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U.S. DEPARTMENT OF JUSTICE,

OFFICE OF THE U.S. ATTORNEY,

Washington, D.C., May 17, 1963. Hon. THOMAS G. ABERNETHY, Chairman, Subcommittee No.2, Committee on the District of Columbia, House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN : Referring to the hearing held before your subcommittee on May 2, 1963, to consider H.R. 4200, a bill to provide for the regulation of the securities business in the District of Columbia, I enclose the copy of the transcript of that hearing which Mr. Clark sent to me, with a few noted corrections in my testimony. I have noted on the cover of the transcript the pages at which the corrections appear, and the corrections themselves on each page are identified by a checkmark in the margin and by the correct interlineation.

There are two items of information which I would like to supply to the subcommittee, in answer to questions which arose during the hearing. On page 19, Mr. Springer asked me how the Maryland regulations define the net capital requirement. The Maryland regulations are based upon, with slight variations, rule 15c3–1 of the SEC General Rules and Regulations under the Securities Exchange Act of 1934. “Net capital” is defined in the SEC regulations in subsection (c)(2) of that rule. The relevant excerpts from the SEC regulations and the Maryland regulations defining net capital are attached. Of course, it would be highly desirable for the local District of Columbia Commission to follow the SEC regulations, to simplify dual compliance, and it would be the easier course for the local Commission to follow the pattern already established.

On page 30 of the transcript, Mr. Mathias inquired about my views on the right to counsel in proceedings under the act, and on page 31 you asked me to supply further information on that point. H.R. 4200 itself does not deal with the point at all, nor is there any general legislation similar to the Federal Administrative Procedure Act which is applicable to the District of Columbia government agencies. They are, of course, specifically excluded from the Federal act by the definition of "agency" contained in that act. Title 5, U.S.C., section 1001(a). As a practical matter, the right to counsel is provided by the Rules of Practice and Procedure before the Public Utilities Commission of the District of Columbia, adopted by Order No. 3492 dated February 4, 1949. Rule 4.2 of those rules provides :

“Rule 4.2. Representation by Attorney. A person may be represented in any proceeding by an attorney at law admitted to practice before the U.S. District Court for the District of Columbia or before the highest court of the State wherein he resides."

These rules of practice would, of course, be followed by the Public Utilities Commission, renamed the Public Service Comm on, in its administration of H.R. 4200.

If it were thought necessary to provide statutory authority for representation by counsel in proceedings under H.R. 4200 before the Public Utilities Commission, it might be done by adding to the provisions of H.R. 4200 the first two sentences of title 5, U.S.C., section 1005 (a), substituting the word "commission" for the word "agency” which appears in that statute. This might be added to section 16 of H.R. 4200 as new subsection (p), on page 37. Alternatively, the five rules governing appearance and representation might be lifted from chapter 4 of the rules of the Public Utilities Commission and enacted into law, with minor changes.

If the subcommittee were to contemplate adding to H.R. 4200 statutory authority for representation by counsel, I should think it would be important that the subcommittee have the views of the Corporation Counsel for the District of Columbia. My own view is that it is not necessary. There are numerous proceedings held by District of Columbia agencies, in which there is no statutory provision for representation by counsel, but in which representation by counsel is provided for by the rules and regulations of the agency. It would not appear to me that there is any greater need for a specific provision in H.R. 4200, particularly since the Public Utilities Commission rules and regulations cover the matter very well, and, of course, there is no thought of rescinding them or attempting in any way to deprive parties and witnesses of representation.

I have not had the opportunity to make an exhaustive study of any requirement of representation by counsel in administrative agency proceedings under the due process clause of the fifth amendment. A preliminary survey of the

law indicates that the cases go different ways, depending upon the type of administrative proceeding, the interest that is at stake in the proceeding, and the severity and finality of the administrative action taken. Of course, the constitutional question could easily be avoided by providing representation of counsel to witnesses and parties pursuant to rules of the Commission.

Pursuant to your request, I have met with the Assistant Corporation Counsel and with Messrs. Nees and Calvert of the Investment Bankers Association to discuss their proposals to amend H.R. 4200. We have reached agreement on all but two or three of their proposals and we intend to meet once more before making a further report to the subcommittee. It seems clear, however, that there are two or three proposals made in their memorandum to which neither I nor the District of Columbia government could agree. We will report in detail on those items on which we have agreed and those items on which we cannot, after our final meeting, which will be in the very near future. Sincerely yours,

DAVID C. ACHESON,

U.S. Attorney.

U.S. DEPARTMENT OF JUSTICE,

Washington, D.C., May 2, 1963. Hon. John L. MCMILLAN, Chairman, Committee on District of Columbia, House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: 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, which was introduced at the request of the District of Columbia Commissioners.

