INVESTOR PROTECTION TUESDAY, DECEMBER 3, 1963 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE AND FINANCE OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, The subcommittee met at 10 a.m., pursuant to call, in room 1334, Longworth Building, Hon. Harley O. Staggers (chairman of the subcommittee) presiding. Mr. STAGGERS. The subcommittee will come to order. When this subcommittee recessed the last time, we had heard certain witnesses in favor of the bill. Today we continue the hearings on H.R. 6789. Our first witness will be Mr. Amyas Ames. Mr. Ames, welcome to the committee. STATEMENT OF AMYAS AMES, PRESIDENT, INVESTMENT BANKERS ASSOCIATION OF AMERICA; ACCOMPANIED BY MURRAY HANSON, MANAGING DIRECTOR AND GENERAL COUNSEL; AND WILLIAM WARD FOSHAY, SPECIAL COUNSEL, OF SULLIVAN & CROMWELL, NEW YORK, N.Y. Mr. AMES. I am Amyas Ames, president of the Investment Bankers Association of America. With me are Murray Hanson, the managing director and general counsel of the association, and our special counsel, William Ward Foshay, of the firm of Sullivan & Cromwell, of New York. The IBA has a membership of over 750 investment banking firms and securities dealers and brokers. They have offices in every State and every important city in the country, and they employ about 80,000 people. As the name "investment banking" implies, their primary function is raising capital for the American economy. In 1962 they participated in over $15 billion of financing, divided about equally between public and private corporate purposes. Our annual meeting convened yesterday in Florida. It will continue in session throughout this week, and, as the President for this year, I should be there. The passage of this proposed legislation-H.R. 6789, 6793 and S. 1642-however, is the most important single matter with which our industry has been concerned for a long time. I therefore considered it essential that I leave the meeting and fly here to inform you gentlemen of our endorsement of the bills. Let me make it clear at the outset that we are not regulators or even self-regulators. We speak as the regulated. This is not a new experience. In the last 30 years we have become the most extensively and intensively regulated industry. We strive to work under State blue-sky laws, all the Federal laws administered by the SEC, the rules of fair practice, and other dictates of the National Association of Securities Dealers, Inc., and the constitution and regu lations of the New York Stock Exchange, the American Stock Exchange, and various regional exchanges. As to whether there should be additional regulation and, if so, what kind, we are experts and in a position to contribute constructively. Ever since your initiation of the project, the SEC's Special Study has been followed and studied closely by us. Our members have been kept informed and their criticism is being readied. This is not to say, however, that we have not been impressed by the thoroughness of the investigation but also the manner in which it was conducted. On the contrary, there was an earnestness, an objectivity, and a lack of calculated sensationalism which must be considered exceptional for this type of endeavor. Moreover, the report itself is a model of orderly and clear presentation. Naturally, we are not in agreement with all its findings, but we are gratified with the overall conclusion that our industry is not riddled with abuse, but in the main, conducted according to standards of which we are proud. The report's recommendations reach a total of 175, but only a relatively small number of these call for amendments of the statutes. The decision last spring to proceed at once toward implementing these legislative recommendations was certainly the correct one. Amendments are needed not only to introduce new requirements, but more importantly, to assure statutory foundation for administrative regulation and self-regulation to follow. The SEC's approach to the legislative program recognized again, as was true in the 1930's, in 1940-41, and 1954, that Federal legisla tion in the securities field, if it is to be effective, must have the benefit of government and industry collaboration. The problems are complex, and they cannot be solved from ivory towers. Practicality is an essential ingredient, and that can be supplied only with the help and advice of businessmen. Recently, and from an unlikely quarter, there was heard a voice complaining of the SEC's turning to industry for consultation and warning of dangers of SEC captivity and coopera tion becoming appeasement. The gentleman overlooks the lessons of the past, and what is far worse, seems to question the integrity of the conscientious individuals in government and industry who last spring molded a program which merits the approbation of all concerned. DISCUSSION OF THE BILL Standards, qualifications, and disciplinary powers: Our review and analysis of the Special Study Report, although not yet complete, has led to one inescapable conclusion. Many, if not most, of the abuses and undesirable practices described in the report could be eliminated to a very great extent by the imposition and enforcement of higher standards of conduct, experience, competency, integrity, and financia responsibility