(1) There are first-time recordkeeping violations which are serious, and should be subject to fines. As currently drafted, H.R. 3310 does not sufficiently distinguish inadvertent or trivial violations that should not be sanctioned with fines from more serious violations.

Under the Paperwork Reduction Act ("PRA")," the term "collection of information" is defined to include not only recordkeeping and reporting requirements imposed on a business by a government agency, but also any disclosures that an agency requires a business to make to third parties, such as clients or prospective clients." Thus, the reach of the PRA includes information provided to investors to protect them from fraud, as well as enable them to make informed investment choices. For example, a company's prospectus, annual reports, and customer confirmations of securities transactions are all "collections of information" under the PRA. Similarly, other important "collections of information" include items such as broker stock quotations -which are required to be transmitted accurately and rapidly to make the markets work properly and fairly.

Under H.R. 3310, violations involving these important documents are exempted from civil fines as well as those more trivial "paperwork" violations that may be imposed for more bureaucratic purposes. Here are examples of some of the "important" SEC paperwork requirements that would be subject to penalty exemption under H.R. 3310.

The Commission's penny stock rules, which were mandated by Congress, provide investor protections through both recordkeeping and disclosure requirements. These rules require that certain disclosures be given, and

that customers agree to certain types of transactions, before the transactions are effected. Violations of this type of rule harm investors by denying them information necessary to make an informed decision, and in many cases, lead to the purchase of disastrous investments in speculative issues.

Another example is in the reporting of a public company's carnings. Virtually every accounting fraud by a public company involves a violation of the requirement to accurately keep the company's books and records. Protection for companies that make inadvertent or innocent mistakes is already built into the law by the requirement that violations be material.

Another type of serious recordkeeping violations involves the deliberate falsification of records and record destruction. These kinds of violations can mask serious fraud. For example, the Commission recently sued eight floor brokers of the New York Stock Exchange for conducting what the Exchange's chairman has described as a "massive falsification of books and records" to conceal illegal trading for their own accounts." The Commission believes that cases involving this type of illegal conduct should not be trivialized or treated with leniency. Often we find that misleading disclosure is used to draw investors into a fraud, and false recordkeeping conceals it from regulators long enough for wrongdoers to profit at the expense of innocent investors.

Concerning a more time-sensitive matter, the Commission currently is engaging in a serious Year 2000 initiative which, in part, would require

certain issuers and market participants to disclose material deficiencies in their systems' Year 2000 readiness. Any six-month grace period would not seem appropriate for failure to make such disclosures.

The Commission believes that fines are an important enforcement tool. The threat of civil fines deters unlawful conduct by removing economic incentives to cut corners in recordkeeping or compliance. Congress recognized the importance of civil fines to upholding the federal securities laws when, in 1990, it gave the Commission new authority to assess penalties in administrative proceedings against regulated brokers, investment advisers and other regulated persons." Congress also gave the Commission authority to seek civil penalties in court actions against any violator, whether or not registered with the Commission.

Notably, Congress created three tiers of possible Commission fines, which link the amount of fines that can be imposed to the type of violations found and the degree of harm caused or the wrongful gain obtained. Thus, the securities regulatory scheme already provides for a penalty scheme that distinguishes more serious violations from those that are less important. A case by case approach has many benefits over a flat prohibition against civil penalties for first-time violators.

(2) The six-month provision may become an excuse for delay in correcting mistakes. The securities markets rely on immediate, accurate information that moves at the speed of light. As described above, the Commission has an active inspections program. When violations are discovered, the staff works with registrants to resolve

recordkeeping violations with informal action. In most cases, however, violations should and can be remedied in 30 days or less.

The proposed amendments may inadvertently be subject to the interpretation that Congress created a presumption that wrongdoers have a six-month safe harbor to correct even the most serious mistakes. An individual investor may choose not to balance their checkbook each month. It is unacceptable, however, to think that a broker could ignore customer confirmation and other recordkeeping requirements, lose customer funds, and be allowed up to six months to correct its records and provide customers with relief.

(3) An exception for all first-time violators may be unintentionally broad. The grace period for first-time violators allows an unscrupulous operator to regain protection from civil fines each time he establishes a new entity. In our experience, when the SBC moves to shut down a broker-dealer engaged in manipulating penny stocks, the rogue brokers and scam artists from the firm named in our enforcement action will quickly form a new firm and start up operations again. Under H.R. 3310, the new firm would have another "free pass" for a first-time violation.

A related difficulty under the proposed amendments will be determining when there has been notice of a "first-time" violation that triggers the grace period. As described, the Commission has a vigorous inspections program and a longstanding policy of leaving to the staff to informally resolve minor, technical or inadvertent deficiencies. The success of this program lies in large measure with the understanding that continued inattention to the requirements of the securities laws could result in formal action. In the event that informal resolution does not cure a problem, violators should not automatically

have the benefit of a safe harbor. The bill does not address whether a "first-time"

violation is established simply by agency notice, or whether there must be any additional process.

SUGGESTIONS FOR IMPROVEMENT.

Generally, the Commission believes that the concept of an automatic exemption from civil fines for first-time violators is not as effective as one tailored to prevent abuses. Whether such a provision should be included in the PRA may best be made a subject for study and consideration by the Task Force also proposed in H.R. 3310. If the provision is given detailed consideration, we suggest the following:

The exception that permits fines for violations that are found to pose an imminent and substantial danger to the public health or safety should be expanded to include violations that involve investor protection or the integrity of the securities markets.

The penalty exception should be limited to "good faith" violations. This would permit fines for violations (i) when the conduct involves fraud, intentional wrongdoing, or destruction of records, and (ii) when the owner or principal of the small business is a repeat offender.

As a more technical point, we suggest that the bill's definition of "small business" conform to the definition of "small business" that is currently in the Regulatory Flexibility Act and used now by all federal agencies.