will keep the unlisted companies off the regional exchanges (unless they apply) even when they meet all the 1934 act reporting requirements and thus protect the bread and butter of the OTC group. Naturally this has strong OTC backing. It is most essential that a real understanding of these rule changes and the underlying issues be achieved, for this is a highly complex industry and vast amounts of money are involved; so even small changes can have far-reaching effects on the industry and on the national economy itself and especially on the pocketbooks of special interests who are anxious to keep the whole matter "out of the light." There is a real need for the smaller and regional exchanges so subservient to the volume of major brokerage firms and the New York Stock Exchange ticker system, because through these local exchanges local funds can be reemployed in local industry instead of being exported to major financial centers (New York) where the money often serves only to make blue chip issues more than ever overpriced (comparatively) and thus more susceptible to future "May breaks" as national public investing continues to be concentrated in too limited a number of national blue chip issues. The 12b rule was passed 30 years ago for reasons entirely different than exist today and to solve problems which no longer exist. There was no thought by the architects of the 1934 act that anything like the present OTC market could be created by this small clause in the Exchange Regulation Act of 1934. If you would care to inquire of Dean James Landis, one of the architects of the 1934 act and one of the first SEC Chairmen as to his opinion of the 12b rule, I believe that you will be interested to hear he has been strongly in favor of the full disclosure recommendations of the SEC and the logical and necessary repeal of the 12b rule. When previous efforts to place further necessary controls on the security industry were undertaken in the past, legislation was defeated by the opponents by a curious device; that of progressively raising the reporting size of the unlisted companies to a point where all the smaller companies needing the most supervision were no longer in a reporting status and the need for passing the bill for large companies only was so little that the bill was dropped. A similar pattern appears to be developing which would be unfortunate indeed as the smaller companies need this control most of all and the reporting would take only a tiny fraction of their budgets instead of causing prohibitive expense as the testimony tries to show. Naturally the companies themselves not wishing to report their affairs cry "excessive costs" which is echoed by their spokesmen in their effort again to raise the minimum reporting size to exempt the thousands of smaller companies. In point, the minimum reporting size was recommended in May at 300 stockholders, then 500, then 750 (one million net worth) and today a 1,000 minimum was recommended. In conclusion, Senator, this is a critical area requiring thoughtful study and free undirected testimony to clarify the great need for the repeal of the 12b rule and the retention of the 12f-3 rule when the unlisted companies are brought under the full disclosure requirements of the 1934 act. Some of the finest and most highly paid minds with impeccable connections are no doubt aggressively at work, considering the size of the stakes, and the true issues may therefore be even more difficult to bring out in testimony. Strange alliances indeed are formed when mutuality of objectives can be found in the financial world I am sure, as in the political world, and I can appreciate the problem you may have in hearing the validity of one small voice through the duet of two major voices in opposition to our fight for repeal of 12b and for our survival and growth. Thank you for your consideration. LAWRENCE H. TAYLOR, HARRIS TRUST AND SAVINGS BANK, Hon. A. WILLIS ROBERTSON. Chairman, Senate Committee on Banking and Currency, DEAR SENATOR ROBERTSON: As a State-chartered bank and as a member bank of the Federal Reserve System, we would like to present to you and your committee our views on S. 1642 providing for certain amendments to the Securities Exchange Act. To put our position shortly, it is our view that banks should be expressly exempted from these proposed amendments to the Securities Exchange Act, and that in lieu thereof there should be legislation to the effect of either: (a) That in this area of proxy solicitation and information to stockholders member banks of the Federal Reserve System (and perhaps banks insured by the FDIC) shall be subject to the same regulations as are applicable to national banks under regulations promulgated by the Comptroller; or (b) That in this area of proxy solicitation, etc., State-chartered banks shall be subject to regulations of the Federal Reserve Board and national banks shall be subject to regulations of the Comptroller. We assume that legislation of the kind above suggested would also make it clear that the Comptroller or, as the case may be, the Federal Reserve Board would have the power in framing the applicable regulations to either exempt entirely banks of a limited size or with a limited number of stockholders, or to apply a different scope of requirements to banks of different size or numbers of stockholders. We respectfully submit that legislation of the kind above suggested would fit the pattern historically established by Congress in dealing with regulatory matters which it felt should apply to all banks, both State