if, at the time of the extension, the Commission finds that

the emergency still exists and determines that the continuation

of the order beyond 30 business days is necessary in the public

interest and for the protection of investors to attain an objective

described in clause (i), (ii), or (iii) of subparagraph (A). In no

event shall an order of the Commission under this paragraph

(2) continue in effect for more than 90 calendar days.

* * * * * * *

ø(6) DEFINITION OF EMERGENCY.—For purposes of this subsection, the term ‘‘emergency’’ means a major market disturbance characterized by or constituting— ø(A) sudden and excessive fluctuations of securities

prices generally, or a substantial threat thereof, that

threaten fair and orderly markets, or

ø(B) a substantial disruption of the safe or efficient operation of the national system for clearance and settlement

of securities, or a substantial threat thereof.¿

(6) DEFINITION OF EMERGENCY.—For purposes of this subsection, the term ‘‘emergency’’ means— (A) a major market disturbance characterized by or

constituting— (i) sudden and excessive fluctuations of securities

prices generally, or a substantial threat thereof, that

threaten fair and orderly markets; or

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(ii) a substantial disruption of the safe or efficient

operation of the national system for clearance and settlement of transactions in securities, or a substantial

threat thereof; or

(B) a major disturbance that substantially disrupts, or

threatens to substantially disrupt— (i) the functioning of securities markets, investment

companies, or any other significant portion or segment

of the securities markets; or

(ii) the transmission or processing of securities transactions.

* * * * * * *

Æ