We especially want to call this to your committee's attention and strongly urge this position because we noticed in the remarks on H.R. 9419 of Representative John L. McMillan, chairman of the House Committee on the District of Columbia, contained in the Congressional Record of February 24, 1964, at page 3232, that there was no reference to the opposition of this association to the exclusion of variable annuities from H.R. 4200 (the predecessor bill to H.R. 9419). The association did not appear at the hearing on H.R. 4200 but did submit to Chairman McMillan a letter dated June 4, 1963, in which the association urged that variable annuity contracts be deemed securities for the purpose of the regulation of the securities business in the District of Columbia. As we pointed out in the aforementioned letter, the board of governors of the association took no position on the remainder of the bill before your committee as normally the board does not comment upon State laws and the bill before your committee would be in the nature of a local securities or "blue sky" law. But the board has taken the position since 1957 that variable annuities are securities and in view of the fact that this bill, if adopted, would be a local securities law enacted by the Federal Government, we believe it is more than a matter of local concern and one in which we should again state our position. By the way of background as to its organization and functions, the association was organized under the laws of the State of Delaware in 1939, for the purpose of registering with the Securities and Exchange Commission under section 15A of the Securities Exchange Act and is now so registered. The association has approximately 4,235 members, all of which are securities brokers and dealers registered as such with the Commission pursuant to the requirements of section 15(b) of the Securities Exchange Act of 1934 (48 Stat. 881; 49 Stat. 1375; 15 U.S.C. 780 (b)). The functions and activities of the association constitute an integral part of the Federal system of securities regulation. The association's certificate of incorporation provides that its objectives and purposes, in part, are to "promote through cooperative effort the investment banking and securities business, to standardize its principles and practices, to promote high standards of commercial honor and to encourage and promote among members observance of Federal and State securities laws." The certificate of incorporation also requires the association to provide "a medium through which its membership may be enabled to confer, consult, and cooperate with governmental and other agencies in the solution of problems affecting investors, the public, and the investment banking and securities business." As pointed out in report No. 1102 of the House of Representatives, 88th Congress, 2d session, on H.R. 9419, at page 4, the Supreme Court of the United States in SEC v. VALIC, 359 U.S. 65 (1959) held that variable annuity contracts come within the provisions of the Securities Act of 1933 and the Investment Company Act of 1940. The association was an active intervenor in support of the Securities and Exchange Commission in this litigation from the district court through the Supreme Court of the United States. Since this House report was prepared, the U.S. Court of Appeals for the Third Circuit on January 20, 1964, affirmed an order of the Securities and Exchange Commission which had held that the Prudential Insurance Co. of America must comply with the Investment Company Act of 1940 in the sale of that insurance company's variable annuity contracts to the public. The court, in upholding the Securities and Exchange Commission opinion and rejecting the arguments of Prudential, stated at page 10 of the opinion: "Considerations of logic and policy provide further support for our conclusion. The Investment Company Act of 1940 contains significant safeguards for the protection of those who, like the purchasers of variable annuities, invest in 'securities.' These safeguards, characterized by the Commission as insuring 'corporate democracy,' include disclosure of investment policy and operating practices, and the regulation of fees, trading practices, and changes in investment policy. See VALIC, 359 U.S. at 79. The mere fact that the investment program in the case at bar is under the aegis of an insurance company ought not to negate compliance with these controls in the absence of compelling circumstances. We find no such circumstances here." We support the conclusion arrived at by the House Committee on the District of Columbia in its report at page 5 where the House committee resolved the treatment of variable annuity contracts "by determining that under the present court decisions and law, agents or broker-dealers offering variable annuity insurance contracts to the public in the District of Columbia shall be required to secure licenses and will be subject to the provisions of this act.” We request that in the public interest and in conformity with a growing body of law, your committee and the Senate continue variable annuity contracts within the definition of "security" as now set forth in H.R. 9419. Very truly yours, ROBERT W. HAACK, Chairman of the Board of Governors. Hon. VANCE HARTKE, THE METROPOLITAN WASHINGTON BOARD OF TRADE, Chairman, Subcommittee on the Judiciary, District of Columbia Committee, DEAR SENATOR HARTKE: The board of directors of the Metropolitan Washington Board of Trade has carefully reviewed the provisions of S. 1001, 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, and recommends its passage with the following changes: 1. The bill requires $15,000 minimum capital of broker-dealers licensed in the District. The board of trade recommends this be raised to $25,000. The same recommendation was made to and adopted by the House of Representatives committee. 