Mr. ETHERINGTON. I just don't believe it, Mr. Chairman. Automation has its limits. I have yet to see a little black box that has the timing and money and the courage and the judgment to do the job that a human being can do in bringing the people together.

Mr. STAGGERS. You go around the corner and Macy's will sell you anything.

Mr. ETHERINGTON. I don't believe they will sell that.

Mr. STAGGERS. Again, on behalf of the subcommittee, I want to thank you for your response to our questions and your response to our letters of inquiry. I also wish to commend you.

Mr. ETHERINGTON. Thank you very much. Thank you for your generosity.

Mr. STAGGERS. Mr. Lemkau, we are glad to welcome you to the committee, together with your associates. I recognize among them one who has been before us in the past, ex-Commissioner Goodwin. I am also pleased to welcome the newly designated president of your association, Mr. Robert Haack of Milwaukee.

I note the presence of Mr. Avery Rockefeller, who has been head of the Commission's advisory committee on this legislation. Mr. Wallace Fulton and Mr. Marc White are old friends of the committee. They have assisted us greatly in the past with their ever helpful counsel and readiness to supply information.

If I have missed any of your associates, I wish you would state your name and position, and give their names and position capacities.

STATEMENT OF HUDSON B. LEMKAU, VICE CHAIRMAN OF THE BOARD OF GOVERNORS, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; ACCOMPANIED BY MARC A. WHITE, GENERAL COUNSEL; A. JACKSON GOODWIN, JR., MEMBER, BOARD OF GOVERNORS AND CHAIRMAN, LEGISLATION COMMITTEE; ROBERT W. HAACK, CHAIRMAN, NATIONAL BUSINESS CONDUCT COMMITTEE AND CHAIRMAN-ELECT OF BOARD OF GOVERNORS FOR 1964; AVERY ROCKEFELLER, JR., CHAIRMAN, ADVISORY COMMITTEE TO BOARD OF GOVERNORS; WALLACE H. FULTON, EXECUTIVE DIRECTOR; AND JOHN HODGES, STAFF MEMBER, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

Mr. LEMKAU. Mr. Chairman and members of the subcommittee, I am Hudson B. Lemkau, of New York City. I am a vice chairman of the board of governors of the National Association of Securities Dealers, Inc., and have been serving as acting chairman of the board since the illness early this year of our chairman, Merrill M. Cohen, of Minneapolis, Minn., who died in June.

You have identified the other gentlemen with me.

I might state that Mr. Goodwin is chairman of the association's legislation committee, that Mr. Haack is a member of the board of governors, chairman of the national business conduct committee of our association, chairman-elect of the board of governors for the year 1964, and as you stated, yesterday he was elected to the position of president of the association to take office upon Mr. Fulton's retirement on April 1, 1964, after Mr. Haack relinquishes his duties as chairman of the board on that date.

Avery Rockefeller, of New York City, is chairman of our advisory committee, and he is a past chairman of the board of governors.

Mr. Fulton, as you know, is our executive director, and Marc White our general counsel.

Our association was, as the committee knows, established under the authority of the Maloney Act of 1938. It operates through local committees in 13 geographic districts, upon which serve 125 individuals actively engaged in the securities business, and through the board of governors, consisting of 21 such individuals.

These groups are supported by many individuals serving on local quotations committees and by various other standing committees.

At October 31, 1963, there were approximately 4,545 members of the association, and some 85,093 registered representatives of members. The association's certificate of incorporation provides that its objectives and purposes, in part, are to—

promote through cooperative effort the investment banking and securities business, to standardize its principles and practices, to promote high standards of commercial honor, and to encourage and promote among members observance of Federal and State securities laws.

The certificate of incorporation also requires the association to provide

a medium through which its membership may be enabled to confer, consult, and cooperate with governmental and other agencies in the solution of problems affecting investors, the public, and the investment banking and securities business.

The association has the power to expel or suspend or impose other sanctions upon its members found guilty of violations of its rules of fair practice or of Securities and Exchange Commission rules.

