Sen. David Perdue, R-Ga., will introduce a bill this week that would give publicly traded companies the option to face civil securities fraud complaints in federal court instead of state courts. Perdue hopes to attach the bill to the U.S. Senate's version of the JOBS 3.0 bill, a bipartisan legislative package mostly focused on capital formation and passed by the U.S. House in July.
A legislative draft obtained by S&P Global Market Intelligence proposes allowing a publicly traded company to remove a civil action alleging securities fraud from a state court to a federal district court. The bill maintains that a state's securities commission or similar office may continue to bring criminal enforcement actions related to securities fraud but limits a state from bringing a civil securities fraud suit against a covered company in its state court.
The bill, called the Blue Sky Harmonization Act, is substantially similar to a provision introduced in the House by New Jersey Republican Thomas MacArthur, which was debated by the House Financial Services Committee in June. The bill has yet to clear the House committee.
"A uniform securities fraud definition would streamline compliance and encourage economic growth, so we are hopeful this could be included in the Senate's [JOBS] Act 3.0," said Caroline Vanvick, a spokeswoman for Perdue.
Proponents argue that the bill would provide clarity to the role of federal regulation among the patchwork of "Blue Sky" securities fraud laws at the state level, speculating that the option of taking a suit to state court or federal court will reduce compliance costs and remove a barrier to companies wanting to go public.
"I think we need to have a little bit more clarity around some of these things to reflect the changing marketplace that we have," said Tom Quaadman, executive vice president of the U.S. Chamber's Center for Capital Markets Competitiveness. Quaadman added that one beneficiary of the bill would be the financial technology industry, which has long complained of state-level ambiguity around usury laws.
Opponents say such a proposal would allow companies to bypass state laws. MacArthur's bill drew the ire of the New Jersey Attorney General and the North American Securities Administrators Association. New Jersey AG Gurbir Grewal warned that the bill would block states from pursuing "major" cases against large companies such as AIG. Joseph Borg, president of the NASAA and also the director of the Alabama Securities Commission, said state regulators are closest to Main Street investors and therefore are best suited to handle enforcement matters.
"In more than 24 years as a securities regulator, I don't believe that I've ever seen a legislative proposal that so alarms me, offends me, and worries me," Borg said in testimony to the House in June.
Donald Langevoort, law professor of securities regulation at Georgetown University, said that the legislative proposal takes aim at states with securities fraud laws that may be stronger than the federal standard. In New York, for example, the Martin Act gives the state the power to enforce securities fraud without proving probable cause. Whether or not the Blue Sky Harmonization Act would be productive depends on one's faith in the state courts, Langevoort said.
"If you're skeptical about [federal regulation], you will find this legislation frightening in that it closes the door on alternative enforcement, which is state-level action," Langevoort said in an interview.