Regulating the Sale of Securities: Hearing...88-1...May 2, 1963
Por United States. Congress. House. District of Columbia
Also, 20 enforcement proceedings were brought against District broker-dealers by the SEC during the period from July 1, 1959, to May 7, 1962.
I submit, however, in view of the fact that the Commission's responsibilities are primarily national in scope, it should not be burdened with the responsibility for the full range of local regulation of the securities brokerage business in the District of Columbia.
In addition, the National Association of Securities Dealers has increased its complaints filed against District securities dealers by 650 percent. The national increase was at a rate of 215 percent. In 1961, 18 percent of the association's members in the District of Columbia failed, compared with 8 percent nationally.
Many District investors have learned the hard way that their money and their hopes for future security and happiness can vanish into thin air through the action or inaction-of the unscrupulous or the unqualified securities dealer.
The investing public in the District needs protection. It is entitled to protection. And that protection must include driving out of the District those broker-dealers who, morally or professionally, are unqualified to protect the needs of those they purport to serve.
H.R. 4200 will serve that purpose. It will go far toward correcting the unhealthy conditions which have arisen in certain segments of the investment field in the District of Columbia. It should be passed. Thank
Mr. Chairman. Mr. ABERNETHY. I would like to say further I have no particular purpose in showing any preference to any particular witness here. I am going to call them the way they are on this list. The first witness will be Mr. David C. Acheson, U.S. attorney for the District of Columbia.
STATEMENT OF DAVID C. ACHESON, U.S. ATTORNEY FOR THE
Mr. ACHESON. Mr. Chairman, in the interest of saving time, will omit reading the part of my prepared statement which deals with some of the facts and figures respecting the volume of law enforcement proceedings in the securities field in the District of Columbia and measures the degree of lawlessness in the securities field here
Mr. ABERNETHY. Let me make a suggestion. Would you like to begin with page 1 and then you will skip over as you would like and the reporter will record your statement in chronological order in full, unless there is objection on the part of the committee?
Mr. ACHESON. If the Chair would like it that way, I will be glad to do that. On the other hand, I don't want to repeat some of the material that Mr. Springer has touched upon.
Mr. ABERNETHY. All right.
You want to begin where?
Mr. ACHESON. I would like to begin at the bottom of page 4 of my statement.
Mr. ABERNETHY. The reporter will please incorporate Mr. Acheson's complete statement at the conclusion of his testimony.
(The complete statement appears at p. 29 hereof.)
Mr. ABERNETHY. Proceed.
Mr. ACHESON. The Chairman of the SEC, who will follow me this morning, has recommended that legislation be enacted which put the responsibility for local administration of the securities regulations upon the local government–i.e., the government of the District of Columbia.
I want to say I agree with that recommendation. To do so would comport with the local nature of the task of regulating a local business. Moreover, there would not appear to be unmanageable problems of personnel, budget, and administration associated with the job of regulating broker-dealer entry into the business. The bill for which I am appearing here was drafted to minimize these administrative problems and to enable the local government to make the best use of existing facilities and personnel that might be brought to bear.
This bill is a joint product of representatives of government agencies and private bodies that have been most closely concerned with securities regulation. Prior to drafting and during the preparation of three drafts, a thorough discussion of the basic plan and of specific provisions was had among members of the drafting committee.
From time to time, naturally, there were minor differences among individual members of the drafting committee over particular provisions of the bill; but throughout its deliberations the drafting committee enjoyed a remarkable degree of cohesiveness of view.
Mr. ABERNETHY. Mr. Acheson, there is no difference between you and Mr. Cary on that?
Mr. ACHESON. None at all.
The composition of the drafting committee was as follows—I would like to state the composition of the drafting committee, because I think it is significant from where the experience was drawn that went into the drafting of the bill.
Besides myself, the committee consisted of Mr. Irving Bryan
Mr. ABERNETHY. I think we can read that rather rapidly, and suppose you pass over it. I don't want to leave the impression that that is not a very distinguished group of men.
