Mr. Chairman, I find it incredible that, as our national markets are roiled by the greatest volatility in the last decade, we are holding a legislative hearing on S. 1260, a bill that has the potential of further undermining investor confidence in the marketplace by taking away the ability of consumers to recover for securities fraud under state law. As has been said many times before: the markets run on trust, not on money. Surely, this is not the time to tamper with that trust by further limiting investor rights.
When we had our oversight hearing on the operation of the Private Securities Litigation Reform Act of 1995 [PSLRA] in July -- months before this latest dramatic market activity -- I said that it was a matter of common sense that we should wait some time to see how this new law is interpreted by the courts and how it is affecting consumers in the market before we rush into more legislation. I believe it would be foolhardy to act now to preempt class actions for securities fraud under state law -- a step that might result in consumers having no remedies whatsoever when they are cheated in the financial markets. Quite simply, we need to have all the facts about the problems, if any, with the PSLRA before we dismantle the shared federal/state enforcement system that has served our country exceptionally well for the past 60 years.
At our last hearing, Securities And Exchange Commission Chairman Arthur Levitt expressed the clear view that, based on an exhaustive one-year study of the PSLRA by the SEC staff, it would be premature to enact additional legislation at this time. Last week in testimony before the House Commerce Committee, Chairman Levitt again urged restraint and insisted that legislating "a total broad-based preemption" of state anti-fraud laws was not a wise course. I wholeheartedly agree.
I would emphasize several points that have struck me as I have considered this issue.
First, we have no basis on which to judge the effectiveness of the PSLRA. The law is in an embryonic stage. It has not even been two years since It was enacted, and there have been no trials, no appeals court decisions on any of its major provisions, and relatively few PSLRA opinions at all, with the exception of vastly conflicting rulings on the new pleading standard. It is obvious that it will take more time before we can gauge the PSLRA's impact and until the courts can offer some definitive interpretation of its terms. Until then, we simply do not know whether individual investors still have a viable remedy for securities fraud under federal law; eliminating state remedies under such circumstances would be a prescription for disaster.
Second, there is absolutely no evidence that there is any national problem with respect to the numbers of securities class actions that have been brought in state courts. The most recent study by the National Economic Research Associates found state court cases thus far this year are being filed more slowly than in the two years prior to the PSLRA's enactment. Since December 1995, when the PSLRA was enacted, only slightly more than one hundred securities class actions have been filed - 2 - in state courts nationwide. In that same 22-month period close to some 30 million total civil cases have been filed in state courts around the country. State courts are clearly not overburdened with these cases; the number of state class actions is so small that it obviously does not rise to a problem that Congress must address.
In addition, a substantial proportion of the 105 securities class actions that have been filed in state court since the enactment of PSLRA -- over 60 -- have been in California. No other state has had more than seven cases filed in its courts in the last 22 months. If the "problem" is principally in California, California should solve it. There is absolutely no reason why Congress should impose on the other 49 states a solution to a problem that only exists in one state. Nevada, for example, has had only one securities class action filed in its state courts since the enactment of the PSLRA; but if my home state wishes to enact stronger consumer protections against fraud and allow such suits in its courts I see no reason that it should not be able to do so.
Third, some recent decisions by federal district courts on PSLRA give me great concern. Most particularly, I remain worried about the possibility that the federal courts will determine that reckless wrongdoers are no longer liable to their victims under the new law. The SEC has already entered a number of cases in which this issue has arisen to argue that such a result would essentially end enforcement of the federal securities laws by individual citizens. There is no assurance, however, that the courts will not disagree with the Commission and leave consumers with no federal remedy.
Based on our July hearing and the information in the public record, it therefore seems clear to me that Congress should not enact my legislation at this time. The risks of such new broad-based legislation are far too serious and there is no immediate need for passage.
Despite my strong feelings on this matter, I understand that it might be the will of this Committee to move forward. If so, I hope the proponents will at least take the advice of Chairman Levitt and re-draft the legislation before us so that it is narrowly targeted and directed only at those few issues that are alleged to be problems -- the statutory safe harbor and, perhaps, the problem with discovery stays. It seems to me that there is no reason to preempt the entire body of anti-fraud laws of all 50 states when there are only two claimed problems that even the proponents have identified.
With respect to S. 1260 specifically, I do see a number of obvious problems with the bill that I hope to bring out during the questioning of our witnesses today. Of most concern is the fact that the bill would leave large institutions with the ability to bring cases on their own in either federal or state court -- where better remedies for investors may be available -- but will force individual citizens into federal court where they may have no ability to recover under the PSLRA. I hope my colleagues will re-think their support for legislation that so patently discriminates against the little guy-
I look forward to listening to our witnesses today. I hope the hearing will make clear that
preemption legislation is a grave public policy risk at this time, and that S. 1260 in particular is overly
broad and flawed in any number of areas.
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