reveals no reason why the exemptions in section 2 for transactions with employees of the issuing corporation should not extend to employees of its subsidiaries.

The law seems clearly to be aimed at protecting the public from inexperienced, financially irresponsible, and unqualified persons engaging in the securities business. If this protection is deemed to be unnecessary in the case of purchases of stock by direct employees under employee stock purchase plans, it should likewise be unnecessary in the case of purchases by employees of subsidiaries under the same plan. Accordingly, we recommend that sections 2(a) (3) and 2(f) (8) be revised as follows:

On page 2, line 7, after the word "issuer", insert the words "or any of its subsidiaries."

On page 6, line 23, after the word "issuer", insert the words "or any of its subsidiaries."

Under the stock purchase plan of the American Telephone & Tele graph Co., all Bell System employees are eligible to purchase A.T. & T. stock through payroll deductions. Each of the 7,100 regular employees of the Chesapeake & Potomac Telephone Co. is eligible to participate, and, under the plan, all are treated exactly the same as direct employees of the parent company. The stock is offered on a nondiscriminatory basis, and no commissions are charged. Yet, by referring only to "employees*** of the issuer," the language of the proposed act might give rise to a question as to whether the employees of my company who help to administer the plan would be required to register as "agents." It hardly seems that such a result is intended.

There is no active solicitation by any officer or employee of A.T. & T. or any of its subsidiaries for the purchase of stock, and, therefore, it is my company's view that no registration would be required under the Uniform Securities Act even apart from the specific exceptions provided in section 2. In fact, the Uniform Act has been adopted in a number of States without the clarification we are suggesting.

The broadening of the exemption to include employees of subsidiaries would become of much greater importance in the event that the materials and information which we disseminate were even construed to be active solicitation. Thus, our suggested amendment is somewhat technical.

However, apart from technical accuracy for its own sake, there is one important consideration which prompts us to urge this change. State governments are placing more and more emphasis on the need for well written, workable "blue sky" laws. It can surely be anticipated that many of the States which have not adopted the Uniform Act will be considering some revision or improvement. The version of the Uniform Securities Act which has passed the scrutiny of the U.S. Congress will undoubtedly be used as a model wherever such changes are contemplated. For this reason this technical change is particularly important.

Thank you again for the opportunity to appear before you.

Senator HARTKE. Thank you for your very logical suggestion. I know of no reason why such a change cannot be made, but we will review it at the time we meet in executive session. Thank you, sir. Mr. ZAHN. Thank you.

Senator HARTKE. We will hear next, Mr. Larry D. Gilbertson, for the Variable Annuity Life Insurance Co. of America.

Good morning, sir.

STATEMENT OF LARRY D. GILBERTSON, VICE PRESIDENT AND GENERAL COUNSEL OF VARIABLE ANNUITY LIFE INSURANCE CO. OF AMERICA

Mr. GILBERTSON. Good morning, sir. My name is Larry D. Gilbertson and I am vice president and general counsel of the Variable Annuity Life Insurance Co. I have also been authorized to speak on behalf of the Equity Annuity Life Insurance Co., the other variable annuity company organized in the District of Columbia. Our company was organized in 1955 and has been licensed as a life insurance company in the District of Columbia since that time. Our company is authorized by its charter to write not only variable annuity contracts but a full line of life insurance contracts as well. We are presently licensed in 30 States as a life insurance company. And I might say at that point, because the hearings have extended this morning we have increased our number from, when we originally prepared this statement, 28 to 30.

I would like to express our views on H.R. 9419 and S. 1001, a bill to provide for the licensing and regulation of security dealers in the District of Columbia.

I think it is important to consider what fundamentally is the issue involved in H.R. 9419. Before answering this question, I think it is more important to determine what the real issue was in the introduction of H.R. 4200 and S. 1001. Without repeating the information given to you by other representatives before the committee, I think it is simply this H.R. 4200 was introduced to provide regulation where none existed. These bills were introduced partially as a result of the series of articles entitled "Investors Beware" by Miriam Ottenberg, which were published in the Washington Star.

The District of Columbia at the present time has no regulation over the sale of securities. Nowhere in the Ottenberg report was any mention made about abuses in the sale of variable annuities. No one has to date testified as to any such abuses. On inquiry from the committee to Mr. Acheson and Mr. Cary, as I recall, neither had any information as to any abuse whatever insofar as the sale of variable annuity contracts in the District of Columbia was concerned. I think it may be safely said that the purpose of the legislation as introduced was to remedy a need in the District of Columbia, that is to provide regulation where none existed.

