Table Of Content

CAPITAL MARKETS DEREGULATION AND LIBERALIZATION ACT OF 1995 Y 4, C 73/8: 104-50 ARINGS Cipltal Barkets Oerejulatimi anil Li, BEFORE THE ^~7 SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE OF THE COMMITTEE ON COMMERCE HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS FIRST SESSION ON H.R. 2131 NOVEMBER NOVEMBER AND DECEMBER 14, 30, 5, 1995 Serial No. 104-50 Printed for the use of the GoHHmttefi..finjCommerce 'wcic, APR 8 } 1996 ""-^am U.S. GOVERNMENT PRINTING OFFICE ' " 21-910CC WASHINGTON 1996 : ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,Congressional SalesOffice,Washington,DC 20402 ISBN 0-16-052315-X CAPITAL MARKETS DEREGULATION AND LIBERALIZATION ACT OF 1995 . C 73/8: 104-50 ARINGS tal riarkets Deregulation and Li. BEFORE THE SUBCOMMITTEE ON I'l TELECOMMUNICATIONS AND FINANCE '^f ' / J -j^ OF THE COMMITTEE ON COMMERCE HOUSE OP REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS FIRST SESSION ON H.R. 2131 NOVEMBER 14, NOVEMBER 30, AND DECEMBER 5, 1995 Serial No. 104-50 Printed for the use of the GoHHnittee-fin_Commerce "X \m Lil'.' APR 8 I J996 *0 (JB^^r' U.S. GOVERNMENT PRINTING OFFICE 21-910CC WASHINGTON 1996 : ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington.DC 20402 ISBN 0-16-052315-X COMMITTEE ON COMMERCE THOMAS J. BLILEY. Jr., Virginia, Chairman CARLOS J. MOORHEAD, California, JOHN D. DINGELL, Michigan Vice Chairman HENRY A. WAXMAN, CaUfornia W.J. "BILLY" TAUZIN, Louisiana EDWARD J. MARKEY, Massachusetts JACK FIELDS, Texas CARDISS COLLINS, Ilhnois MICHAEL G. OXLEY, Ohio RON WYDEN, Oregon MICHAEL BILIRAKIS, Florida RALPH M. HALL, Texas DAN SCHAEFER, Colorado BILL RICHARDSON, New Mexico JOE BARTON, Texas JOHN BRYANT, Texas J. DENNIS HASTERT, Illinois RICK BOUCHER, Virginia FRED UPTON, Michigan THOMAS J. MANTON, New York CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York BILL PAXON, New York GERRY E. STUDDS, Massachusetts PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey SCOTT L. KLUG, Wisconsin SHERROD BROWN, Ohio GARY A. FRANKS, Connecticut BLANCHE LAMBERT LINCOLN, Arkansas JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee MICHAEL D. CRAPO, Idaho ELIZABETH FURSE, Oregon CHRISTOPHER COX, California PETER DEUTSCH, Florida NATHAN DEAL, Georgia BOBBY L. RUSH, Ilhnois RICHARD BURR, North Carolina ANNA G. ESHOO, Cahfornia BRIAN P. BILBRAY. California RON KLINK, Pennsylvania ED WHITFIELD, Kentucky BART STUPAK, Michigan GREG GANSKE, Iowa DAN ERISA, New York CHARLIE NORWOOD. Georgia RICK WHITE, Washington TOM COBURN, Oklahoma James E. Derderian, Chiefof Staff Charles L. Ingebretson, General Counsel Alan J. Roth, Minority StaffDirector and Chief Counsel Subcommittee on Telecommunications and Finance JACK FIELDS, Texas, Chairman MICHAEL G. OXLEY, Ohio, EDWARD J. MARKEY, Massachusetts Vice Chairman RALPH M. HALL, Texas CARLOS J. MOORHEAD, California JOHN BRYANT, Texas W.J. "BILLY" TAUZIN, Louisiana RICK BOUCHER, Virginia DAN SCHAEFER, Colorado THOMAS J. MANTON, New York JOE BARTON, Texas GERRY E. STUDDS, Massachusetts J. DENNIS HASTERT, Illinois BART GORDON, Tennessee CLIFF STEARNS, Florida ELIZABETH FURSE, Oregon BILL PAXON, New York BOBBY L. RUSH, Ilhnois PAUL E. GILLMOR, Ohio ANNA G. ESHOO, Cahfornia SCOTT L. KLUG, Wisconsin RON KLINK, Pennsylvania CHRISTOPHER COX, Cahfornia CARDISS COLLINS, Ilhnois NATHAN DEAL, Georgia BILL RICHARDSON, New Mexico DAN FRISA, New York JOHN D. DINGELL, Michigan RICK WHITE, Washington (Ex Officio) TOM COBURN, Oklahoma THOMAS J. BLILEY, Jr., Virginia, (Ex Officio) (II) CONTENTS Page Hearings held on: November 14, 1995 1 November 30, 1995 99 December 1995 167 5, Testimony of: Beese, J. Carter, Jr., Chairman, Capital Markets Regulatory Reform Project, Center for Strategic and International Studies 16 Belt, Bradley D., Director of Capital Markets and Domestic Policy Issues, Center for Strategic and International Studies 279 Campbell, Rutheford B., Jr., University ofKentucky College of Law 264 Coffee, John C, Jr., Adolphe Berle Professor of Law, Columbia Univer- sity 30 Cohen, Saul S., Esq., Rosenman & Colin, LLP 24 Cox, Charles, Senior Vice President, Lexecon, Inc 12 Fink, Matthew P., President, Investment Company Institute 216 Friedman, Stephen J., Partner, Debevoise & PUmpton 236 Gaine, John, General Counsel, Managed Futures Association 211 Greenspan, Hon. Alan, Chairman, Board of Governors, Federal Reserve System 152 Harris, Dee, President, North American Securities Administrators Asso- ciation 298 Krongard, A.B., Chairman, Securities Industry Association 183 LaRoche, Elaine, Vice-Chair, Public Securities Association 200 Levitt, Hon. Arthur, Chairman, Securities and Exchange Commission 102 McDaniel, Morey, Attorney 277 Saladino, Mark, Representing Government Finance Officers Association .. 