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Mr. ABERNETHY. You list yourself as president but there are no other officers of the business, is that right?
Mr. Shaw. No; it isn't—that is right. We call it in that order for giving statements.
Mr. SPRINGER. Let me ask this: What would your average account run, $100, $500, $1,000?
Mr. SHAW. You mean in mutual funds?
Mr. SPRINGER. No; I am talking about an account you will have with somebody who is purchasing.
Mr. Sław. I would say $500.
Mr. SPRINGER. As a small dealer, what do you feel should be the reasonable minimum capital requirement?
Mr. Shaw. I think, sir, if his business is limited where he doesn't handle—his books are open at all time to the SEC and the NASD, that $500 should be
Mr. SPRINGER. The capital requirement?
Mr. SPRINGER. What do you then figure should be the minimum or the maximum bond that ought to be required!
Mr. Shaw. This is just a guess. I would say $15,000.
Mr. Shaw. Provided he is doing a limited business and he is not buying securities for the account and holding them.
Mr. SPRINGER. Thank you, Mr. Chairman.
If this law were to pass, your only alternative would be to go to work for somebody else?
Mr. Shaw. Correct, sir.
Mr. Shaw. And I would like you to know that our business is just beginning to grow after 5 years.
Thank you very much.
I would like to submit for the record several letters that will be incorporated in the record, without objection. (The documents referred to are as follows:)
BLUM OLSON & OULAHAN,
Washington, D.C., May 1, 1963. Re H.R. 4200. Hon. John L. MCMILLAN, Chairman, District of Columbia Committee, House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: As a member of the practicing bar and not on behalf of any client, I submit herewith a legal memorandum concerning H.R. 4200, the proposed District of Columbia Securities Act. I know that this bill will receive the careful consideration it deserves by your committee and the Congress. I also would urge you to consider this bill in conjunction with the proposed District of Columbia Administrative Procedure Act, H.R. 5594, which you introduced by request on April 10, 1963. Such careful consideration, and, I believe, appropriate amendment of H.R. 4200, can do much to avoid legal and administrative problems which will inevitably result if the legislation is enacted in its present form.
Should you or any member of your committee desire that I testify, I shall be glad to do so, although I believe that the memorandum speaks for itself and I know that the committee's hearing time is limited. I also would be glad to answer any questions your committee staff may have. Respectfully yours,
MEMORANDUM CONCERNING H.R. 4200, PROPOSED DISTRICT OF COLUMBIA
SECTION 2, DEFINITIONS (f) Exempt transactions
Clause (5) generally follows the language of section 406(b) (9) of the Uniform Securities Act exempting a transaction involving a so-called private distribution to not more than 25 offerees during a 1-year period, “if the seller reasonably believes that all the buyers in the District are purchasing for investment." This definition continues to present the broker or issuer with the dilemma of determining when his offerees are really purchasing for investment, a situation which often results in a SEC proceeding several years later based on what happened, and not on what the offeror could reasonably believe. A solution would be for the offeror to be protected if the buyer executes an investment letter in a form approved by Commission rule.
It is therefore recommended that section 2(f) (5) be amended by adding at the end thereof the following (page 6, line 2): “Provided, however, That, for the purpose of this clause, such offeror or seller may reasonably rely upon an investment letter executed by such buyer, in form and content satisfactory to the Commission pursuant to published rule under section 16(f).”
SECTION 3. FRAUD
* * * to
This section follows exactly the language of section 101 of the Uniform Securities Act. However, the language does depart from that of section 17 of the Securities Act of 1933. Subsection (b) omits the language in brackets from section 17(a) (2) of the Federal statute: "It shall be unlawful for any person [obtain money or property by means of] make any untrue statement of a material fact * * *." Clause (c) makes it illegal to practice a fraud or deceit upon “any person,” not, as in section 17(a) (3) of the Federal act, upon "the purchaser” of the security involved.
It would be impossible to predict with any certainty just what persons would be included within the class of “any person” allegedly injured by the proscribed fraud and deceit. Further, section 3, read in conjunction with the definition of fraud in section 2(g) and with the criminal penalties of section 13(b), proscribes untrue statements even when there is no harm to the public or to any investor.
It is therefore recommended that section 3 be amended to read, as follows (pp. 10–11, lines 18 through 5):
"SEC. 3. It shall be unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly
-“(a) to empoy any device, scheme, or artifice to defraud ;
“(b) to obtain money or property by means of (make) any untrue statement of a material fact, or any omission [to omit] to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they are made, not misleading; or
"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any [person] purchaser."
