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tions would also provide a source of funds to which investors who have suffered financial injury could look for satisfaction.

The bill also contains antifraud provisions which would be enforced by the Public Service Commission. These provisions would supplement the antifraud provisions contained in the Federal securities laws.

Vigorous enforcement activity by the Commission has had the apparent effect of generally improving the conduct of local brokerdealers. However, as I have already mentioned, enforcement can never be a permanent substitute for high regulatory standards.

Indeed, the legislative history and the language of the Federal securities acts makes it clear that these statutes are not, and were not intended to be, complete instruments for local regulation, but that they contemplated concurrent jurisdiction by local securities commissions.

It is primarily for this reason that we recommended that local regulatory controls over broker-dealers be established by a “blue sky” law administered under the District of Columbia government by an administrator with an adequate enforcement staff.

In the Commission's opinion H.R. 4200 would furnish the local regulation necessary to complement the Federal statutes and would contribute significantly to the protection of investors in the District of Columbia.

Its benefits would not, however, be limited to this area, since the impact of improper practices by broker-dealers in the District is felt not only by residents of the District, but also by persons in adjoining States who may have dealings with such broker-dealers. The Commission, therefore, strongly favors enactment of H.R. 4200.


Now, Mr. Chairman, my last item of discusion deals with the variable annuity problem to which Congressman Keith has already adverted.

I thought of just introducing that into the record, but in view of his discussion of it, perhaps I ought to read it at this time.

Mr. ABERNETHY. Yes. You may.

Mr. Cary. There is one additional provision of the bill to which I should like to address myself. The definition of “security” in section 2(m) of the bill excludes insurance and annuity contracts, which are exempted under section 3(a) (8) of the Securities Act of 1933.

However, the bill also excludes contracts issued by an insurance company pursuant to section 41 of chapter III of the District Life Insurance Act, so-called “variable annuity” contracts.

Accordingly, persons engaged in the business of selling variable annuity contracts who have complied with the local insurance law would be subject to regulation by the Superintendent of Insurance, rather than the Public Service Commission.

It is our understanding that these provisions are designed to prevent the sellers of variable annuity contracts from being subjected to dual regulation by local authorities, and represent an effort to provide fair, but not oppressive, regulation on a Îocal level pending further experience with variable annuity contracts.

The Commission has asserted, and the Supreme Court has upheld, the proposition that variable annuity contracts are securities. Although in our view persons who sell variable annuity contracts may be more appropriately regulated by a securities commissioner, we do not believe that this provision of the bill will have any adverse impact upon our administration of the Federal securities laws.

In any event, it is not our urderstanding that considerations leading to a choice of regulatory authorities on a local level are intended to have any significance with regard to our administration of a problem which is national in scope.

That completes my presentation, Mr. Chairman.
Mr. ABERNETHY. Thank you very much, sir.
Mr. Springer?

Mr. SPRINGER. Mr. Chairman, this is an excellent statement. I want to see if I can, in 2 minutes, just hit the high spots.

These are, as you have recorded, I think, your impressions of what this really does.

First of all, you believe this legislation is important because you do not belive that your body can continuously provide adequate protection and enforcement and at the same time do the job which is really your mission, and that is in the national securities enforcement; is that correct?

Mr. CARY. That is correct, sir.
Mr. SPRINGER. That is the first one.

The second thing I think here that is of importance, that you have mentioned, is the fact that we do not have any “blue sky” law in effect in the District, has had two effects:

First, it has encouraged the formation of substandard new brokerage outlets in the District.

That is the first one. Mr. CARY. Right. Mr. SPRINGER. And second, that you had firms and individuals of undesirable character who have moved in from other areas.

Mr. CARY. That is correct.

Mr. SPRINGER. These are the two effects that you think the lack of this has had here?

Mr. Cary. We have referred to the migratory broker-dealer who has come to this particular district.

Mr. SPRINGER. Now, there have been two particular problems which I understand you have attacked in this statement that are peculiar, apparently, at this time, to the Distritc of Columbia, among the 50 States and the District.