2. We also feel it is unnecessary to require a bond of a broker-dealer in the amount of $50,000 who has capital of at least that much. 3. We are opposed to inclusion of the provision in H.R. 9419, the House-passed bill, which would require dual licensing under this act and the life insurance laws of an agent or broker who offers variable annuity contract as well as standard life insurance policies. Sincerely, Re H.R. 9419. WILLIAM H. PRESS, Executive Vice President. BETTER BUSINESS BUREAU OF METROPOLITAN WASHINGTON, Hon. VANCE HARTKE, Chairman, Senate District Committee's Judiciary Subcommittee, MY DEAR SENATOR HARTKE: The Better Business Bureau of Metropolitan Washington wishes to endorse H.R. 9419 as passed by the House of Representatives and to urge its prompt enactment by the Senate. Inquiries and complaints received by us, together with surveys and investigations by our professional shopper, during the past 4 years, clearly indicate the need of this legislation for the protection of the public. For your information, I am enclosing a copy of a resolution adopted by our board of directors for submission to the appropriate authorities on March 27, 1961. The public interest requires the prompt enactment of this bill, as the District of Columbia sorely needs this legislation. Very truly yours, Enclosure. LELAND S. MCCARTHY, Managing Director. RESOLUTION The following resolution was unanimously adopted at a meeting of the board of directors of the Better Business Bureau of Metropolitan Washington, held on Monday, March 27, 1961: Whereas the number of securities firms and the number of securities sales personnel operating in the metropolitan area of the District of Columbia have risen rapidly in the past several years; and Whereas the promotional activities and business methods of some of these securities firms have resulted in severe losses to the investing public in this area; and Whereas inquiries and complaints filed with the Better Business Bureau, the general observations of members of the board of directors, and specific information developed by the staff of the bureau, all clearly indicate that the background of such firms and the nature of the securities being promoted by them require increased investigation and close surveillance by the regulatory authorities, so as adequately to protect the investing public; and Whereas a recent survey of the current activities of a number of such securities firms, made by a professional investigator for the bureau, confirms these observations: Now therefore be it Resolved That the board of directors of the Better Business Bureau of Metropolitan Washington record with the Securities and Exchange Commission and with the National Association of Securities Dealers, Inc., its deep concern over the foregoing situation: That the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., be advised that, in the opinion of the board of directors of the Better Business Bureau, increased investigation and more timely enforcement efforts are required in the public interest throughout the Metropolitan Washington area; That it is the firm belief of the board of directors of the Better Business Bureau that the staffing of the regional office of the Securities and Exchange Commission, and of the District Committee of the National Association of Securities Dealers, is inadequate to enable these organizations properly to discharge their assigned investigatory responsibilities and otherwise to cope with the serious securities problem which has developed in the Nation's Capital; and That the president of the Better Business Bureau be and he hereby is authorized and directed appropriately to convey the foregoing sentiments to the Chairmen of the SEC and of the NASD, in order to enlist the increased assistance and cooperation of their respective organizations. LELAND S. MCCARTHY, Secretary. INDIANAPOLIS BOND & SHARE CORP., Hon. VANCE HARTKE, U.S. Senator, Chairman, Judiciary Subcommittee of the Senate Committee for the District of Columbia, Senate Office Building, Washington, D.C. MY DEAR SENATOR HARTKE: I understand that your Judiciary Subcommittee of the Senate Committee on the District of Columbia is having hearings on H.R. 9419, proposed District of Columbia Securities Act. I believe this act as passed by the House has great merit and would urge that you and your committee approve it as passed by the House. I am particularly interested in the provision making variable annuities subject to the act. The variable annuity concept is an excellent one, and as a securities dealer I have no quarrel with it. However, I have a firm conviction that variable annuities are just a modified form of a mutual fund and therefore are a security and should be subject to the same regulation as any other securities. Furthermore, I believe that anyone selling variable annuities should be registered as a securities salesman. I believe