tion, it would seem appropriate to limit the scope of the first sentence of the last paragraph of section 12(f) rather than to permit the Commission by rule to vary the legislative policy. Sections 3 (c) and 4 In new subsection 12(g) (1) and amended section 13 (a) of the Securities Exchange Act of 1934, insert the words "copies thereof" in place of the words "duplicate originals" in line 8 of page 7, and in line 15 of page 11 of the bills. Comment. The requirement that any copies which are to be furnished to the Commission pursuant to these sections must be duplicate originals seems unduly onerous. Section 6 (b) In the new clause 15(b) (2) (E), substitute the word "purposely" for the word "willfully" in line 13 on page 18 of the bills. Comment. The word "willfully" was added to the draft bills in recognition of the Commission's view that a person would not violate this clause if he did not know, and did not have reasonable cause to know, of the acts, omissions, scheme, or plan of the other person so violating. Because of the fact that the word "willfully" has been given a broader construction by the Commission when used in other contexts, and is, in fact, used elsewhere in the section in cases where a more expansive interpretation is likely, we suggest that the use of an entirely different word has distinct advantages. Section 12 In paragraph 1, change the words "subsection 12(g) (1)" in line 21 of page 38 of the bills to "subsections (12(g) (1) and 14(c)" and in paragraph 2 change the words "section 15 (a)" in line 37 of page 38 and line 1 of page 39 of the bills to the words "sections 12(b) and 15(a)". Comment. In order to avoid discrimination against listed securities as compared with unlisted securities, the provisions of the amendment to section 12(b) and the new section 14 (c) should not be effective sooner than the effectiveness of the new subsection 12 (g) (1). SHIPLEY, AKERMAN & PICKETT, Re S. 1642, amendments to Securities Act of 1933 and Exchange Act of 1934. Hon. HARRISON A. WILLIAMS, Jr., Chairman, Securities Subcommittee of the Senate Banking and Currency Committee, Washington, D.C. DEAR SENATOR WILLIAMS: Our office represents clients in various phases of the securities industry, thus we have an interest in S. 1642, which embodies the legislative recommendations of the Securities and Exchange Commission. SEC Chairman Cary testified on June 18 before your committee that the "enactment of S. 1642 will represent a major achievement in securities regulation, [and] will materially increase existing investor protection, and thus will maintain and enhance investor confidence." While the SEC Special Study of Securities Markets (H. Doc. 95, pt. 1) cites several cases of "boiler room" activity, neither the study nor Chairman Cary adduce any data to indicate that there has been any significant increase in wrongdoing in proportion to volume or in comparison to other similar industries, or that wrongdoing in the securities industry goes undiscovered or unpunished. Indeed, all evidence indicates that the SEC, in conjunction with Federal, State and local law enforcement authorities, is doing as good a job as any other Federal regulatory body. The industry is extremely well policed. As we understand S. 1642, it will extend to investors in over-the-counter securities the same protections given to investors in securities listed on a stock exchange under the Securities Exchange Act of 1934. These include filing of a registration statement containing full financial and business operations information, which must be kept current with periodic and annual reports; furnishing shareholders an adequate proxy statement in vote solicitations; and requiring corporate insiders to report securities transactions, pay the corporation short-swing profits, and forbidding insiders to sell short. (Secs. 3, 4, 5, and 8 of S. 1642.) These requirements will be imposed on all unlisted companies with $1 million of assets and 750 or more shareholders. It may be an unreasonable burden and expense for smaller companies, particularly those with 1,500 shareholders or less. Your committee might consider less stringent requirements, such as simplified reports and abbreviated proxy and insider trading requirements. Perhaps Congress can adjust this problem by writing some more definite standards into section 3(d) of the bill, and substituting “shall” for “may” as a guide for exemption by the SEC. The second major purpose of S. 1642 is to strengthen qualification standards and controls over persons and firms in the over-the-counter securities business. Only the three jurisdictions of Delaware, Nevada, and the District of Columbia have no State blue-sky laws. Most brokers and dealers now must register with one or more regulatory agencies, such as the SEC, the NASD, the registered national securities exchanges, or a State agency. Very few broker-dealers are unregulated by reason of doing business solely in exempted securities or exclusively in the three non-bue-sky jurisdictions. The SEC seems to feel that the present controls over entry into the securities business created "only low barriers." (H. Doc. 95, pt. 1, p. 68.) Actually, section 