R.V.3.7 Je 49. D6A41 CONTENTS Brown, Alexander J., Jr., Acting Regional Administrator, Washington regional office, Securities and Exchange Commission... Bryan, Irving, Chief, Legislation and Opinions Division, Office of Cary, William L., Chairman, Securities and Exchange Commission.. Cohen, Manuel F., Commissioner, Securities and Exchange Commis- Fleischer, Arthur, legal assistant to the Chairman, Securities and Kneipp, Robert F., Assistant Chief, Legislation and Opinions Division, Office of Corporation Counsel, District of Columbia.. Korman, Milton D., Principal Assistant Corporation Counsel, District Law, Stuart, attorney, Division of Trading and Exchanges, Securities Loomis, Philip A., Director, Division of Trading and Exchanges, Securities and Exchange Commission.._ Nottingham, C. T., Superintendent, License and Permit Division, Peters, Richard, secretary, district No. 10, National Association of White, Marc A., counsel, National Association of Securities Dealers, Gray, Chester H., Corporation Counsel, District of Columbia, letter 49-59 III SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA MONDAY, MAY 21, 1962 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE AND FINANCE OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, The subcommittee met at 10:30 a.m., pursuant to call, in room 1334, New House Office Building, Hon. Peter F. Mack, Jr. (chairman of the subcommittee), presiding. Mr. MACK. The subcommittee will come to order. This morning we have scheduled a hearing on the securities regulations in the District of Columbia. It has been called to the attention of this committee that there has been an unusual amount of questionable activity here in the District of Columbia. The Securities and Exchange Commission and the National Association of Securities Dealers have taken certain action in recent months to correct the situation. This committee feels that whatever action is necessary to solve the problem in the District should be taken. We recognize that the Securities and Exchange Commission has authority over vast areas, primarily interested in the regulation of securities on an interstate basis. But there does not seem to be any justification for having a situation existing right here in the Nation's Capital that is not regulated, to have an area which is not regulated, and to have situations existing here that are worse or as bad as any other areas of the country. For that reason, we have scheduled the hearings today to determine what action should be taken to solve this problem. Our first witness today will be Mr. William L. Cary, Chairman, Securities and Exchange Commission. 1 STATEMENT OF WILLIAM L. CARY, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY MANUEL F. COHEN, COMMISSIONER; PHILIP A. LOOMIS, DIRECTOR, DIVISION OF TRADING AND EXCHANGES; ARTHUR FLEISCHER, LEGAL ASSISTANT TO THE CHAIRMAN; ALEXANDER J. BROWN, JR., ACTING REGIONAL ADMINISTRATOR, WASHINGTON REGIONAL OFFICE; AND STUART LAW, AN ATTORNEY IN THE DIVISION OF TRADING AND EXCHANGES Mr. CARY. Mr. Chairman and members of the committee, I am William L. Cary, Chairman of the Securities and Exchange Commission. I have with me my colleague, Commissioner Manuel F. Cohen, also Philip Loomis, the Director of the Division of Trading and Exchanges; my legal assistant, Arthur Fleischer; our Acting Regional Administrator of the Washington district, Alex Brown, and Stuart Law, an attorney in the Division of Trading and Exchanges. I am here to testify on the problems of securities regulations in the District of Columbia. I have a prepared statement, which I believe you have copies of. I will expect to proceed through that with minor deviations. The Commission believes that a serious problem existed in the Metropolitan Washington area with respect to the conduct, business methods, ethics, and qualifications of numerous broker-dealers engaged in the securities business. This situation has been graphically and thoroughly discussed in a series of articles by Miriam Ottenberg in the Washington Star. It has been reflected in the great number of enforcement actions brought by the Commission and the National Association of Securities Dealers against local firms; by the crescendo of illegal and unethical practices; by the number of local brokerage firms that have gone out of business; and by the substantial number of new firms managed by inexperienced personnel. Apparently vigorous enforcement action has measurably reduced the present gravity of the situation, although we have no illusions it is entirely cured. We cannot be assured there will be no recurrence unless additional corrective action is undertaken. It is my understanding that a main purpose of these hearings is to assist in the determination of what such action might be. I wish to point out that the problems of securities regulation in the District of Columbia are not unique. As the committee knows, the Commission is presently engaged in a broad study of the securities markets pursuant to Public Law 87-196, a bill introduced by Congressman Mack. One of the important reasons for this study was evidence of a general breakdown of controls and lowering of standards in various sectors of the securities markets. The situation in the District of Columbia appears to represent a particularly intensified and extreme example of a national problem. Why has there been an acute problem in the District? I do not have any scientifically developed correlations. But I do believe that there are certain factors peculiar to the Metropolitan Washington area which aggravate problems normally present in securities regulation. In the first place, the District of Columbia has no local securities regulation-no "blue sky" law. There are only two States without this type of legislation. Its absence in the District appears to have been a substantial inducement in encouraging both the formation of substandard new brokerage firms and the movement of undesirable persons from other areas to here. Convincing evidence is seen in the fact that nearly all new brokerage firms have located within the boundaries of the District, rather than in Maryland or Virginia. Moveover, principals and salesmen from outside the District with so-called boilerroom backgrounds became participants in local firms. The District had become a haven for a developing breed-the migratory broker-dealer who flocks to the place of minimum interference with his operation. I might say in that connection, there have been quite a few homegrown ones, too. Secondly, the metropolitan area would generally be attractive to broker-dealers. Its comparatively high-income military and Government population, largely transient and allegedly somewhat unsophisticated in investing, and its large number of retired people, interested in supplementing fixed income, obviously present a prime target for unscrupulous brokers and their salesmen. While this potential appears not to have been fully appreciated until recently, the phenomenal sprouting of local brokerage houses in the past few years attests to the fact that the possibilities offered by the market here have become well known. The new firms, some of which enjoyed rapid apparent growth for a time, in turn, trained new salesmen. Then the salesmen, upon exposure to the prospects offered, frequently opened up firms of their own. The problems of securities regulation in the District of Columbia may be illustrated in numerous ways. The growth of the brokerdealer community in itself is exceptional. At the end of 1958, there were 71 District firms who were members of the NASD. At the end of 1961, this number had increased over 47 percent to 104. In this connection, it should be borne in mind that in the interim a large number of firms had failed-23 in 1961 alone. By contrast, the net gain in NASD membership for the Nation as a whole was only 22 percent and the failures were correspondingly lower. The genesis-and subsequent history-of many new firms reflects what has caused our anxiety and resulted in our actions. A staff study of the past 5 years shows that many local brokerage firms have been formed by persons formerly associated with houses that the Commission had closed. Approximately one-third of the 67 that went out of business in the past 5 years had an officer, director, or owner who had previously worked for a firm against which the Commission had brought proceedings. Half of this group had two such persons. |