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and ordinarily shall be accompanied by an opinion of counsel to this effect.
(e) Bonding of trustees : Trustees shall be required to obtain a fidelity bond in an amount to be specified by the administrator. Ordinarily the requirement will be waived with respect to corporate trustees subject to other governmental supervision.
(f) Removal of trustees : A trustee or trustees shall ordinarily be removable upon the vote or written consent of holders of a majority of the
outstanding variable annuity trust securities. Termination of trust. The trust shall be terminable, after the first 2 years, at any time by a vote, or written consent of the holders of a majority of the outstanding annuity securities.
RULES UNDER THE MARYLAND SECURITIES ACT
2. The provisions of Section 1 hereof shall not apply to the following individuals :
(a) Any individual who at the time his application for registration is filed is a registered representative registered with the National Association of Securities Dealers, Inc., or the New York Stock Exchange;
(6) Any individual who had passed the examination give by the National Association of Securities Dealers, Inc., or the New York Stock Exchange;
(c) Any individual who has been actively engaged in the securities business on a full-time basis for the five (5) years immediately preceding the date of filing of his application for registration; or
(d) Any individual who effects transactions exclusively in securities exempt under Section 26(a) of the Maryland Securities Act. 3. Such examination shall contain one hundred (100) questions relating to securities, securities marketing, securities regulation, and ethics. The applicant must answer at least sixty-five (65) questions correctly in order to receive a passing grade.
4. Individuals who fail such examination may apply for registration and take the examination again, but upon a second failure they must wait a minimum period of three (3) months before again applying for registration and taking the examination, and upon a third failure they must wait a further minimum period of one (1) year before again applying for registration and taking the examination.
5. The examination shall be given at such times and places as the Commissioner may determine.
DEFINITION OF "NET CAPITAL" AND "AGGREGATE INDEBTEDNESS"
1. For the purposes of Section 16(d) of the Maryland Securities Act, the terms “net capital" and "aggregate indebtedness" shall have the following meanings.
A. With respect to broker-dealers who are registered with the Securities and Exchange Commission and subject to Rule X-15C3–1 of the Securities and Exchange Commission, the terms “net capital” and “aggregate indebtedness” shall have the meanings set forth in Rule X-15C3–1.
B. With respect to broker-dealers who are members of those national securities exchanges from time to time referred to in paragraph (b) (2) of said Rule X15C3–1, the terms “net capital” and “aggregate indebtedness" shall have the meanings set forth in the rules of such exchanges.
C. With respect to all other broker-dealers, the terms “net capital” and "aggregate indebtedness” shall have the following meanings:
(1) The term "net capital” shall be deemed to mean the net worth of a broker-dealer (that is, the excess of total assets over total liabilities) adjusted by:
(a) adding unrealized profits (for deducting unrealized losses ) in the accounts of the broker-dealer and, if such broker-dealer is a partnership, adding equities (or deducting deficits) in accounts of partners, as hereinafter defined ;
(b) deducting fixed assets and assets which cannot be readily converted into cash (less any indebtedness secured thereby) including, among other things, real estate ; furniture and fixtures; exchange memberships; prepaid rent, insurance, and expenses; good will; organization expenses; all unsecured advances and loans; customers' unsecured notes and accounts; and deficits in customers' accounts, except in bona fide cash accounts within the meaning of Section 4(c) of Regulation T of the Board of Governors of the Federal Reserve System;
(c) deducting the percentages specified below of the market value of all securities, long and short (except exempted securities) in the capital, proprietary and other accounts of the broker-dealer, including securities loaned to the broker-dealer, pursuant to a satisfactory subordination agreement, as hereinafter defined, and if such broker-dealer is a partnership, in the accounts of partners, as hereinafter defined :
(i) in the case of nonconvertible debt securities having a fixed interest rate and a fixed maturity date which are not in default, if the market value is not more than 5% below the face value, the deduction shall be 5% of such market value ; if the market value is more than 5% but not more than 30% below the face value, the deduction shall be a percentage of market value, equal to the percentage by which the market value is below the face value; and if the market value is 30% or more below the face value, such deduction shall be 30% ;
