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(i) striking the words "licensed broker-dealers and agents to post surety bonds" in lines 23–24 of page 14 and by substituting in lieu thereof the following: "a licensed broker-dealer or the agent of an issuer to post a surety bond, issued by a corporate surety company licensed to do business in the District of Columbia," and

(ii) by inserting after the word “investors" in line 2 at page 15 the following: the surety bond of a licensed broker-dealer to cover such brokerdealer and all licensed agents thereof in the District of Columbia ; provided that no surety bond may be required of any licensed broker-dealer who has

and maintains a minimum net capital of at least $50,000.” (7) Renewal of license.-Section 5 does not include specific requirements for renewal of the licenses of broker-dealers. We believe that proiection afforded by the act would be strengthened if an additional subsection (f) were added at line 10 of page 15 as follows:

“(f) The license of a broker-dealer or agent may be renewed by filing with the Commission prior to the expiration thereof an application containing such information as the Commission may require to indicate any material change in the information contained in the original application or any renewal thereof, payment of the prescribed fee and, in the case of a broker-dealer, a financial statement showing the financial condition of such broker-dealer as of a date within 1 year prior to the date of such application for renewal.”.

(8) Filing of advertising.At pages 16–17, section 8 authorizes the Commission by rule or order to require any broker-dealer or agent to file with the Commission any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature or advertising communication addressed or intended for distribution to prospective investors. This omits a provision in the uniform act exempting from this section sales literature relating to exempt securities or securities sold in exempt transactions. The exemption is needed because it would not be consistent to authorize the Commission to require the filing of sales literature relating to securities which are exempt or transactions which are exempt. If there is a question regarding sales, literature describing a specific exempt security or used in an exempt transaction, the Commission has adequate authority under section 11 of the act to obtain copies of any such sales literature, Accordingly, we recommend that the period at the end of line 2 on page 17 be changed to a comma and that there be inserted thereafter the following: "except sales and advertising literature describing an exempt security as defined in section 2(e) or used in an exempt transaction as defined in section 2(f)."

Section 8 may be interpreted to authorize the Commission by rule to require all broker-dealers to file with the Commission copies of all sales and advertising literature. This would impose an unnecessary burden on broker-dealers and swamp the Commission with a bulk of written material which probably could not be checked without an extremely large staff whose efforts could more effectively be directed to other types of investigation. However, the Commission might find it helpful to require specific broker-dealers to file copies of sales and advertising literature. Accordingly, we recommend that in line 22 of page 16 the words “rule or” be deleted and that in line 23 of page 16 the word “specific" be inserted preceding "broker-dealer."

(9) Dishonest or unethical practices.-At page 19, in section 10(a) specifying grounds for denial, revocation, suspension, or cancellation of licenses, item (7) specifies engaging "in fraudulent practices in the securities business." This differs from the Uniform State Securities Act where the words “dishonest or unethical” are used instead of “fraudulent.” Many undesirable practices in the securities business might be dishonest or unethical but not be fraudulent. Accordingly, we recommend that the uniform act be followed by striking the word "fraudulent" at line 13 of page 19 and by substituting in lieu thereof "dishonest or unethical."

(10) Suspension of license without hearing.At page 21, section 10(c) authorizes the Commission by order summarily to postpone the issuance of a license or to suspend an effective licence prior to a hearing by the Commission or any court action. Under this authority the Commission could put a licensed dealer temporarily out of business without any hearing or court proceeding by postponing renewal of a license or suspending an effective license. We believe that any licensed dealer is entitled to a hearing before he is put temporarily out of business by an administrative order, and the authority of the Commission under section 12 to obtain an injunction against violations of the act gives it adequate authority to prevent continuance of a flagrant violation. Accordingly, we recommend that, in line 4 of page 21, the words “an original" be inserted following the phrase "issuance of a" and that there be deleted the words."'or suspend an effective license."

(11) Publication of information prior to determination of violation.--At pagë 23, section 11 (dealing with investigations and subpenas) in subdivision (3) authorizes the Commission to publish information concerning any violaton of this act or any rule or order hereunder. This apparently would permit the Commission to attempt to build up public sentiment to support its claims of an alleged violation by publishing information prior to any hearing or determination on the merits of the alleged violations. We believe that publication of information should be permitted only after there has been a determination by the Commission after a hearing or by a court that there has actually been a violation. Accordingly, we recommend that there be added following the word “hereunder” in line 13 of page 23 the following: "after a determination of such violation by the Commission after a hearing or by a court.".

(12) Time for criminal prosecution8.–At page 25, section 13 prescribes crim. inal penalties, but provides no limit on the time within which prosecution may be commenced. The uniform act includes an optional provision barring criminal prosecution under the act more than 5 years after an alleged violation. Accordingly, we recommend that in section 13(d) at line 25 of page 25 a sentence be inserted providing “No person shall be prosecuted under this section more than 5 years after the alleged violation."

