In the Matter of GEORGE C. KERN, JR

125 Broad Street; New York, New York

June 21, 1991

Release No. 34-29356

June 21, 1991

Administrative Proceeding File No. 3-6869

OPINION OF THE COMMISSION

SECTION 15(c)(4) PROCEEDINGS

Section 15(c)(4) of the Securities Exchange Act is construed as not providing for the issuance of orders directing compliance with applicable requirements in the future.

APPEARANCES:

Henry L. King and L.Gordon Harriss, of Davis Polk & Wardwell, and Marvin Schwartz, RichardJ. Urowsky, Gandolfo V. DiBlasi, Robert A. Sacks, and Charles S. Sullivan, of Sullivan & Cromwell, for George C. Kern, Jr.

Thomas C. Newkirk, Mark Kreitman, Jerry A. Isenberg, Jay A. Dubow, and Julie K. Lutz, for the Division of Enforcement.

Steven B. Flood, for the Committee on Securities Regulation of the Association of the Bar of the City of New York, and E.Michael Bradley, for Brown & Wood, amici curiae.

I

These are proceedings pursuant to Section 15(c)(4) of the Securities Exchange Act. ¹ On its own initiative, the Commission ordered review of the administrative law judges initial decision herein with respect to George C. Kern, Jr., a partner in a New York law firm who was head of the firms mergers and acquisitions group during the relevant period. Kern also appealed from the law judges decision.

The law judge found that Kern, who was a director of Allied Stores Corporation and its principal outside counsel, was a cause of Allieds failure to comply with the disclosure requirements of Section 14(d)(4) of the Exchange Act and Rule 14d-9 thereunder. ² However, the law judge declined to issue an order of future compliance with respect to Kern because Kern was no longer in a position either to require Allied to make corrective filings or to control its future compliance. The law judge concluded that issuance of an order was beyond his authority under these circumstances, and accordingly, discontinued these proceedings. ³

For the reasons set forth below, we have determined to affirm solely the determination to discontinue these proceedings.

II

The issuance of general orders of future compliance under Section 15(c)(4) is essentially a matter of first impression in an adjudicated proceeding. ⁴ The Commissions authority to enter such orders under Section 15(c)(4) was highly contested in this proceeding. The Division has contended that under Section 15(c)(4) the Commission may issue orders requiring general future compliance by individuals who are a cause of the violations of others, and that such orders apply to the respondents conduct with respect to any issuer with which the respondents may associate in the future.

The administrative law judge, however, while finding that Kern was a cause of Allieds failure to comply with Section 14(d)(4) of the Exchange Act and Rule 14d-9 thereunder, did not issue the requested order directing future compliance by Kern with these provisions. The law judge ruled that Section 15(c)(4) authorizes the entry of an order of future compliance requiring an individual to take steps to effect compliance by the issuer whose violation is involved, even if the specific violation alleged has been cured prior to the entry of the order; but he found that it does not authorize the entry of an order requiring general future compliance with respect to any issuer with which the individual might become associated. Since Kern no longer was associated with Allied, the law judge concluded that issuance of any order was beyond his authority.

Kern has argued that neither the statutory language of Section 15(c)(4) nor its legislative history can be read to authorize the issuance of general orders of future compliance. He has further contended that, since there is no basis for the relief sought by the Division, the proceeding should be dismissed without the entry of any findings by the Commission on any of the underlying issues in the case.

The issues in this regard concern the proper construction of Section 15(c)(4). In accordance with established principles of statutory construction, the starting point of our analysis is the statutory language, ⁵ and if the language is unclear, we may look to the legislative history for guidance. ⁶

Section 15(c)(4) provides in pertinent part that, upon a finding of a failure to comply with certain provisions of the Exchange Act, the Commission may publish its findings and issue an order requiring [the person failing to comply], and any person who was a cause of the failure to comply *** to comply, or to take steps to effect compliance with such provisions *** upon such terms and conditions and within such time as the Commission may specify in such order. The text of the statute refers generally to orders to comply, and the statute itself does not contain any limitation whatsoever on the scope of such compliance orders. However, at the same time, the statutory text does not specifically provide for the issuance of orders requiring general future compliance for any and all issuers. Thus, on its face, the language of the statute does not clearly resolve the question of the permissible breadth of orders of the Commission authorized under Section 15(c)(4).

Section 15(c)(4) was first enacted as part of the Securities Acts Amendments of 1964, at which time it applied only to persons who failed to comply with the requirements of Sections 12, 13, and 15(d) of the Exchange Act. Taken as a whole, the legislative history of the 1964 Amendments leads to the conclusion that, at the time, Congress did not specifically contemplate that Section 15(c)(4) would be the basis for orders of future compliance.

Several statements in the legislative history suggest that the provision was primarily intended to create more limited remedies, such as orders requiring corrective filings. For example, a Commission statement explaining the provision stated that, under the section, if a company filed a false or misleading report, the Commission could issue an opinion pointing up that fact and require the company to correct its filing. ⁷ The Senate Committee Report concerning the legislation stated that the section was intended to establish an administrative procedure *** for apprising investors of materially misleading filings and for the resolution of accounting and other complex and technical questions involving the disclosure provisions of the [Act]. ⁸ While other references in the legislative history provide more generally that the provision permitted the Commission to issue an order requiring compliance, ⁹ these do not directly suggest that this meant the Commission could order generalized future compliance as to every filing of every issuer.

