Securities laws face closest look since '33 Fields' bill seeks to pre-empt state oversight

Less scrutiny for brokers

Legislation bars 'frivolous' lawsuits by cheated investors

November 12, 1995|By Bill Atkinson | Bill Atkinson,SUN STAFF

Iris Rounsaville made millions as a financial adviser working out of her Chesapeake Beach, Md., home.

Both friends and investors from around the country were impressed with her story of being a star broker at E. F. Hutton and PaineWebber. But they were more impressed with her promises of huge returns by investing in European Bank Instruments.

But the investments were bogus, and Ms. Rounsaville, who had spent two years in a California prison for investment fraud, bilked investors of almost $4 million.

Her operation was shut down and she was sent to prison after Maryland securities officials caught wind of her scam in August 1992.

But securities commissioners across the country worry that people like Ms. Rounsaville will go unchecked if a controversial bill in Congress passes.

The legislation would wipe out states' authority to register and police financial planners at the very time when their numbers are exploding, they argue.

What's more, the bill proposes a number of other dramatic changes to securities laws -- changes that many say will leave small investors vulnerable and could even spark financial crime.

The bill would:

* Enable unscrupulous brokers to sell institutional investors, such as counties, municipalities and college endowment funds, bad securities without fear of being sued, unless a prior agreement is reached that allows the client to sue.

* Put small investors at risk by allowing brokers to sell them newly issued securities without first delivering them a prospectus, which spells out a company's finances and strategy.

* Allow individuals and corporations to secretly launch takeovers because they wouldn't have to file public notice or state their intentions, even after buying more than 5 percent of the company's stock.

Today, more than ever before, people are managing money saved for their retirement and children's education. Critics worry that the bill strips away rules that protect novice investors.

What makes them so nervous is that there is plenty of margin for error because there has been an explosion in the number of mutual funds and investment advisers, and that makes the job more difficult for regulators.

From 1980 to 1994, the number of mutual funds has shot from 1,510 to 4,530, and they now manage $2.5 trillion in assets, compared with $240 billion in 1980, according to the Consumer Federation of America, a Washington-based public advocacy group. During the same period, investment advisers have grown to 21,000 managing $9.6 trillion, up from 3,500 with $440 billion under management.

The legislation is a "right-winged zealot's wish list," says Joel Seligman, author of "The Transformation of Wall Street" and dean of the College of Law at University of Arizona.

The subject of all this criticism is Rep. Jack M. Fields Jr., R.-Texas the powerful chairman of the House Telecommunications and Finance subcommittees.

Bill defended

Mr. Fields said his legislation wouldn't diminish protection of investors. And he insists that a revision of the nation's securities laws -- most of them untouched since the Great Depression -- is necessary to help U.S. corporations wade through red tape and to curb government waste.

"There is grumbling about everything we [Republicans] are doing to try to reform America. What's new?" he said. "It makes me suspicious when you put a piece of legislation out and people run and say, 'You, can't consider that.' "

The bill is supported by the Securities Industry Association, which represents more than 760 brokerage firms, mutual funds and investment bankers, and the Public Securities Association, the trade group for securities firms and banks that underwrite, trade and sell debt. The Business Roundtable, which represents 220 of the nation's largest corporations, hasn't taken a formal position on the bill, but it likes most of its provisions.

"The Fields bill has been the springboard for an enormous amount of overdue attention," said Paul Saltzman, general counsel with PSA. "To suggest that the bill is ludicrous is denying reality."

The Fields legislation is one of a handful of bills being considered in Congress to change the way the Securities and Exchange Commission does business. Rep. Christopher C. Cox, R-Calif., and Sen. Christopher J. Dodd, D-Conn., have introduced bills to reduce "frivolous" lawsuits against securities firms and corporations. There's also an appropriations bill in the Senate that would cut the SEC's budget by 10 percent, as well as one in the House that would freeze the budget.

SEC looks for savings

The SEC itself is looking for ways to cut costs and is experimenting with ways to make it less expensive for companies that file with the agency.

But it's Mr. Fields' bill that has touched a raw nerve. His bill (H.R. 2131), critics insist, would expose small investors to crime and unscrupulous brokers by weakening state powers.

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