(ii) in the case of cumulative, nonconvertible preferred stock ranking prior to all other classes of stock of the same issuer, which is not in arrears as to dividends, the deduction shall be 20% ;
(iii) on all other securities, the deduction shall be 30% ; provided, however, that such deduction need not be made in the case of (i) a security which is convertible into or exchangeable for other securities within a period of 30 days, subject to no condiditions other than the payment of money, and the other securities into which such security is convertible, or for which it is exchangeable, are short in accounts of such broker-dealer or partner, or (ii) a security which has been called for redemption and which is redeem
able within 90 days. (d) deducting 30% of the market value of all “long" and all "short" future commodity contracts (other than those contracts representing spreads or straddles in the same commodity and those contracts offsetting or hedging any "spot" commodity positions) carried in the capital, proprietary or other accounts of the broker-dealer and, if such broker-dealer is a partnership, in the accounts of partners as hereinafter defined ;
(e) deducting, in the case of a broker-dealer who has open contractual commitments, the respective percentages specified in subparagraph (c) above of the value (which shall be the market value whenever there is a market) of each net long and each net short position contemplated by any existing contractual commitment in the capital, proprietary and other accounts of the broker-dealer and, if such broker-dealer is a partnership, in accounts of partners, as hereinafter defined; provided, however, that this deduction shall not apply to exempted securities, and that the deduction with respect to any individual commitment shall be reduced by the unrealized profit, in an amount not greater than the percentage deduction provided for in subparagraph (c), (or increased by the unrealized loss) in such commitment; and that in no event shall the unrealized profit on any closed transactions operate to increase net capital;
(f) excluding liabilities of the broker-dealer which are subordinated to claims of general creditors pursuant to a satisfactory subordination agreement as herein defined; and
(g) deducting, in the case of a broker-dealer who is a sole proprietor, the excess of (i) liabilities which have not been incurred in the course
of business as a broker-dealer over (ii) assets not used in the business. (2) The term “aggregate indebtedness” shall be deemed to mean the total money liabilities of a broker-dealer arising in connection with any transaction whatsoever, including, among other things : money borrowed ; money payable against securities loaned and securities "failed to receive”; the market value of securities borrowed (except for delivery against customers' sales) to the extent to which no equivalent value is paid or credited ; customers' free credit balances; credit balances in customers' accounts having short positions * * *.
VARIABLE ANNUITY LIFE INSURANCE Co. OF AMERICA,
Washington, D.C., May 7, 1963. Mr. JAMES T. CLARK, Committee on the District of Columbia, House Office Building, Washington, D.C.
DEAR MR. CLARK : Enclosed is a copy of the report of the Maryland committee which made a study of the “blue sky” laws of Maryland. I call your attention particularly to the comments relating to section 26 on pages 44 and 45 relating to the variable annuity in which the committee recommends that variable annuities be left within the control of the insurance commissioner. I trust you will find this report of interest in considering H.R. 4200. Sincerely yours,
LARRY D. GILBERTSON,
WELLINGTON MANAGEMENT Co.,
Philadelphia, Pa., May 24, 1963. Mr. JAMES CLARK, Clerk, House District Committee, House Office Building, Washington, D.C.
DEAR MR. CLARK: During our conversation yesterday with Ed Carroll and Irv Swanson with respect to House bill No. 4200, you suggested that it would be helpful if I would write you a letter explaining our position on this bill.
First of all, I would like to say that we fully support this effort to provide regulation of the securities business in the District of Columbia. We believe that the citizens of the District are entitled to the same protection in this area as are citizens of all of the States in the Union. We have only one problem with the bill and that is in the definition of "security," contained in section 2(m). This definition excludes from the regulatory provisions of the bill and from the definition of a security the typical insurance or endowment policies or fixed annuity contracts issued by insurance companies. We wholly support these exemptions, as these typical insurance contracts certainly are not securities.