15 of the Exchange Act of 1934 now provides for denial of registration or revocation if a firm or employee has been convicted of a securities crime, or is enjoined from securities transactions, or has willfully violated the 1933, or 1934 acts. In addition, section 15A of the Exchange Act of 1934 authorizes registration of national securities associations with the SEC, and the NASD counts 4,771 out of 5,785 registered brokers and dealers as members now. Presently membership in the NASD is not a legal requirement for securities firms, but NASD rules preclude a member from dealing with a nonmember except as a member of the public. This is an economic inducement to membership as an essential to obtaining underwriting discounts in distributions and other benefits. Section 15 (a) of the 1934 act is proposed to be amended to make membership in a registered national securities association compulsory. This proposal may be unconstitutional. The Supreme Court has ruled that legislative power is unconstitutionally delegated to a quasi-industry group, unless Congress itself sets up a standard other than a statementof general aims. (A.L.A. Schechter Poultry Corp. v. U.S., 295 U.S. 495). If membership is compulsory, Congress must establish much more exact criteria for membership or exclusion than section 15A presently contains. Indeed, there is a basic question of whether Congress has any power at all to require compulsory membership in a self-regulatory organization. It amounts in practice to a delegation of licensing authority to a nongovernmental authority, which in turn is given broad authority to establish standards of training, experience, and competence for members and their employees and to establish capital requirements for members. This is the power of business life and death. More seriously, the proposed amendment would relieve the SEC of the burden of proving a use of the mails or an instrumentality of interstate commerce in a proscribed transaction. The SEC would lift itself by its own bootstraps-compulsory membership in a self-regulatory body, based on use of mails or interstate commerce, then elimination of proof of such use as a basis for Federal jurisdiction. This would deny to brokers and dealers the basic right of being innocent until proved guilty, and would violate the Federal principle of dual sovereignty. The significance of this SEC proposal becomes plain when it is considered in conjunction with the SEC proposal to repeal the "exclusively intrastate" exemption now in section 15 (a) of the 1934 act. The SEC justifies these far-reaching departures from due process of law by a reliance on section 6 of the Exchange Act. However, section 6 deals only with voluntary membership in a self-regulatory industry group, and voluntary agreement to be bound by membership rules, with a specific affirmation of all constitutional rights, including the right to contest an NASD rule. Compulsory membership coupled with a broad delegation of rulemaking power raises a basic question of unconstitutionality. Section 7(a)(3) of the bill fails to meet the constitutional standards of the Schechter case. It would not appear necessary to expand the basis for disqualification of brokers and dealers to other types of financial offenses than those involving securities transactions, as proposed in section 6(b) of the bill. The fact that it is patterned after the Investment Advisers Act of 1940 does not justify extension of the "dragnet" concept to brokers and dealers, since they are buyers and sellers, subject to the common law of the marketplace, as distinguished from investment advisers, who deal in opinions, recommendations, and analyses, requiring higher ethical standards akin to the fiduciary responsibilities of lawyers and accountants. 20-226-63-18 The question arises whether there is a sufficiently documented showing of need to justify extension of SEC authority into every phase of the securities business. Regulation is not an end in itself. It can only be justified if there is substantial evidence that existing law and State and local regulatory agencies and law enforcement officers are failing to meet their responsibilities. Some of the SEC report seems to seek additional authority without a showing of need. For example, the SEC views with alarm the fact that "While many of the nonmember firms do not do a significant business with the public, there are many others, such as those whose business is confined to the exchanges, certain large, integrated mutual fund sales organizations, firms handling real estate limited partnership interests, and put-and-call dealers, which are not NASD members." (SEC Special Study Report, pt. 1, p. 72.) The SEC seems perturbed by the fact that "significant sections of the industry, including certain distributors of mutual funds and real estate securities, are not subject to the discipline of self-regulation." (SEC release No. 27, June 4, 1963.) Chairman Cary justifies compulsory self-regulation, as follows: "Most over-the-counter brokers and dealers find it economically necessary to be members of NASD. A limited number, however, restrict their operations to retailing directly