Mr. ACHESON. The basic aim of H.R. 4200 is to regulate the conduct of broker-dealers and agents by the creation of a licensing and enforcement power. It would appear that the heart of the securities problem in the District is the problem of unqualified or unscrupulous brokerdealers and agents. This is not to ignore the problems of unseasoned issues of securities.
Rather, the control of licensing and operations of broker-dealers and agents which is afforded by the bill will go a long way to cure the related problem of the distribution of unseasoned issues, normally accomplished through dealers or agents of issuers.
The bill focuses the regulatory power upon the segment of the securities business that deals with the public—the seller, rather than the issue itself. Ideally a "blue sky law would provide complete powers over every phase of the securities business, but there are sound reasons why H.R. 2200 deals selectively with that aspect of the securities business in the District which cails for the most immediate attention. Considerations of budget and staff of the District of Columbia government suggested that some selection of measures was necessary.
The selection of sellers' conduct as the area of regulation, rather than securities issues, was dictated primarily by two considerations:
(a) Since very few issues originate in the District of Columbia, public offerings of securities in the District of Columbia are often subject to the controls of the States in which they originate or are sold, and they are always subject to the disclosure requirements of the Federal Securities Act of 1933.
(b) More importantly, it is that area (broker-dealer transactions) in which there appears to be the most immediate need of protection of the public.
With these aims in mind--protection of the investing public through broker-dealer licensing and enforcement—the drafting committee turned to the Uniform Securities Act, a model law proposed for State legislation by the National Conference of Commissioners on Uniform State Laws. The Uniform Act is in four basic parts:
(1) a fraud section;
(2) a part providing for registration of broker-dealers, agents, and investment advisers;
(3) a part providing for registration of securities issues; and
(4) a part providing for procedures, subpenas, penalties and liabilities, judicial review, and administration.
As I have said, the drafting committee believed that administrative and budgetary considerations suggested leaving control of securities issues to the SEC and concentrating local government powers upon the regulation of sellers and accordingly worked toward an adaptation on the Uniform Act that would eliminate part III and make use of the other parts with necessary adaptations for the unique circumstances of the District of Columbia.
By way of brief summary, H.R. 4200 provides a licensing system in terms very similar to part II of the Uniform Act. Three board categories of fraud are made unlawful (sec. 3). It is made unlawful for a broker-dealer or the agent of a broker-dealer or agent of an issuer to do business without a license (sec. 4).
To apply for a license an applicant must make detailed disclosures about his business and history and pay a filing fee (sec. 5).
Bonding, a minimum capital, and a ratio bet ween net capital and aggregate indebtedness are provided for (sec. 5).
Records and examinations of applicants are required (sec. 7). Licenses may be denied, suspended, or revoked for specified causes, including incomplete or misleading statements in the application, substandard qualifications, involvement in certain criminal or enforcement or disciplinary proceedings, inadequate finances or supervision of employees, fraud, or violations of the act, and so forth (sec. 10).
The local government has the power of summary suspension pending final determination of action against an applicant or licensee (sec. 10).
Investigations, subpenas, injunctions, criminal penalties, and civil liabilities are provided for (secs. 11-14).
There are numerous procedural and administrative provisions designed to achieve convenience and simplicity of procedure while affording protection to the rights of applicants, licensees, and the public. The bill is to become effective upon approval in its provisions regarding fraud and preliminary administration, and effective 180 days from approval in respect of its provisions for licensing and enforcement. This preparation period was provided to allow the responsible local agency time to organize and process applications prior to the deadline for licensed operation.
H.R. 4200 is designed to give the local government ample powers to bring under control the problems of unscrupulous and unprofessional seller transactions with the public. It will leave to the Public Utilities Commission of the District of Columbia, renamed the Public Service Commission (secs. 16, 201), the responsibility for the administration of the bill and the exercise of the powers created by the bill.
We believe that the public will greatly benefit from the provisions of the bill, and that legitimate securities broker-dealers here in the District will benefit commensurately.
A broker-dealer house, however small, which is adequately financed, staffed, and supervised, with no history of irresponsibility or fraudulent practices, should not have any difficulty obtaining a license to carry on a securities business.
By eliminating the fly-by-nights and the black mark with which they stigmatize the securities business as a whole, the bill will be good for business as well as for the public.