which must be met by persons engaged in the securities business. It is necessary to provide for effective and flexible dis ciplinary powers which may be used by the Commission and the selfregulatory bodies to bar from the industry those who have failed to demonstrate their ability or willingness to meet the established standards. The enactment of the proposed legislation will not, in itself, guarantee the achivement of these objectives, but it will provide the statutory authority which the SEC and the self-regulators need in order to put into effect the necessary reforms in cooperation with responsible leaders of the industry. A brief analysis of the major provisions of this portion of the bill will illustrate how it will increase the effectiveness of regulation and self-regulation and will permit greatly improved disciplinary procedures. 1. Disciplinary action by the Commission: Under present laws, there is no procedures by which the Commission may take action against an individual associated with a broker-dealer. If it proceeds at all, it must proceed against the firm, even though it is a large orga nization with a generally good record, and even though only a small number of persons were involved in the alleged violation. If the Commission takes action against the firm, the only penalties it may impose are revocation of the firm's broker-dealer registration, suspension of the firm from the NASD, or suspension of the firm or its partners or officers from a national securities exchange. There is no provision for taking action against the individual guilty of the violation without taking action against the firm, and there is no provision for suspending, rather than revoking, the firm's registration. Because of this lack of flexibility, the Commission has sometimes been reluctant to take any action at all in cases involving isolated trangressions by individuals. The bill would make it possible for the Commission to proceed against an individual without making the firm a party to the proceeding and, in appropriate cases, to enter an order temporarily or permanently barring the individual from being associated with a broker or dealer. The bill would also authorize the Commission to censure or suspend the registration of a broker-dealer firm in cases not warranting revocation. We feel that this broadening of the Commission's disciplinary powers is clearly in the public interest and will make it possible for the Commission to act more effectively in the protection of the public interest by excluding from the industry persons who have failed to live up to their responsibilities. 2. Broadening of SEC jurisdiction: The bill would eliminate the present exemption from registration for broker-dealers whose business is exclusively intrastate, but who use the mails or instrumentalities of interstate commerce. The number of broker-dealers entitled to this exemption is small, and we feel that they should be required to conform to the same rules as those which apply to the great majority of firms in the industry. Many of the State blue-sky authorities have done a good job of regulating broker-dealers, but such regulation is not uniform from State to State, and the State authorities often have no effective means of proceeding against persons who leave their jurisdictions. This provision of the bill recognizes that regulation of individuals in the securities business is a matter of national concern. The bill will not affect the right of each State to impose requirements of its own, in addition to the requirements of Federal law. Another helpful provision of the bill would eliminate the necessity of proving that the mails or instrumentalities of interstate commerce were used in connection with a violation by a registered broker-dealer. A registered broker-dealer who violates Federal law should be subject to appropriate action by the Commission or the courts regardless of the means employed in the commission of such violation. 3. Increasing the self-regulatory powers of the NASD: It has long been recognized that the Commission cannot reasonably be expected to shoulder the entire responsibility for prescribing and enforcing standards for the securities industry. Self-regulation has played and will continue to play a vital role. The stock exchanges pioneered in selfregulation, even before there were any Federal securities laws. The enactment of the Securities Exchange Act of 1934 and the Maloney amendments of 1938 amounted to an endorsement by Congress of the policy of supporting and encouraging responsible self-regulation of the industry. At present, broker-dealers may avoid subjecting themselves to the NASD's authority simply by electing not to join the organization. The bill would eliminate this loophole in the self-regulatory structure by requiring that all broker-dealers transacting over-the-counter business be members of the NASD or some other national securities association which meets the standards of the act. The bill also gives the NASD important new powers to prescribe standards of financial responsibility for members and standards of training, experience, and competence for members and their employees, and also clarifies the NASD's power to regulate quotations. These are matters which can