(13) Uniformity in civil liability provision.—At page 26, subdivision (2), of section 14(a) subjects to civil liability any person who "offers or sells à security by means of any written or oral communication which includes any, untrue statement of a material fact'or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." [Emphasis supplied.]

The italicized language does not appear in the Uniform State Securities Act. It is important that the language of this section be uniform so that brokerdealers will know by court decisions in one jurisdiction what to expect in interpretation of identical language in other States which adopt the Uniform Act. We recommend that, to make the language of this section identical with the Uniform Act and to avoid any unintentional interpretation of the section, the words "written or oral communication which includes any" be deleted at lines 10-11 of page 26 and the words "any omission" be substituted for the word "omits" in line 12 of page 26.

(14) Advisory committee.—When the uniform act was adopted in several States, a section was inserted providing for the appointment of an advisory committee to give the Commission the benefit of its advice on matters pertaining to the administration of the act. Such provisions have been included in acts adopted in recent years in Washington, Kentucky, New Jersey, and Maryland. The advisory committees have been helpful to the Administrator in these States Accordingly, we recommend that there be inserted a new section as section 18 at the top of page 38 to read as follows, and that the subsequent section's be renumbered accordingly :

SEC. 18. The Chairman of the Board of Commissioners of the District of Columbia shall appoint a District of Columbia Securities Act Advisory Committee which shall consist of six members, who shall be residents of the District of Columbia or the State of 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. The members shall be selected on the basis of their experience and qualifications to advise the Commissioner on all phases of the securities business. The members shall be appointed for staggered terms "of three years each, with two members being appointed each year, to serve without compensation and shall not be eligible for reappointment for a succeed. ing term. The terms of the first members appointed hereunder shall be designated by the Chairman of the Board of Commissioners at the time of their ap pointment. The members of the committee shall select their own Chairman. The committee shall give the Commission the benefit of its advice on any and all matters pertaining to the administration of this Act."

Mr. CALVERT. In this we have attempted to suggest the necessary language to effect the amendments which we propose and I don't contemplate going into those, but the language is there. Prefatory to

this, I think it might be well to point out that the bill does have several variations from the Uniform Act.

Most of our recommendations are designed to do either of two things:

One, either to put back in provisions of the Uniform Act which have been omitted, or second, to strengthen provisions of the bill.

What I would like to do is very quickly to summarize this and I would welcome your stopping me at any time on any of these points.

First, on variable annuities, we urge very strongly that they be made subject to this act. There has not been here this morning an explanation of what they are, but very briefly, a variable annuity differs from a conventional annuity in that the purchaser is not guaranteed repayment of fixed dollar amounts.

He is repaid the value of whatever his units may be at the time he receives them, and secondly, the proceeds of his payments are not invested in fixed obligations, but rather in stocks which will go up and down in value.

So that, in short, a variable annuity is simply an interest in a fund of stocks, highly similar to a mutual fund.

We think there will be a great gap in the regulatory protection provided to the public if you do not write those within the act.

The fact that they are regulated by the insurance department does not provide the protection you intend to provide under this act. I think the best example is that there is a national organization of the administrators of the State securities act and they are on record that the variable annuities should be regulated under State securities acts as securities.

Mr. SPRINGER. Is this in the uniform code?

Mr. CALVERT. That is left optional in the Uniform Act. There is language left in there in brackets so you can go either way in the Uniform Act.

Mr. SPRINGER. Thank you.

Mr. CALVERT. Second, the bill provides that every license and renewal license shall be allowed to run 2 years.

We suggest regulation would be more effective by having annual renewals of it.

Mr. ABERNETHY. What difference does that make ?

Mr. CALVERT. Simply that if you review the condition of a dealer annually, you will be able to keep a better eye on what his condition is.

Rather than every 2 years, the Commission every year would get a financial statement from the dealer.

Mr. ABERNETP.Y. All right.

Mr. CALVERT. Third, with respect to the application for license, there are three subpoints here. The bill would only provide with respect to the information filed by individual partners, directors, officers, information on their business background. We think that it is essen: tial that if the Commission is to do an effective job of reviewing the background, the other information as specified in the act that is required of a firm also be furnished with respect to the individual partners and officers.

Mr. SPRINGER. What about just the seller, the agent? Mr., CALVERT. As I understand the bill, it would be required of an agent.

Mr. SPRINGER. It is required of an agent?

Mr. CALVERT. Yes; but not of the individual partners and officers. I am thinking of such things as disciplinary actions. Where they previously had a criminal record, we think this should be disclosed with respect to each partner or officer.