(d)-(e) Minimum capital
Section 202 (e) of the Uniform Act requires a minimum capital of $25,000 or a bond of $10,000 where the amount of capital is less. The proposed District of Columbia section requires $15,000 of capital but further permits the imposition of a bond of up to $50,000 “on such conditions as the Commission may determine
to be necessary or appropriate in the public interest or for the protection of investors.” Under this section, the Commission has unrestricted discretion regulated by no definitive legislative standard. For example, should a broker-dealer not be willing to submit to an order of the agency, the bond could be imposed or increased “in the public interest." The two sections should be consolidated to require a capital of at least so many thousands of dollars, with a bond required where such capital is not available.
(a)(2) Willful violation of act
This provision continues the language of alleged "wilful” violations of the 1933 and 1934 Federal statutes. See, for example, section 15 (b) (2) (A) of the 1934 act. As construed by the SEC, the term "wilful” means only that the doer knew what he was doing, whether or not he knew or ought to have known the statute was being violated, or that he acted with intent to defraud the purchaser. See II Loss, Securities Regulation 1309 (1962 ed.). The courts have approved this unfortunate interpretation by the SEC. See, e.g., Hughes v. SEC, 174 F. 2d 969, 977 (District of Columbia Cir. 1949).
Therefore a separate definition should be inserted in section 2 of the statute, as follows: “Wilful, or wilfully, as used herein, except in section 13, shall mean that the doer acted with knowledge that his actions would violate the provisions of this Act or in a grossly negligent manner". (a) (9) Lack of experience
Under this criterion, the Commission can determine lack of qualification as it sees fit, on a case-by-case basis. The subsection should be amended to read as follows (p. 19, lines 22–24) : "Is not qualified on the basis of such factors as training, experience, and knowledge of the securities business, pursuant to criteria established by rule pursuant to section 16, and except as otherwise provided in subsection (b).” (C) Summary action
Although copied from section 204 (b) of the Uniform Securities Act, this provision contains no criteria whatsoever for the summary action authorized. Further, the section places no time limit on the summary action, which remains in effect until “final determination” of the proceeding, e.g., judicial review through the Supreme Court.
Because of the severe damage which can be done to the reputation and business of persons who are the subject of summary action, the Congress should carefully examine the alleged reasons for this extraordinary sanction. With the injunctive authority available to the Commission under section 12, I do not understand why the summary suspension provision is necessary.
Should the Congress, after careful examination of the problems involved, determine that a summary suspension authority is necessary, it is recommended that section 10(c) be amended as follows:
"(c) The Commission may by order for probable cause stated in such order, summarily and for a period of sixty (60) days postpone issuance of a license or suspend an effective license pending determination of any proceeding under this section. Upon the entry of the order, the Commission shall forthwith [promptly] notify the applicant or licensee, as well as the employer or prospective employer if the applicant or licensee is an agent, that it has been entered and of the reasons therefor and that within fifteen days after the receipt of a written request the matter will be set down for hearing. If no hearing is requested (and none is ordered by the Commission] the order will remain in effect until it is modified or vacated by the Commission. No summary order otherwise shall be extended or reissued, except that, if hearing is requested [or ordered], the Commission, after notice of and opportunity for hearing, may modify or vacate the order or extend it until final determination.”
This procedure would require the Commission to act within 60 days, unless the persons concerned consented to an extension. Should the Commission desire to extend such time, during the 60 days it would have ample opportunity to seek injunctive relief under section 12. Further, section 17 should be amended to provide judicial review of a summary order for lack of probable cause.
SECTION 11. INVESTIGATIONS AND SUBPENAS
Right to counsel
No right to counsel whatsoever is provided for any private person during an investigation. Such right should be afforded either by an appropriate provision therefor in the proposed District of Columbia Administrative Procedure Act or in the proposed securities statute, similar to that contained in section 6(a) of the Federal Administrative Procedure Act, as follows:
“Any person compelled to appear in person before the Commission [any agency] or representative thereof shall be accorded the right to be accompanied, represented, and advised by counsel." (a) (3) Publication of information
Clause (3) permits the Commission to "publish information concerning any violation of this Act or any rule or order hereunder." Since the provision is contained in a section dealing with investigations, the right is afforded the Commission to publish unsubstantiated charges before the issuance of any final order after opportunity for hearing. The use of such publicity by the SEC has been the subject of judicial censure on two occasions by the second circuit, Gilligan, Will & Co., V. SEC, 267 F. 2d 461, 468 469 (1959), and N. Sims, Organ & Co. V. SEC, 293 F. 2d 78, 81 (1961).
It is recommended that clause (3) be amended to read as follows (p. 23, lines 12–13): “and (3) may publish information concerning (any violation of this Act or] any rule [or order] hereunder.”
A new subsection (p) also should be added to section 16 with respect to publicity.
