be held within a reasonable time thereafter, and while there is no express provision terminating the period of suspension, we think it is evident from the statute that it was the legislative intent that when a hearing is demanded and had, it shall terminate either in a revocation of the license or a restoration. It is our conclusion that the statute does not deny due process. In the interest and protection of the public, provision is made for a summary suspension, followed by provisions for a speedy hearing upon the merits of the suspension order if and when demanded by the broker affected. This amounts to no more than a reasonable and valid exercise of the police power" (248 N.W. 458, 461).

Note that this type of analysis makes it possible for the court to prevent arbitrary abuses of the summary suspension power, by looking, as the Wisconsin court said, to whether the suspension "is reasonably necessary to protect the public" in a particular case. This type of approach gives the court enough latitude to review, on a case-by-case basis, the question whether the particular facts make the need for public protection weighty enough so that the broker may be suspended, prior to any hearing, without violation of due process. Naturally, an arbitrary or capricious or malicious suspension could not be sustained consistently with due process.

The committee should note that the provision in the Wisconsin statute (similar to that in H.R. 4200) for a hearing following suspension, when and if demanded by the broker, was an important factor in reconciling the broker's constitutional rights with the act.

A similar type of analysis of an SEC order was recently made by a Federal court in a case in which the SEC order had the effect of suspending all the broker's exemptions under regulation A, and, in effect, working a suspension of the broker's business, prior to any final determination. In that case the U.S. Court of Appeals for the District of Columbia Circuit followed the Wisconsin Supreme Court's analysis and came to the same result. (See R. A. Holman & Co. v. Securities and Exchange Commission, 299 F. 2d 127 (D.C. Cir. 1962) (Judges Prettyman, Washington, and Burger).)

A similar due process issue was presented to the Supreme Court of California a few years ago, under a statute of that State authorizing the insurance commissioner to vest title (as conservator) to the assets of any insurance company which, in the judgment of the commissioner, is in a hazardous condition which jeopardizes the future of the company. The California statute provided that such a vesting should be accomplished by petition filed in court, the court order to continue in effect until, after a full hearing, it should appear that the ground for the order did not exist or had been removed. Upon such a vesting by the insurance commissioner, the company proceeded by mandamus to attack the vesting order, contending that due process required that the condition of the company be determined before the vesting order might issue. The court pointed out that the purpose of the statute was to protect the public interest in the assets of insurance companies and that to allow a delay in conservatorship, while a court examined the basis for the action of the commissioner, would effectively defeat that purpose. The petitioner's constitutional rights, held the court, were adequately protected by the postvesting hearing pursuant to the statute. The balance between possible injury to the company on the one hand and the public interest on the other did not require a hearing before the event. Financial Indemnity Co. v. Superior Court, 289 p. 233 (1955) (following Rhode Island Insurance Co. v. Downey, 212 p. 2d 995 (1950)).

IBA item No. (11)

This matter has been compromised. We have agreed with the IBA representatives that the bill should be amended by putting a comma at the end of line 13, page 23, of the bill, and adding: "except that no public statement, notice, or release concerning any investigation, proceeding, or order under this Act which is not a finding of a hearing examiner or of a Commissioner or a final determination of the Commission shall allege a violation of this Act or a ground for denial, suspension, or revocation of a license, unless such statement, notice, or release specifies that such allegations are unproved until final determination, and that the purpose of the investigation or proceeding is to determine whether the allegations are true."

A word of explanation here is in order, so that the considerations are before the subcommittee.

Objection was made to the provision of H.R. 4200 giving the Commission authority to publish information concerning any violation of the act or of any

rule or order thereunder (sec. 11(a)(3), p. 23, lines 12 and 13). The objection was that the Commission would thereby possess the power to inflict serious damage to the business of the broker-dealer by public information, press releases, and the like, before the truth of any allegation against the broker-dealer could be established.

If the only dictate of policy involved here were the undisturbed continuity of the broker-dealer's business, the objection might have merit. This is, of course, not the case. If the public knows of the initiation of proceedings against a broker-dealer, and of the allegations in those proceedings, individual members of the public are in a position to choose intelligently whether to continue dealing with that broker-dealer. Some members of the public may decide, in the interest of safety, to have no further dealings with him. Still other members of the public may decide to deal with that broker-dealer, but not in purchases of X stock which are involved in the Commission's proceeding. The point is that the public is unsuspecting prey, if it does not have the basic information about the charges which are the subject of the proceeding.