315 Sargent, Mark A., Professor, University ofMaryland School ofLaw 258 Shufeldt, R. Charles, Representing American Bankers Association 227 Sommer, A.A., Jr., Morgan, Lewis & Bockius, LLP 34 Material submitted for the record by: Fleischman, Edward H., Consultant, Linklaters & Paines, prepared statement of 327 Government Finance Officers Association, et al, letter dated October 23, 1995, to Hon. John D. Dingell 96 Loudon, Douglas M., prepared statement on behalfof Investment Counsel Association ofAmerica 333 (III) — CAPITAL MARKETS DEREGULATION AND LIBERALIZATION ACT OF 1995 TUESDAY, NOVEMBER 14, 1995 House of Representatives, Committee on Commerce, Subcommittee on Telecommunications and Finance, Washington, DC. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 2123, Raybum House Office Building, Hon. Jack Fields (chairman) presiding. Members present: Representatives Fields, Oxley, Cox, Frisa, White, Markey, Furse, Eshoo, Klink, Richardson, and Dingell (ex officio). Staff present: David L. Cavicke and Linda Dallas Rich, majority counsel; Brian McCullough, professional staff member; and Deirdre McCullough, clerk. Mr. Fields. By previous agreement, the chairman will recognize himself for 10 minutes and the gentleman from Massachusetts for 10 minutes for the purpose of an opening statement and all other members will be recognized for the customary 5 minutes. Today this subcommittee embarks on an historic effort to examine and analyze our Nation's securities laws. This is the first major reform effort of its kind since the securities laws were enacted in the 1930's and I think that it's important to point out that these laws have served our country well. Our markets are the envy of the world, both because the markets are transparent and because we have a strong system of investor protection. And in this historic effort, market transparency and investor protection is not on the table for discussion, but unnecessary and du- plicative rules, regulations and laws are, whether they are on a State, an SRO or Federal level. But during this process I am not looking for reform strictly for reform's sake. The Speaker has asked that those of us in positions of responsibility put all aspects of our jurisdiction under the micro- scope, and we're doing that with the other half of our jurisdiction telecommunications. And we will send an historic piece of legislation to the President prior to the Christmas break. And, as most of you know, it's that jurisdiction, telecommunications, which normally consumes most of our subcommittee's time and energy. This year, however, I felt it incumbent upon us to dust off the 1933, 1934 and 1940 Acts and so I introduced "The Capital Markets Deregulation and Liberalization Act of 1995" during the last week of July. (1) My goal was to initiate a national debate on our securities laws, both State and Federal, and to do so, as I thought we were nearing the end of telecommunication reform, so that everyone would have plenty of time to comment and State opinions. And I've already heard a number of comments and statements about the legislation, some good, some bad, but almost total unanimity that our securities laws should be examined after 50-plus years and that there has already been dramatic change since the Capital Markets bill was enacted in July. I think it is important to know that the Capital Markets bill has done more than just trigger a debate. As an example, No. the 1, SEC has announced a top to bottom review of the SEC's regulations to see which ones are now outdated and/or counterproductive. This entails over 300 existing regulations and more than 100 forms. Second, there's been a dramatic shift in the SEC's position on margin