As a dramatic instance of how substandard firms have grown, hydra-like, from the pieces of revoked firms, let me give the following example: A large District broker-dealer recently was put out of business by the Commission's Washington regional office. Investigation of possible fraud in the operations of this firm had barely begun when a number of salesmen and others connected with it opened new offices of their own.

Indeed, even before the firm closed, its salesmen were setting up firms. Altogether, at least 16 new houses were started by alumni of the original alma mater. Of this group, nine have either gone bankrupt, been forced to sell out, become dormant, or been put out of business.

Proceedings have been brought against several of this group of nine, and investigation is in progress with respect to others.

A barometer of what the District securities problem was may be seen in the great number of enforcement actions brought by the Commission and complaints filed by the NASD against District broker-dealers.

During the 4-year period up to June 30, 1959, a total of 12 administrative proceedings were brought by the Commission against District firms.

From July 1, 1959, to May 7, 1962, a period of less than 3 years, a total of 20 such proceedings were brought, nearly twice that of the previous period. Similarly, from July 1, 1955, to June 30, 1959, only two injunctive proceedings were brought against local firms.

From July 1, 1959, to May 7, 1962, 18 such actions have been brought, an increase of 900 percent. The Commission's Washington regional office has brought more of these actions against District brokerage firms than firms in all other States for which this particular regional office is responsible (Maryland, Virginia, West Virginia, Delaware, and Pennsylvania).

Data furnished to the Commission by the NASD is likewise illuminating. The NASD has indicated that, over the past 5 years, the number of complaints filed against District broker-dealers increased 650 percent, over three times the national increase of 215 percent.

Further, in 1960, the NASD filed complaints against 8 percent of its members nationally, whereas, for the District, the figure was 25 percent.

Thus, one out of four District firms was the subject of an NASD complaint involving some infraction of its rules. In 1961, possibly because of the increase in the number of local firms that went out of business, the District's percentage dropped to 18 percent, but this was still twice the number of complaints per member as the national percentage.

The number of local broker-dealer firms that have gone out of business is an additional measure of what has been the poor health of the broker-dealer community here.

Nationally, in 1961, approximately 8 percent of the firms admitted to the NASD failed. In the District, 18 percent of NASD member firms failed.

This rate of failure has presented a grave danger to the investing public and has resulted in substantial losses by many investors. One recent District broker-dealer, which is now in bankruptcy, has debts of well over $1 million, and few assets.

Hundreds of individual public investors dealing with this firm failed to receive certificates for which they paid, or proceeds from stock which they sold. It is doubtful whether they will receive anything on their claims filed in the bankruptcy proceedings.

There is evidence to demonstrate that these failing firms were characterized by management which had little or no prior experience. Such experience as existed was too frequently with a firm that had been involved in Commission proceedings.

Nearly half of the firms which commenced business in the past 5 years and failed had no executive with any previous experience except in a firm involved in revocation proceedings or injunctive action.

The consequences attendant upon minimal standards of qualification for the securities business so graphic here are the subject of major concern in the special study now being conducted by the Commission.

The unhealthy state of the securities business here in the District is also illustrated by the types of securities broker-dealers have been selling. In many cases, for example, the insiders and underwriters have taken for themselves what might appear to be an unconscionable amount of the proceeds of a public offering of securities and have left little for the benefit of the company and its public shareholders.

Thus, in one case, a company which had an operating deficit of over $12,000 was underwritten by a local broker. The total issue was for 150,000 shares at $2 per share. The underwriting group received 40 cents per share as commission and expenses and 30,000 shares of stock at a penny and a half a share, a total compensation of approximately $120,000 or 50 percent of the net proceeds received by the issuer.

Seven months after the stock was issued, the price had risen over 500 percent to more than $11 per share. The issuer is now the subject of bankruptcy proceedings.

