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STATEMENT OF BERNARD NEES, CHAIRMAN, WASHINGTON LEGIS
LATIVE COMMITTEE, INVESTMENT BANKERS ASSOCIATION OF
I am a partner of the Washington investment banking firm of Johnston, Lemon & Co. and have been actively engaged in the securities business for more than 30
years. I have served as president of the Washington Stock Exchange and as vice chairman of the Business Conduct Committee of District No. 10, which includes the District of Columbia, of the National Association of Securities Dealers.
Currently, I represent the securities industry on the board of directors of Better Business Bureau of the Washington metropolitan
Mr. Chairman, I have a letter of the Better Business Bureau which Mr. Leland S. McCarthy, the managing director, asked me to transmit to the committee.
Mr. ABERNETHY. It will be incorporated in the record at the conclusion of your statement, along with your complete statement.
Mr. NEES. I might say it supports the board of trade's recommendation of the $25,000 minimum capital.
I appear to you as the chairman of the Washington Legislative Committee of the Investment Bankers Association, representing the 30 investment banking firms in the District of Columbia, who are members of the association.
Mr. Chairman, nationally, our association has 800 members with 2,100 branch offices.
For the reasons already stated and which I will in the interest of time not attempt to repeat, we submit that legislation is necessary in the public interest, and in the interest of our industry and that it should be strengthened to the greatest extent possible to protect the investor and provide fair treatment of the ethical firms which are in the large majority.
While we endorse in general the objectives and the approach of this legislation, we feel strongly that it would be greatly improved, strengthened, and made more effective if certain changes and additions, which we propose, are made in the bill.
With the able assistance of Gordon Calvert, assistant general counsel of the Investment Bankers Association of America who is with me and who is an expert on legislation of this type, having assisted in the drafting of similar legislation in many States, we have prepared and cleared with our Washington members a memorandum of proposed changes in H.R. 4200. With your permission I would like to ask Mr. Calvert to summarize very briefly our proposed changs.
Mr. ABERNETHY. Before you do so, let me make this observation. You people are certainly not testifying before experts on this subject and I realize there have been numerous amendments submitted and there will be others.
When we conclude these hearings, I am going to wait a time and see if there can't be some meeting of the minds between some of you
on these amendments. I am just wondering if you have counseled with Mr. Acheson, Mr. Bryan, and some of the others who participated in the drafting of this legislation with regard to these amendments.
Mr. NEES. Sir, we did not participate in the drafting of H.R. 4200.
Mr. ABERNETHY. Have you since conferred with them about the amendment ?
Mr. Nees. They have been furnished with copies of the memorandum which is quite lengthy and detailed and which we had no intention of attempting to handle in any detail here, sir.
Mr. ABERNETHY. I certainly think copies of the amendment should be placed in their hands, and Mr. Clark, I would like to suggest that you do so. If they do not already have them, see that they are given copies of them-not that they are going to be permitted to have their way. I don't want to be misunderstood.
Now, go ahead, Mr. Calvert.
Mr. CALVERT. May I ask that our association's entire statement be incorporated in the record ?
Mr. ABERNETHY. I thought he already read it, but it will be included in its entirety. (The correspondence and statement referred to follow :)
INTRODUCTORY STATEMENT BY BERNARD NEES
? I am Bernard Nees, a partner of Johnston, Lemon & Co., a District of Columbia investment banking firm. I have been engaged in the securities business in the District of Columbia for about 34 years, and presently a member of the board of the District of Columbia Better Business Bureau and have previously served on the Business Conduct Committee of the National Association of Securities Dealers. I am testifying today as the District of Columbia member of the Legislation Committee of the Southeastern Group of the Investment Bankers Association of America.
Accompanying me, to assist on technical questions, is Gordon L. Calvert, assistant general counsel of the IBA, who specializes in work on State securities acts and served on the advisory committee for the Harvard Law School study of State securities regulation which led to preparation of the Uniform State Securities Act.