reform. Prior to introduction of the Capital Markets bill, the SEC was cool to the idea of margin reform. Now the SEC has proposed to eliminate a substantial portion of its margin rules. Third, Chairman Levitt has proposed that the States, SROs and SEC the coordinate inspection of broker-dealers. Fourth, Chairman Levitt has announced a proposal to allow for the electronic delivery of a prospectus. Each one of these reforms at the Commission relates to a sepa- rate provision in the Capital Markets bill. It could be that these developments are merely coincidental or that Federal regulators have responded to our legislation. And for that I applaud Chairman Levitt. It's also important to note that the North American State Securi- ties Administrators have created a blue ribbon panel to examine the respective roles of the States and the Federal Government in securities regulation, again patterning after a specific provision in our legislation. And I will hasten to add that I look forward to hearing from NASSA and working with them. Today begins the first of three hearings. On November 30, the subcommittee will hear from SEC Chairman Arthur Levitt and Federal Reserve Chairman Alan Greenspan. On December 5 the subcommittee will hear from the SIA, PSA, ABA, ICI and NASSA; in other words, acronym day. And we will also hear from consumer groups. I look forward to these hearings and the testimonies that we will We receive. will search out answers for questions such as: Is suit- ability inappropriately raised by institutional investors when a bad investment decision is made? Should a national securities market be created similar to the Euro market? Should margin rules be lib- eralized and then harmonized between banks and broker-dealers? Should there be reform in the prospectus area? I look forward to not only finding answers to questions like these but also to clear up misconceptions and misrepresentations about this piece of legislation. As an example, the Capital Markets proposal does not repeal the Williams Act. Rather, it streamlines disclosure under 30(g), making disclosure requirements apply quar- terly and leaves in place the William Act anti-fraud provisions. The Capital Markets bill leaves in place the ability of the SEC to adopt rules governing tender offers. I'm excited about these hearings. I fully intend to mark this legislation up at the subcommittee and the full committee and take the Capital Markets bill to the floor. This legislation is a work in progress. During this process parts of the legislation may be de- leted or modified, and good ideas that we hear in our testimony may be added to the legislation. And while I introduced the Capital Markets bill prior to the Au- gust recess for the purpose of initiating a debate on our securities laws, it was not my intent to exclude my friends on the other side My of the aisle. good friend from Massachusetts has played a vital role in the area of securities law and it is my hope that we can work together to further investor protection, capital formation and market efficiency while, at the same time, ferreting out duplicitous and unnecessary rules, regulations and forms. That concludes the statement of the Chair. The Chair will now recognize the vice-chairman of the subcommittee, Mr. Oxley, for 5 minutes. Mr. Oxley. Thank you, Mr. Chairman, and I commend you for your leadership on this very important issue. This morning's hearing on capital markets deregulation begins an overdue reassess- ment of a system of regulations set up in the 1930's. I welcome this opportunity to review the Nation's securities laws. Indeed, as a co- sponsor of your bill, I'm persuaded of the need for a comprehensive overhaul. This effort is about more than reducing paperwork and red tape, although these are worthy goals in and of themselves. The reality is that these regulatory burdens impose real economic costs on the Nation by impeding capital formation and, in turn, job creation. I, as you know, Mr. Chairman, recently had a town hall meeting with Chairman Levitt in Columbus, where we had over 1,000 peo- ple attend, showing a great interest in capital formation and markets. I think it was one of the best opportunities I've had to inter- act with