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Mr. SPRINGER. But that would mean in his case that he would $500. The fellow with $50,000 would pay nothing, is that correct?
Mr. CALVERT. That is correct. Mr. Springer, your purpose here is to protect the public. "Why require the dealer that has the necessary capital to protect the public to go to the expense of putting up a bond?
Mr. SPRINGER. But the capital is all in his hands. A surety bond is surety that somebody else is going to pay.
Mr. CALVERT. That is correct.
Mr. SPRINGER. I can see the necessity of having the capital to operate, but it seems to me on the bond, the all important thing is that it is in separate hands, which insures that the public is protected.
It isn't surety of the fact that he has money in the bank that protects him, but that is the fact that here is a surety bond, we will say Fidelity & Guaranty Co., of Baltimore, which stands there with money in their hands.
Mr. ABERNETHY. That bond is the equivalent of money held in escrow for the protection of people who do business with them.
Mr. CALVERT. That is correct, but if you have a firm with substantial capital that maintains that capital, why should they be put to the burden of a bond
Mr. ABERNETHY. I am not saying you are wrong. But I think your point is that that capital is in the hands of the man of whom protection is being sought in this legislation.
He has a right to dispose of it within 24 hours.
Mr. ABERNETHY. Who would know if he did! Suppose he disposed of it? Suppose it were depleted today and his business, his license, or whatever you want to call it to do business for a year, let's say has 10 more months to run; the Commission could not police his accounts every 24 hours, could it?
Mr. CALVERT, No; it could not.
Mr. ABERNETHY. Without a tremendous staff. And they would be doing nothing but snooping if they did.
Mr. CALVERT. The Commission would probably have received complaints from customers prior to the time that he was out of capital. I come back to the fact that the person who is in business with $50,000-or-better capital is not the firm you are going to have trouble with.
Mr. ABERNETHY. Well, you would not have any with me if I had $50,000.
Mr. CALVERT. In other words, you are not trying to put the burden on a reputable firm. You are trying to protect the public with a minimum of burden on the reputable firm.
Mr. ABERNETHY. But you know, a disreputable firm could raise $50,000, too.
Mr. CALVERT. Yes; but could we point to an example?
Mr. ABERNETHY. I would not want to call any names. But I am assuming they could.
Mr. CALVERT. They would be rare.
Mr. SPRINGER. Let me ask you that. Isn't that exactly what Whitney did when he went to jail ?
Mr. CALVERT. Of course, this brings up
Mr. SPRINGER. It is a little bit different. It is not quite the same thing. But that is exactly what he did, and it is my understanding that even though it was his own nieces or daughters property which he confiscated, in that circumstance, he did not have any surety.
Mr. CALVERT. The stock exchange members are presently required to post surety bonds. This is a question of why should they be required to put up another kind of bond.
It is a different type of bond. We have checked into this with the surety companies.
Incidentally, we would also suggest that the surety company be required to be one that is licensed to do business in the District of Columbia.
On point 7, renewal of license, we suggest here certain requirements, including, as I have indicated, the filing of an annual financial statement.
Point 8, with respect to the filing of advertising, the bill would authorize the Commission by rule or order to require any broker-dealer to file all of his advertising material. We don't think this is contemplated or practical, because, frankly, if all the advertising material put out by each dealer firm in the District were filed, the Commission would be swamped and have time to do nothing but process it.
In the uniform act, there is a provision not included here for exempt transactions. We are requesting that this exemption be included so That this authority not apply to exempt securities such as government or municipal bonds or exempt transactions; secondly, that it be limited so that the Commission would have authority only to require a specific dealer to file his advertising material.
Mr. ABERNETHY. Would that include just normal notices that are mailed out by investment houses ?
Mr. CALVERT. Yes; it is so worded that it could; yes.
Mr. SPRINGER. May I ask what the SEC rule is on this point? They file a prospectus?
Mr. CALVERT. That is correct.
Mr. CALVERT. If the security is registered under the 1933 act, you are required to deliver to the customer a company prospectus.
Mr. SPRINGER. I meant with the Commission.
Mr. CALVERT. You file a registration statement with them which includes the prospectus and the registration data.
Mr. SPRINGER. Does it include all the advertising? This is what you are trying to get left out.
Mr. CALVERT. That is correct.
Mr. SPRINGER. I think their rule is only as required. Only as required by the SEC! It does not say you furnish all your advertising. It says only as required.
Mr. CALVERT. As a practical matter, of safety, Mr. Springer, most of the dealers file most of what they use with the SEC, because this gives them a protection if they have filed it with the Commission.
Mr. SPRINGER. What I was trying to find out is what the rule is. As I remember, the rule of the SEC is only as required.
Mr. CALVERT. I am not sure of that.
Mr. CALVERT. Point 9, in the grounds for denying or revoking the license of the dealer, the broadest authority presently included is that he has engaged in fraudulent practices. This differs from the Uniform Act, where the language is dishonest or unethical practices.
We suggest that the language of the Uniform Act be included, because we think it is somewhat broader.
There are some practices that might not be fraudulent, but would be dishonest or unethical.
This would provide additional protection to investors.
Mr. ABERNETHY. I don't see why any of those it seems to me you would include all three of them.
Mr. CALVERT. We would have no objection to that. That would be quite satisfactory,
Point 10. The bill would permit the Commission to summarily postpone not only the issuance of an original license but to suspend the license of a dealer in business, without a hearing and without any court proceeding. This seems to us rather shocking to our American system, that a man in business can, by an administrative order, without any hearing or court proceeding, be put indefinitely out of business.