and Federal, in the same way. One example of such historical pattern is, of course, the provision of the Federal law to the effect that State member banks are subject to the regulations of the Comptroller in respect of "purchasing, selling underwriting, and holding of investment securities and stocks" (12 U.S.C. 335). Our experience has been that this historical pattern has worked out well in practice. We do not believe the provision of S. 1642 to the effect that the powers, functions, and duties of the SEC "shall be delegated in whole or in part to the Federal banking regulatory agency or instrumentality which has jurisdiction to examine or supervise the business of such banks ***" is a solution to the problem. This provision would mean, of course, under present conditions, that the powers in this area would be delegable to the Comptroller as to national banks, but would be delegable to the Federal Reserve Board as to State member banks, and in each case the particular scope of functions which would be delegated might be different and might differ from time to time as administrations, or personalities in a given administration, changed. The result might well be continuous confusion of regulations, interpretations, and enforcement policies. While we recognize the desirability of adequate disclosure in this general area and feel that this institution has been particularly mindful of its obligations in this regard, we do not believe any need for further regulations in this area, no matter how pressing seems the necessity, should be used to subject banks to regulation by still another commission which, no matter what its expertness in other fields, has no experience or particular background in the banking field. Very truly yours, KENNETH V. ZWIENER, President. PORTLAND, OREG., June 24, 1963. Hon. WILLIS A. ROBERTSON, Senate Office Building, Washington, D.C.: Oregon Bankers Association, representing every bank in Oregon, voted in convention June 18 complete support James Saxon's position against subjection of banks to SEC laws. Such legislation unnecessary expense to banks without equivalent benefit to public. LESTER E. THAYER, Executive Secretary. MEMORANDUM FROM ROBERT L. AUGENBLICK, GENERAL COUNSEL, ON BEHALF OF INVESTMENT COMPANY INSTITUTE, REGARDING NEED FOR CLARIFICATION OF THE SECURITIES ACTS AMENDMENTS OF 1963 (S. 1642) The Investment Company Institute submits this memorandum in order to point out the need for clarification of certain portions of S. 1642 so as to make it plain that such proposed legislation does not confer upon a registered securities association any power or jurisdiction over an investment company registered under the Investment Company Act of 1940 or an investment adviser of any such investment company, or with respect to personnel of such investment company or investment adviser. The Investment Company Institute is an association composed of 169 open-end investment companies (popularly called "mutual funds") and also the 89 investment advisers to, and 80 principal underwriters for, such investment companies. The investment company members of the Investment Company Institute, all of which are registered under the Investment Company Act of 1940 and are subject to extensive regulation by the Securities and Exchange Commission under that act, have aggregate assets constituting approximately 95 percent of the assets of all domestic registered open-end investment companies. These companies provide a medium by which investors may pool their resources and have the funds invested collectively in the securities of other corporations. They offer the investor of moderate means an opportunity to obtain diversification of risk and experienced investment management which might otherwise be available only to persons of substantial means. These companies have approximately 6 million shareholder accounts. The average size of these accounts is about $3,600. Investment advisory services are usually furnished to an investment company by an investment adviser which is a separate corporation or partnership. In the case of an investment company organized as a trust, investment advisory services may be performed by the trustees of the trust. Most investment companies employ principal underwriters for the sale of their shares, and the principal underwriter may be a corporation or partnership separate from the investment adviser. As a result of stock ownership, there is often a "control" relationship between the investment adviser and the principal underwriter of an investment company. An underwriter to an investment company is a "dealer" under the Securities Exchange Act of 1934 and would, under proposed section 15 (a) of such act (bill, p. 14), be required to be a member of a registered securities association. The need for clarifcation of S. 1642 arises because of the breadth of the definition of "person associated with a broker or dealer" contained in the proposed amendment of section 3(a) of the Securities Exchange Act of 1934 (bill, p. 2). Such definition of "person associated with a broker or dealer" includes any person "directly or indirectly controlling or controlled by” a broker or dealer, and thus might include those corporate investment advisers, whose majority stock is owned by, or who own the majority stock of, a principal underwriter. Moreover, since the word "control" is essentially vague and is not defined in the 1934 act, there is no certainty that an investment company itself might not in some circumstances be claimed to be a person "directly or indirectly controlling