be most effectively dealt with by a self-regulatory organization rather than by the Commission, and the NASD must be given adequate powers to permit it to impose new requirements recommended by the Special Study Report. Frear-Fulbright proposals: We support strongly the so-called Frear-Fulbright provisions of the bill in the belief that they are essential for the protection of holders of securities of unlisted companies and for the functioning of orderly markets in such securities. Investors in widely held unlisted securities are entitled to the same information and protection as the law presently provides for holders of listed securities. Although there has been some difference of opinion as to where the line should be drawn in determining which companies are to be subject to the requirements, we support the provision of the present bill making the requirements initially applicable to all companies with more than $1 million in total assets, and 750 or more stockholders with provision for reduction of the stockholder test to 500 after the first 2 years. We feel that it is not unreasonable to require companies meeting these tests to make available to the public audited financial statements prepared in accordance with standards established by the Commission, and to make public disclosure of other information required by the Commission's reporting forms and proxy rules. Whatever additional burdens which may be placed upon such companies will be far outweighed by the benefits to investors. It is also proper to subject the officers, directors, and 10-percent stockholders of such companies to the same insider trading provisions as are now imposed with respect to listed companies by sections 16(b) and 16(c) of the act. The present bill recognizes an important need by exempting from these sections ordinary marketmaking transactions by broker-dealers who might otherwise be subject to such provisions. This exemptive provision will permit broker dealers to continue to make a market in securities of over-the-counter companies while at the same time providing advice and counsel to the managements of such companies by being represented on their boards of directors. Broker-dealers who are represented on the boards of companies while making a market in the stocks of such companies perform a valuable function. Such sponsorship, as it is sometimes called, is particularly beneficial for smaller companies which have recently gone public. Their securities are not well known, and the internal management is often not fully aware of the additional obligations imposed upon them as a result of having public stockholders. The sponsoring broker-dealer has two principal responsiblities: to develop and maintain an orderly market for the stock, and to represent the interests of the public stockholders on the board of directors by counseling the management on business decisions and by pointing out to the management its obligation to make full and fair disclosure of all information of interest to investors. In developing an orderly market, the sponsoring broker-dealer benefits the company by making others aware of its investment potential; by serving as a trusted adviser to management he helps facilitate the difficult transition from a privately held to a publicly held company. Broker-dealer sponsorship has proved to be of immeasurable benefit to a large number of companies, and we are pleased that the bill makes possible the continuance of this service function of our industry. Proposed amendment to section 4(1) of the Securities Act of 1933: We endorse this section of the bill, which would change the 40-day prospectus delivery period to 90 days in the case of issues which represent the first registered public offering by the issuer, but would also give the Commission power to shorten either the 40-day or the 90-day period in appropriate cases. Although we do not think this amendment will solve whatever remains of the "hot issue" problem, it will give the Commission needed flexibility where none exists today to vary prospectus delivery periods according to circumstances. The most important function of the prospectus is to inform prospective investors, and it is reasonable to require prospectus delivery for a longer period in the case of companies going public for the first time which are not well known to investors. In contrast, little is accomplished by requiring use of the prospectus for any substantial period following the completion of the distribution of senior securities, or additional common stock issues, of companies whose outstanding securities are already widely held and whose reports have been available to the public over a period of time. In conclusion, may I state that we endorse the bill without qualification and hope that it will be passed by the House of Representatives as soon as possible in substantially the form passed by the Senate. We feel that the Special Study Report has demonstrated the need for this legislation, and we are confident that it will contribute significantly to the protection of the public. Thank you very much. Mr. STAGGERS. Thank you, Mr. Ames, for taking the time to come back from Hollywood, Fla., to appear before the committee and give us the benefit of your views. |