The District of Columbia presently has no laws regulating the business of selling securities or the licensing of persons engaged in the sale of securities. The purpose of the proposed District of Columbia Securities Act is to control the activities of local broker-dealers by the establishment, under the jurisdiction of the Public Service Commission of the District of Columbia (the bill provides for this change of name of the Public Utilities Commission), of procedures to license broker-dealers, to require the filing of periodic reports, and to make examinations of records and accounts. The proposal also provides for prosecutions by the U.S. attorney for fraud in the sale or purchase of securities, and civil liabilities for fraudulent sales. Judicial review of the administrative proceedings of the Commission will be had in the court of general sessions of the District of Columbia,

A serious problem exists in the District of Columbia with respect to the conduct, business methods, ethics, and qualifications of broker-dealers engaged in the securities business. Forty-eight of the fifty States have “blue sky" laws regulating local securities firms. The District does not now have such a law governing securities businesses, and has had to rely on applicable provisions of the Federal securities laws for protection, but these statutes are not, and were not intended to be, complete instruments for local regulation but as supplements thereto. The Federal statutes are largely punitive or remedial, not preventive, and provide only limited control over entrance into the securities business.

The proposed act was drafted by the U.S. attorney, District of Columbia, with the assistance of officials of the Securities and Exchange Commission and other attorneys practicing in the securities area. Attorneys in the Department have reviewed drafts of the bill, as have members of local bar association committees and securities organizations. The proposed act is based on the Uniform Securities Act, a model law proposed for State legislation by the National Conference of Commissioners on Uniform State Laws, that has been adopted for local needs and government. No attempt is made in the act to require the registration of securities, since the Securities and Exchange Commission has jurisdiction in this field and to require registration would raise serous problems of budget and staff.

Section 3, fraud, is similar to section 17(a) of the Securities Act of 1933 (15 U.S.C. 77q(a)), and the penalties, section 13(b), are the same as in section 24 of the Securities Act of 1933 (15 U.S.C. 77x).

The Department of Justice recommends passage of this bill.

The Bureau of the Budget has advised that there is no objection to the submission of this report from the standpoint of the administration's program. Sincerely yours,

NICHOLAS DEB. KATZENBACH,

Deputy Attorney General. Mr. ABERNETHY. The next witness will be Mr. William L. Cary, Chairman of the Securities and Exchange Commission.

Mr. Cary, we appreciate your appearance and we will hear your statement.

STATEMENT OF WILLIAM L. CARY, CHAIRMAN, SECURITIES AND

EXCHANGE COMMISSION; ACCOMPANIED BY PHILIP A. LOOMIS, DIRECTOR, DIVISION OF TRADING AND EXCHANGES; GEORGE MICHAELY, SPECIAL COUNSEL; AND ALEXANDER BROWN, WASHINGTON REGIONAL OFFICE

Mr. Cary. I appreciate the opportunity of appearing this morning. I would like to introduce those persons from the SEC who do happen to be with us this morning.

First, of all, Mr. Philip A. Loomis, the Director of our Division on Trading and Exchanges, on whom I may rely on questions you may ask; Mr. George Michaely, special counsel in the General Counsel's Office; and Mr. Alexander Brown, who is head of our Washington regional office, which covers the District of Columbia, Maryland, Pennsylvania, and generally that particular area adjoining this district.

Mr. ABERNETHY. These gentlemen represent your frontline forces this morning?

Mr. Cary. In this area; that is right. Mr. Brown is directly in the line of fire.

I wish to testify wholeheartedly in favor of the enactment of H.R. 4200, which would provide for the regulation of the business of selling securities in the District of Columbia and for the licensing of persons engaged in that business,

I

The Commission, as well as industry organizations, responsible citizens, and committees of Congress, has been concerned about the lack of local securities regulation in the District of Columbia and the consequent erosion of standards of conduct in the securities field here.

On April 21, 1962, as Congressman Keith has mentioned, I testified on those issues before the Subcommittee on Interstate and Foreign Commerce, House of Representatives. I there expressed the Commission's concern with the serious problems existing in the Metropolitan Washington area with respect to the conduct, business methods, ethics, and qualifications of numerous broker-dealers engaged in the securities business.

I pointed out that, although vigorous enforcement activity on the part of the Commission had measurably reduced the gravity of the problems, they were not considered cured. We believed that there might be a recurrence of those problems unless additional corrective action were undertaken.

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I also pointed out that the Commission did not believe it could continuously provide adequate protection through enforcement activity without impairing its ability to meet its national responsibilites and that in any event vigorous enforcement can never be a permanent substitute for high regulatory standards.