This legislation is patterned after the Uniform Securities Act and it had been made clear by the Commissioners on Uniform Securities Act to quote their editorial comment:

If it is desired to exclude variable annuities along with orthodox annuities on the ground that the former are sufficiently regulated by the insurance authorities in the particular State, the bracketed language should be eliminated.

We submit that in view of this the proponents of the amendment to require variable annuities to be included in the definition of securities in H.R. 9419 are challenging the adequacy of the regulation by the Insurance Department in the District of Columbia of the sale of variable annuities. I feel confident that the committee recognizes the thoroughness of the regulation which exists in the District-few States have as adequate and thorough regulation. One witness questioned

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the ability of the Insurance Department to adequately regulate it when he said, and I quote his statement:

If we pass a bill with a legislative gap as to variables, I think we would find exactly the same think happening in the next few years as has happened with stockbrokers in the last 10. This vacuum would attract a lot of bums,

and the public will be hurt.

We do not believe this gives recognition to the type of regulation which we have here in the District.

It may be interesting for the committee to observe that since the hearing held before the House District Committee on May 2, 1963, on H.R. 4200, nothing new has happened nor has any new evidence been brought forward changing the picture, which has been brought to bear by the competitive industry association, namely, the Investment Bankers Association, as to regulation of variable annuities other than the pressures which have been brought to bear by a competitive industry association; namely, the Investment Bankers Association, whose members sell mutual funds. It is also interesting to observe that not one witness objected to H.R. 4200 as submitted by the District Commissioners at that hearing with the exception of the last witness to testify; namely, the Investment Bankers Association. This prompts us to review how the language of H.R. 4200 and S. 1001 was developed. This was not hastily drawn legislation. Mr. Acheson in his statement before the House committee pointed out in detail the work and study which had been given to the drafting of H.R. 4200 and S. 1001 in their original form.

To quote his statement:

This bill is a joint product of representatives of Government agencies and private bodies that have been most closely concerned with securities regulation. Prior to drafting, and during the preparation of three drafts, a thorough discussion of the basic plan and of specific provisions was had among members of the drafting committee. From time to time, naturally, there were minor differences among individual members of the drafting committee over particular provisions of the bill, but throughout its deliberations the drafting committee enjoyed a remarkable degree of cohesiveness of view.

The composition of the drafting committee was as follows (by alphabetical order):

David C. Acheson, U.S. attorney for the District of Columbia; Irving Bryan, Chief, Legislation and Opinions Division, Office of the Corporation Counsel for the District of Columbia;

Wallace Kirkpatrick, professor of law, George Washington University; formerly First Assistant to the Assistant Attorney General in charge of the Antitrust Division, Department of Justice;

Philip A. Loomis, Director, Division of Trading and Exchanges, Securities and Exchange Commission;

Ganson Purcell, member of law firm Purcell & Nelson; formerly Chairman, Securities and Exchange Commission; chairman, Committee on Securities of Bar Association of the District of Columbia;

E. Ladd Thurston, member of the law firm Purcell & Nelson; secretary, Committee on Securities of Bar Association of the District of Columbia;

Marc A. White, counsel, National Association of Securities Dealers. In addition, a number of lawyers, securities brokers, Government officials, and members of financial groups made themselves available

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for consultation, met with members of the drafting committee, supplied information and contributed many valuable suggestions.

Only after several months of extended study and review by this committee and later by a committee of the District of Columbia Bar Association was H.R. 4200 introduced by the District Commissioners with a definition of security which eliminated the variable annuity. As I stated, all witnesses before the House District Committee favored it in that form with the exception of the IBA.

At the close of the House hearings the chairman of the committee, Congressman Abernethy, appointed an ad hoc committee which included Irving Bryan of the District Commissioners, Dave Acheson of the U.S. Attorney's Office, and Bernie Nees, representing the IBA. No representative of the life insurance companies issuing variable annuities (referred to as a "pressure group") was included on this committee.