SECTION 16. ADMINISTRATION OF ACT
Before approving the proposed jurisdiction of the PUC, the Congress should carefully examine the merits of administration of the act under a single securi
Whether the act is administered by the Commission or an administrator, the result is that the agency acts as investigator, prosecutor, jury, and judge in cases before it. This, of course, also is the situation with respect to the SEC. Although a fact of life in the securities field, the situation should be examined carefully by the Congress in order to determine whether or not the mixing of functions, inapplicable to court proceedings, can be corrected in order to assure due process consistent with sound and expeditious administration of the statute. For example, under the proposed Commission administration, Congress could provide in the act that
(1) Where a Commissioner participated in the investigation of a case, he could not participate in the adjudication of the case.
(2) Where a Commissioner participated in the issuance of an initial order in a proceeding, based upon access to nonpublic files, he could not participate in the adjudication of the case.
(3) The Commisison could have authority to delegate the function of instituting investigations and issuing initial orders to either one of its members
or to a responsible subordinate officer. New (P) public information
The unwarranted injury done to private persons by publicity concerning any private Commission investigation of such persons is incalculable, even though the investigation may not result in any proceeding. The same also is true with respect to the issuance of press releases and other statements in connection with formal orders and decisions issued by the agency. The situation is quite unlike that where economic issues alone (e.g., the CAB) are involved. In the securities field, the livelihood and reputations of persons, who under our system of law are presumed innocent of crime or administrative violation until otherwise proved guilty, are peculiarly involved. Indeed, the SEC itself has recognized that publicity attendant upon a proceeding is a form of sanction, resulting in losses to business even before the proceeding is terminated and an order and decision issued, e.g., Bruns, Nordemann & Co. (Securities Exchange Act Release No. 6540, CCH Fed. Securities Law Rep. Para. 76, 765 (1961)).
While the issuance of a formal order concerning the initiation or termination of a proceeding is public knowledge which is rightfully given appropriate pub
licity by the press, the administration of a District of Columbia securities statute does not require the issuance of press releases or the disclosure of, or comment upon, information not squarely within the four corners of the official document. It is therefore recommended that a new subsection (p) be added to section 16, as follows: “(p) The Commission shall make no public statement concerning the merits of
tter under investigation or adjudication except in the form of an official order, decision, brief or other document filed in the public record, and the making of such a statement may constitute grounds for the dismissal of the proceeding upon a showing of prejudice resulting therefrom on judicial review thereof."
H.R. 5594, the proposed District of Columbia Administrative Procedure Act, is now pending before this committee. It is recommended that enactment of the proposed securities statute be made contingent upon the enactment of the Administrative Procedure Act and that the securities statute be made subject to the latter.
ASSOCIATION OF CASUALTY & SURETY COMPANIES,
Washington, D.C., March 27, 1963. Hon. JOHN L. MCMILLAN, Chairman, Committee on the District of Columbia, House of Representatives, Washington, D.C.
DEAR MR. MCMILLAN: We are taking this opportunity to write you regarding H.R. 4200, introduced by Mr. Springer on February 25, 1963, which proposes the enactment of the District of Columbia Securities Act.
The only comment we have to make with reference to the bill is with respect to the bonding requirement incorporated in section 5(e).
This section is objectionable, as it purports to give the Public Service Commission the power to determine the condition of the bonds (for broker-dealers and agents) and then later provides, “Every bond shall provide for suit thereon by any person who has a cause of action under section 14 and, if the Commission by rule or order requires, by any person who has a cause of action not arising under this Act."
The language quoted in the third paragraph of this letter is vague and would require a decision by the courts to clarify the meaning of the language in litigation after a loss occurs. This would probably make corporate sureties very circumspect about bonding licensees under this act.
It is preferable that the section state the condition of the bond with certainty. The usual condition for a license bond is that the licensee will comply with the act, and such rules and regulations as may be issued under the act.
In order, therefore, to provide for normal underwriting conditions, we respectfully suggest that the attached redrafted language be substituted for section 5(e) as it appears in this bill. Very truly yours,
DAVID M. MARSH, Assistant Counsel.
REDRAFT OF SECTION 5(e) H.R. 4200, 88TH CONGRESS, 1st SESSION (e) The Commission may by rule require licensed broker-dealers and agents to post surety bonds in amounts up to $50,000, conditioned that the licensee will comply with the provisions of this Act and the rules and regulations is. sued pursuant thereto. Such bond may be so drawn to cover the original registration and any renewals thereof. Any appropriate deposit of cash or security shall be accepted in lieu of any such bond. Every bond shall provide that no suit may be maintained to enforce any liability thereon unless brought within two years after the contract of sale or other act upon which such suit is based and shall also provide that the liability of the surety on each such bond to all persons aggrieved shall in no event exceed in the aggregate the penal sum thereof.
STATEMENT REGARDING H.R. 4200 INTRODUCED BY MR. SPRINGER This statement is filed on behalf of the Association of Casualty & Surety Companies, a voluntary nonprofit organization with a membership of 131 capi. tal stock insurance companies.