In another case, the public paid nearly $175,000 for what eventually was a 30-percent interest in a company which had less than $3,000 in the bank, less than $200 worth of office furniture, and a net loss for the 6 months in which it had been in business of over $6,000. The insiders received the other 70 percent of the company for less than $500. The issuer is now bankrupt.

Securities problems in the District are perhaps most acutely demonstrated by the allegations, and evidence, of widespread fraudulent conduct on the part of certain local broker-dealers. Because of the Commission's quasi-judicial functions, it is not appropriate for me to comment on any pending cases or active investigations.

But, speaking generally, the erosion of standards which has occurred to some extent on a national level appears to have been magnified in the District. Just as the broker-dealers seem to have found a center of operations in the District, so have all of the unsavory practices which the Commission is constantly trying to extinguish.

The aforementioned conditions lead to the question of whether some type of legislative action is called for.

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The District of Columbia, unlike virtually all of the States, is without legislation of its own, and must rely on the Federal securities laws for protection.

In this connection, it should be emphasized that, as a practical matter, investors in the Maryland and Virginia suburbs are affected by the situation in the District, inasmuch as the "blue sky" laws of these States do not effectively reach District brokers.

The Commission has attempted to meet the challenge of the problem without any new legislation. We have taken concentrated enforcement action in this area, which I believe has been at least temporarily productive in diminishing the unhealthy practices and creating a new environment.

Some of the specific steps that we have taken include the following: (1) The assignment of personnel to the Washington regional office from the national office and other regional offices.

(2) The institution, since January 1, 1961, of 23 administrative and injunctive proceedings against District broker-dealers, involving a total of 79 persons from the local area, and 23 parties from other

areas.

Indicative of the complexity of these administrative cases is one pending broker-dealer proceeding involving some eight firms, including four local ones, and some 20 salesmen and principals, of whom 9 are from the Washington area. Another case new pending took over 9 months to investigate.

(3) Various investigations are in the final stages. It is anticipated that a number may result in reference for criminal prosecution to the U.S. attorney, Mr. David C. Acheson, who is giving us his full cooperation.

However, despite the important steps we have taken and the apparent general improvement in the conduct of local broker-dealers, the situation still presents many difficulties-which can be expected to increase to the extent that the market for over-the counter securities moves up.

Vigorous enforcement can never be a permanent substitute for high regulatory standards. If there is a relaxation of our present efforts, and our national enforcement responsibilities might make this necessary, there could be a renaissance of past unsavory practices, hopefully now substantially curtailed.

The Federal securities acts do not presently appear to be a full answer. The legislative history and the language of the Federal statutes make clear that they are not, and were not intended as, complete instruments for local regulation.

They contemplate concurrent jurisdiction by the Securities Commission of any State or the District of Columbia. Although specifically designed to supplement, rather than supplant, local securities legislation, the Federal acts have been forced to function in the District of Columbia as a local "blue sky" law without the provisions which "blue sky" laws normally have.

Under the Federal acts, the Commission's power is largely punitive or remedial, not preventive. There are only limited controls over entrance into the securities business.

Usually, we cannot act until violations have taken place, and investors have suffered-until the fraud has been committed, or the firm's net capital depleted beyond the limit allowed by law.

Further, revocation and suspension proceedings before the Commission, and injunctive and criminal actions filed by the Commission in Federal courts, necessarily must follow prescribed procedures and meet high standards of proof which, in turn, frequently delay appropriate action and impose a heavy burden on our staff.

By contrast, local "blue sky" administrators ordinarily have far greater control over those desiring entry into the business. Character or experience requirements may be imposed as they may not under the Federal law as it presently stands.

Furthermore, the administrators may exercise summarily many enforcement powers. Frequently, registration of securities is required, with controls over unconscionable transactions.

The Commission does not believe it can achieve the full degree of securities regulation-realized in other jurisdictions with local regulation-through continuation of its present intensive enforcement program without impairing its ability to meet our national responsibilities.