However, the language in this definition continues and excludes "or any contract issued by an insurance company pursuant to section 41 of chapter III of the Life Insurance Act as added by Public Law 86–520 (District of Columbia Code, section 35–5410.)” The contracts issued by insurance companies under this section 41 are variable annuity contracts, where the investor takes all of the investment risks just as he would in the purchase of common stocks.
The reason for this is that, unlike the typical and conventional insurance contracts where the insurance company guarantees a fixed amount of dollars at some time in the future, the variable annuity contract does not guarantee a fixed amount of dollars, but simply guarantees payment of the value of certain units which will increase or decrease, depending upon the market value and income of the underlying portfolio of common stocks.
The U.S. Supreme Court in 1959 ruled that variable annuities were securities. (See SEC. v. Variable Annuity Life Insurance Company of America, 359 U.S. 65, 1959.) It is also important to know that the Variable Annuities Committee of the North American Securities Administrators, an association composed of State securities commissioners, as well as Canadian and Mexican securities commissioners, has held that variable annuities are securities and should be regulated as such under appropriate State as well as Federal securities laws. Furthermore, another association of State securities commissioners (Midwest Securities Commissioners Association) has promulgated a statement of policy, holding that variable annuities should be subjected generally to the same securities regulation in the various States as are securities of investment companies. This midwest securities commissioners group includes the States of Arizona, California, Colo rado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, and Wisconsin.
If the residents of the District of Columbia are to be protected in the offer and sale of securities, they should, I believe, be protected with respect to all securities, including variable annuities. This desirable result could be accomplished by eliminating the exemption for variable annuities by strikng out the following words at the end of the definition of a security:
Strike these words : "or any contract issued by an insurance company pursuant to Section 41 of Chapter III of the Life Insurance Act as added by Public Law 86-520 D.C. Code Section 35-5410."
I appreciate sincerely the courteous interview you gave us yesterday and thank you very much for your consideration. Sincerely yours,
JOSEPH E. WELCH, President.
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.,
Washington, D.C., June 4, 1963. Re H.R. 4200, District of Columbia securities regulation exclusion of variable
DEAR MR. McMILLAN : The purpose of this letter is to urge your committee to eliminate from the definition of "security” in section 2(m) of H.R. 4200 the exclusion of variable annuities.
The National Association of Securities Dealers, Inc., takes no position on the remainder of this bill to adopt a securities law for the District of Columbia as this proposal is in the nature of local securities legislation concerning which the board of governors of the association has not normally in the past commented upon to State governments. But, because this board has taken the position since 1957 that variable annuities are securities and in view of the fact that this bill, if adopted, would be a local securities law enacted by the Federal Government, we believe it is more than a matter of local concern and one in which we should again state our position.
By way of background as to its organization and functions, the association was organized under the laws of the State of Delaware on June 18, 1939, for the purpose of registering with the Commission under section 15A of the Securities Exchange Act and is now so registered. The association has approximately 4,690 miembers, all of which are securities brokers and dealers registered as such with the Commission pursuant to the requirements of section 15(b) of the Securities Exchange Act of 1934 (48 Stat. 881 ; 49 Stat. 1375; 15 U.S.C. sec. 780 (b)). 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 functions and activities of the association constitute an integral part of the Federal system of securities regulation. By section 15A of the Securities Exchange Act of 1934, which authorized its creation, it has been empowered to require high standards and principles of trade and trade practices on the part of underwriters and dealers in investment company securities as well as other securities. It has power to expel or suspend or visit other severe sanctions upon its members found guilty of violation of Federal securities laws or of deceptive and manipulative practices upon the public. The Commission and the association have power on a nationwide basis effectively to prevent the continuance in business of unscrupulous security dealers and underwriters. Under the Investment Company Act of 1940 it is given important functions and rulemaking power to insure that member dealers in their dealings with investment companies do so without prejudice to such companies and their investors. It also has rulemaking power to prevent unconscionable relationships between its members and open-end investment companies. These powers the association has exercised. Moreover, the association has cooperated with the Commission in the formulation and promulgation of a statement of policy as to what would be deemed misleading statements or omissions of material fact in the sales literature used in the sale of shares of open-end investment companies. The association has undertaken and is engaged in policing this statement of policy in respect of its members.