or controlled by" the principal underwriter. If an investment adviser or investment company were found to be a "person associated with a broker or dealer" under proposed section 3(a) (18), it would also be a "person associated with a member" under proposed section 3(a) (21) (bill, p. 2) since the definition of "person associated with a member" includes a "person associated with a broker or dealer which is a member of such [registered securities] association." If an investment adviser or investment company were a person "associated with a member," it is not clear whether the proposed amendments to section 15A of the 1934 act might not for the first time subject the personnel of an investment adviser or investment company to regulation in certain areas by a registered securities association. More specifically, proposed paragraph (5) of section 15A (b) (bill, pp. 26, 27) states that the rules of the registered securities association must, unless the Commission directs otherwise, provide that no "natural person" shall become a "person associated with a member" unless such person meets standards prescribed by the association, and further states that for the purpose of defining such standards the association may classify "persons proposed to be associated with members" and may require them to be registered with the association. Proposed amended paragraphs (9) and (19) of section 15A (b) (bill, pp. 28, 29) require the rules of the association to provide disciplinary measures and procedures for persons "associated with members." Although the mandatory direction to the registered securities association to set standards and qualifications is limited in the case of a "person associated with a member" to a "natural" person, this might, taken literally, be interpreted to include an officer or director of an investment adviser or investment company, a partner of an investment adviser partnership, or a trustee of a trust-type investment company, all of which individuals are "natural" persons. The uncertainty is increased by the fact that proposed amended section 15A (k) (2) (bill, p. 34) provides that the Commission, if an association fails to alter or supplement its rules upon the Commission's request, may by order alter or supplement the association's rules with respect to, among other things, the "qualifications required for * * * persons associated with members * * *", and in this case the word "person" is not qualified by the word "natural." The technical statement of the SEC submitted in connection with the bill points out clearly that the bill is not intended by the SEC to subject registered investment companies, investment advisers, or their personnel, to regulation by a registered securities association. Thus, the SEC technical statement says in this connection (p. B−22). "Under the proposed amendment, the NASD could not prescribe qualifications for persons associated with a member unless such persons were natural persons. This would mean for example, that the NASD could not prescribe qualifications such as training, experience, and capital for a nonmember corporation or partnership acting as investment adviser to an investment company, or for an investment company itself, even if such investment adviser or investment company controlled or was controlled by a member of the NASD which acted as underwriter for the investment company." Such technical statement is consistent with the fact that registered securities associations are associations of "brokers and dealers" under section 15A of the Securities Exchange Act of 1934. Investment companies, and to some extent their advisers, are subject to regulation by the carefully drawn provisions of the Investment Company Act of 1940, and their functions are fundamentally different from those of a broker or dealer concerned with the sale of securities. Because of the importance to investment advisers and investment companies of certainty of exclusion from regulation by an association of brokers or dealers, we respectfully suggest that clarification of the bill in this respect is needed. In aid of such clarification, we suggest that the word "natural" should be inserted before the word "persons" in clause (A) in the seventh line from the top of page 34 of the bill, and additionally that the committee report on the bill affirmatively adopt the substance of the SEC technical statement and state clearly that the bill is not intended to confer upon a registered securities association any power or jurisdiction over an investment company registered under the Investment Company Act of 1940 or an investment adviser of any such company, or with respect to standards or qualifications for personnel of such investment company or investment adviser. Re: S. 1642. THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK, Senator HARRISON A. WILLIAMS, Jr., DEAR SENATOR WILLIAMS: Last July the Association of the Bar of the City of New York formed a special committee on securities regulation. Much of the impetus for the formation of the committee at that time came from the recognition that the special study then being carried out on behalf of the Securities and Exchange Commission pursuant to section 19 (b) of the Securities Exchange Act of 1934 would culminate in a report and presumably specific recommendations for legislative and administrative changes with respect to securities regulation. This committee has therefore taken a keen interest in the Securities Acts Amendments bill (S. 1642). The members of the committee have reviewed this proposed legislation