Hon. OREN HARRIS, SECURITIES AND EXCHANGE COMMISSION, Chairman, Interstate and Foreign Commerce Committee, House of Representa tives, Washington, D.C. DEAR MR. CHAIRMAN: We are writing you concerning the Commission's legislatvie program (S. 1942, H.R. 6789, and H.R. 6792). As you well know, the bill has passed the Senate and is now pending before your committee in the House of Representatives. The President has specifically endorsed this legislation in his consumer message to the Congress dated February 15, 1964. The Comptroller of the Currency has repeatedly opposed this bill as it relates to national banks. He has now made public an attack (in the form of a letter dated March 6 to each national bank president) which is not only unwarranted but misleading. In an earlier letter on the same subject, dated March 3, 1964, the comptroller attacked the president of the American Bankers Association, which supports the bill, in an attempt to arouse opposition to the bill and to the views of that association. The Commission has until this time refrained from replying to the Comptroller but believes that it is now under a duty to state the facts. In connection with our bill, which requires disclosure of information concerning all companies having wide public ownership, including banks, we have scrupulously avoided taking jurisdiction over banks. The bill vests authority over banks and bank securities in the appropriate banking regulatory agencies, including the Comptroller of the Currency as to national banks. Indeed, the bill would divest the Commission of its present jurisdiction over bank securities which are or may be listed on a stock exchange. In answer to a question in the House hearings from you whether the Securities and Exchange Commission would object to a provision making it abundantly clear that no rules or regulations of the SEC would be binding upon the Federal banking agencies, I replied: "I do not object at all, sir, that is what we contemplate, and when we said delegate, we meant it." Pursuant to your suggestion, an amendment to the bill is being prepared which excludes SEC jurisdiction in even more explicit language. In his letter of March 6 containing seven pages of selected summary of statutory provisions, the Comptroller has attempted to convey an impression of incredibly burdensome and technical requirements flowing from the bill. He totally omits the fact that administration of the law is exclusively in his hands and that he has ample authority to carry it out, in a reasonable way. His letter, to the contrary, carries the implication that he will be and must be an unreasonable administrator. The Comptroller has apparently overlooked, or chosen to ignore, those provisions of the bill which grant to the banking regulatory agencies broad powers to exempt banks, classify them and generally relate rules to particular situations where necessary. In the words of the Senate Report the bill provides "[a] great discretionary authority for the administering agency to make appropriate rules, classifications, and exceptions." In the sum the Comptroller has chosen to overlook the ample authority to be granted him by the Congress to tailor the requirements of the bill to the special needs and problems of national banks. In closing, I would point out that our legislative program is the end product of a 2-year examination of the securities markets directed by the Congress; that this program has received almost universal support of the securities industry; that the application of the bill to banks, to be administered by the banking authorities, has been approved by the Federal Reserve Board, the American Bankers Association, and the U.S. Chamber of Commerce; and that the complete and exclusive power of the Federal banking regulatory authorities to deal with bank stocks has been already spelled out in the legislative history of the bill and it will be further reemphasized in the proposed amendment. Very truly yours, WILLIAM L. CARY, Chairman, 28-738-64-pt. 2—45 EXECUTIVE OFFICE OF THE PRESIDENT, BUREAU OF THE BUDGET, Washington, D.C., March 13, 1964. Hon. OREN HARRIS, Chairman, Committee on Interstate and Foreign Commerce, House of Representa tives, Washington, D.C. DEAR Mr. CHAIRMAN: It has come to our attention that in a letter to your committee, dated February 19, 1964, and in a statement of the same date, the Comptroller of the Currency expressed strong opposition to certain provisions of H.R. 6789 and S. 1642 which affect the Nation's banks. As you may have noted, neither the letter nor the testimony contained the usual advice from this Bureau as to relationship to the President's program. The views expressed. therefore, were the Comptroller's own views and they were in fact contrary to the administration position with respect to these provisions of the bill. To summarize the record on this matter: 1. The provisions of the bill affecting banks and insurance companies were extensively discussed before the legislation was transmitted to the Congress, and the decision to include them under the full disclosure and certain other provisions of the bill was a carefully considered one. 2. Your committee was advised on June 3, 1963, and November 14, 1963, that enactment of this legislation would be in accord with the program of the Presi dent. 3. President Johonson's 1965 budget document (pp. 106 and 107) reaffirmed this position as follows: "Pending legislation should be enacted to help protect millions of small investors by extending the present disclosure safeguards to all companies whose securities are widely owned, and by otherwise strengthening the securities laws." 4. The President's consumer message of February 5, 1964, also recommended its prompt enactment. We would appreciate your making this letter a part of the record on S. 1642 and H.R. 6789 in order that there may be no doubt as to the administration position on this matter. Sincerely, KERMIT GORDON, Director. Mr. STAGGERS. I would like to take this opportunity to thank you. Mr. Cary, and your whole staff. This has been a hard day; you have been here many days and have spent a lot of time here. We appreciate it, because