There may be other provisions of Federal statutes that are parallel to certain provisions of H.R. 4200 and are applicable in the District of Columbia. Hence, it was thought unwise to specify particular provisions of Federal statutes which were to remain in effect locally, for fear of implying, contrary to the intention of the drafting committee, that provisions not specified should be suspended locally. Hence, we treated the applicability of the Federal statutes in the general terms as indicated in section 3.

One brief comment on section 4, Mr. Chairman.

Subsections 4 (a), (b), and (c) are substantially verbatim from section 201 of the Uniform Act, except that the present bill—

(1) uses the term "license" instead of the Uniform Act term "registration," and

(2) omits the license requirement as to investment advisers. This omission is based upon a desire to limit the new administrative responsibilities of the local government to the essentials, and to concentrate attention and facilities upon broker-dealers and agents.

Subsection 4 (c) of the bill fixes a 2-year term of license, instead of the 1-year term of the Uniform Act, and adapts the provisions of 201 (d) of the Uniform Act.

Section 5. License procedure: Subsections 5 (a), (c), and (e) are substantially verbatim from subsections 202(a), 202(c), and 202(e) of the Uniform Act.

Subsection 5(a) (7) of the bill is new, allowing the local government some discretion in requiring additional disclosures in license applications.

By "additional," I mean disclosures in addition to those required by the Uniform Act.

Subsection 5 (b) adapts the provisions of the Uniform Act regarding license fees. Section 5(d) fixes the sum of $15,000 as the basic required minimum capital, with limited discretion in the Commission, in certain narrow circumstances, to fix a smaller sum to avoid individual hardship where the protection of the public does not require $15,000 minimum capital.

Mr. ABERNETHY. How does that compare with other jurisdictions, the $15,000 level?

Mr. ACHESON. Maryland has a $15,000 minimum capital, Mr. Chair

man.

Mr. ABERNETHY. What does Virginia have?

Mr. ACHESON. I don't know the answer to that, I regret to say. The Uniform Act, of course, does not recommend a figure.

Mr. ABERNETHY. I just wanted to make a comparison.

Mr. ACHESON. I daresay one of the most discussed provisions of this bill will be the minimum capital requirement which, of course, some houses would like to see very high and some houses-individuals would like to see very low.

One of the most important areas for the promulgation of regulations of the Commission, to implement the statutory language, is in connection with this section. Regulations would be essential for further definition of "minimum capital," "net capital," and "aggregate indebtedness." With respect to the last two terms it would be useful for the Commission to borrow from the regulations of the Securities and Exchange Commission in defining these terms, in order to simplify dual

compliance, to make use of the considerable learning and many refinements that the Securities and Exchange Commission has developed, and to take advantage of court decisions interpreting the SEC regulations regarding these difficult terms. (See rule 15c3-1, General Rules and Regulations under the Securities Exchange Act of 1934.)

This section raises difficult legislative questions of balancing considerations of protection of investors against those of open competi

tion in the broker-dealer business.

A high minimum capital will raise a salutary barrier against irresponsible entry into the business and will instill a healthy appreciation of risk in the newcomer. A minimum capital that is too high will, of course, tend to restrict new competition and favor the position of the larger houses. The drafting committee cannot offer a definitive resolution of these competing considerations. I would offer the suggestion that any error be made on the high side, in the interest of public protection. The $15,000 minimum capital was borrowed from the Maryland act, but well might be too low for the District of Columbia.

Mr. SPRINGER. Right at that point, Mr. Acheson, might I ask, when you are talking about $15,000 minimum capital, is this a cash account, or is this in the form of a bond?

Mr. ACHESON. This would be defined by regulations of the Commission.

Mr. SPRINGER. As to what the securities should be?

Mr. ACHESON. As to what should constitute the minimum capital. Mr. SPRINGER. And the form which the minimum capital should take?

Mr. ACHESON. Correct. And I would assume it should be defined so as to have a pretty liquid character.

I should not think that leases and furniture and that kind of thing would

Mr. SPRINGER. May I just ask this, for the information of the committee: Since you have selected $15,000 as that set up in the Maryland Code, how do the regulations define it there?

Do you remember how it should be carried?