We urge very strongly that this be changed so that a dealer in business can have his license suspended or revoked only after there has been a hearing at the administrative level or a court proceeding.
Mr. ABERNETHY. Within a reasonable time?
Mr. CALVERT. Yes. And there is also the further protection here that if there is a flagrant violation going on, the Commission can go to a court and get an injunction.
Their hands aren't tied' in the interim period so that the fellow can
We think he is entitled, though, to a hearing, either administratively or by a court.
Mr. ABERNETHY. Does this authority exist in other jurisdictions !
Mr. ABERNETHY. There are jurisdictions, then, which carry author-
Mr. CALVERT. Point 11, with respect to the publication of information prior to the determination of a violation, the bill would permit the Commission to publish information about an alleged violation when there had been neither a court proceeding nor a hearing at which it had been determined that the violation had occurred.
This would in effect, we think, permit the trial of a man in the newspapers, if you will, when there had been no real determination that a violation had occurred.
Accordingly, we urge that the Commission be authorized to publish information after determination of a violation by the Commission after a hearing or by a court.
Very quickly, over our last three points
go on with it.
Mr. CALVERT. There are a few States that have this. It is not common.
Mr. ABERNETHY. All right.
Mr. CALVERT. There is no limit in the bill on the time for criminal prosecutions.
A provision in the Uniform Act has been omitted which would limit that to 5 years. We suggest that that provision be included.
Mr. ABERNETHY. I think the normal statutory limitation would apply, the overall limitation. They evidently have some in the District. I don't know what it is.
Mr. ACHESON. It is in 18 U.S. Code 282. It is 5 years.
Mr. ABERNETHY. I think I made some notation of that some place here.
Mr. CALVERT. The section on civil liability has a few words inserted which are not in the Uniform Act and are not in the corresponding acts of other States.
While it is uncertain what the effect of these would be, we think it is highly important that dealers have the same standard of civil liabilities applied in all States and more particularly in neighboring States in the community of business, so that in order to put this in the same form as the adjoining States of Virginia and Maryland, we are urging that the new language which was inserted be taken out and that the exact language of the Uniform Act be followed.
Our last point: We suggest that the act provide for creation of an advisory committee. Several States have provided for this in their acts in recent years, including Maryland-among others, Kentucky, Washington-we know it has been very helpful to the Commissioner. It gives him a small group of highly knowledgeable people he can call on in practical problems.
Thank you very much.
Mr. ABERNETHY. You have certainly made an interesting statement, and we appreciate your appearance, as well as you, Mr. Nees.
Mr. KEITH. I just wish that he had been asked to testify before our Subcommittee on Finance and Commerce.
Mr. ABERNETHY. Thank you very much, gentlemen.
STATEMENT OF EDWIN F. BASTABLE, PARTNER, HARRIS, UPHAM
Mr. BASTABLE. My name is Edwin F. Bastable and I have been engaged in the securities business in the District of Columbia for more than 30 years.
I have a prepared statement I would like to read here. It is rather short.
Mr. ABERNETHY. We will be happy to hear from you, Mr. Bastable.
Gentlemen, my name is Edwin F. Bastable, and I am the manager of the Washington office of Harris, Upham & Co., a member firm of the New York Stock Exchange. I am here today to present the views of the Association of Customers' Brokers of the District of Columbia.
This association is a voluntary association, whose membership is comprised of the registered representatives from the majority of the member firms of the New York Stock Exchange in the District of Columbia.
We support the statement previously made by the District of Columbia members of the Investment Bankers Association of America. However, because of the fact that our organization is composed of members whose business it is to deal primarily with the public, we have a few suggestions to present which may be of interest to the committee.
We would suggest that section 5(a) of the bill be amended by adding a new section (a) to meet the problem of those who would enter the securities business as a broker-dealer with insufficient training and experience. The lack of such training and experience was one of the major wrongs found in the series of articles on the Washington securities business by the Washington Star.
Our suggested language is as follows:
SEC. 5. (a) No broker-dealer license shall issue unless the applicant has had at least two years of full-time experience in the sale of securities to the public as of the date of the application ; if applicant is a corporation, this requirement must be met by a majority of its officers, if applicant is a partnership, this requirement must be met by a majority of the partners.
This requirement would still enable men to enter the securities business as agents, and under the supervision of broker-dealers, until they have had such a minimum experience as to warrant them becoming broker-dealers on their own.
We would also suggest that section 5(d) of the bill be amended so that each broker-dealer must have and maintain a minimum "net current" capital of $15,000.
Our proposal would add the words "net current” between "minimum" and capital” in the bill.
The reason for this is that capital alone may be viewed as including nonliquid assets which would have little realistic significance in insuring that every broker-dealer has a minimum current asset provision appropriate to the business in which he is engaged.
With regard to the suggestion of the Investment Bankers Association that a new section 18(b) be added, we feel most strongly that this would be an excellent and practical suggestion. However, we see no purpose in making a person, selected for the Advisory Committee by the Board of Commissioners, ineligible after serving one term.
Because of the desirability of continued service and the difficulties of finding the dedicated men who will serve, we believe it would be better to have no restriction as to reappointment to the committee.
Mr. ABERNETHY. We thank you, Mr. Bastable.
You are the only one who suggested this 2 years' apprenticeship insofar as I know. Do you have any further backing for that?