tion under those acts may be withdrawn only with the consent of the Commission if the request to withdraw such application is received by the Commission after it has commenced a proceeding to deny registration. The only opposition to these proposals has come from the American Bar Association. In addition, the American Bar Association has volunteered an amendment to section 6(c) of the Securities Act of 1933, to proscribe the Commission's authority to deny applications for withdrawal of registration statements under that statute.1

I. Proposal to amend section 6 (c) of the Securities Act of 1933

The amendment proposed by the American Bar Association would, if adopted, interfere unduly with stop-order procedures now availabale to the Commission and in effect would, at least in part, negate or repeal judicial precedent in this area. Although premising its proposal on Jones v. S.E.C., 298 U.S. 1, the bar association proposal, as more fully discussed below, even goes beyond the restrictive holding of that case.

First, it should be emphasized that the Commission in acting upon applications for withdrawal is governed exclusively by "the public interest and protection of investors,' ,"2 and the Commission has permitted withdrawal of statements after the institution of stop-order proceedings where consistent with the public interest. Essentially, the bar association quarrels with the Commission's view, which has been judicially sustained, of what action is necessary in the public interest and urges that a more restrictive approach be embodied in the statute. Next, it should be observed that in considering the Jones case, the courts have consistently found a reason not to follow it. Indeed, the "Supreme Court itself has cast great doubts on the continued vitality of the case.' In United States v. Morton Salt Co., 338 U.S. 632, 642 (1950) the Sureme Court observed: "More recent views have been more tolerant of the [administrative process] than those which underlay many older decisions. Compare Jones v. S.E.C., 298 U.S. 1 with U.S. v. Morgan, 307 U.S. 183, 191." See also Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 203-204; Columbia General Inv. Corp., v. S.E.C., 265 F. 2d 559, 562 (C.A. 5, 1959); Lansky v. Savoretti, 220 F. 2d 906, 909 (C.A. 5, 1955); Bowles v. Misle, 64 F. Supp. 835, 841 (D. Nebr., 1946).

994

The proposal of the bar association to grant an absolute right to withdraw a registration statement before it has become effective so long as the withdrawal application precedes the institution of a stop-order proceeding under section 8 of the act and no securities have been sold under the registration statement, would produce a more restrictive result than contemplated by the Jones case and would specifically overrule the recent decision of the Court of Appeals for the Fifth Circuit in Columbia General Inv. Corp. v. S.E.C., supra.

1 The two resolutions adopted by the American Bar Association (Tr., p. 207 ff.) insofar as they deal with the Securities Act of 1933, relate not to the bills now before this subcommittee but to bills introduced in the 85th Cong. These bills (S. 2544 and H.R. 9326) embodied an amendment to sec. 6(c) of the Securities Act of 1933 to provide to a registrant a right to withdraw a registration statement in all cases except where a proceeding or examination initiated by the Commission under sec. 8 of the act was then pending, or was commenced within 15 days after the application for withdrawal was filed, or where the registration statement was already subject to an order of the Commission under sec. 8 of the act. The purpose of that limitation was to prevent unscrupulous persons from filing a false or misleading statement with the Commission, and then withdrawing it when the Commission instituted or deemed it necessary to institute proceedings under sec. 8 to disclose the false and misleading character of the statement and to ascertain the true facts. It was also proposed to prohibit withdrawal of an effective registration statement where part or all of the securities had been sold, in order to safeguard the rights of investors who had purchased such securities. Since the introduction of the bills in the 85th Cong., there has been additional judicial consideration of the subject of withdrawal and in the Commission's view, the judicially approved standards for denial of application for withdrawal are satisfactory so that it is not necessary to seek statutory amendment in this

area.

2 Rule 477, which the Commission has adopted pursuant to the Securities Act, provides in pertinent part: "Any registration statement or any amendment or exhibit thereto may be withdrawn upon application if the Commission, finding such withdrawal consistent with the public interest and the protection of investors, consents thereto."

3 Columbia General Inv. Corp. v. S.E.C., 265 F. 2d 559 (C.A. 5, 1959); Resources Corporation International v. Securities and Exchange Commission, 103 F. 2d 929 (C.A.D.C. 1939); Oklahoma-Texas Trust v. Securities and Exchange Commission, 100 F. 2d 888 (C.A. 10, 1939); Securities and Exchange Commission v. Hoover, 25 F. Supp. 484 (N.D. Ill.,1938). Columbia General Inv. Corp. v. S.E.C., supra, 265 F. 2d at 562.