Mr. ACHESON. I am not familiar with the Maryland regulations, Mr. Springer.

Mr. SPRINGER. As to whether or not that has to be a cash account, a bond account, a real estate account, or what?

Mr. ACHESON. I am almost sure it does not have to be a cash account. But the committee may wish to hear from Mr. Decatur Miller, who is the Maryland administrator, on these questions. They have, I guess, the most recent experience of any State nearby which has gone through the legislative drafting and regulations experience in the last couple of years in the securities field. And Mr. Miller would probably have lived through necessary problems within the last 12 months. I will look into this.

(Mr. Acheson subsequently wrote the chairman. See p. 36 hereof.) Mr. SPRINGER. Thank you.

Mr. ACHESON. I would like to read from my statement regarding two more provisions, Mr. Chairman, and then I will have finished. The provisions of section 10 of the bill and the provisions of section 11. This begins on page 17 of my statement.

Section 10 is based upon section 204 of the Uniform Act, except that the bill adds the following grounds for denial or revocation of licenses: 1. Failure to comply with the minimum capital requirement;

2. Prior acquittal of certain criminal charges solely by reason of insanity:

3. Prior disciplinary action against the applicant by an exchange or association; and

4. Prior fraudulent practices in the securities business or while acting in a fiduciary capacity.

These are grounds for revocation which do not appear in the Uniform Act.

In addition, this section makes it obligatory, instead of discretionary, for the local commission to provide for examinations of applicants. Section 11. Investigations and subpenas; Mr. Chairman, this section closely follows section 407 of the Uniform Act, except that certain limiting adaptations were thought necessary in regard to the enforcement and immunity provisions.

Subsections 11 (c) and (d) provide for means of compelling a witness to comply with a subpena of the Commission, in the face of his claim of privilege against self-incrimination in exchange for immunity from prosecution.

Subsection 11(c) gives the U.S. attorney the power to control applications for compelling orders. This is desirable, since a witness will gain immunity from prosecution by reason of a compelling order obtained by the Commission and subsequent testimony in compliance with that order.

As in all such provisions, it is important that the U.S. attorney exercise care in granting approval of applications for compelling orders, so as to avoid unnecessary grants of immunity from Federal or local prosecution.

Subsection 11(d) limits the immunity which the witness may acquire so as to make it explicitly clear that immunity is acquired only by testifying, after claim of privilege, pursuant to a court order issued pursuant to subsection (c). This language is intended to make it impossible for the Commission or for prosecuting attorneys to compel a witness to testify or to bestow immunity by their own action, and to make it impossible for the witness to claim immunity unless he is required to testify by the court.

Once the witness is properly compelled, subsection 11(d) grants an immunity which is every bit as broad as the constitutional privilege which the witness gives up, by forbidding prosecution on account of any matter as to which he is compelled to testify. While the immunity language is not as broad as that contained in 18 U.S.C. 3486 (c) (Ullman v. United States, 350 U.S. 422), nevertheless the language is amply broad to be a valid substitute for the constitutional privilege and would probably even secure immunity from State prosecution. (Brown v. Walker, 161 U.S. 591.)

One final brief comment on the bottom of page 20, Mr. Chairman, in connection with section 16 of the bill, which deals with adminis

tration.

Subsection (a) of section 16 places the responsibility for administration of the act in the Public Service Commission, successor to the

Public Utilities Commission of the District of Columbia. (See sec. 201.)

This subsection provides the usual authority to the Commission_to organize and staff itself for proper performance of its functions under the bill. By making use of an existing organization and body of personnel, rather than creating a new agency, it is hoped to minimize the cost of administration, recruitment of personnel and most of the labor pains that accompany the birth of a new governmental body. That concludes my statement, Mr. Chairman. If there are any questions, I will be glad to attempt to deal with them.

Mr. ABERNETHY. I have just one question for the moment. I had you skip over the committee that helped draft this, but I want to go back to it.

Who selected the committee? Was anyone designated to do it, or was this your idea along with the Corporation Counsel, or someone else?