to the public securities of companies with which they have some association-for example, as the sole underwriter. It is important that this group, which includes retailers of mutual fund shares and real estate securities, be brought within the self-regulatory scheme." (Statement of Chairman Cary to Securities Subcommittee, U.S. Senate, June 18, 1963.) It is important to note that the only reason offered by the SEC for regulating these groups is that they are nonmembers of NASD. There is no showing that the public interest is not adequately protected at present under Federal, State, and local law. Is this legislation necessary? Can an objective judgment on this issue be made until Congress has studied the remaining volumes of the SEC special study report, due later this year? Other questions as to the proposed bill should be given most careful consideration, as follows: Section 2: Is the term "person associated with a broker or dealer" as defined to include "any person directly or indirectly controlling or controlled" too vague to be constitutionally enforceable? Section 3(c): Does the phrase "affecting interstate commerce" exceed the constitutional reach of Congress? Section 6(a): Is compulsory membership in a securities association constitutional, as discussed hereinabove? Section 6(b) (1): Can Congress eliminate proof of Federal jurisdiction by evidence of use of mails or interstate commerce, and rely upon compulsory registration as a bisis for intrastate broker and dealer jurisdiction? Section 6(b) (2): Can Congress constitutionally authorize penalty proceedings against a broker or dealer because of willful wrongdoing of an associated person, without any showing of negligence or culpability, or even knowledge, on his part? Section 6(b) (2): Can Congress constitutionally authorize penalty proceedings against a broker or dealer for an associated person's false application, conviction of crime which the SEC finds to involve securities, or misappropriation of funds, or mail fraud, fictitious names, or wire, radio, or TV fraud under title 18 of the U.S. Criminal Code, without knowledge, culpability, or negligence? Section 6(b) (2): Is the "dragnet" prohibition against an associated person's aiding, abetting, counseling, commanding, inducing, or procuring a violation of the securities laws a constitutional basis for penalty proceedings against a broker or dealer who may have no knowledge or is not guilty of fault or negligence? Section 6(b) (2) (C), (d), (F): Can a broker or dealer constitutionally have his registration revoked because an associated person has violated the securities laws, is permanently enjoined, or has "failed reasonably to supervise" a third person under this supervision who commits a violation? Section 6 (b) (2) (E): Can Congress limit due process for purposes of a denial of a broker or dealer's registration application, after appropriate notice, to a hearing which consists solely of affidavits and oral arguments? Section 7(a): Can Congress grant to a quasi-official self-regulatory registered national securities association the power to deny or revoke compulsory membership of a broker or dealer because of the acts or omissions of associated persons, without knowledge, fault, or negligence? Section 7(a): Can Congress constitutionally delegate to a quasi-official selfregulatory securities association the broad power to deny compulsory membership to a broker or dealer on the basis of unspecified "financial responsibility" or minimum capital requirements for himself, and unspecified standards of "training, experience, and such other qualifications *** as the association finds necessary or desirable," for himself or an associated person? Section 7(a): Can Congress constitutionally delegate to a quasi-official selfregulatory association the power to expel, suspend, or fine not only compulsory members, but persons associated with members, and bar such associated persons from being associated with other members, or impose "any other fitting penalty"? Section 7(c): Is a 30-day period sufficient time for a broker or dealer or associated person to appeal to the SEC from a penalty imposed by a self-regulatory association? Section 32(a): Can Congress impose a $10,000 fine, 2 years in jail, or both, on a broker or dealer who violates some of the above provisions of the SEC bill, which make him subject to penalty without knowledge, negligence, or fault for the derelictions of second and third parties? It is respectfully submitted that some of the SEC proposals listed are unconstitutional, unwarranted, unnecessary, and loosely drawn. Others are too vague to be comprehensible, and are thus unenforceable. In their present form, the SEC's legislative proposals will deprive brokers and dealers of substantial rights without due process of law, and will cause more problems than they solve. Very truly yours, CARL L. SHIPLEY. NATIONAL ASSOCIATION OF INDEPENDENT INSURERS, Chicago, Ill., June 21, 1963. Senator HARRISON A. WILLIAMS, Chairman, Subcommittee on Securities, Senate Banking and Currency Committee, Washington, D.C. DEAR SIR: The National Association of Independent Insurers is a trade association