The Investment Bankers Association of America is a voluntary unincorporated trade association of investment banking firms and securities dealers who underwrite and deal in all types of securities. The association has close to 800 member firms engaged in the securities business in the United States and Canada, including about 100 commercial banks. Our members have, in addition to their main offices, about 2,100 registered branch offices.
BETTER BUSINESS BUREAU OF METROPOLITAN WASHINGTON,
Washington, D.C., May 2, 1963. Re H.R. 4200. Hon. THOMAS G. ABERNETHY, Chairman, Subcommittee No. 2, House Committee on the District of Columbia,
House Office Building, Washington, D.C. DEAR MR. ABERNETHY: This bureau desires to record with your committee its endorsement of the general objectives of H.R. 4200, a bill to provide a securities act for the District of Columbia.
In our opinion, however, the minimum capital requirement set forth in the bill as introduced is inadequate and should be increased to $25,000,
Inquiries and complaints received by us, together with surveys and investigations by our professional shopper, during the past 3 years, clearly indicate the need of such legislation for the protection of the public. For your information I am enclosing a copy of a resolution adopted by our board of directors for submission to the appropriate authorities on March 27, 1961. Yours very truly,
LELAND S. MCCARTHY, Managing Director.
The following resolution was unanimously adopted at a meeting of the board of directors of the Better Business Bureau of Metropolitan Washington, held on Monday, March 27, 1961:
Whereas the number of securities firms and the number of securities sales personnel operating in the metropolitan area of the District of Columbia have risen rapidly in the past several years; and
Whereas the promotional activities and business methods of some of these securities firms have resulted in severe losses to the investing public in this area ; and
Whereas inquiries and complaints filed with the Better Business Bureau, the general observations of members of the board of directors, and specific informátion developed by the staff of the bureau, all clearly indicate that the background of such firms and the nature of the securities being promoted by them require increased investigation and close surveillance by the regulatory authorities, so as adequately to protect the investing public; and
Whereas a recent survey of the current activities of a number of such securities firms, made by a professional investigator for the bureau, confirms these observations: Now, therefore, be it
Resolved, That the board of directors of the Better Business Bureau of Metropolitan Washington record with the Securities and Exchange Commission and with the National Association of Securities Dealers, Inc., its deep concern over the foregoing situation :
That the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., be advised that, in the opinion of the board of directors of the Better Business Bureau, increased investigation and more timely en-forcement efforts are required in the public interest throughout the Metropolitan Washington area ;
That it is the firm belief of the board of directors of the Better Business Bureau that the staffing of the regional office of the Securities and Exchange Commission, and of the district committee of the National Association of Securities Dealers, is inadequate to enable these organizations properly to discharge their assigned investigatory responsibilities and otherwise to cope with the serious securities problem which has developed in the Nation's Capital ; and
That the president of the Better Business Bureau be and he hereby is authorized and directed appropriately to convey the foregoing sentiments to the Chairmen of the SEC and of the NASD, in order to enlist the increased assistance and cooperation of their respective organizations.
LELAND S. MOCARTHY, Secretary.
STATEMENT BY THE DISTRICT OF COLUMBIA MEMBERS OF THE INVESTMENT BANK
ERS ASSOCIATION OF AMERICA RE H.R. 4200, THE PROPOSED DISTRICT OF COLUMBIA SECURITIES ACT
Representatives of the Investment Bankers Association of America have worked for many years with State securities administrators and legislative committees for the adoption of State securities acts which will provide effective protection for investors with a minimum of restraint on the conduct of legitimate business by reputable securities dealers.
H.R. 4200 embodies the antifraud provisions and broker-dealer and agent licensing requirements of the Uniform State Securities Act, with minor modifications designed to adapt the act to the District. We endorse the adoption of this act but recommend that the 14 amendments suggested below be adopted all of which are designed either to strengthen the act or to eliminate variations from the Uniform Act which appear to serve no useful purpose :
(1) Application to so-called variable annuity contracts.-At page 10, the definition of "security” in section 2(m) by language in lines 8–11 would exclude so-called variable-annuity contracts from the definition and thereby (i) exclude such contracts from the antifraud provisions; and (ii) exclude persons selling such contracts from the licensing requirements. It was conclusively established by the Supreme Court of the United States on March 23, 1959, that variableannuity contracts are securities subject to registration under the Federal Securities Act of 1933 and that the issuers of the contracts before the Court (Variable Annuity Life Insurance Co. of America and Equity Annuity Life Insurance Co.)
must comply with the requirements of the Federal Investment Company Act of 1940.