Secondly, under this, the application could be executed by any partner or officer of the firm. It is conceivable that there might be disclosed in the application considerable information on the back ground of individual partners and officers that was unknown to the member of the firm executing it to other members of the firm. Accordingly, we urge that there be a requirement that the application be executed by all of the partners or officers who are engaged in business in the District, the purpose of this being so that they will be familiar with the background of some of their fellow officers.

You might think they would know this. You would be surprised that in some instances of the unpleasant situations here, they have not been.

Third, under this, there is the requirement that the application include a complete statement of each disciplinary action by a securities exchange or securities association. As it is presently worded, this would apparently be a historical statement going back to the beginning of the firm, which might be 30 or 40 years. We think this is an undue burden and suggest a 10-year cutoff, that the requirement apply to any disciplinary actions or proceedings within the past 10 years.

Fourth, with respect to fees, since we have suggested that the relicensing or renewal be on an annual basis, we suggest that the annual fees be one-half of those in the 2-year bill.

This would result in the same total amount received.

Secondly, we suggest that there be a maximum aggregate filing fee for any one firm and its agents of $300, so a single firm of 500 agents would not have to pay an annual fee more than $500.

Section 5, we get to minimum capital.

We have a couple of points. We concur very strongly in the recommendation of the board of trade that it be increased from $15,000 to $25,000.

We also suggest that rather than just capital, it apply to net capital, the idea here being that you cannot make up your capital by some office furniture and an automobile, but that you also have available some current capital in that amount.

The bill would provide an exception here, giving the Commission authority to create exceptions.

We suggest that rather than such broad authority, this be made very specific and that there be an exception only for those firms which engagé in transactions exclusively in securities registered under the Federal Investment Company Act of 1940. In other words, you might have a firm that dealt exclusively in so-called mutual fund shares where capital in a large amount would not be important.

In that case, we suggest that they be granted a limited license and be required to have only $5,000 capital.

Six, on surety bonds, there is one important variation in the bill here from the uniform act in that the uniform act would except from the surety bond requirement a dealer that has $25,000 capital. That

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provision has been included in many of the States which have adopted the uniform act, several of which are referred to in our statement.

One other point there is that this provision can be interpreted in the bond requirement that the $50,000 bond might be required not only of the firm but of each agent individually.

Bearing in mind here that the premium on one of these bonds normally runs about $10 a thousand, this would mean a $500 bond for a salesman, perhaps for each salesman as well as the firm.

This seems a little unreasonable. I think it should be borne in mind here that, actually, your bond requirement is really a parallel requirement to the minimum capital.

What you are attempting to do is to assure that there are some financial resources in the dealer firm to which an investor can look if there is trouble.

Accordingly, we think that if a dealer has a minimum capital we are suggesting of at least $50,000, which is double the proposal you make, that he be required to have $25,000; if he has double that amount, he then be excepted from any bond requirement.

This is on the condition that he not only has that at the outset, but that he maintains it, so that a dealer who has and maintains $50,000 net capital would be excepted from any surety. :

Mr. ABERNETHY. How are they going to police the maintenance of it? It can go in 24 hours.

Mr. CaLyERT. By their annual filing of a capital report. Subject to their power to go in and investigate at any time, where they had reason to believe a dealer might be in financial difficulty. They have authority under the act to examine him at any time. .

Mr. ABERNETHY. Well, now, if the capital is depleted, to go in and investigate him is fine, but it is too late.

Mr. CALVERT. I think the practical application of this is that the firms that normally have $50,000 do not get into trouble.

Mr. ABERNETHY. There are not many of us that have $50,000.

Mr. CALVERT. That is true. The problem has been very little capital, the so-called fly-by-night operator. As we understand the purpose of your bill, it is to protect the public, but doing that with a minimum of burden on your reputable firms.

Mr. ABERNETHY. I don't want to make it so restrictive that I set up a closed shop here for just a few houses.

Mr. CALVERT. The combination we are suggesting is a $25,000 minimum capital requirement, but in the surety bond, an exception for the dealer that has $50,000.

Mr. SPRINGER. May I ask a question?
Mr. ABERNETHY. Surely.
Mr. SPRINGER. I think the chairman's point here is pretty well taken.

I have done a lot of thinking on this point and I think this is going to be one of the cruxes of the bill.

For instance, we will say there is a good sized firm, secure and well thought of in the community, that has no trouble putting up $50,000.

But the fellow who does not put up, say, but $15,000 and he has a salesman or two, that means, then, they would have to have three bonds of $500, which would be three bonds of $50,000 ?

Mr. CALVERT. No; one of our suggestions is that a single bond cover the firm and the salesman.

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