The first is the lack of experience of persons entering the securities business, and second, the increase in the rate of failure of local brokerage houses.

Both of these you think can be corrected with H.R. 4200; is that correct?

Mr. CARY. That is correct; yes. Mr. SPRINGER. Now, I think the fourth point, which I have felt is of considerable importance, that is, that you yourself, as I believe I understand from the statement and I think this is right, myself, from my old Subcommittee on Commerce and Finance, which my distinguished colleague, for example, Mr. Keith, is now on, that the Commission cannot act until investors have already been hurt?

Mr. Cary. That is true. We can act in an injunctive procedure, but we cannot act upon a firm.


We don't have immediate suspensory power which this bill would provide to the Public Utilities Commission of the District.

Mr. SPRINGER. Unless the Commission has disciplinary measures to be taken you cannot prevent new brokerage firms from opening?

Mr. CARY. That is right; and experience has demonstrated that in this very place.

Mr. ABERNETHY. Mr. Keith?
Mr. KEITH. Thank you, Mr. Chairman.

I would like to have your comment on the climate for the investor, prospective investor in Washington, now, as contrasted with other cities.

Mr. Cary. Congressman Keith, of course, you have the statistics which Mr. Acheson has already given. I would say that moving away from those statistics to the present moment to which I assume you are referring, there has no doubt been an improvement and I would like to believe that that improvement is due in substantial part to very vigorous enforcement activity on our part.

We have borrowed people from other parts of the Commission for the purposes of working on cases here at the present time. Indeed, our quota over there in the District of Columbia regional office, headed by Mr. Brown, is greater than really is allocated normally to it.

However, we, although an improvement has been shown, we do not, we cannot say and do not say that that will be a permanent improveWe have had a history in the last few years of really a remarkable

a amount of dereliction on the part of broker-dealers here, and it is for that reason, on the basis of that history, up to practically the present moment, that we felt it is necessary to have this kind of bill.

I could go back. I didn't know whether you wanted the statistics that I furnished before your committee a year ago, for example.

I did not know whether you wanted to make that.

Mr. KEITH. I am trying to get a short answer to the simple question as to how it compares with other cities.

Mr. Cary. I will ask Mr. Loomis if he can give it precisely to you.

Mr. KEITH. No, it is all right; I will change the direction of my questioning, if I may, and say that the subcommittee, which has shown a lot of interest in this problem for a long period of time, was awaiting your final report, which hopefully we were to have originally in January, later on in April, and now we hope very soon, as to perhaps helping to shed further light on this subject so that the Congress might act on this matter as well as the others that before

Mr. Cary. That part of our report, sir, has been filed with you.

When we were before you on April 3, the part of the report dealing with what we think is our national responsibility in the field of qualification of persons entering the business, that report was filed.

Mr. KEITH. There have been no legislative recommendations?

Mr. CARY. There have been; not formally, but as we indicated to you, in the Committee of Interstate and Foreign Commerce on April 3-yes, on April 3—we said we would have a legislative proposal before you which would ask on a national scale for a raising of the standards of qualification for persons generally.

This would be both in respect to character, competence, and financial responsibility.




That has not formally been submitted as a bill, but as you may recall, Congressman Harris, the chairman of your committee, has said to us that he wanted those bills in final form before long and we are working with the industry on getting a final draft of those bills by the end of this month.

Mr. KEITH. Can we anticipate that the requirements contained in this legislation before this committee might be quite comparable to those in legislation that you may file?

Mr. Cary. In respect of qualification, there will be a substantial parallel; yes, sir.

In respect of, for example, the question of the power to suspend the license of a broker-dealer, I don't believe there will be the same parallelism.

In other words, I still think there will be powers vested in the public utilities commissioner here which will not be given either to the NASD, which is the organization on whom a great deal of this responsibility will be placed, or to the SEC.

Mr. KEITH. In this legislation, as I understand it, you waive certain responsibilities in behalf of the insurance industry as it pertains to variable annuities?