The economic inducement for joining the association is set forth in the association's bylaws, which are based on section 15A (1) of the act and provide that no member shall deal with a nonmember brokerdealer except at the same prices and upon the same terms as such member deals with the public. This means, for example, that nonmember brokers and dealers cannot, as a practical matter, obtain underwriting discounts or commissions as participants in any distribution by members.

Detailed information upon the history and activities of the association is set forth in a reprint dated 1959 of the Subcommittee on Legislative Oversight of your committee.

On June 4, 1963, the Securities and Exchange Commission submitted H.R. 6789, which was introduced by Representativve Oren Harris, chairman of the House Committee on Interstate and Foreign Commerce. A companion bill, S. 1642, was introduced in the Senate on June 3, 1963, and was passed by the Senate.

In sending the bills to Congress on June 3, 1963, Chairman William L. Cary, of the Securities and Exchange Commission, stated in a transmittal letter that the legislative proposals are, in large part, based upon those sections of the report of the Special Study of the Securities Markets which were delivered to the Congress on April 3, 1963.

Chairman Cary also said that the Commission's aim was to present to the Congress legislation representing important advances which would be supported by the securities industry. Further, he noted that

the Commission has assurances of support from the leaders of the major securities organizations.

Our comments today, on behalf of the board of governors of the association, will be addressed to certain substantive provisions of the bill in the order in which they are presented in the six-page statement of the Commission which accompanied the bill.

The first area covered is that pertaining to the extension of the reporting, proxy, and insider trading provisions of present law to certain companies whose securities are traded over the counter. Under present law, these requirements extend only to companies whose securities are listed upon national securities exchanges.

It has been recognized for a number of years that the absence of financial reporting requirements in respect to over-the-counter securities has resulted in inadequate disclosures in some issues traded over the counter. The board supports the extension of the disclosure and reporting requirements to over-the-counter issues.

Our board wishes to note, however, that in an effort to prevent onerous reporting, proxy solicitations, and insider trading reports for smaller and less actively traded issues, the board would raise the stockholder test from the 750/500 level proposed by the Commission to a minimum of 1,000 shareholders before making operative the requirements now imposed upon listed companies.

We agree with the additional test in the bill that issuers required to report must also have assets in excess of $1 million. We note here that the Senate passed S. 1642 without changing the shareholder test. The association would prefer a 1,000-shareholder cutoff figure, but our support of the bill does not turn on this item.

The board of governors of the National Association of Securities Dealers, Inc., has been opposed to any blanket amendment to section 16(b) of the Securities Exchange Act of 1934 which would impose, without exception, the insider short-term profit recapture provisions to officials of companies traded over the counter.

The Securities and Exchange Commisison has recognized this viewpoint in section 8(b) of the proposed bill which provides, in new section 16(d) of the 1934 act, for an exemption from the operation of section 16 (b) for broker-dealers who make markets in over-the-counter securities. The board, thus, supports this section of the bill in its present form.

We support the exemption of foreign securities from the requirements of this part of the bill. We note that should the Commission seek to remove the exemption in a given case, and to impose these requirements on securities of a foreign issuer, the procedures would afford opportunity to be heard before the Commission could make a finding.

In the event the Commission did find that the continuance of an exemption was not in the public interest, it is assumed that the Commission would afford to foreign securities covered by this bill the same exemptions now given to listed securities of a foreign issuer under rule 3(a) 12-3 of the Securities Exchange Act of 1934; namely, exemptions from the provisions of sections 14 and 16 and from the requirement of filing current and semiannual reports. Such exemptions by the Commission could be accomplished by rulemaking and would not require legislation.

