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

THE BALTIMORE SUN

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.

"You are going to see growth in securities fraud that will make the previous decade look like a walk in the park," warned Barbara Roper, director of investor protection with the Consumer Federation of America. "If you look at the markets in this country, they are booming. What's the justification? If it's not broken, how do you justify radically rewriting the laws?"

That's why critics say states must continue to patrol for financial cheats such as Ms. Rounsaville.

Under the bill, states would no longer be able to enact their own rules to govern the securities business. State securities departments would perform some functions, like registering investment advisers, but their role in sniffing out crime would be limited.

"The bill basically makes states handmaidens to the federal government," said Mark Griffin, director of Utah's securities division.

Mr. Griffin's division snuffed out runaway penny-stock fraud by introducing legislation in 1986 that made it nearly impossible for individuals to start "blind pools."

In these scams, "promoters" raise money from partners and invest it in shell corporations. Through insider trades, the promoters run up the stock, and when it climbs high enough, they sell to the public and bail out before the stock collapses.

Mr. Griffin said it took the SEC four years before it adopted similar rules. He said that while the SEC will go after high-profile cases, it doesn't have the manpower to regulate smaller brokers, mutual funds and advisers.

Robert N. McDonald, Maryland's securities commissioner, said that the agency might have never put Ms. Rounsaville out of business if the Fields bill was law.

"In its current form, I think it totally pre-empts us on investment advisers," he said. "If we get a serious complaint our focus is on Maryland and the citizens of Maryland. The SEC there is only so much they can do."

About four years ago, Maryland enacted legislation that requires financial advisers to obtain a state license. Since then, 989 firms have registered and the state has pursued about 77 cases -- five of them criminal -- against financial advisers and securities firms.

Mr. Fields says his critics are over-reacting, and that the bill only eliminates redundant laws that drive up costs for companies offering securities.

Seventeen months ago, Charles County officials were stunned when they found out that they were facing huge losses from investments that went sour.

The county employed 12 investment and brokerage firms to manage its portfolio, and it invested $29 million in risky derivatives -- complex instruments whose value is based on the value of underlying assets, such as mortgages.

The county recovered all but $8 million and later filed suits against the brokerage firms.

Mr. Fields' bill would make it tougher for institutional investors, such as counties, universities or municipalities, to sue a broker that recommends an investment that goes bad unless there is a prior agreement allowing a lawsuit.

Mr. Fields said institutional investors try to shift the blame to brokers and dealers when they lose money. Some investors are looking for an outright guarantee against loss, he said.

Investors could lose another way. Brokers wouldn't have to provide a prospectus before investors buy stock in new issues. A prospectus, among other things, spells out a company's finances, lists the risks its faces and describes its strategies.

Mr. Fields said investors should have the document in a reasonable time, but that it may be after they buy the stock. His argument boils down to this: "They [investors] don't read the prospectus. We think there has got to be a better way."

While Ms. Roper of the Consumer Federation agrees that many people don't read these documents, the answer is not to hold back on delivery, she said.

"At a time when we are trying to encourage investors to make more responsible decisions, reducing the amount of information that's provided to them goes in the opposite direction," she said.

Alex Hart, an analyst with Ferris, Baker Watts Inc. in Baltimore, said that the "whole idea is for the investor to make a rational and reasonable decision."

Williams Act concerns

Investors and even corporations would be thrown further into an HTC information blackout because the bill would repeal the Williams Act, the 1968 law requiring investors who buy 5 percent or more of a company to disclose the acquisition and their intentions.

The act was designed to prevent "Saturday night specials" -- sudden takeover attempts, usually announced over the weekend.

Mr. Fields said the Williams Act adds costs to friendly mergers, and doing away with it could result in staff reductions at the SEC.

"We've had comments from other people saying that [the Williams Act] is an anachronism, a dinosaur," he said.

SEC Chairman Arthur Levitt says Mr. Fields' bill has some merit. "Some of the issues he has raised need to be aired, including, in an age of deeply diminished resources, the duplication of effort between state and federal regulators," he said in a recent speech.

But critics say the legislation would hurt the small investor -- the person who most needs protection.

"I think it is totally unjustified and ill-conceived legislation," said Ms. Roper. "If people stop believing in our markets they will start pulling their money out. People who are saving for retirement or for their children's education can't take extraordinary risk with their money."

What the bill would do

Here are some of the major effects of Rep. Jack Fields' Capital Markets Deregulation and Liberalization Act of 1995:

* Pre-empts states' ability to regulate securities and mutual fund sales within their borders.

* Insulates brokers from being sued by institutional investors, including counties and municipalities, unless a prior agreement is signed allowing such recourse.

* Eliminates rules requiring brokers to sell newly issued stock without first showing investors a prospectus.

* Wipes out the Williams Act, which requires investors who acquire 5 percent or more of a company to register with the SEC and state their intentions.

* Eliminates two of the five SEC commissioners to save $1 million annually.

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