of 350 casualty and fire insurance companies of every type-stock, mutual, and reciprocal-located and doing business in all parts of the country. Our membership includes 218 stock companies. Our association strongly urges that S. 1642 pending before your subcommittee be amended to exempt from its scope securities issued by insurance companies subject to State regulation. The supervision provided the insurance industry under State regulation is more thoroughgoing and comprehensive by far than that applicable to any other industry in our economy. Virtually all aspects of insurance company operations are subject to intensive examination and reporting requirements. Out of the many hundreds of insurance companies in operation, there has been singularly few instances of defalcations in connection with issuance of and trading in insurance securities, a fact which reflects the strong disciplinary force State regulation has imposed. The State regulatory processes have also proven quite capable of expansion and adaptation to meet new needs as they have arisen. Thus under the aegis of the National Association of Insurance Commissioners during the past few years, all the major segments of the insurance business (casualty, fire, life, and A. & H.) have developed company programs for disclosure of conflict-ofinterest situations involving officers, directors, and other key personnel. Extension of SEC authority over securities issued by insurance companies would impose upon those companies the costs and burdens of dual regulation, which would be both wasteful and unnecessary. For these reasons we earnestly request your subcommittee to amend S. 1642 so as to exempt any securities issued by insurance companies which are subject to supervision by the insurance commissioner or any agency or officer performing like functions, for any State or territory of the United States or the District of Columbia. Respectfully submitted. ARTHUR C. MERTZ, General Counsel. LIFE INSURERS CONFERENCE, Hon. HARRISON A. WILLIAMS, Jr., Chairman, Subcommittee on Securities, MY DEAR SENATOR WILLIAMS: In connection with the hearings presently being conducted by your subcommittee on S. 1642, a proposed amendment to the Securities Exchange Act of 1934, we submit the attached statement urging an exemption for insurance companies, which are fully supervised and regulated by the States. We respectfully request that this statement be included in the printed record of the hearings. Sincerely yours, AMERICAN LIFE CONVENTION, GLENDON E. JOHNSON, General Counsel. Vice President and General Counsel. Executive Vice President. STATEMENT ON S. 1642 BY THE AMERICAN LIFE CONVENTION, LIFE INSURANCE ASSOCIATION OF AMERICA, AND LIFE INSURERS CONFERENCE This statement is submitted on behalf of the combined membership of the American Life Convention, the Life Insurance Association of America and the Life Insurers Conference, comprising 361 United States and Canadian legal reserve life insurance companies. Collectively these companies hold approximately 99 percent of the total assets of all legal reserve life insurance companies doing business in the United States. Of these companies, 260 are stock companies, and the remaining 101 are mutual companies. Our statement relates only to that part of S. 1642 which would extend the reporting requirements, proxy rules, and "insider trading" provisions of the Securities Exchange Act of 1934 to certain companies, including stock life insurance companies, whose securities are traded in the over-the-counter market. We oppose this extension of SEC jurisdiction to life insurance companies. All of these companies have for years been subject to the comprehensive supervision and regulation of the States. The effect of the SEC proposal, in brief, would be to subject many of these companies to two regulatory bodies, the States and the SEC. This would result in duplicate regulation which would be burdensome, expensive, and unnecessary. The Senate Banking and Currency Committee has consistently rejected prior SEC proposals of this kind As far back as 1946, the Securities and Exchange Commission has urged the Congress to extend the Securities Exchange Act of 1934 to over-the-counter securities, including life insurance company stocks. In 1949, Senator Frear introduced a bill (S. 2408) designed to carry out the SEC's recommendations. After a public hearing on the bill, the Senate Banking and Currency Committee took no further action with respect to the SEC's recommendations. In 1951, Senator Frear introduced a similar bill (S. 1860). Again the Senate Banking and Currency Committee took no action. In 1955, Senator Fulbright introduced a bill (S. 2054) which was similar to the two Frear bills. The life insurance business requested the Subcommittee on Securities of the Senate Banking and Currency Committee to amend the bill so as to exempt insurance companies. The subcommittee approved S. 2054 with an amendment exempting insurance companies. In 1957, Senator Fulbright introduced S. 1168 which would have included insurance companies. Again, however, the Senate Banking and Currency Committee restored the exemption for insurance companies. |