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The Subcommittee has requested the Commission's views concerning S. 1260, the "Securities Litigation Uniform Standards Act of 1997," which would adopt a uniform federal standard for the prosecution of certain securities fraud class actions by limiting or eliminating parallel state causes of action. Although the bill could be seen as an effort to extend national standards to fraud involving nationally traded securities, it also appears to reflect concern about an increase in securities fraud class actions in state courts following the passage of the Private Securities Litigation Reform Act of 1995.
The issue of a uniform federal standard for securities litigation is a delicate one. The federal securities laws presuppose an active, vital system of state securities regulation and state court enforcement. The Commission believes that there are important types of antifraud claims that should continue to be governed by state law. The Commission is pleased to note that S. 1260 would preserve such important state court actions as those involving individual claims against brokers, claims involving localized fraud, claims involving fraud in penny stocks and "micro cap" securities, and actions by state regulators.
The Commission is concerned, however, that the bill would deprive investors of important protections, such as aiding-and-abetting liability and longer statutes of limitations, that are only available under state law. Preemption of state claims involving liability for reckless conduct may also be inappropriate while the status of such claims under federal law is still being considered by the courts. The bill could also have the unintended effect of preempting traditional state corporate governance claims, such as class actions involving proxy and tender offer materials, that need to be decided quickly so that mergers can go forward.
The bill would not solve several problems of the Litigation Reform Act that have led to calls for preemption. The bill would not prevent plaintiffs' lawyers from avoiding the stay of discovery in federal cases, because it would still allow them to bring parallel suits on behalf of an individual in state court, where the discovery stay does not apply. If enacted, the bill could also discourage institutional investors from seeking to be named as lead plaintiffs in securities fraud class actions because it would prevent them from bringing related state claims unless they opted out of the plaintiff class.
As Congress considers solutions to the problems of securities fraud litigation, the Commission believes that great care should be taken to safeguard the benefits of our dual system of federal and state law, which has served investors well for over 60 years.
Full Text of Testimony
Chairman Gramm, Senator Dodd, and other Members of the Subcommittee:
We appreciate the opportunity to testify on behalf of the Securities and Exchange Commission ("Commission") concerning S. 1260, the "Securities Litigation Uniform Standards Act of 1997." We commend the Subcommittee for its continuing efforts to focus on the question of whether frivolous securities litigation threatens to inhibit capital formation and harm investors. The issue is one of importance. It is also one that we must approach with a surgeon's skill to assure that any proposed solutions, whether legislative, judicial, or regulatory, do not foreclose investors with legitimate grievances from obtaining prompt and full redress.
INTRODUCTION
The Subcommittee has requested the Commission's views concerning S. 1260. The bill would adopt a uniform standard for the prosecution of certain securities fraud class actions by limiting or eliminating certain causes of action for fraud under state law. S. 1260 appears to reflect concerns that frivolous class action securities litigation has migrated to state courts and that such state court litigation may undermine the reforms adopted by Congress in the Private Securities Litigation Reform Act of 1995 ("Reform Act" or "Act"). S. 1260 addresses these concerns by preempting class actions that are based on the statutory or common law of any state and that allege an untrue statement or omission of material fact, or other fraudulent conduct, in connection with the purchase or sale of specified securities trading over national exchanges.
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