TRENTON –Attorney General Gurbir S. Grewal and Bureau of Securities Chief Christopher W. Gerold are urging key members of Congress to oppose a federal bill that, according to the State’s top law enforcement official and top securities regulator, will severely weaken state-level efforts to protect investors from securities fraud.
In a letter today to the leadership of the House Committee on Financial Services and the Subcommittee on Capital Markets, Attorney General Grewal and Securities Chief Gerold caution that the federal Securities Fraud Act of 2018 (H.R. 5037) will restrict New Jersey’s ability to enforce its anti-fraud laws and recover investors’ funds.
Among other concerns, the letter notes that, if passed, the bill would prevent state securities regulators from bringing enforcement actions with respect to issuers of securities listed on an exchange (i.e., the New York Stock Exchange, NASDAQ). In the past, such a bill would have rendered state regulators unable to pursue such major securities fraud cases as Enron, Worldcom, AIG, HealthSouth and Qwest Communications.
The current version of the proposed bill also raises questions about whether New Jersey’s Bureau of Securities could continue to prosecute the kinds of fraud that impact small-scale investors on a daily basis. Read broadly, the letter asserts, it appears the bill could leave the Bureau powerless to enforce New Jersey laws against:
- A financial advisor “churning” listed securities in the account of a New Jersey senior citizen, resulting in the total loss of her life savings;
- A broker-dealer engaging in a “pump and dump” scheme to manipulate the shares of a listed security, selling the stock to New Jersey customers at
- A broker-dealer recommending unsuitable-listed securities to a New Jersey investor with disabilities, resulting in the loss of funds intended to cover a lifetime of medical care.
“New Jersey’s Bureau of Securities encounters cases like these on a regular basis and strives to ensure that our State’s law-abiding residents recover their savings when they fall victim to such fraud,” Attorney General Grewal and Securities Chief Gerold write in their letter. “The federal Securities and Exchange Commission cannot respond effectively to frauds like these on its own – they are too common and widespread. Preempting states’ traditional authority to regulate securities fraud therefore would leave New Jersey residents vulnerable to fraudsters who know that the federal government does not have the resources necessary to police their unlawful conduct.”
The letter goes on to express concern that the proposed bill “does not stop at preventing our Bureau of Securities from protecting New Jersey investors. The bill even could prevent our State from prosecuting fraudsters whose schemes violate our criminal laws.”
While Attorney General Grewal and Securities Chief Gerold acknowledge the bill’s current language is “ambiguous” regarding criminal prosecutions, they assert that “one thing is clear: the bill would create new hurdles that would make it harder for prosecutors to do their jobs.”
The letter concludes with Grewal and Gerold espousing their agreement with the North American Securities Administrators Association (NASAA), which recently sent its own letter to Congress opposing the bill. The NASAA letter derides the bill as “an attempt to tie the hands of the regulators who are the ‘cops on the beat,’ and the closest to Main Street investors, in favor of large companies engaged in or suspected of securities fraud.”
The joint letter sent today by Grewal and Gerold went to Rep. Jeb Hensarling, Chairman of the House Committee on Financial Services, Rep. Bill Huizenga, Chairman of the Subcommittee on Capital Markets, and Ranking Members Rep. Maxine Waters, and Rep. Carolyn Maloney. In the letter, Grewal and Gerold say they “agree” with NASAA’s conclusion that the proposed federal securities bill would be “bad for investors and bad for our capital markets.”
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