This committee, after extended discussions, concluded in a split between the two government members, namely, Mr. Acheson and Mr. Bryan. Mr. Bryan, representing the District Commissioners, maintained the existing position of the District Commissioners. In an executive session of Mr. Abernethy's committee, without any further hearings, without having any statement on the record from Superintendent Jordan, the one person in the District of Columbia who has regulated the issuance and sale of variable annuities, the committee then decided to amend the bill to take away from Mr. Jordan his authority over variable annuity contracts and to give it to the Public Services Commission.

It is apparent that Chairman McMillan, when the bill was brought to a vote on the floor of the House of Representatives, did not agree with the actions of this subcommittee. You need only read his statement which was placed in the record to see that he definitely did not feel that the variable annuity should be included within the definition of security under the act. I make this summary to you of the committee to clear up the record, because of the allegations that have been made as to the pressure groups involved as to the legislation concerned. The question now to be raised is is there any public need for the type of additional regulation which would be imposed? Superintendent Jordan of the Insurance Department says there is no further need and that if further regulation is needed, he has adequate authority to impose it, or as testified here before the committee, he indicated he would come up and ask for additional authority by new legislation. We believe there is adequate regulation in the present Life Insurance Act to protect the public against the fraudulent representations which the new Securities Act would provide for the issuance and sale of securities in the District.

I have prepared a comparison of the detailed provision of the Life Insurance Act which I am making available to the committee. I make no suggestion that these are identical provisions, but are similar provisions which do give protection against the same type of offenses, but I have made this comparison to point out that the present Life Insurance Act does contain the same type of protection against the offenses that are sought to be remedied by the new Securities Act.

Some concern has been expressed as to whether or not bonds or minimum capital requirements should be required of these salesmen, that is of variable annuity salesmen.

We submit that neither is necessary in the case of life insurance salesmen. The general accepted rule of law is that a life insurance salesman is in fact an agent of the company. This is particularly true in the District of Columbia where section 35-429 of the Life Insurance Act specifically provides that—

An insurance agent, solicitor, or broker who acts in negotiating or renewing or continuing a contract of insurance for a company lawfully doing business in the District and who receives any money or substitute for money as a premium for such contract from the insured * * * shall be deemed to hold such premium in trust for the company making the contract.

No one questions the authority of the Insurance Department to regulate the financial condition of the insurance companies doing business in the District. Therefore, the public is well protected from any agent who may abscond with any moneys from a member of the public who may pay any premiums to him under a variable annuity.

Another important area which needs clarification is the past history of the treatment of the variable annuity by the Congress. The exact continuity of certain acts of the Congress and the Supreme Court case, I think, have to a certain extent, been confused in some of the present discussions. Litigation over the variable annuity began on June 19, 1956, and was finally heard and the decision rendered by the Supreme Court on March 23, 1956.

Later that same year, the Congress enacted the Life Insurance Company Income Tax Act and faced up to the question of the variable annuity. In this act which was enacted on June 25, 1959, under 801 (b) (2) (g) variable annuities are considered life insurance for the purposes of this act and life insurance companies issuing such contracts were to be treated as life insurance companies under the act.

It is important to remember this is an act of Congress which took place after the Supreme Court decision. Senate Report No. 291, 86th Congress, 1st session, provides this specific reference to variable

annuities:

Variable annuities differ from the ordinary or fixed dollar annuities in that the annuity benefits payable under the variable annuity vary with the insurance company's overall investment experience. The fixed dollar annuity, on the other hand, guarantees the payment of a specified amount irrespective of the actual investment earnings. Both the fixed dollar annuities and the variable annuities, however, are based upon the principle of paying out either specified amounts, or specified units with values which vary with investment experience, over the life of each member of an annuitant group. Thus, in both cases the insuring company bears the mortality risk. In view of this your committee believes variable annuities should in general be treated like other annuities for tax purposes.

Also in the 86th Congress this Committee on the District of Columbia gave full and long consideration to the question of regulation of the variable annuity and gave specific reference to the Supreme Court case in connection with Public Law 86-620. By this act the Congress determined that the regulation of companies issuing variable annuity contracts was to be in the Insurance Department. Included in this act was a specific provision which gives to Superintendent Jordan the "authority to issue such reasonable rules and regulations as may be necessary to carry out the purposes of this section."

The treatment of variable annuities was again considered by the Committee on Finance of the Senate in 1962. Senate Report 2109, 87th Congress, 2d session, quoting from page 7 of this report, after a