The publication authority was thought sufficiently important by the Commission on Uniform Laws so that it was included in section 407(a) of the Uniform Securities Act, from which it is taken verbatim by H.R. 4200. Similarly, the authority is contained in section 21(a) of the Securities Exchange Act of 1934, and in section 31(a) of the Maryland act.

The public has a legitimate and important concern with a broker-dealer's violations of the act and with proceedings involving allegations of such violations, even before they are proven. By analogy, a criminal charge contained in an information or indictment is traditionally made public prior to the trial and ultimate proof of the charges. Similarly, civil suits charging unethical dealing or nonperformance or breach of contract are available to the public, and often publicized, when filed, long before the trial occurs. It is true that there may be injury to the reputation and business of the defendant in both civil and criminal cases, and that the charges may ultimately fail of proof. Nevertheless, it has always been thought that the need of the public for the information in the interest of self-protection, and the interest of the citizen and taxpayer in scrutinizing the functions of Government, justify placing the charges and even the evidence out in the open, on the table, subject to the full light of day. This policy underlies section 407(a) of the Uniform Act, 21(a) of the 1934 act, 11(a)(3) of H.R. 4200, and 31(a) of the Maryland act.

While the courts have not been critical of the possession by the Securities and Exchange Commission of the power to publish, the courts have at times criticized the exercise of that power by the Commission in a particular way. The form of press release involved in N. Sims Organ & Co., Inc. v. Securities and Exchange Commission, 293 F. 2d 78, 81 (2d Cir. 1961), and Gilligan, Will & Co. v. Securities and Exchange Commission, 267 F. 2d 461, 469 (2d Cir. 1959) charged that violations had occurred. The releases did not make it sufficiently clear that charges were being considered by the Commission merely as staff allegations subject to a burden of proof, and hence carried an implication of prejudgment by the Commission which the court criticized. Since those decisions, the SEC has used a form of press release which does make it clear that charges against a brokerdealer are only allegations and that they do not carry any persuasive force unless the burden of proof is sustained. An example of the new form of press release is attached as appendix A to this memorandum, and would appear successfully to avoid the suggestion of abuse of the publication power which is made in the two court opinions cited above. The amendment which we propose to the bill will require substantially the same type of notice or press release and will meet the objections voiced by the two court opinions.

IBA item No. (12)

The IBA proposal is not legally necessary, but we would have no objection to a provision spelling out a period of limitation. The proposal is unnecessary because the 5-year provision contained in title 18, United States Code, section 3282, applies to District of Columbia crimes as well as to Federal crimes. See Askins v. United States, 102 U.S. App. D.C. 198, 251 F. 2d 909 (1958). We would have no objection, however, to adding to section 13 (d) of the bill a sentence which provides: "The limitation of any prosecution under this act or under any rule or order hereunder shall be governed by title 18, United States Code, section 3282" (or language to similar effect).

IBA Item No. (13)

The IBA proposed amendment would conform section 14(a)(2) of the bill with the language of section 410 (a) of the Uniform Act. Mr. Bryan and I concur in this amendment.

IBA Item No. (14)

Agreement has been reached with the IBA representatives upon a slightly modified version of their proposal. The agreed language is as follows:

"The President of the Board of Commissioners of the District of Columbia shall appoint a District of Columbia Securities Advisory Committee which shall consist of six members, who shall be residents of the District of Columbia or the State or Maryland or the State of Virginia, at least two of whom shall be actively engaged in the securities business and at least two of whom shall be members of the Bar of the District of Columbia. The members shall be selected on the basis of their experience and qualifications to advise the Public Service Commission on all phases of the securities business. The members shall be appointed for staggered terms of 3 years each, with two members appointed each year, to serve without compensation and eligible for reappointment for additional terms, provided that not more than two of the terms are in succession. The duration of the terms of the first members appointed hereunder shall be designated by the President of the Board of Commissioners at the time of their appointment. The members of the Advisory Committee shall select their own Chairman. Meetings of the Advisory Committee shall be held when called by the Chairman of the Public Service Commission and may be attended by members of the said Commission. The Advisory Committee shall give the Public Service Commission the benefit of its advice on any and all matters pertaining to the administration of this act, particularly the adoption, amendment, or repeal of rules, regulations, and forms provided for herein."