Mr. ACHESON. The committee evolved, Mr. Chairman. I confess that I suppose I was the first to worry about drafting this bill. Mr. ABERNETHY. Well, the responsibility of the draft was put on you to begin with, I assume, is that right, or was directed to you? Mr. ACHESON. I assumed it and attempted to divide it up.

Mr. ABERNETHY. You felt the need to counsel with some other people about it?

Mr. ACHESON. I certainly did, Mr. Chairman, because I am not a securities expert and I tried to find people who were willing to work on the bill with me.

Mr. ABERNETHY. I see.

Mr. Springer?

Mr. SPRINGER. Just one or two things.

I think there are three or four things here that probably should be emphasized. I have tried to make notes of them.

First, by this bill you are trying to put the burden for the enforcement of this on the local body of the local governmental unit. That is the first thing you are trying?

Mr. ACHESON. That is correct.

Mr. SPRINGER. And this is where the committee believes it ought to rest; is that correct?

Mr. ACHESON. That is correct.

Mr. SPRINGER. This is, in effect, a "blue sky" law similar to what you have in 48 of the 50 States of the Union?

Mr. ACHESON. With this exception, Mr. Springer: A good many of the "blue sky" laws regulate the securities issues themselves in a fashion similar to the way the SEC regulates securities issues under the 1933 act.

Mr. SPRINGER. What you did was not have enough issues here; is that true?

Mr. ACHESON. That is correct.

Mr. SPRINGER. You felt the burden here ought to be on regulating the developer rather than regulating the issues?

Mr. ACHESON. This seemed to us the most effective and cheapest way of protecting the public in this city, considering the problem we have here, regulate the qualifications of broker-dealers and agents who go into the business.

Mr. SPRINGER. Since they are, like all securities, interstate in effect, the SEC has to regulate those anyway; doesn't it?

Mr. ACHESON. The SEC, as I understand it, has a postaudit supervisory responsibility over broker-dealers. It may revoke their registration, and often does so if they disobey the law or the regulations.

What we have attempted to do here is to provide preventive regulation which will govern the qualifications of broker-dealers and agents before they get into the business, which my present understanding is the SEC does not do and cannot do under the laws that govern them. Mr. SPRINGER. And that has been, may I say-this is a question. That has been the problem in the District of Columbia? Mr. ACHESON. That is right.

Mr. SPRINGER. Now, second, you have tried to follow a tried and true example set before you, and that as nearly as you could, the "Uniform Securities Act," as has been enacted in many of the States? Mr. ACHESON. That is right, Mr. Springer.

Mr. SPRINGER. The third thing you have done is regulate the seller only. The fourth thing, as I understood it, is you have tried here to get preventive legislation which would keep the harm from happening rather than prosecuting a person after the person has already lost his property.

Mr. ACHESON. Precisely.

Mr. SPRINGER. Thank you, Mr. Chairman.

Mr. ACHESON. I would add, Mr. Springer, that although the emphasis is put upon preventive legislation, there are plenty of powers under the bill to take punitive measures. There are, of course, the criminal provisions and the provisions for revocation of the license once the license has been granted.

Mr. SPRINGER. That is in the bill which does not have anything to do particularly with your office?

Mr. ACHESON. Which the local commission may do itself.

Mr. SPRINGER. You are not in any way sloughing off your responsibility as prosecutor of the District of Columbia?

Mr. ACHESON. Not at all. The prosecution provisions in the bill would be exercised by us as the felony prosecutor.

Mr. ABERNETHY. Mr. Mathias?

Mr. MATHIAS. As you have said, Mr. Acheson, your bill does follow the language of the Uniform Securities Act. I am wondering if the committee had any experience with difficulties that had arisen under the act in several situations, one of which would possibly arise under the exempt transactions clause, clause 5, which provides that a transaction will be exempt if it involves a private distribution of not more than 25 offerings during the 1-year period if the seller reasonably believes that all the buyers in the District are purchasing for investment.

Would you care to comment on that, sir?

Mr. ACHESON. Well, that provision, Mr. Mathias, is simply a way of eliminating the de minimis situations, where an applicant would otherwise have to come in and get a license as a dealer or an agent for a one-shot transaction, and of course, invoke all the machinery of the local commission.

We thought, rather than put the local commission through all that for these very limited types of transactions, we would follow this very