The Supreme Court, in holding that variable annuities are not insurance with. in the exemptions of the Securities Act of 1933 or the Investment Company Act of 1940 or within the meaning of the McCarran-Ferguson Act, stated that:
"For in common understanding insurance involves a guarantee that at least some fraction of the benefits will be payable in fixed amounts (citing authorities). The companies that issue these annuities take the risk of failure. But they guarantee nothing to the annuitant except an interest in å portfolio of common stocks or other equities-an interest that has a' ceiling but no floor. There is no true underwriting of risks, the one earmark of insurance as it has commonly been conceived in popular understanding and usage."
According, we believe that exclusion of variable-annuity contracts from the definition of “security" would leave an important gap in investor protection under the proposed act. We recommend that this be corrected by inserting a period following the word "period" in line 8 of page 10 and striking the language following that period at lines 8 through 11 of page 10.
(2) Expiration of license.—At page 11, section 4(c) would provide that every license an renewal license shall expire years from its effective date. More effective regulation would be provided by an annual renewal of licenses. ACcordingly, we recommend that the word “two" be changed to "one!' at line 19 of page 11 and that the words "two-year” be changed to "one-year" at line 2 of
(3) Application for license. (a) At page 12, section 5(a) providing the licensing procedure for broker-dealers or agents requires that information specified in items (1) through (7) shall be contained in the application but that only the information in item (3) as to qualifications and business history need to be supplied for partners, officers, directors, and similar persons in the case of a brokerdealer. In order effectively to review the personal record of the partners, officers, and directors of a broker-dealer, it would seem essential to require with respect to each of them the information in items (4) and (5) covering injunctive or administrative orders or convictions of misdemeanors involving the securities business, conviction of felonies and disciplinary action by a securities exchange or association. Accordingly, we suggest that there be deleted at lines 16 through 19 of page 12 the language "and, in the case of a broker-dealer, of each partner, officer, or director, each person occupying a similar status or performing similar functions, and each person directly or indirectly controlling the broker-dealer"; and that the words “The application shall contain a statement of” in lines 10-11 of page 12 be deleted and there be substituted in lieu thereof the following:
"The application for each broker-dealer applicant shall contain the following information, and for each partner, officer, or director, each person occupying a similar status or performing similar functions and each person directly or indirectly controlling such broker-dealer the information prescribed in subdivisions (3), (4), (5), and (7); and the application for each agent shall contain the information specified in subdivisions (3), (4), (5), and (7)::."
(0) It is possible that an application for licensing a broker-dealer might reveal information regarding the business history, conviction, or disciplinary action with respect to persons connected with the firm and that this information is unknown to some partners, officers, or directors of the firm. In order to provide better opportunity for reputable members of the firm to be on notice of such information regarding other members of the firm, we suggest that there be inserted a requirement that the original application be executed by all partners, directors, and officers of the applicant personally engaged in the securities business in the District. Accordingly, we recommend that in line 8 at page 12 the words “or renewal” be deleted and that there be inserted following the word "application" at line 9 of page 12 the following: "executed by all partners, directors, and officers of the applicant personally engaged in the securities business in the District." . Provisions regarding renewal are suggested below in (7).
(c) Subdivision (5) of section 5(a) requires an application for license to contain a statement of “each disciplinary action by a securities exchange or securities association.” Many reputable firms have been the subject of disciplinary action by a securities exchange or a securities association for technical violations. However, no useful purpose seems to be served in requiring a historical statement of all such actions during the business life of the firm or its partners, officers, directors and similar persons. Accordingly, we recommend that this requirement be limited to the preceding 10 years by inserting following the word “association" at line 25 of page 12 "within the 10 years preceding the date of application.”