The second section of the Commission's statement deals with qualifications, standards, and controls of persons engaged in the securities buisness. The securities business has recognized, and it has been brought to the attention of a large segment of the investing public as a result of the Special Study, that presently there exists only a limited basis upon which the association or the Commission may bar inexperienced, undercapitalized, or otherwise unqualified persons from entering the business as proprietors or as employees of broker-dealers. Over a period of years the association has concerned itself with this problem. One of its earlier recommendations was the imposition of à $5,000 minimum net capital for members dealing directly with customers. This recommended requirement was disapproved by the Securities and Exchange Commission in 1942 because, among other reasons, there was no express statutory basis for the rule. The legal foundation for such a rule is now presented for the first time in this bill, and would give the association the authority to write rules reacting to minimum capital requirements for its members. The board strongly supports this section of the bill and believes that proper minimum capital requirements can be developed and defined by the association whose rules must be reviewed by the Commisison and not disapproved. As to qualifications of persons entering the business, the association has since 1956 imposed upon the new salesmen of its members a requirement that they pass an examination dealing with various technical, economic, and regulatory aspects of the securities business. This examination has been made progressively more difficult. Moreover, the association has lately developed new examinations and has coordinated with other groups its activities in the examination of persons entering the securities business. On December 1, 1963, the association will extend even more difficult testing requirements to members new to the business and their principals, before registering them with the association.

The board endorses the provision of the bill relating to qualifications as it provides the basis upon which the association may adopt additional safeguards for the public. The association will confer with the Securities and Exchange Commission and will correlate the information provided in chapter III of the Report of the Special Study in developing and adopting those rules considered desirable.

The provision of the bill incorporating the recommendation of the study report, which will require all broker-dealers to become members of a national securities association, whether this association or one to be organized, is supported by the board of this association. We agree with the purpose of this section of the bill and we believe to be worthwhile the extension of the self-regulation pattern to those not presently covered.

The sections of the bill which would allow direct action by the Commission against individual violators and which would allow proceedings by the association against individuals without the necessity for joining their employers in the action are considered to be helpful in the efficient handling of disciplinary matters.

We feel confident that the Commission will exercise this power in a manner that will serve to expedite proceedings against individuals while retaining full authority over their employers. In this regard, we expect the association to adopt new procedures under which it also

may proceed against individuals without the necessity of joining the employing member in the proceeding purely for technical jurisdictional reasons.

We welcome that section of the bill which would shorten the time period in which persons disciplined by the association can appeal to the Securities and Exchange Commission to 30 days. Since the appeal procedure is simple, the present period of 60 days has proved to be more time than needed and in many instances has served as a means of delaying the ultimate disposition of a case to the possible detriment of the public.

The board supports those other sections of the bill dealing with the broadening of the statutory disqualifications of brokers and dealers from registration with the Commission, the addition of intermediate sanctions against broker-dealers in Commission disciplinary proceedings, the elimination of the exemption for broker-dealers engaged in intrastate commerce in proceedings involving violations of the Securities Exchange Act of 1934 by broker-dealers.

The bill would add to existing law a provision stating that the association shall adopt rules pertaining to quotations of securities. The association presently disseminates retail quotations through its nationwide district and local quotations committees under the overall supervision of its national quotations committee.

Retail quotations of over-the-counter securities are supplied by the association to the major financial dailies as well as to almost all of the newspapers throughout the country that publish quotations of over-the-counter securities. The association has, since its inception, been concerned with the problems inherent in quotations of over-thecounter securities which involve a range of prices within which securities could have been traded on a given date.

The association is always seeking methods to provide informative and useful quotations in the over-the-counter market. We believe that section of the proposed bill pertaining to quotations to be a useful basis upon which the association may develop additional rules and procedures.

The board has no objection to the amendments to section 4(1) of the Securities Act of 1939 which would extend the requirements as to delivery of prospectuses for certain first issues from 40 to 90 days and would add a provision which would allow the Commission to shorten this period by rule or order.

We might comment here that we do not believe that this amendment will have much effect in preventing so-called hot issues, issues which command immediate premiums over the offering price. We support fully the permitted shortening of both periods by Commission action. Over the past 2 years the association has been reviewing all provisions of its bylaws and rules in an effort to update and supplement them in areas where experience has proved the necessity therefore. We now have the completed Report of the Special Study and are attempting to correlate our study of our bylaws and rules with those recommendations contained in the Special Study.

We believe that the study shall be of material aid to us in forthcoming years in establishing those standards in the securities business which the public interest requires. We have already furnished this committee with an analysis of the association rules, the comments of the study