The legislative history of the Insider Trading Sanctions Act of 1984 (ITSA), which amended Section 15(c)(4) in two respects relevant to this proceeding, ¹⁰ suggests that when Congress revisited that section, it may have had a broader scope in mind. For several years prior to 1984, the Commission had issued consent orders under Section 15(c)(4) providing for general future compliance, ¹¹ and this practice was noted in the House Energy and Commerce Committee hearing on ITSA. ¹² The report of the House Committee on Energy and Commerce, in discussing the Commissions existing authority under Section 15(c)(4), stated that the objectives of a Commission order issued pursuant to that provision may include direct[ing] future compliance and obtain[ing] additional relief as part of the terms and conditions of the order, and compared the Section 15(c)(4) order to a civil injunction. ¹³ Like the statutory text itself, the Committees Report did not suggest that there is any limitation on the power of the Commission to issue such an order directing future compliance.

The Division has argued that this subsequent legislative history demonstrates that Congress was aware of and approved the interpretation that Section 15(c)(4) authorized orders of general future compliance. ¹⁴ In assessing this argument for legislative ratification, however, we must also take into account more recent, and more definitive, Congressional action. In particular, we are influenced by Congress recent grant of cease and desist authority to the Commission in the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (SERPSRA). ¹⁵

The cease and desist provisions added by SERPSRA expressly provide that a Commission order thereunder may require a violator or a cause of violations to cease and desist from committing or causing such violation and any future violation of the same provision, rule or regulation; it further provides that [a]ny such order may, as the Commission deems appropriate, require future compliance or steps to effect future compliance, either permanently or for such period of time as the Commission may specify, with such provision, rule, or regulation with respect to any security, any issuer, or any other person. ¹⁶ The language of SERPSRA expressly providing for orders requiring general future compliance, contrasts with the lack of a clear indication in Section 15(c)(4) that such orders were contemplated.

The inclusion of this express language in the cease and desist provisions of SERPSRA thus conclusively answers, in the affirmative, the question of whether the Commission has the power to issue a broad order requiring generalized future compliance in accordance with the terms of any such order. Thus, for the future, the passage of SERPSRA renders moot the issue of the Commissions general power.

This subsequent more explicit action by Congress could be argued to provide an additional basis for concluding that Congress did not intend Section 15(c)(4) to authorize similar orders. Alternatively, this action could be seen as reflecting a continuing Congressional determination that the Commission should have the authority in question, and a decision to remove any and all doubts concerning the issue. In short, the passage of SERPSRA does not resolve the issue of whether or not the Commission had such authority in 1987 when it brought proceedings against Kern pursuant to Section 15(c)(4).

Review of the nearly 100 proceedings instituted under Section 15(c)(4) reveals a gradual expansion of the application of this administrative remedy, by consent in all but the two instances already noted. During the three years 1964_{-1967, the remedy was unused; during the eight years 1967}-1975, ¹⁷ the Commission initially issued orders for corrective amendment of filed reports and orders specifying the method of publicizing the corrections so ordered, then issued orders requiring compliance with respondents undertakings to implement procedures designed against repetition of the violations corrected. Orders requiring fulfillment of undertakings for future compliance with the Exchange Act, and ultimately orders directly requiring general future compliance with the act, evolved thereafter. In the context of consent orders, that process of expansion is both comprehensible to the observing public and useful to the Commission, to the Division and to the affected respondents and others similarly situated. ¹⁸ The possibility of challenge to the legislative underpinnings of that expansion has always been open to a respondent.

With respect to the portion of Section 15(c)(4) that authorizes remedial orders, in 1963 the Commission (which had drafted and then substantively revised the statutory language before transmittal to Congress) explained to Congress, in its explanatory statement accompanying the bills submitted to both houses, that it intended to utilize its proposed authority to require the company to correct its filing. ¹⁹ In 1984, the Commission forwarded to the relevant House Subcommittee legislative proposals to amend Section 15(c)(4) that included, among other things, a summary of the use of Section 15(c)(4) as primarily a means of compelling issuers to correct false or inaccurate periodic reports. ²⁰

The statutory language at issue was proposed by the Commission, was transmitted to Congress with an explanation of the Commissions particular purposes, and was enacted into law by Congress and the President using substantially the words transmitted by the Commission without any persuasive indication of Congressional or Presidential intent contrary to or supplemental of the explanation adopted by the Commission.

In light of all the foregoing factors, we now believe that the better view of the proper exercise of our authority, in the context of the Commissions performance of its adjudicative function in contested administrative proceedings, is that we are and ought to be constrained from imposing orders of general future compliance under Section 15(c)(4).

Accordingly, after careful consideration of all the relevant facts and circumstances, the arguments of the parties and amici, and the legislative record, we conclude that Section 15(c)(4) should not now be construed to authorize an administrative remedy of this nature.

III

In view of our determination not to impose orders of general future compliance under Section 15(c)(4), we affirm solely the law judges determination to discontinue these proceedings and reach none of the other matters addressed therein.

An appropriate order will issue.

By the Commission (Chairman BREEDEN and Commissioners FLEISCHMAN, SCHAPIRO, LOCHNER and ROBERTS).

Jonathan G. Katz

Secretary

[Footnotes]

SEC_CODE_REF_0090001192884