Mr. Cary. No, sir. We don't waive anything. We simply say that by our standards—if we were looking at it as a national proposition, we would say the securities commissioners, logically, just as the SEC, should be handling the variable annuity problem. But that is a matter of local decision as to who should handle this particular problem. It doesn't mean that we in the SEC waive anything of it.

In other words, our jurisdiction is still in the SEC and we are not in any way allocating responsibility or jurisdiction to the insurance commissioner.

Mr. KEITH. With reference to the possibility of banks entering into the mutual fund field-would you comment on that?

Mr. Cary. Yes, sir.

I don't think-I don't claim to go through this bill with intense care, but I don't think that there is anything here that really will affect that problem either way.

The present problems that we are having with respect to the banks entering into what we say is going squarely into the investment company industry through these managing agency accounts which are now authorized by the Comptroller of the Currency—the problem we have there is that we say that if the banks move in that direction they will be issuing securities which are subject to the Securities Act of 1933, and which will be also a security—subject to the jurisdiction of the SEC under the Investment Company Act.

Because now it is really comparable to an interest in the mutual fund.

Now, as far as that is concerned, this is a problem as it is posed by the Comptroller of the Currency of a choice of jurisdiction.

He would say that the Comptroller of the Currency should have jurisdiction over this problem. We say that the banks are moving into a new industry and when it moves into a new industry and out of the banking industry exclusively, then it becomes subject to our act in order to make it uniform with mutual funds generally which are subject to our act.

Mr. KEITH. Well, specifically, would they be covered under the provisions of this legislation or should they be?

Mr. Cary. Well, it is a security. Logically they should be under our interpretation. I think I had better check, if I may, with Mr. Loomis, who certainly could speak more accurately to this point than I.

Mr. LOOMIS. Well, I believe, under our view, it would be a security because the definition of security in this act as I recall, is quite similar to the one in Federal statutes.

This act, of course, does not regulate the issuance of securities, so that problems particularly under-similar to those in the Investment Company Act, and so forth, would not arise under this act.

The only problem that might arise under this act with reference to these activities would be the status of persons engaged in selling contracts.

Mr. KEITH. Those are the persons to whom I refer.

Mr. Loomis. Whether those people are engaged in selling these contracts as opposed to the banks that issued them, I haven't studied it, but it could well be that they will need a license.

Mr. KEITH. Thank you, sir.
Mr. ABERNETHY. Mr. Irving Bryan.



Mr. BRYAN. Mr. Chairman and members of the committee, for the record, my name is Irving Bryan. I am Assistant Corporation Counsel and I am appearing on behalf of the Board of Commissioners of the District of Columbia.

Mr. ABERNETHY. Mr. Bryan, at this point, I would like to insert in the record a letter from the District Commissioners under date of February 25, 1963, addressed to the Speaker of the House of Representatives with regard to this legislation.

Mr. BRYAN. I will hand one to the reporter now, sir. I have one for the members of the committee if they would like it.

Mr. SPRINGER. I have already read it.
Mr. ABERNETHY. You might give one to Mr. Keith.
(The document referred to is as follows:)


Washington, D.C., February 25, 1963. Hon. John W. McCORMACK, The Speaker, U.S. House of Representatives, Washington, D.C.

MY DEAR MR. SPEAKER: The Commissioners of the District of Columbia have the honor to submit a draft bill entitled “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.”

The Commissioners have had brought to their attention that in the District of Columbia in recent years there has been an increase in the activities of unqualified or unscrupulous dealers in securities. This increased activity seems to stem from the fact that the District unlike 48 of the 50 States, has no securities, legislation or "blue sky” law. The Commissioners have reason to believe that by virtue of this, unqualified or unscrupulous dealers in securities who are unable to operate in those States having a so-called “blue sky” law may utilize the existing situation to their advantage, but to the disadvantage of the general public.

The situation in the District of Columbia with respect to the business of dealing in securities is perhaps best demonstrated by the fact that over the past 5 years



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