we feel this is serious business. We needed your help, and you have been helpful, you and all of your staff. I wish to thank the members of the staff of this committee because they have certainly been tolerant in all of their time and giving of not only their free time but their time to be helpful. We do appreciate your help very much. I was impressed with you and your Commission's presentation on the things you intend to do. Mr. CARY. Thank you, Mr. Chairman. We certainly want to say as I did at noontime that I think that the probing questions and the encouragement and sometimes the stimulus that this committee has given to us will stand in good stead for the investor. Thank you very much. (The following letters were later received from Mr. Cary:) As I mentioned in my statement, we have circulated to industry groups a proposed Commission rule requiring broker-dealers holding free credit balances to notify customers on a periodic basis of the status of customer free credit balances and of the fact that they are being used by the broker-dealer holding them and thus may be vulnerable in the event of insolvency. For your information, I am enclosing a copy of this rule, which incorporates one of the recommendations of the Special Study relating to financial responsibility. (Recommendation 1, ch. III. D.) We are now discussing this proposal with the industry. In addition to the above rule, the Commission is now preparing a substantial revision of the Commission's net capital rule (rule 15c3-1 under the Exchange Act) which will contain, among other things, a provision to require that brokerdealers maintain a certain percentage of customers' free credit balances in liquid form. The primary purpose of this amendment is to provide a certain amount of liquidity in the event that customers wish to withdraw these balances. Moreover, by in effect restricting the investment of free credit balances, this proposal can also serve to limit the risks a firm might otherwise incur. This proposed rule has not yet been circulated to the industry but we expeet to do so within the very near future. I should point out, as I did in my statement before the committee, that the Commission regards complete segregation of free credit balances as a last resort. The need for protection of free credit balances and the added benefits that would be afforded by segregation must be balanced against the added cost which might have to be absorbed by customers. We have concurred with the conclusion of the study that on the basis of prior loss experience, there does not appear a need to require complete segregation at this time. If I can be of further assistance to you on this or any other matter, by all means let me know. Sincerely yours, WILLIAM L. CARY, Chairman. [Staff draft, Feb. 6, 1964] PROPOSED RULE 15c3-2 UNDER SECTION 15(c)(3) OF THE SECURITIES EXCHANGE ACT OF 1934 No broker or dealer shall use any funds arising out of any free credit balance carried for the account of any customer in connection with the operation of the business of such broker or dealer, unless such broker or dealer has established adequate procedures pursuant to which (A) each customer will be informed in writing, when such customer opens an account with such broker or dealer, that such customer may request repayment of such funds without prior notice; that such funds may be commingled with assets of such broker or dealer and may be used in connection with the operation of any business of such broker or dealer ; and that interest will (or will not) be paid on such funds and, if so, the rate or other basis of computation; and (B) each customer for whom a free credit balance is carried will be given or sent, not less frequently than once a month, (i) a written statement informing such customer of the exact amount due to the customer by such broker or dealer on the date of such statement, and (ii) a written notice that such funds may be commingled with assets of such broker or dealer and may be used in connection with the operation of any business of such broker or dealer; and that such customer may request withdrawal of such funds without prior notice. The notice required by clause (B) (ii) above shall be in type at least as large as 8 point modern type. For the purpose of this rule the term "customer" shall mean every person other than a broker or dealer. SECURITIES AND EXCHANGE COMMISSION, Hon. HARLEY O. STAGGERS, DEAR MR. CHAIRMAN: Thank you for your letter dated February 24, 1964, concerning the activities of specialists on the American Stock Exchange. The Commission has not made a specific study of the activities of American Stock Exchange specialists following the assassination of the President on November 22. As I stated in my letter transmitting the staff's study of the New York Stock Exchange specialists, under present circumstances reconstruction of the market is a difficult and painstaking process, requiring con siderable clerical and analytical work. In line with the recommendations of the Special Study, we have instituted a broad and regular inspection program of all national securities exchanges. Members of the Commission's staff are now inspecting on a routine basis various aspects of the American Stock Exchange's regulatory activities, including that exchange's oversight of its specialists. It would appear from our inspections that the exchange has made a considerable effort to improve its supervision and surveillance of specialists' ac tivities, including the development of new tests for judging specialists' per formance. In another step, the exchange has recently reorganized its market surveillance functions to improve their effectiveness. However, there remain a number of important areas where the exchange can improve its surveil lance of specialists and their financial arrangements, particularly in the areas outlined in the Special Study Report. We expect to discuss these matters in the near future with the American Stock Exchange when we commence discussions on the Special Study recommendations relating to specialists. In answer to your last question, we are not aware of any disciplinary actions taken by the exchange