I further testified that the absence of local regulation was one of the principal factors peculiar to the Metropolitan Washington area which aggravated problems normally present in securities regulation. Only the District and Delaware do not now have any local securities regulation.

As far as the District is concerned, this absence appears to have had the effect of encouraging both the formation of substandard new brokerage firms and the movement of undesirable persons from other areas to here. The District had become a haven for the migratory broker-dealer who tends to gravitate to the place of minimum interference with his operation.

Of the several alternative means of coping with these problems, the Commission recommended the enactment of a “blue sky” law for the District of Columbia to be administered by local authorities. We pointed out that such action would assist in meeting the local securities problems, would be consistent with our traditional Federal pattern of dual regulation, and would permit our continued concentration on national problems. We recommended that such a statute could be based upon the “Uniform Securities Act,” as approved by the National Conference of Commissioners on Uniform State Laws.

Thereafter, leadership in drafting a District of Columbia Securities Act was assumed by Mr. David C. Acheson, U.S. attorney for the District of Columbia.

Various interested persons, including members of the Commission's staff, cooperated with him. The bill which is before you is a result of this effort. We strongly support this bill as an effective means of meeting the problems discussed.

I might say that we are all grateful for the enterprise and craftsmanship of Mr. Acheson.

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II

I do not believe it is necessary for me to make an extended analysis of the provisions of the bill. That will, I believe, be done by other witnesses before this subcommittee. I should like, however, to comment generally on the provisions of the bill.

Two particular problems in the District have been the lack of experience of persons entering the securities business locally and the increase of the rate of failure of local brokerage houses.

The Federal securities laws at the present time offer only limited controls over entrance into the securities business and their provisions relating to financial responsibility do not afford investors the type of protections which can be provided through local regulation.

H.R. 4200 contains provisions expressly designed to meet these problems on a local level.

We expect to sponsor Federal legislation at the present session of the Congress which would raise standards of qualification for entry into the securities business, primarily through the medium of the selfregulatory associations, but this should not be viewed as an adequate substitute for requirements at the local level.

A licensing procedure is set up in sections 4 through 10 of the bill. Under this procedure the Public Service Commission of the District of Columbia, which would be the local regulatory authority, would be permitted to deny, suspend, or revoke a license to engage in the securities business, if an applicant or licensee, or any person associated with him, is not qualified on the basis of such factors as training, experience, and knowledge.

In addition, section 10 of the bill provides summary procedures for postponing the issuance of a license or suspending an effective license.

These procedures should afford adequate means of preventing unqualified persons from entering into, or remaing in, the securities business, thus

reducing the possibility of potential violations. In contrast, under the Federal securities acts the Commission usually cannot act until violations have occurred and investors injured. Furthermore, unless a Commission disciplinary proceedings again a firm has been completed, we cannot prevent salesmen and others connected with the firm from opening new brokerage offices of their own. This is precisely what occurred in connection with one Commission investigation. Ultimately a large District broker-dealer was put out of business, but before the firm was closed at least 16 new houses were started. The qualifications for entry into the securities business and the summary procedures provided by the bill would permit effective local control over this type of situation.

Section 6 of the bill would impose minimum capital requirements upon each broker-dealer licensed in the District. The Public Service Commission would also be allowed to require surety bonds in amounts up to $50,000 and on such conditions as it determines to be necessary or appropriate in the public interest or for the protection of investors.

Mr. ABERNETHY. I failed to ask a question a moment ago. Is the bond uniform for all brokers?

Mr. Cary. I think Mr. Acheson could speak to that point more clearly than I.

Mr. ACHESON. Would the bond be the same for all brokers, Mr. Chairman?

Mr. ABERNETHY. Yes. Mr. ACHESON. As I understand the purpose of this provision, and all of us were agreed on this, it would allow power in the Commission to look at an applicant's particular situation, the amount of capital, and determine how much bond would be needed to protect the public in his case.

Mr. ABERNETHY. I see. Could you direct me to you can look it up and give me a memorandum--the page in the bill where that would appear, sir.

You may do that and you may proceed, Mr. Cary.

Mr. Cary. It is section 6, which would therefore be at page 15—just page 15 of the bill, sir.

Mr. ACHESON. Pages 14 and 15, Mr. Chairman. Mr. ABERNETHY. All right. You may proceed. Mr. Cary. These provisions should have the effect of reducing the high rate of failure of security houses in the District of Columbia, substantially higher here than on a national level. In 1961, for example, 18 percent of the NASD member firms in the District failed, as compared with approximately 8 percent nationally. These sec

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