IBA item No. (1)

ITEM OF DISAGREEMENT

The IBA memorandum and others that I understand are on file with the committee propose that the bill should not define the word "security" (see p. 10, lines 4-11) so as to exclude from regulation under the bill any category of issuers or salesmen of variable annuity contracts. The bill presently does exempt such contracts which comply with the local insurance act, but does not exempt those that do not comply.

With respect to this item, I concur with the IBA position, because I believe it is supported by the simplest, most direct, and persuasive reasons. Mr. Bryan does not concur. While your committee will have to decide which view to support, perhaps I can help the committee by pointing out the considerations which, in my view, are those that should be most carefully weighed.

An important consideration in favor of the proposed IBA amendment (which would bring all variable annuities issuers and sellers within the regulation of H.R. 4200 as issuers and sellers of securities) is that the Superintendent of Insurance in the District of Columbia has not issued regulations under District of Columbia Code 35-541 which would place upon variable annuity salesmen or issuers standards or restrictions similar to those imposed upon securities dealers by H.R. 4200. It is not certain that he could, under present legislation, promulgate regulations of a scope comparable to the provisions of H.R. 4200. I do not mean that his regulations, or his power to regulate further, offer the public no protection, but I do mean that the qualifications, standards of conduct, and enforcement powers that are applicable to securities sellers under H.R. 4200 are not matched by the requirements placed upon sellers of variable annuities by District of Columbia Code 35-541 or regulations thereunder. Indeed, the requirements of 35-541 are directed to issuers of variable annuity contracts rather than to salesmen. I think it fair to say that the public would be better protected if variable annuity issuers and salesmen were under H.R. 4200. For that reason, I must agree with the IBA criticism that H.R. 4200 as written would leave a gap in investor protection, and, of course, investor protection is the paramount consideration in writing securities legislation.

If investor protection were the only consideration, the drafting committee would have proposed a bill which classified variable annuities as securities without qualification. The consideration weighing on the other side as that to do so would place variable annuities issuers and salesmen under dual regulation by two District of Columbia agencies, the Insurance Superintendent and the Public

Service Commission, as well as the Securities and Exchange Commission. The drafting committee was divided on the question and the present language of the bill was the resultant compromise. However, dual licensing and dual compliance with regulations designed for the protection of the public in different fields of service are perfectly sound when imposed on professionals who engage in dual services. Any salesman who engages in both the insurance business and the securities business through variable annuities is, in fact, engaged in such a dual service and as such should be subjected to dual licensing and regulation, such as is now the case with securities salesmen who undertake to sell insurance.

It is probable that more individuals and firms support the IBA position than support the present language of the bill, so far as variable annuities are concerned. Virtually all securities broker-dealers would endorse the IBA view. The variable annuities issuers and, I suppose, a number of insurance agents would support the language of the bill. Our original drafting committee would, I expect, remain divided on the question.

My personal inclination is to place variable annuities under the regulation of the bill for all purposes, as securities. I believe that the record of hearings on the bill will show that this would accord most closely with the position of the Securities and Exchange Commission. I am sure that some administrative arrangements could be undertaken to minimize the burden of dual local compliance on the part of variable annuity sellers.

As far as my personal views are concerned, therefore, I concur in the proposed amendment of the IBA. The primary considerations in my own mind would be to (a) give investors in variable annuities the same protection as is given to investors in other types of securities and (b) to enhance the outlook for passage of the bill. This last is a matter which the committee is far better able to calculate than I.

Mr. Bryan does not concur in my views as to IBA item (1) and wishes to express his views separately, as per the attached memorandum. I understand that the Board of Commissioners have planned a hearing next week at which Mr. Nees will appear and present fully the IBA position on variable annuities, but at present writing I am advised that the Commissioners are in accord with Mr. Bryan's memorandum.

I earnestly hope, with this nearly complete measure of agreement among the IBA representatives, Mr. Bryan and myself, that we may look to favorable committee action in the near future. All of us think we have a good and badly needed bill here, which has been given the most painstaking care and toil.

I would like to advise the subcommittee that Mr. Bryan and I have had unstinting cooperation from Mr. Nees and his associates in our numerous and lengthy meetings, and that they have demonstrated a most constructive attitude throughout these talks.

Sincerely yours,

DAVID C. ACHESON, U.S. Attorney.

GOVERNMENT OF THE DISTRICT OF COLUMBIA,

Hon. THOMAS G. ABERNETHY,

EXECUTIVE OFFICE, Washington, D.C., July 22, 1963.

