Arthur Levitt Testimony.
House Commerce Committee Hearing on HR 1689.
May 19, 1998.
Source: Printed statement provided by SEC.

ORAL TESTIMONY OF
ARTHUR LEVITT, CHAIRMAN
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

CONCERNING H.R. 1689,
THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1997

BEFORE THE SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS
COMMITTEE ON COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES

May 19, 1998

Chairman Oxley, Congressman Manton, and members of the Subcommittee. I appreciate this opportunity to testify on behalf of the Commission and to express our views on H.R. 1689.

The Commission shares with the Congress a continuing interest in the process of bringing private securities class action lawsuits. Indeed, this is my fifth appearance before Congress to address such lawsuits since enactment of the landmark securities litigation reform bill in 1995.

When the private litigation system works properly, it fulfills a vital role in our system of securities regulation. In the words of the Statement of Managers in 1995, these lawsuits are "an indispensable tool with which defrauded investors can recover their losses without having to rely on government action." The Managers noted that "such lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers ... properly perform their jobs."

But when the private litigation system does not work effectively -- when the system itself establishes incentives that encourage the filing of meritless lawsuits -- the cost to growing companies, to investors, and to our economy can be needlessly high. In a highly competitive global market, these are costs that we can no longer afford to pay.

As we understand it, H.R. 1689 is intended to address an element of the private litigation process that was not squarely considered by the Congress in 1995. The issue is whether it continues to make sense to have different class action rules for nationally traded securities, depending on whether the lawsuit is brought in state or federal court.

The Commission has thought long and hard about this question, and we have concluded that we can support a carefully crafted uniform liability standard for certain securities class action lawsuits. We do so primarily because we believe that for those securities where a transparent and highly liquid national trading market exists, conflicting standards in class action lawsuits may impose an unnecessary cost on the capital formation process.

That said, however, we cannot support uniformity at any cost. As we strengthen the law, we must be sure not to embrace approaches that could imperil investor protection.

An outcome of the 1995 Reform Act that we believe was unintended, unforeseen, and undesirable is that some lower federal courts interpreted it to eliminate liability for reckless conduct. Although most courts agree that the 1995 Litigation Reform Act did not -- and was not intended to -- alter the recklessness standard, it is troubling that some courts have reached a contrary conclusion.

A uniform national standard must not jeopardize the right of injured investors to seek recourse against those who recklessly violate the law. Otherwise, wrongdoers could harm investors by deliberately turning a blind eye to available information. In my judgment, the elimination of liability for reckless misconduct under the federal securities laws would be a profound mistake. As I said at a previous hearing here, it would be akin abolishing manslaughter from the criminal laws.

A majority of the Commission agreed to support the Senate bill because the report made clear that in 1995, the Senate did not intend to change the existing substantive liability standard. Chairman D'Amato and Senator Dodd also engaged in a useful colloquy restating that recklessness is the appropriate standard.

The Senate bill also contains three refinements that I urge the House to consider:

• First, the Senate bill avoids pre-empting certain corporate law claims which have traditionally and effectively been resolved by state courts.
• Second, the bill improves the definition of class action to focus on cases where abuses are claimed to be more prevalent.
• And third, the bill strikes an appropriate balance by preempting only those cases involving nationally traded securities.

National standards make sense for national markets, as long as the interests of investors are protected.

I know the schedule is tight here this afternoon, but before I close I would like to thank Chairman Bliley and Chairman Oxley for their continued leadership in this area. I'd also like to commend Congressman White and Congresswoman Eshoo for working so constructively with the Commission as they developed their bill.

We look forward to working with the Committee as you consider this legislation.