(4) Fees.-At page 13, section 5(b) provides for an initial or renewal license a filing fee for a broker-dealer of $100 plus $10 for each partner, officer, and director and a filing fee of $25 for an agent. These fees were based on a 2-year license. If our recommendation in point (2) is adopted, that a license be effective for 1 year, the fees applicable to a 1-year period should be one-half the fees indicated above so that in line 21 at page 13 "$50 plus $5" should be substituted for "$100 plus $10" and in line 24 of the same page “$12.50" should be substituted
. The aggregate pling fees prescribed in section 5(b) would be excessive for a firm with a large number of officers and agents. Accordingly, we recommend that, as in the new Maryland Securities Act, the maximum aggregate filing fee for any one firm and its agents in 1 year be limited to $500 by inserting the following sentence at line 24 of page 13:
"The aggregate filing fees paid for initial or renewal licenses in any 1 year for any broker-dealer and its partners, officers, directors, persons occupying similar status or performing similar functions and agents shall not exceed $500, regardless of the number of persons licensed for it in such capacities."
(5) Minimum capital.-At page 14, section 5(d) provides that a broker-dealer shall have and maintain a minimum capital of $15,000 but that the Commission may by rule fix a minimum capital in lesser amounts for broker-dealers engaged in a limited phase of the securities business,
Investors would be better protected if broker-dealers were required to have minimum net capital of $25,000. Accordingly, we recommend that the word "net" be inserted preceding the word "capital" in line 10 of page 14 and that "$25,000” be substituted for “$15,000.”
The authority of the Commission to fix a lower minimum capital for brokerdealers engaged in a limited phase of the securities business leaves so much discretion as to what constitutes a limited phase of the securities business that we recommend that the discretionary authority be eliminated completely and that there be substituted a provision permitting a lower minimum net capital only for a limited license authorizing a broker-dealer to engage only in transactions in securities registered under the Federal Investment Company Act of 1940. Accordingly, we recommend that at page 14 there be stricken all of the language following the word "amounts” in line 12 through line 20 and that there be substituted in lieu thereof the following :", but in no case less than $5,000 net capital, for a broker-dealer with a limited license which authorizes such broker-dealer to engage only in transactions in securities registered under the Federal Investment Company Act of 1940."
(6) Surety bond8.-At page 14, section 5(e) authorizes the Commission by rule to require licensed broker-dealers and agents to post surety bonds in such amounts up to $50,000 as the Commission may determine. This apparently might permit a requirement that a broker-dealer and each licensed agent thereof post individual surety bonds in amounts up to $50,000. The annual premium for a single $50,000 surety bond would probably be at least $500, so that this might impose a wholly impractical and unreasonable cost burden on dealers and agents. Furthermore, it appears an unnecessary financial burden to require broker-dealers who have and maintain à net capital substantially in excess of the required minimum net capital to post any surety bond.
H.R. 4200 omits a provision in the Uniform State Securities Act that "no bond may be required of any registrant whose net capital, which may be defined by rule, exceeds $25,000.” The uniform act as adopted in numerous States has exempted from the surety bond requirement a broker-dealer whose net capital (or, in some States, net worth or minimum capital) exceeds $25,000. For example, such provisions are in section 2(c) of the Alabama Securities Act, section 202(e) of the Alaska Securities Act, section 3(5) of the Colorado Securities Act, section 302(b) of the Indiana Securities Act, section 2(c)(3) of the Kentucky Securities Act, section 10(e) of the New Jersey Securities Act and section 13.1-505 (b) of the Virginia Securities Act. The exception in Colorado requires net capital of only $10,000.
Section 5(e) does not impose any requirement as to the company issuing the surety bond.
We recommend that section 5(e) be amended to make it clear (a) that a single bond in an amount up to $50,000 shall cover a broker-dealer and the licensed agents thereof, (b) that the surety company issuing the bond be a corporate surety company licensed to do business in the District of Columhia, and (c) that no surety bond be required of a broker-dealer who has and maintains a minimum net capital of at least $50,000 (which would be double the required net capital which we propose). These amendments can be effected by: