magnitude and importance of the law enforcement cases in which the Commission becomes involved.

Like all other major law enforcement agencies, the Commission must have and give protection against premature or unwarranted public disclosure of information gathered in its investigations. This serves several essential enforcement purposes including (1 preventing the frustration of enforcement action by the destruction of evidence, the corruption or intimidation of witnesses, and the manufacture of testimony: (2) protection of the constitutional rights of prospective defendants; (3) the protection of informers and others who furnish confidential information to their Government in reliance upon the promise that their Government will respect their confidence.

These considerations, which are applicable to all law enforcement efforts, have been recognized by the courts and by the Congress as applicable to the Commission's enforcement work.

The Commission's investigations have been likened by the courts to those of a grand jury, and just as grand jury minutes are rarely revealed, the secrecy of our investigatory files, particularly those relating to ongoing investigations, must be preserved. Thus, the Commission has rules requiring the sequestration of witnesses and their counsel and precluding a witness in a private investigation from necessarily being able to receive a copy of a transcript of his testimony, as distinguished from examining it at the Commission's office. These rules have been held valid by the courts. See Securities and Exchange Commission v. Higashi, 359 F. 2d 550 (C.A. 9. 1966), and Commercial Capital Corp. v. Securities and Exchange Commission, 360 F. 2d 856 (C.A. 7, 1966).

The need for the latter rule presumably convinced the Congress to amend earlier drafts of the bill that was to become the Administrative Procedure Act. As originally introduced. S. 7. 79th Cong., 1st Sess.. January 6, 1945, would have provided, without exception, that: "every person required to submit data or evidence shall be entitled to retain or procure a copy or transcript thereof." The same provision was contained in a revised text-Committee Print, May 1945-upon which this Commission commented. The Commission stated: "(b) INVESTIGATIONS 5

"The requirement in the sentence of Section 6(b) that ‘every person compelled to submit data or evidence shall be entitled to retain or procure a copy or transcipt thereof' would deprive the agency of the power in its discretion to withhold transcripts where necessary to prevent perjury or conspiracy among witnesses.

"Our objections to the requirement that transcripts of testimony be furnished does not of course apply to transcripts of testimony given in public hearings. Investigations, however, are normally private proceedings, and we believe the furnishing of transcripts of testimony taken therein is a matter which should depend

2 See, e.g., In the Matter of Four Seasons Securities Law Litigation, CCH Fed. Sec. L. Rep. 193,400 (W.D. Okla., 1972): Securities and Exchange Commission V. First National Bank, 447 F. 2d 166 (C.A. 10. 1971), certiorari denied sub. nom. Nemelka v. Securities and Exchange Commission, 409 U.S. 1038 (1972); Wooley v. United States, 97 F. 2d 258, 262 (C.A. 9. 1938): In re Securities and Exchange Commission, 84 F. 2d 316. 318 (C.A. 2. 1936): cf. Perkins v. Endicott-Johnson Corp., 128 F. 2d 208. 214 (C.A. 2, 1942), affirmed, 317 U.S. 501 (1943); President v. Skeen, 118 F. 2d 58, 59 (C.A. 5, 1941).

3 Rule 7(b) of the Securities and Exchange Commission's Rules Relating to Investigations, 17 CFR 203.7(b):

"(b) Any person compelled to appear, or who appears by request or permission of the Commission, in person at a formal investigative proceeding may be accompanied, represented and advised by counsel, as defined in Rule 2(b) of the Commission's Rules of Practice provided, however, that all witnesses shall be requestered, and unless permitted in the discretion of the officer conducting the investigation no witness or the counsel accompanying any such witness shall be permitted to be present during the examination of any other witness called in such proceeding."

Rule 6 of the Commission's Rules Relating to Investigations. 17 CFR 203.6, provides in pertinent part:

"Transcripts, if any, of formal investigative proceedings shall be recorded solely by the official reporter, or by any other person or means designated by the officer conducting the investigation. A person who has submitted documentary evidence or testimony in a formal investigative proceeding shall be entitled, upon written request, to procure a copy of his documentary evidence or a transcript of his testimony on payment of the appropriate fees: provided, however, that in a nonpublic formal investigative proceeding the Commission may for good cause deny such request. In any event, any witness, upon proper identification, shall have the right to inspect the official transcript of the witness' own testimony."

See pp. 16-17 of appendix to Comments of the Securities and Exchange Commission. dated July 25, 1945, on specific provisions of S. 7, revised text, Committee Print, May

upon the likelihood of the transcript being used to defeat the discovery of facts essential to administration of the Congressional policy laid down in the statutes authorizing the investigation.

"It has been our practice to be liberal in giving transcripts of testimony taken in investigations. However, we have on some occasions found it necessary to refuse requests for transcripts where there was reason to fear that the witness would make it available for the purpose of coaching other witnesses still to be examined or of revealing to a prospective defendant in a criminal proceeding just what testimony the Government has.

"It is a time-honored safeguard against perjury and conspiracy among witnesses to exclude other witnesses from a courtroom, or hearing room, while a particular witness is testifying, and, of course, witnesses are always examined in secret in grand jury proceedings. Where transcripts are made available to witnesses there is no way of guarding against their being made available to the persons whose activities are the principal subject of investigation.

"An example of a very difficult investigation conducted by the Commission was the investigation of the so-called political slush fund of the Union Electric Company of Missouri. While the existence of that slush fund was so notorious as to be a matter of newspaper comment at the time the investigation began, it was only after efforts of a large number of investigators over a period of many months that any reliable evidence was elicited, and when it was developed the evidence furnished the basis for perjury prosecutions of a number of the leading officials in the company, as well as convictions of violation of the statutory provision against political contributions. It would seriously have impeded, if not completely frustrated, that investigation if the Commission had been forced to make transcripts of testimony available to witnesses, and thus indirectly to those principally involved in the violations of the law.

"In cases where the investigation involves examination of employees of the suspected law violator, the employees may be under considerable pressure from the employer, who may demand that they request, ostensibly on their own account, and turn over to it transcripts of their testimony. If a witness subject to such intimidation is entitled to a transcript of his testimony as a matter of law, he may be unwilling to testify fully and truthfully.

"A large proportion of the investigatory work of this Commission is directed to uncovering fraud in connection with the interstate sale of securities, and in this specialized field the Commission, as the courts have recognized, performs a function very similar to that of a grand jury. If the Commission could not safeguard the secrecy of its investigatory procedures, this would substantially impair the usefulness of administrative investigation in this field. It would similarly impair the legislative investigations made by the Commission in connection with rules and recommended legislation."

The Administrative Procedure Act, as adopted, provided in Section 6(b) (emphasis supplied):

"Every person compelled to submit data or evidence shall be entitled to retain or, on payment of lawfully prescribed costs, procure a copy or transcript thereof, except that in a non-public investigatory proceeding the witness may for good cause be limited to inspection of the official transcript of his testimony."

Except for editorial revisions, this provision of the Administrative Procedure Act has never been changed. See 5 U.S.C. 555. The congressional purpose in adopting the exception for testimony given in a “nonpublic investigatory proceeding” was explained by the the House Committee on the Judiciary: *

66

6

'Nonpublic investigatory proceeding' means those of the grand jury kind in which evidence is taken behind closed doors. The limitation, for good cause, to inspection of the official transcript may be properly invoked by an agency where evidence is taken in a case in which prosecutions may be brought later and it would nullify the execution of the laws to permit copies to be circulated. . . ." In 1962 a plenary session of the Administrative Conference of the United States urged elimination of the exception which would authorize agencies to preclude a witness from obtaining a copy of his testimony. As indicated above, Congress did not amend the Administrative Procedure Act in accord with this recommendation. The Commission on April 17, 1963, determined not to implement

H. Rep. No. 1980, 79th Cong., 2d sess. (1946), at p. 33. The Senate Committee on the Judiciary expressed nearly identical views. See S. Rep. 752, 79th Cong., 1st sess. (1945), at pp. 19-20.

7 See Recommendation No. 24, Selected Reports of the Administrative Conference of the United States, S. Doc. No. 24, 88th Cong., 1st sess. (1963), at p. 54.

the recommendation of the Administrative Conference in this respect, but subsequently did determine to do so, amending its rules, effective on November 27, 1970. to permit a witness in any instance to obtain a copy of the transcript of his testimony. When it became evident that this change had an adverse effect on its enforcement proceedings, the Commission amended its rules to follow the prac tice it had followed prior to November 27, 1970. See Securities Act Release No. 5331 (Nov. 16, 1972), a copy of which is attached for your information.

From the foregoing it is apparent that the problems of our investigative files becoming public are by no means limited to the possible prejudice of potential parties, which, you suggest in your letter of April 9, might be cured by the passage of time. We note in this connection, however, that problems of the running of the statute of limitations and of defendants' constitutional right to a prompt trial may not permit this cure. See, c.g., United States v. Parrott, 248 F. Supp. 196 (D. D.C., 1965). Moreover, Congressional investigations of pending enforcement matters have been held to impair "the right of private litigants to a fair trial and, equally important, . . . their right to the appearance of impartiality, which cannot be maintained unless those who exercise the judicial functions are free from powerful external influences." Pillsbury Co. v. Federal Trade Commission, 354 F. 2d 952, 964 (C.A. D.C., 1966).