An entire securities business of a major city cannot be regulated effectively by criminal prosecution. Prosecutions have their place, and there will be vigorous criminal enforcement under this bill, as there is now, but preventive regulation is worth much more than prosecution alone. Regulation must be applied at the source of the trouble. The most obvious source, in the District of Columbia, is the lack of preventive restraint over the entry into the securities business of crooks and unqualified adventurers. Only by controling entry into the business by licensing, by enforcing the licensing requirements, and by holding licensees to high professional standards, can the securities business be kept safe for the public.
Now, Mr. Chairman, I would like to condense my discussion of the section-by-section analysis of the bill, and I have selected a few of the major sections to read from my statement.
I want to start with the definitions section, which is section 2. That appears on page 11 of the statement.
These definitions are taken substantially verbatim from section 401 of the Uniform Act. The definitions relating to the area and government of the District of Columbia are, of course, new. The basic definitions of "agent" and "security" are very broad. Without exemptions, the danger would be commensurately great of subjecting to the licensing requirements of the act numerous "agents" of "issues" whose business is wholly foreign to the type of securities business that the act seeks to reach; for example, bank employees issuing evidences of indebtedness employees of mutual funds who purchase securities for portfolio, and so forth.
To avoid this danger of bringing extraneous business personnel and transactions under fortuitous regulation by virtue of the very sweeping basic definitions, certain exemptions from licensing are provided for agents of issuers of certain securities and in certain transactions.
Mr. ABERNETHY. Off the record. (Discussion off the record.)
Mr. ACHESON. These exemptions are particularized and are kept to a minimum.
The definition of "security" (see p. 10, line 4 of the bill) excludes insurance or annuity contracts payable "in a fixed sum," or contracts issued by insurance companies pursuant to section 41 of chapter III of the local life insurance act (District of Columbia Code 35–541).
This latter reference is to variable annuity contracts issued in compliance with the local law governing the same. The purpose of this handling of variable annuities in H.R. 4200 is to bring under regulation by this bill all variable annuities sellers in the District who have not been approved by the local Superintendent of Insurance and have not complied with section 541 of the insurance law. The definition of "security" in this bill would exclude from regulation variable annuities sellers who have complied with the local insurance law and are approved by the Superintendent of Insurance. The sellers in this latter category would then fall under the regulatory scheme of the insurance law and would not be subject to dual regulation by two local agencies under two separate local statutes and two local sets of agency regulations.
This statement is not the place to attempt a definitive discussion of the pros and cons of regulation of variable annuities under the securities laws.
The Supreme Court has held that variable annuities may be regulated as securities for registration purposes under the Federal Securities Act of 1933, and that issuers of such annuities may be treated as investment companies under the Investment Company Act of 1940 (SEC. v. Variable Annuity Life Insurance Co. of America, et al., 359 U.S. 65 (1959)).
It may be that variable annuities also may be regulated under the Securities Exchange Act of 1934, a question which the courts have not thus far decided. The drafting committee did not attempt to decide whether variable annuities are securities for all purposes.
Variable annuity contracts are sold and handled by issuers in ways that have some of the aspects of the selling and handling of mutual fund shares. Of course, variable annuity contracts also have some of the basic aspects of insurance.
In the District of Columbia, variable annuity contracts are now subject to regulation by the Superintendent of Insurance. Variable annuities and their regulation are matters of relatively recent consideration, and experience with the problem is not highly developed. Differences of view exist among lawyers and securities men as to how variable annuities can best be regulated. The provisions of this bill regarding variable annuities represent an effort to find an interim solution that will assure effective, but not oppressive local regulation of variable annuities pending further experience with the problem.
Section 3: I want to comment briefly on the fraud provision, which is section 3 of the bill.
The provisions of 3 (a), (b), and (c) are substantially verbatim from 101(a), (2), and (3) of the Uniform Act.
These provisions are also closely similar to those of section 17(a) of the Securities Act of 1933. Section 17(a) of the 1933 act is, by operation of section 2(7) of that act, applicable in the District of Columbia. It is not intended that H.R. 4200 should oust the application in the District of section 17(a) or of any Federal statute.