real citizens about the importance of capital markets. I commend you for putting together an excellent package of reforms. I'm looking forward to hearing from some of the experts in the field today. I anticipate future testimony from Administration officials and other industry representatives, and I yield back the my balance of time. Mr. Fields. The Chair will now recognize the gentleman from Massachusetts, the distinguished ranking minority member, for 10 minutes. Mr. Markey. I thank the chairman very much and I must con- fess some mixed feelings at the moment, Mr. Chairman. I am very pleased that you have brought us together to discuss an exception- ally important long-term issue of great significance to virtually all working Americans. That issue is on the table because of your leadership and because of the hard work and the long hours that you and your staff have devoted to studying it. The issue is how to maintain the status of American capital markets as the fairest, most successful and most liquid that the world has ever known. It should be noted for the record that the subcommittee is also meeting at an awkward time, given that we are faced with a pro- found short-term crisis, and paradoxically, the harm that could be done to our capital markets by this crisis far exceeds the help that would be provided to them were we to enact any or even all of the proposals and ideas that will be discussed here today, assuming, of course, that all of these ideas would be helpful. But without belaboring the point, I believe it is regrettable that the American government's creditworthiness is being jeopardized by being linked to a controversial and partisan set of issues. Notwithstanding the paradox, however, we begin our review with an accomplished panel of witnesses and I look forward to hearing from them. I also look forward to working with you, Mr. Chairman, as we plan additional hearings to bring in a range of other experts and interested parties to develop the fullest possible factual record on the various needs of the marketplace. The logical starting point for our review should be an assessment of the health of the market itself. And on this score, all indications are that the news is quite good. By virtually every statistical meas- ure, our capital markets are vibrant and healthy. For example, in 1994, for the third consequence year, companies raised $1 trillion in capital from investors in American fmancial markets, smashing all previous records. Indications are that 1995 will be even more successful. Those who follow the stock tickers also know what kind of year it has been. Yesterday marked the 218th trading day of the year on our stock markets. On 40 occasions the American Stock Ex- change closed at a new record high. On 56 occasions the Dow-Jones Industrial Average closed at a record high. And on 66 occasions the NASDAQ closed on a record high. The stock market is not the only thing setting records. We are in the midst of the greatest merger and acquisition boom in his- tory. The value of mergers exceeds even the levels in the mid- 1980's and has been accomplished without the perilous debt levels and speculative frenzy that so often characterized take-overs in that era. With 6 weeks to go, approximately $400 billion in mergers of U.S. companies has already been announced, shattering the record set just last year. Overall, the stock markets are in the midst of the longest run in this century, now about 5 years, without a 10 percent drop. This has been an unprecedented boom for companies, investors and Wall Street firms. With all this good news, it should come as no surprise that Wall Street's profits are expected to set new records for the second time in the last 3 years. This is just a small sample of the data that can be put forward to demonstrate the vitality that presently characterizes our finan- cial markets and that serve to make them the envy of the world. While this unprecedented streak can't last forever, it is against this successful backdrop that we should evaluate proposals for reform and renewal such as those contained in H.R. 2131. As I have said many times before, even healthy patients need periodic check-ups. But the statistics do suggest that our exam