Accordingly, the Commission recommends that some further regulator powers over broker-dealers in the District of Columbia be established.

Several alternatives are open:

(1) The District of Columbia is presently exploring the extent of its power under its licensing statute, section 47-2344, to license broker-dealers and establish standards with respect to character and capital. If adequate standards can be developed in this manner swiftly, we shall be hapy to work with the District authorities. However, they have indicated substantial doubts as to the extent of their authority under the existing licensing statute. Furthermore, rules are not enough, and experienced personnel would have to be available to the District for the administration of any rules.

Finally, under the District Code, the only penalty for operating without a license appears to be a fine up to $300 or imprisonment for not more than 90 days.

While conviction for such a violation, being a misdemeanor in the securities field, would probably be a ground for a broker-dealer revocation by this Commission, we believe it would be much more effective if the local authorities themselves could put an unlicensed securities firm out of business.

(2) Another possibility is to have local broker-dealers regulated by the Commission acting as a "blue sky" administrator. Expanded SEC jurisdiction could be effected by an amendment to section 15 of the Securities Exchange Act of 1934, which would provide rulemaking power in the Commission with respect to broker-dealers doing business in the District of Columbia.

This power would permit the Commission to establish standards for qualification of broker-dealers and their salesmen with respect to net capital, character and experience. It would also give us increased powers for taking immediate action to suspend operations of a firm.

(3) We believe the preferable solution is a strong "blue sky" statute for the District of Columbia to be administered under the District of Columbia Government by an administrator with an adequate enforcement staff.

Such a statute could be based upon the uniform "blue sky" law, which offers several alternatives as to statutory provisions.

The act followed a 2-year study of State legislation. Part 1 of the Uniform Act prohibits fraud in the sale or purchase of any securities. Part 2 provides for the registration of broker-dealers and their salesmen, and of investment advisers.

Included in this part are sections dealing with denials, suspensions, and revocations. If control of securities issues is desired, part 3 provides three alternative methods for registration: by notification, by coordination, or by qualifications.

It should be noted that this legislation has various provisions for payment of fees which presumably could be set at a sufficiently high amount to permit adequate agency staffing.

The Commission recommends a local "blue sky" statute with local administration for several reasons.

If the Congress desires that local government in the District should be strengthened, it would seem appropriate for the District to have its own "blue sky" laws and "blue sky" administrator. All but two States have such a law and feel it necessary to regulate the conduct of brokers and dealers doing business in their jurisdiction. To the extent that the present District problem arises from a lack of local legislation, it would seem proper for the District to have a law and build a staff in order to meet future recurrence of the present problem. Most importantly, I must emphasize that the Commission's responsibilities are national. As I have stated, we accelerated our enforcement program in the District of Columbia, and I believe that this action has produced noticeable results and created a change in the environment here. However, if we were to continue our activities on the same intensive basis, this concentration would tend to impair our national enforcement obligations.

Similarly, we prefer not to assume a particular responsibility with respect to a region where we regard our main job to be one of establishing national standards. Indeed, in many ways, this would divert us from the primary program to which we are committed-as evidenced by our market study, which was initiated by this very committee.

Many of the issues apparent in the District situation are being studied as national problems. By way of example, an important aspect of the market study is an analysis of the qualification, training, supervision, and financial responsibility of broker-dealers and their salesmen. Our studies might lead us to the conclusion that present requirements for entrance into the securities business should be strengthened. If that be so, we would then properly be meeting a problem, apparent not only in the District, but on a national basis.

At the same time, I want to emphasize our belief that any new Federal legislation will not, and should not, supersede local regulation. They should be concurrent.

Were the Commission to assume the responsibility of local regulation, we would, in effect, be administering two different types of lawsone based on the "blue sky" pattern and the other based on the national pattern.

The confusion that would be created, and the anomalous picture that would be presented, of a single agency administering two different sets of rules is evident. The same person who was unfit for the