The basic problem relates to the successful prosecution of our cases where potential defendants in a criminal proceeding can learn in advance exactly what we know of their activities and the witnesses upon whom we must rely. Members of organized crime are increasingly involved in our criminal cases; and despite all of our efforts to keep our investigations private, in more than one case potential witnesses have permanently disappeared. In many of our investigations, as a result of successful securities fraud, the subjects may have almost unlimited funds at their disposal, so that even if they would not countenance murder they would not hesitate to persuade potential witnesses that it would be worth their while for them to perjure themselves or at least to take a lengthy vacation abroad. Apart from the harm in the particular case, the opening to the public of our investigatory files would have a devastating effect upon our future enforcement efforts. For a small agency, the Commission has, over the years, had a remarkable enforcement record. Without reference to administrative disciplinary proceedings, the Commission has, in the 10 years prior to June 30, 1972, enjoined 3,757 persons or corporations, and there have been 903 convictions in cases that had been referred to the Justice Department. We could not have achieved these results were we unable to guarantee privacy to confidential informants; nor if our own staff members could not freely communicate with each other and with the Commission about the best ways to proceed without being concerned that any such comments might become available for anyone to second guess and quote out of context, with a resulting adverse impact upon the staff. Factors of this sort were presumably recognized by Congress in connection with the Public Information Act, passed in the 89th Congress, which contains an exemption from disclosure for "investigatory files compiled for law enforcement purposes, except to the extent available by law to a party other than an agency.' The Senate Committee on the Judiciary noted, S. Rep. 813, 89th Cong., 1st Sess. (1965), at p. 9: "These [investigatory files] are the files prepared by Government agencies to prosecute law violators. Their disclosure of such files, except to the extent they are available by law to a private party, could harm the Government's case in court.” The House Committee on Government Operations, H. Rep. 1497, 89th Cong., 2d Sess. (1966), at p. 11, observed that the exemption "covers investigatory files related to enforcement of all kinds of laws, . . . securities laws as well as criminal laws." As noted in Frankel v. Securitics and Exchange Commission, 460 F.2d 813, 817-818 (C.A. 2), certiorari denied, 409 U.S. 889 (1972):

"If an agency's investigatory files were obtainable without limitation after the investigation was concluded, future law enforcement efforts by the agency could be seriously hindered. The agency's investigatory techniques and procedures would be revealed. The names of people who volunteered the information that had prompted the investigation initially or who contributed information during the course of the investigation would be disclosed. The possibility of such disclosure would tend severely to limit the agencies' possibilities for investigation

This is now codified at 5 U.S.C. 552 (b) (7). The language of the act as passed should he compared with the language in a predecessor bill where this exemption would have been limited to "investigatory files until they are used in or affect an action or proceeding or a private party's effective participation therein." See S. Rep. No. 1219, 88th Cong., 2d sess. (1964), at p. 3, relating to S. 1666, 88th Cong., 1st sess.

and enforcement of the law since these agencies rely, to a large extent, on voluntary cooperation and on information from informants."

We are also concerned about the fact that our private files sometimes contain what appear to be unfounded charges against individuals who, on investigation, have not appeared to have violated the law. The mere publication of such charges and other gossip that may appear in these files could seriously defame and injure law-abiding citizens.

We have set forth at some length the reasons why the Commission cannot conscientiously permit its investigatory files to be made public so that the Subcommittee will understand why we think it necessary that we work out a manner for the Subcommttiee to review the Commission's enforcement program which differs from that proposed in your April 2 letter. While we do not suggest that either of the two members of the General Accounting Office staff detailed to assist your Subcommittee staff, any member of the Subcommittee staff, any member of the Subcommittee, or any other member of Congress who would have the right to examine documents in the possession of the Subcommittee (see 2 U.S.C. 72a (d) ) would make public the information contained in our investigatory files unless he should deem it necessary in the public interest, it is not clear that all such individuals would recognize all of the problems set forth above. Certainly the almost daily leaks of information from closed-door sessions of Congressional committees raise our most serious apprehensions.