and many of the members have actively engaged in the discussions with the Securities and Exchange Commission and industry leaders which led to the formulation of the proposal as submitted to Congress. The members of the committee, as lawyers, have appraised the bill primarily from the standpoint of the general public policy embodied therein and the applicability and propriety of the language employed in the bill viewed from a professional and technical point of view. The committee understands that detailed appraisal of the bill from the standpoint of the practical effect on the securities industry is being provided in a number of statements by members of the industry. As a result of its review and appraisal, the committee has concluded that the passage of S. 1642 is in the interest of the investing public and of the securities industry and therefore recommends that the bill be enacted. In the process of considering the bill with the Securities and Exchange Commission, members of the committee made a number of suggestions, a large number of which were adopted by the Commission in its bill. One area to which a great deal of attention was given by the committee was that of section 16(b) of the Securities Exchange Act of 1934, the applicability of which would be extended by S. 1642. Although the committee is in accord with the purpose of section 16(b), we believe that, in a number of decided cases, the courts have, in interpreting the provisions, extended the applicability of the section far beyond that intended by Congress. In this area, the Securities and Exchange Commission representatives with whom the committee members discussed the question believe that the exemptive powers to be granted to the Commission by the bill, together with those already possessed by the Commission under the Securities Exchange Act of 1934, will be sufficient to enable the Commission to meet the objections of the committee, if these prove to be of merit. The committee proposes to continue its exploration of these problems with the Commission. This is on the understanding that the extension of the applicability of section 16(b) provided in the bill will not prevent this further exploration and will not carry with it congressional approval of those lower court interpretations of section 16(b) which the Committee believes to have been erroneously reached; otherwise we would wish to recommend further amendment of the section. As a result of further study of S. 1642 since it was introduced, the committee has some additional technical suggestions with respect to the language of the draft bill. These suggestions are discussed in the memorandum attached hereto. None of the suggestions in the attached memorandum derogate from the basic position of the committee set forth above, that is, that the bill is one which the committee believes to be desirable and which it recommends be enacted. Very truly yours, Section 2 SPECIAL COMMITTEE ON SECURITIES REGULATION, By WILLIAM J. IVEY, Secretary. TECHNICAL COMMENTS ON H.R. 6789 AND S. 1642 In the new paragraph (18) of section 3(a) of the Securities Exchange Act of 1934, insert the word "By" in place of the two words "In such" in lines 9 and 10 of page 2 of the bills. Comment. The preceding sentence in paragraph (18) is expressed in permissive terms, thus arguably vitiating the mandate in the sentence beginning with the quoted words. Section 3(b) At the end of the last paragraph of section 12(f) of the Securities Exchange Act, as amended, add, after the word "title" in line 11 of page 6 of the bills, the words"; and the Commission shall, by rules and regulations, exempt from the operation of such sections any security having unlisted trading privileges pursuant to clause (1) of this subsection (f) if section 12(g) (1) of this title is inapplicable to such security either by its terms or by reason of the provisions of section 12(g) (2)". Comment. The proposed new language is designed primarily to deal with certain difficulties of construction under the last paragraph of section 12(f) with respect to securities of foreign issuers presently entitled to unlisted trading privileges under section 12(f) (1) and securities of domestics issuers similarly traded and falling below the statutory standards as to assets and number of equity security holders of record. By virtue of the new section 12(g) (2) (E), the registration requirements of section 12(g) (1) would not apply to any security of a foreign issuer unless the Commission makes specified findings after notice and hearing. Of course, a listed security of a foreign issuer is presently subject to the 1934 act. It appears that the category of a foreign security entitled to unlisted trading privileges may have fallen between two stools in the proposed legislation. Although arguably this difficulty could be taken care of by Commission regulations, section 12(g) (2) (E) contains certain statutory standards which must be met before the Commission can withdraw, as to a particular issuer, the general exemption available to foreign issuers. These standards are not identical to those set forth in the final paragraph of section 12(f) which would provide the statutory basis for regulation in this area. Furthermore, we believe that this exemption should be statutory and not dependent upon regulations. Similarly, with respect to issuers which fall below the statutory standards as to assets and number of equity securities holders of record, since section 12(g) (1) would presumably reflect legislative policy on minimum size requiring registra |