District of Columbia Securities Act

The subcommittee met, pursuant to notice, at 9:25 a.m., in room 4200, New Senate Office Building, Senator Vance Hartke presiding. Present: Senators Hartke and Dominick.

Senator HARTKE. Good morning, ladies and gentlemen.

The hearing this morning before the Subcommittee on the Judiciary, is on S. 1001 and H.R. 9419, to provide for the regulation of the business of selling securities in the District of Columbia and for the licensing of persons engaged therein, and for other purposes. (S. 1001 and H.R. 9419, referred to, follow :)

[S. 1001, 88th Cong., 1st sess.]

A BILL To provide for the regulation of the business of selling securities in the District of Columbia and for the licensing of persons engaged therein, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

TITLE I

SECTION 1. That title I of this Act may be cited as the "District of Columbia Securities Act".

DEFINITIONS

SEC. 2. When used in this title, unless the context otherwise requires: (a) "Agent" means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. "Agent" does not include any individual who represents an issuer in (1) effecting transactions in an exempt security, (2) effecting exempt transactions, or (3) effecting transactions with existing employees, partners, or directors of the issuer if no commission or other remuneration is paid or given directly or indirectly for soliciting any person in the District. A partner, officer, or director of a broker-dealer or issuer, or a person occupying similar status or performing similar functions, is an agent only if he otherwise comes within this definition.

(b) "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company, or (4) a person who has no place of business in the District if (A) he effects transactions in the District exclusively with or through (i) the issuers of the securities involved in the transactions, (ii) other broker-dealers, or (iii) banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers, whether acting for themselves or as trustees, or (B) during any period of twelve consecutive months he does not direct more than fifteen offers to sell or buy into the District in any manner to persons other than those specified in clause (A), whether or not the offeror or any of the offerees is then present in the District.

(c) "Commission" means the Public Service Commission of the District of Columbia as so designated by section 201 of title II of this Act.

(d) "District" means the District of Columbia, either as a territorial area as defined in the first section of the Revised Statutes of the United States relating to the District of Columbia (Forty-third Congress; sec. 1-101, D.C. Code, 1961 edition). or as the government and municipal corporation of that name as created by section 2 of the Revised Statutes of the United States relating to the District of Columbia (Forty-third Congress; sec. 1-102, D.C. Code, 1961 edition), depending on the context.

(e) For the purpose of subsection (a) of this section "exempt security"

means

(1) any security (including a revenue obligation) issued or guaranteed by the United States, any State, any political subdivision of a State, the District, or any agency or corporate or other instrumentality of one or more of the foregoing; or any certificate of deposit for any of the foregoing;

(2) any security issued or guaranteed by Canada, any Canadian Province, any political subdivision of any such Province, any agency or corporate or other instrumentality of one or more of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;

(3) any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any State;

(4) any commercial paper which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which evidences an obligation to pay cash within nine months of the date of issuance, exclusive of days of grace, or any renewal of such paper which is likewise limited, or any guarantee of such paper or of any such renewal; or

(5) any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan. (f) For the purpose of subsection (a) of this section "exempt transaction"

means

(1) any transaction between the issuer or other person on whose behalf the offering is made and an underwriter, or any transaction among underwriters;

(2) any transaction in a bond or other evidence of indebtedness secured by a real or chattel mortgage or deed of trust, or by an agreement for the sale of real estate or chattels, if the entire mortgage, deed of trust, or agreement, together with all the bonds or other evidences of indebtedness secured thereby, is offered and sold as a unit;

(3) any transaction by a receiver or trustee in bankruptcy;

(4) any offer or sale to a bank, savings institution, trust company, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit-sharing trust, or other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself or in some fiduciary capacity;

(5) any transaction pursuant to an offer directed by the offeror to not more than twenty-five persons in the District during any period of twelve consecutive months, whether or not the offeror or any of the offerees is then present in the District, if the seller reasonably believes that all the buyers in the District are purchasing for investment;

(6) any offer or sale of a preorganization certificate or subscription if (A) no commission or other remuneration is paid or given directly or indirectly for soliciting any prospective subscriber, and (B) the number of subscribers does not exceed twenty-five, and (C) no payment is made by any subscriber; (7) any transaction pursuant to an offer to existing security holders of the issuer, including persons who at the time of the transaction are holders of convertible securities, nontransferable warrants, or transferable warrants, exercisable within not more than ninety days of their issuance, if (A) no commission or other remuneration (other than a standby commission) is paid or given directly or indirectly for soliciting any security holder in the District, or (B) the issuer first files a notice specifying the terms of the offer and the Commission does not by order disallow the exemption within the next five full business days; or

(8) any transaction effected with existing employees, partners, or directors of the issuer if no commission or other remuneration is paid or given, directly or indirectly, for soliciting any person in the District.