As presently written, H.R. 4200 would exclude from the application of its regulatory provisions insurance companies issuing so-called “variable annuity"
contracts and leave sole jurisdiction in the Superintendent of Insurance of the District of Columbia. The association is opposed to this exemption.
"Variable annuities" have been held by the Supreme Court in Securities Exchange Commission v. Variable Annuity Life Insurance Company of America, 155 F. Supp. 521., 257 F. 2d 201, 359 U.S. 65 (1959), to be securities. The association, an intervenor in that case, supported the argument of the Securities and Exchange Commission that variable annuities fall within the definition of securities and as such are within the Federal regulatory framework. The requirements imposed upon persons engaged in the sale of such securities should be applied uniformly upon all selling them. If the present exclusion is allowed to remain, this will not be the case.
Variable annuity contracts are similar to securities of open-end managementtype investment companies which would be subject to the regulatory provisions of the proposed legislation. If the exemption remains, the result would be that people engaged in substantially similar occupations and selling substantially similar securities—that is, securities salesmen selling shares in investment companies, on the one hand, and employees of companies selling variable annuities on the other-would be subjected to different sets of rules and regulations, one established by the Public Service Commission of the District of Columbia pursuant to the provisions of H.R. 4200, and the other promulgated by the Superintendent of Insurance of the District of Columbia. This variance would appear to be at odds with the general belief that regulations with respect to securities should be uniformly applied under one authority. It also runs contrary to present requirements of the Securities Exchange Commission that general agents of companies selling variable annuity contracts register as broker-dealers. At present, two companies in the District of Columbia sell variable annuities. The. general agents of both companies are registered with the Securities and Exchange Commission. If H.R. 4200 is enacted as presently written, these agents would be registered with the Securities and Exchange Commission, as all interstate broker-dealers must be, but would not be required to be registered with the Public Service Commission.
The chief argument made in favor of retaining the exclusion is that without it there would be dual regulation. This argument overlooks the purpose of all insurance and securities legislation-appropriate regulation in the public interest. An agent may be well qualified to sell insurance but he may be completely unqualified to sell securities. Under the bill, an insurance agent selling variable annuities would not be required to meet the criteria spelled out in H.R. 4200 with respect to training, experience, or knowledge of the securities business. Nor would he be required to pass an examination or be subject to criminal penalties for willful violation of the act or of rules or regulations promulgated by the Public Service Commission.
Rather than being unjustified, dual regulation is thoroughly justified since the companies concerned are operating within the confines of two separate industries. The employees involved should therefore be compelled to conform to the requirements of the respective industries.
The association's position on this matter is consistent with the views expressed by other organizations within the securities industry including the Investment Bankers Association of America, the Investment Company Institute, the North American Securities Administration (an association of securities authorities from the United States, Canada, and Mexico), the Midwest Securities Commissioners Association, and others. It is also consistent with the Uniform Securities Act, a model law proposed for State legislation by the National Conference of Commissioners on Uniform State Laws, from which H.R. 4200 was modeled, and which includes variable annuities in its definition of “security." Thanking you in advance for your consideration of this matter, I am Very truly yours,
A. JACKSON GOODWIN, Jr., Chairman, Legislation Committee.
ARNOLD, FORTAS & PORTER,
Washington, D.C., June 21,1963. Hon. John L. McMILLAN, Chairman, Committee on the District of Columbia, House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN : Enclosed for your information is a copy of a letter to the chairman of subcommittee No. 2 of the Committee on the District of Columbia of the House of Representatives with reference to H.R. 4200, the