that it is important that a proper pattern be set concerning this matter and can think of no more representative place for this to occur than in the Congress of the United States in creating a Securities Act for the District of Columbia. Very truly yours, FRANK L. REISSNER, President. SUTER ASSOCIATES, INC., Washington, D.C., February 28, 1964. Senator VANCE HARTKE, Washington, D.C. DEAR SENATOR HARTKE: I am writing in regard to the controversial H.R. 9419 which I understand will be considered by the Judiciary Subcommittee of the Senate District Committee. I believe that the purpose of this bill is to tighten up the regulation of securities dealers and salesmen in the District of Columbia. I have no fault to find with this objective. However, I strenuously object to the provision which will require licensed insurance agents and brokers, who have no desire to sell stocks, bonds, or mutual fund shares but who do wish to have the right to sell variable annuities issued by life insurance companies, to be licensed by both the District of Columbia Department of Insurance and by the Public Service Commission. It seems absurd to require insurance agents and brokers to be licensed by two departments of the government of the District of Columbia. As a matter of fact, many independent agents are also required to obtain a trade, business, or professional license from the District of Columbia government so that the proposed legislation would require such individuals to purchase three licenses from three different agencies of the District of Columbia government. This is carrying things too far. I urge you to exert your influence to exempt from the proposed legislation those who are licensed by the District of Columbia Department of Insurance and whose interest in selling securities is limited to the sale of variable annuities issued by life insurance companies regulated by both the Securities and Exchange Commission and by the Department of Insurance. If there is any inadequacy in the insurance laws of the District of Columbia, it certainly seems much more logical to bolster the insurance laws than to impose the substantial hardship proposed by H.R. 9419 on salesmen of insurance companies which issue variable annuities. In addition to my opposition to the principle of multiple license requirements, I also object to the $25,000 capital requirement for the obtaining of a license to sell variable annuities which you must agree would effectively prevent the great majority of individual life insurance agents from obtaining a license to sell variable annuities. To sum up, regulation and licensing of securities dealers and salesmen is undoubtedly highly desirable in the public interest. However, this public interest is already well served as respects the insuring public by the existing broad insurance laws of the District of Columbia which are ably administered by the Superintendent of Insurance. Respectfully yours, CHARLES F. SUTER, C.L.U., President. Senator HARTKE. We will now stand adjourned subject to the call of the Chair. (Whereupon, at 11 a.m., the subcommittee recessed, subject to the call of the Chair.) DISTRICT OF COLUMBIA SECURITIES ACT WEDNESDAY, APRIL 29, 1964 U.S. SENATE, SUBCOMMITTEE ON THE JUDICIARY OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The subcommittee met, pursuant to notice at 8:30 a.m., in room 6226, New Senate Office Building, Senator Vance Hartke, presiding. Present: Senators Hartke, and Dominick. Also present: Chester H. Smith, staff director; Fred L. McIntyre, counsel, and Richard E. Judd, professional staff member. Senator HARTKE. The committee will come to order. This morning we will continue the hearings on S. 1001 and H.R. 9419, providing for the regulation of the business of selling securities. The first witness this morning is Mr. Hillman Zahn, vice president, the Chesapeake & Potomac Telephone Co. Good morning, sir. You may proceed in your own, sir. STATEMENT OF HILLMAN ZAHN, VICE PRESIDENT, THE CHESAPEAKE & POTOMAC TELEPHONE CO. Mr. ZAHN. Thank you, Mr. Chairman. My name is Hillman Zahn, and I am vice president of the Chesapeake & Potomac Telephone Co., a subsidiary of American Telephone & Telegraph Co. As such, I am responsible for all of its operations. The principal office of the company is at 930 H Street NW., in the District of Columbia. In addition to this testimony I have submitted a supplemental statement containing some background information. First, let me say that I appreciate the opportunity to appear before this committee for the purpose of suggesting a clarifying amendment to the proposed District of Columbia Securities Act which you are now considering. It is apparent to me that this is highly desirable legislation which offers important protection to the public. However, the bill as presently drafted appears to have inadvertently made a distinction in its treatment of employee stock purchase plans between direct employees of the issuing corporation and employees of the corporation's subsidiaries. In sections 2(a) (3) and 2(f) (8), the terms "agent" and "exempt transaction" are so defined as to exempt from the operation of the act all securities transactions with employees of the issuer if no commission is paid for solicitation. A careful study of the provisions of the bill and the various statements of its proponents explaining the need for this kind of legislation |