The Commission will, of course, provide office space in our headquarters building for the two Government Accounting Office investigators. We suggest that they first review the enforcement matters that have been closed during the last three years. We shall give these investigators the right to examine these files, but we suggest two limitations in the interest of preserving the Commission's enforcement capability. We propose that none of the documents in our files are to be removed and no copies are to be made unless clearance is obtained from the Commission, so that it can be assured that sufficient precautions have been worked out to protect material such as documents pertaining to organized crime cases, materials identifying informants, materials identifying witnesses who may be subject to harassment or charges of malicious prosecution, and materials received in confidence from citizens or other government agencies, particularly classified materials. As to such matters, there may conceivably be situations where we may desire to consult with you before even permitting examinations by your investigators. In our view, the Government Accounting Office investigators will be subject to the same criminal sanctions prohibiting unlawful disclosure of nonpublic information which generally apply to our own staff.

When your investigators have concluded their study of the closed files, we will both be in a better position to discuss the review of ongoing investigations, if that still appears necessary. At that point, on the basis of our experience in the investigation of the closed files, we should be more able to work out procedures that would not endanger our enforcement program but would nonetheless serve your purposes adequately.

Sincerely,

Hon. HARLEY O. STAGGERS,

G. BRADFORD COOK, Chairman.

DEPARTMENT OF THE TREASURY,
OFFICE OF THE GENERAL COUNSEL,
Washington, D.C.. October 19, 1973.

Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on H.R. 5050, "To amend the Securities Exchange Act of 1934, and for other purposes.”

The Department would like, at this time, to comment on Title IV, which relates to Securities Processing. Title IV is designed to provide a Federal regulatory structure to enable the Government to take measures to avoid the problems resulting from delays in effecting stock transfers. It would vest sole responsibility for the regulation of securities depositories, clearing agencies, and transfer agents in the Securities and Exchange Commission. Specifically, it would give the SEC authority to establish performance standards, business practices and rules for entities performing transfer, depository and clearing functions, and to require their registration.

The Department is opposed to vesting in the SEC enforcement of the standards and registration requirements as to transfer agents which are banks. We believe

that this authority should be vested in the Federal bank regulatory agencies. This would provide a satisfactory supervisory framework in that it would utilize existing agencies to the maximum extent possible to achieve the purposes of Title IV and thus would avoid unnecessary duplication and inefficiency that would result under Title IV as drafted.

The Department anticipates submitting comments on the other titles of the bill in the near future.

The Department has been advised by the Office of Management and Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Committee.

Sincerely yours,

EDWARD C. SCHMULTS,

General Counsel.

Mr. STUCKEY. Before hearing our first witness, I would like to ask unanimous consent to leave the record open in order to receive statements from Mr. William Casey, Judge Hamer Budge, former Chairmen of the SEC, and Mr. Roy Ash. [See p. 417.] We do regret they will not be able to appear in these next days of hearings with us.

Our first witness today is Prof. William Cary. Professor Cary was former Chairman of the SEC from 1961 to 1964, when he left the SEC to go to Columbia University to teach law.

We are very happy to have a man of your experience before us to comment on title I this morning.

STATEMENT OF PROF. WILLIAM L. CARY, COLUMBIA UNIVERSITY SCHOOL OF LAW, FORMER CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION

Mr. CARY. Mr. Chairman. I have a prepared statement. I think each of you has a copy. I think I shall start by reading it.

I am happy to be back again with this particular committee to appear as a witness at the request of the committee in connection with H.R. 340 and title I of H.R. 5050. My understanding is that you wish. me to address myself primarily to those parts of title I of H.R. 5050 that relate to the independence of the Securities and Exchange Commission. More specifically, you have asked these questions:

In order to insure the Commission's independence, should: (a) the Commission be made a self-funding organization? (b) the Commission be prohibited from clearing proposed legislation and legislative comments with the executive branch?

(c) the Commission be authorized to conduct Supreme Court litigation independently of the executive branch?

(d) the reappointment of Commissioners filling unexpired portions of predecessors' terms be made automatic?

I shall try to give my reaction to these questions and then develop several additional points.

As a preface, I might say that I have done some thinking about the question of independence and have set it down in writing. My remarks are contained in chapters 1, 2, and 5 of a book entitled "Politics and the Regulatory Agencies," McGraw Hill, 1967, which represented the Cooley lectures delivered at the University of Michigan in February and March of 1966. [See p. 130.] I also spoke to this question at a National Institute on New Techniques in Regulating Business: The Ash Council's Recommendations on April 16-17, 1971, and my remarks on that occasion appear in 23 Administrative Law Review, pages 387-395 [No. 4. June 1971]. I am submitting a copy of each of these. [See p. 203.]