Chairman, Subcommittee No. 2, Committee on the District of Columbia, House of Representatives, Washington, D.C.

MY DEAR MR. ABERNETHY: Reference is made to H.R. 4200, a bill to provide for the regulation of the business of selling securities in the District of Columbia and for the licensing of persons engaged therein, and for other purposes.

Following the hearing on this bill held by your subcommittee, you requested an ad hoc committee consisting of Messrs. David C. Acheson, Irving Bryan, and Bernard Nees to consider the amendments which the Investment Bankers Association had, during the hearing, asked to be adopted and to make recommendations to the subcommittee.

The Commissioners have been furnished a copy of a report of the ad hoc committee dated June 21, 1963, containing recommendations concerning the suggestions of the IBA. There is a difference of opinion in the ad hoc committee concerning item No. 1 of the IBA amendments. This item relates to the question whether variable annuity contracts issued by life insurance companies should be included or excluded from the operation of the securities bill. Mr. Acheson

now is of the opinion that the act should not exclude from its operation these contracts, while Mr. Bryan is of the opinion that they should be excluded. The reasons for their respective opinions are stated in the report of June 21, 1963.

Subsequently, the IBA requested the Commissioners to give further consideration to the matter and the Commissioners met with them.

If the recommendation of the IBA were to be followed, it would result in the regulation both by the Department of Insurance and the Public Utilities Commission of life insurance companies and their agents issuing and selling variable annuity contracts. The Commissioners do not agree that dual regulation is necessary or desirable. If the committee is of the opinion that the activities of life insurance companies in respect to the issuance of variable annuity contracts need more regulation than is possible under the authority now vested in the Superintendent of Insurance, the Commissioners feel that the Life Insurance Act should be amended to accomplish this objective. Such amendments could make applicable to life insurance companies and their agents engaging in the issuance or sale of variable annuity contracts all or any of the provisions in the securities bill. On the other hand, if the committee should conclude that life insurance companies and their agents engaging in the issuance and sale of these contracts should be supervised in respect to such activity only by the Public Utilities Commission, then the Life Insurance Act should be amended so as to remove this matter from the jurisdiction of the Superintendent of Insurance. The Commissioners' concern is that the activities of life insurance companies in the field of variable annuities be not subject to supervision and regulation by two District agencies.

Very sincerely yours,

WALTER N. TOBRINER, President, Board of Commissioners, District of Columbia.

GOVERNMENT OF THE DISTRICT OF COLUMBIA,

July 13, 1963.

SEPARATE STATEMENT OF IRVING BRYAN, ASSISTANT CORPORATION COUNSEL,

REGARDING IBA ITEM No. (1)

The Investment Bankers Association recommends that the definition of "security" in section 2(m) be amended so as to include within the scope of the bill "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, sec. 35-541)." The IBA states that the Supreme Court of the United States in an opinion dated March 23, 1959, held that "variable annuity" contracts are subject to the jurisdiction of the Securities and Exchange Commission. In issue in that case (Securities and Exchange Commission v. Variable Annuity Life Insurance Co. of America, et al.), reported in volume 359 United States at page 65, was a particular contract which at the time the case arose was being issued by the Variable Annuity Life Insurance Co. However, it should be noted that there now are other forms of contracts providing for payments which vary according to investment experience. As the Court said in the Variable Annuity case (359 U.S. at page 71), "We realize that life insurance is an evolving institution. Common knowledge tells us that the forms have greatly changed even in a generation. And we would not undertake to freeze the concepts of 'insurance' or 'annuity' into the mold they fitted when these Federal acts were passed."

Subsequent to the decision of the Court in the Variable Annuity case, the Congress enacted a bill which became Public Law 86-520, approved on June 12, 1960, and now appearing in section 35-541, District of Columbia Code. This act amended the Life Insurance Act of the District of Columbia so as to vest in the Superintendent of Insurance a broad grant of regulatory authority over the activities of both domestic and foreign life insurance companies which issue contracts "providing for payments which vary directly according to investment experience." The Superintendent has issued regulations under the aforementioned authority. In addition, the statutory and other regulatory provisions applicable generally to life insurance companies and their agents are applicable to insurance companies which issue these contracts referred to in the act of June 12, 1960. If it should appear that further regulation of life insurance companies and their agents is needed because such companies issue contracts