(g) "Fraud," "deceit," and "defraud" shall not be limited to common law deceit.

(h) "Guaranteed" means guaranteed as to payment of principal, interest, or dividends.

(i) "Issuer" means any person who issues or proposes to issue any security, except that

(1) with respect to certificates of deposit, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors or persons performing similar functions, or of the fixed, restricted management, or unit type, the term "issuer" means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which the security is issued; and

(2) with respect to certificates of interest or participation in oil, gas, or mining titles or leases or in payments out of production under such titles or leases, there is not considered to be any "issuer."

(j) "Person" means an individual, a corporation, a partnership, an association, joint-stock company, a trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organization, a government, or a political subdivision of a government.

(k) (1) "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value.

(2) "Offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. (3) Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered to constitute part of the subject of the purchase and to have been offered and sold for value.

(4) A purported gift of assessable stock is considered to involve an offer and sale.

(5) Every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer, as well as every sale or offer of a security which gives the holder a present or future right or privilege to convert into another security of the same or another issuer, is considered to include an offer of the other security.

(6) The terms defined in this subsection do not include (A) any bona fide pledge or loan; (B) any stock dividend, whether the corporation distributing the dividend is the issuer of the stock or not, if nothing of value is given by stockholders for the dividend other than the surrender of a right to a cash or property dividend when each stockholder may elect to take the dividend in cash or property or in stock; (C) any act incident to a class vote by stockholders, pursuant to the certificate of incorporation or the applicable corporation statute, on a merger, consolidation, reclassification of securities, or sale of corporate assets in consideration of the issuance of securities of another corporation; or (D) any act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding securities, claims, or property interests, or partly in such exchange and partly for cash.

(1) "Securities Exchange Act of 1934" and "Investment Company Act of 1940" mean the Federal statutes of those names as amended before or after the effective date of this Act.

(m) "Security" means any note; stock; Treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profitsharing agreement; collateral-trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting-trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under such a title or lease; or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. "Security" does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically for life or some other specified period, or any contract issued by an insurance company

pursuant to section 41 of chapter III of the Life Insurance Act, as added by Public Law 86-520 (sec. 35-541, D.C. Code).

(n) "State" means any State, Territory, or possession of the United States, and Puerto Rico, but not the District of Columbia.

(o) "Act" means the District of Columbia Securities Act.

FRAUD

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 employ any device, scheme, or artifice to defraud;

(b) to make any untrue statement of a material fact, or to omit to state a material fact necessary in order to make the statments 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.

LICENSE REQUIREMENT

SEC. 4. (a) It shall be unlawful for any person to transact business in the District as a broker-dealer or agent unless he is effectively licensed under this Act.

(b) It shall be unlawful for any broker-dealer or issuer to employ an agent unless the agent is effectively licensed under this Act. The license of an agent shall not be effective during any period when he is not associated with a particular broker-dealer or a particular issuer. When an agent begins or terminates a connection with a broker-dealer or issuer, or begins or terminates those activities which make him an agent, the agent as well as the broker-dealer or issuer shall promptly notify the Commission.

(c) Every license and renewal license shall expire two years from its effective date, but in any case in which timely and sufficient application for a renewal license has been made in accordance with section 5(a) no license shall expire until final action of the Commission upon such pending application. The Commission may by rule or order fix a schedule for the first renewal of licenses so that subsequent renewals may be staggered over the two-year period. For this purpose the Commission shall reduce the license fee proportionately for any initial license which may expire before two years from its effective date.

LICENSE PROCEDURE

SEC. 5. (a) A broker-dealer or agent may obtain an initial or renewal license by filing with the Commission an application together with a consent to service of process pursuant to section 15 (f) of this Act. The application shall contain a statement of

(1) the applicant's form and place of organization;

(2) the applicant's proposed method of doing business;

(3) the qualifications and business history of the applicant and, in the case of a broker-dealer, of each partner, officer, or director, each person occupying a similar status or performing similar functions, and each person directly or indirectly controlling the broker-dealer;

(4) each injunction or administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business and any conviction of a felony;

(5) each disciplinary action by a securities exchange or securities association;

(6) the applicant's financial condition and history; and

(7) such other matters as the Commission may by rule prescribe as being necessary or appropriate in the public interest or for the protection of investors.

The Commission may by rule or order require an applicant for an initial license to publish an announcement of the application in one or more specified newspapers published in the District. If no denial order is in effect and no proceeding is pending under section 10, a license shall become effective at noon of the thirtieth day after an application is filed. The Commission may by rule or order specify an earlier effective date, and it may by order defer the effective date until noon of the thirtieth day after the filing of any amendment to an application. A license of a broker-dealer shall be deemed to constitute a

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