against specialists relating to failure to meet exchange capital rules on November 22, 1963. Since members of the American Stock Exchange, as well as members of other major exchanges, are exempt from the provisions of the Commission's net capital rule, the Commission cannot take disciplinary action against them for violations of that rule. The Commission has found that the rules and settled practices of the exchange are more comprehensive than the requirements of the Commission's net capital rule. In view of the fact that your letter concerns the self-regulatory activities of the American Stock Exchange, I have taken the liberty of sending a copy of your letter, together with our reply, to that exchange. If I can be of any further assistance to you on this or any other matter, by all means, let me know. Sincerely yours, Hon. HARLEY O. STAGGERS, WILLIAM L. CARY, Chairman. SECURITIES AND EXCHANGE COMMISSION, Chairman, Subcommittee on Commerce and Finance, DEAR MR. CHAIRMAN: Thank you for your letter dated February 24, 1964, concerning the specialists in American Photocopy stock. We understand that depriving the specialists of the "book" in this stock was the extent of the disciplinary action taken by the exchange as a result of the events of November 22, 1963. As I mentioned in my statement before your subcommittee, the president of the New York Stock Exchange has informed me that dealer and brokerage activity in American Photocopy stock accounted for almost three-fourths of the income of these specialists. The Commission has no reason to believe, on the basis of the available facts, that this disciplinary action was inadequate. In this connection, the Commission cannot take disciplinary action under exchange rules against specialists for failure to maintain fair and orderly markets. The Commission has recently proposed a rule under the Exchange Act to the New York exchanges which sets forth the basic obligation of specialists to maintain a fair and orderly market. Its general purpose would be to reinforce self-regulation by the exchanges and it would be invoked by the Commission in cases of egregious misconduct by specialists. If I can be of any further assistance to you on this or any other matter, by all means, let me know. Sincerely yours, WILLIAM L. CARY, Chairman. Mr. STAGGERS. With those remarks the committee stands adjourned. (The following material was submitted for the record:) Hon. OREN HARRIS, HOUSE OF REPRESENTATIVES, Chairman, Interstate and Foreign Commerce Committee, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: I respectfully request permission to submit the following statement opposing S. 1642, a bill which would place certain national banks under the provisions of the Securities and Exchange Act of 1934. TEXT OF STATEMENT BY CONGRESSMAN BOB WILSON ON S. 1642 It is public knowledge that national banks already suffer from burdensome overrgulation. They are subject to the National Bank Act, the Federal Reserve Act, the Clayton Act, and the laws of the State wherein their principal office is located. The proposed legislation, S. 1642, would bring under the act of 1934 banks with 750 or more shareholders and with $1 million or more assets. They would thus be required to provide the Federal Government with registration statements, periodic reports, proxy statements, and insiders trading reports, all of this in addition to data they are already required to supply, much of it duplicative of what the proposed legislation contemplates. I would remind the committee that the Comptroller of the Currency opposes this legislation for just the reasons I have cited and has stated that it would place new and wholly unnecessary burdens upon the banks affected, which might well be "the straw that broke the camel's back." There is the additional consideration that banks are less free than other business firms to disclose the kind of information sought under this bill. Bank funds are largely deposits and the depositors are justifiably sensitive about the release of information which might be interpreted in an unfavorable light by the public. The terms of this bill provide no guarantee that the Federal Government would not be free to make such data widely available. For these reasons, I oppose the legislation. I respectfully request that this statement be made a part of the committee's records. Sincerely, BOB WILSON, Member of Congress. Hon. HARLEY O. STAGGERS, THE AMERICAN BANKERS ASSOCIATION, Chairman, Subcommittee on Commerce and Finance, House Committee on Intrastate and Foreign Commerce, Washington, D.C. DEAR MR. CHAIRMAN: The American Bankers Association supports and urges favorable action by the Subcommittee on Commerce and Finance on S. 1642, as amended by the Senate extending to the issuers of stock traded in overthe-counter markets the provisions of the Securities Exchange Act of 1934 relative to public disclosure, proxy solicitation, and insider trading. Because the only provision in this legislation, as introduced, to which the American Bankers Association takes strong exception has been cured by amendment in the Senate, we are presenting our views by letter rather than formal appearance in an effort to economize on the valuable time of your subcommittee. From the very outset the American Bankers Association has supported the general purposes and objectives of S. 1642 and the companion bill, H.R. 6789. However, our association does have one specific objection to this legislation as it was originally introduced in the House and the Senate. It is to those provisions appearing at page 11 of the original bill, which define the manner in which banks are to be regulated under the Securities Exchange Act of 1934. The bill provides that as to banks the requirements of the 1934 act shall be administered by the Securities and Exchange Commission unless a Federal banking regulatory agency requests a delegation of authority from the SEC so that it might exercise all or any of the powers, functions, and duties of the Commission under the 1934 act with respect to those banks which the banking agency normally supervises or examines. We view this provision as being unneces |