(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

New Senate Banking Chairman Gives Views on Securities Laws, Privacy

Incoming Senate Banking Committee Chairman Richard C. Shelby said that his number one goal once the new Congress begins next year would be to protect the integrity of the capital markets. In remarks to the Consumer Federation of America, he also pledged to monitor the implementation of the Sarbanes-Oxley Act and to work to protect privacy. Sen. Shelby will replace current committee chairman Paul Sarbanes when the 108th Congress convenes in January 2003.

Sen. Shelby said that the banking committee would consider the issue of aiding and abetting standards for securities fraud. In a 1994 ruling, the U.S. Supreme Court in Central Bank of Denver v. First Interstate Bank (1993-94 CCH Dec. ¶98,178) held that there was no implied private action against persons who aid and abet securities fraud. Earlier this year, he introduced legislation that would have deemed any person that recklessly aids or abets another person in violation of the federal securities laws to be in violation of such laws to the same extent as the person to whom such assistance was provided. The bill, the Investor Protection Act of 2002 (S.1933), was intended to provide individual investors the opportunity to take legal action against those who aid and abet public companies in the production and dissemination of inaccurate financial information. The bill was not reported out of committee.

In another example of his interest in the aiding and abetting issue, a Shelby-sponsored provision of the Sarbanes-Oxley Act, codified as Sec. 703, directs the SEC to conduct a study of aiding and abetting liability that, among other things, will focus on the number of securities professionals found to have aided and abetted securities fraud in a specified four-year period. A report based on the study must be submitted to Congress at the end of January 2003. Echoing Sen. Shelby's consistent opposition to the Private Securities Litigation Reform Act of 1995, S.1933 would also have restored joint and several liability to securities antifraud actions. The 1995 act embodied a principle of proportionate liability under which damages are apportioned as a percentage of responsibility for fraudulent activities.

Sen. Shelby believes that the changes to the federal securities laws approved by Congress in the 1995 reform measure weakened existing investor protections, making it too difficult for wronged investors to pursue claims against those who harmed them. Too many in the securities industry have been shielded from investor lawsuits, he has reasoned in earlier remarks, and that has removed incentives for doing the right thing as far as investors are concerned. He holds that it is critical that the securities industry fulfill its public obligation to provide accurate and objective financial information.

The senator has also been one of Congress's major proponents of privacy legislation. He unsuccessfully attempted to have the Gramm-Leach-Bliley Act of 1999 include an opt-in provision for the sharing of financial information, instead of the opt-out that was ultimately adopted. He told the gathering that, while he would like to insert an opt-in standard into the Gramm-Leach-Bliley privacy mandates, it is unlikely that there will be support in Congress for that. He did say, however, the he opposes having federal laws preempt state privacy laws, and wishes that this will not happen.

In March 2002, Sen. Shelby introduced a bill to amend the Gramm-Leach-Bliley Act to prohibit financial institutions from disclosing consumer marketing and behavioral profiling information for the purpose of marketing non-financial products, unless the institution notifies the consumer in clear and conspicuous format and the consumer affirmatively consents. This bill, S.536, was never reported out of committee.