WASHINGTON - The Securities and Exchange Commission asked Congress yesterday to pass legislation to restore the aiding and abetting liability of trustees, lawyers, and others who knowingly contribute to securities fraud.

But no quick fix is in sight to overturn a recent Supreme Court ruling that removed such liability from the antifraud provisions of securities law.

And Sen. Phil Gramm, R-Tex., vowed yesterday to fight any such legislation because investor suits against companies have hurt American business and cost jobs. The proliferation of securities fraud suits "is making it difficult for small and medium business to get professional assistance," he said.

SEC Chairman Arthur Levitt Jr. told the Senate Banking Committee's securities subcommittee at a hearing that it is unclear whether the Supreme Court's April 19 decision, Central Bank of Denver v. First Interstate Bank of Denver, applies to SEC suits. But rather than litigate the question, the SEC prefers a legislative solution, he said.

"It is no longer safe to assume that, if there is a gap in the securities laws, the court will supplement the statutory text to effectuate Congress' underlying policy goals," Levitt said. "Instead , Congress should assume that the court will minimize policy considerations and strictly adhere to the text and structure of the statutes drafted 60 years ago."

Legislation is needed to maintain flexible enforcement policy at the SEC and to restore the ability of investors to file private claims, which supplement the commission's efforts to deter and recover losses fro securities fraud, Levitt said.

The SEC "will generally refrain, at this time, from asserting aiding and abetting theories of liability where the statute does not expressly provide for such claims," Levitt said. But the commission still will pursue aiders and abettors under administrative and other remedies, he said.

Subcommittee chairman Sen. Christopher Dodd, D-Conn., said he was concerned abut press reports earlier this week that the SEC is dropping aiding and abetting charges in pending cases. "Aiding and abetting liability has been critically important in deterring individuals from assisting possible fraudulent acts by others," Dodd said.

"We are looking at [the case] very carefully; we are clearly not dropping" them, Levitt said. Of 420 securities fraud cases pending before the commission, about 80 to 85 rely on aiding and abetting charges in conjunction with other charges. Of these, only about 22 rely solely on aiding and abetting claims, he said.

"We think a large number" of those claims "can be brought under other charges," SEC general counsel Simon Lorne told the subcommittee.

The commission believes it "will generally be able to plead a primary fraud violation against persons, such as accountants, who make statements relied upon by investors," Levitt said. "The more difficult situations may involve corporate disclosure cases in which a number of different officers and agents of the corporation play a role in developing the disclosure in question."

The SEC plans to bring more administrative cases by using, for example, authority to order persons who "cause" a securities law violation to "ceased and desist," Levitt said. The commission also could take actions against persons who "control" any other person liable under the Securities Exchange Act of 1934, he said.

But because administrative procedures do not provide for civil penalties, the commission would have to seek such remedies in federal district court, Levitt said. Legislation would remove the need to pursue cases on two fonts, he said.

Investors making private claims will be affected more severely because they do not have administrative authorities available to the commission and, unlike the SEC, they must show they relied on a defendant's misstatement or omission, Levitt said.

Dodd asked Levitt to submit draft legislation "sooner rather than later." However, simply inserting "aiding and abetting" liability into the law will not work because "we will all be back here again in a few years discussing a new troubling Supreme Court decision on this same subject," he said.

Aiding and abetting liability has evolve out of case law "with no direction whatsoever from the legislative branch," Dodd said. "The Supreme Court has laid down a gaunlet for Congress.

The SEC's position is key to any legislative response in both the House and Senate, aides said. But the issue could get tangled up in the long-running debate on litigation reform. Sen. Pete Domenici, R-N.M., who is co-sponsor with Dodd of a comprehensive litigation reform bill, said at the hearing that Congress should proceed with a broad-based bill addressing other liability doctrines.

Sen. Howard Metzenbaum, D-Ohio, who testified before the panel, argued for a quiker, simpler fix. "It is catastrophic what was occurred in the Supreme Court decision" for investors who now not cannot recover losses imposed on them by people who knowingly contributed to fraud, he said.

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