The Jones case implicity recognized that where there are investors, existing or potential, to be affected there is no absolute right to withdraw. Yet, under the bar association's proposal the impact on investors would be ignored if the application to withdraw were filed before a stop-order proceeding were instituted. This sequence of events was precisely before the court in the Columbia General case, and it was unsuccessfully argued, among other things, that since the registrant had acted before the Commission had, the Commission was without authority to conduct the stop-order proceeding. The bar association proposal would incorporate into the statute the position rejected by the Court of Appeals for the Fifth Circuit, and would make the conduct of a stop-order proceeding dependent upon a "race" between the registrant and the Commission, with the interest of investors ignored. The purpose of a stop-order is not only to suspend a license but it also "operates as a warning to the investing public that the Commission has found that the statement is untrue or misleading and therefore, unreliable." Oklahoma-Texas Trust v. S.E.C., 100 F. 2d 589, 591 (C.A. 10, 1959).

5

The public interest considerations which have governed the Commission's action, and the need for rejecting the restraints which the bar association would impose upon the Commission, are fully stated by the court in the Columbia General decision, a copy of which has been offered for the record. It must be emphasized that the very purpose of the registration process is to provide wide dissemination of the information contained in the registration statement. Section 8(a) of the Securities Act provides a waiting period during which dissemination of the information is to be accomplished, and section 6(d) of the act requires that the information be made available to the public. Indeed, the registration statement becomes a public document immediately upon filing and remains public. Even after the statement has been withdrawn it remains in the public files of the Commission, except that the fact of its withdrawal is noted.

In a variety of ways, the information in the registration statement may be disseminated to the public. The statement is available for public inspection, copies may be secured from the Commission, news stories frequently summarize the contents of registration statements as they are filed and financial reporting services publish the information disclosed in the registration statement. The registrant may distribute the prospectus which is a part of the statement and may even offer the security or solicit offers to buy.

To recapitulate, the bar association proposal would permit withdrawal as of right, at any time prior to the institution of a proceeding by the Commission, whether or not there was a public and investor interest in securities of the issuer and whether or not the information contained in the registration statement had in fact been broadly disseminated. The Commission cannot accede to such a proposal because it is contrary to a cardinal objective of the Securities Act to prevent public dissemination of misleading and fraudulent information which may become the basis for securities transactions by the investing public and would tend to make more difficult rather than to facilitate the Commission's efforts to combat the filing of false and misleading registration statements. As the court pointed out in the Columbia General case, 265 F. 2d at 564-565: “* * * On the larger scene, the public interest is served because it (i.e., the Commission's Findings and Opinion in the stop-order proceeding) stands as a deterrent to the filing of registrations by an issuer indifferent to the accuracy or honesty of the statement because he knows that if caught, or nearly caught, or threatened with being caught, or even investigated, he can withdraw the offensive statement at will. As a stop order prevents this, it will indeed promote truth in securities, and that is what Congress intended."

The bar association's draft amendment and the accompanying explanatory statement (p. 7) state specifically that absent a sale under the registration statement itself, the registrant would have an unqualified right to withdraw if no proceeding has been instituted. This is to be contrasted with the statement during the Senate hearings of Mr. Nelson, who testified on behalf of the bar association, that there would be a public interest in denying a withdrawal application and conducting a stop-order proceeding if the registrant had outstanding securities of the same class as covered by the registration statement (Senate hearings, Tr. 224). Even this view takes a narrower approach of the public interest than has been recognized by the courts. See Fischman v. Raytheon Mfg. Co., 188 F. 2d 783 (C.A. 2, 1951). It is also to be noted that Mr. Nelson "appreciate[d] [that] there is room for a difference of view as to whether or not offering activity would constitute prejudice" (Tr. p. 45). But under the association's proposal where the stop-order proceeding had not been instituted even though the securities had been offered, the registrant would have an absolute right to withdraw.

The bar association proposal further provides that, after the initiation of a proceeding by the Commission for the purpose of achieving correction of the defective registration statement, the registrant would have the right to withdraw the registration statement unless the Commission determined that such withdrawal would be contrary to the public interest and the protection of the investors and issued an order prohibiting withdrawal, containing or accompanied by findings in support of such determination, within 15 days after the application for withdrawal is filed. The order denying withdrawal would be deemed a final order and appealable (statement, pp. 6, 8).

Apart from our disagreement with the merits of the bar association proposal, the proposal would present practical difficulties. Insofar as it is intended to require that the Commission order and determination be based upon a record, it is difficult to see how the Commission could effectively, and within 15 days after the application for withdrawal is filed, conduct a hearing surrounded by the safeguards of administrative due process. Furthermore, should action upon applications for withdrawal require all the procedures necessary to hearings upon a record, briefs and argument before a hearing officer and the Commission, and before courts of appeal, this could have the unfortunate effect of delaying the Commission in carrying out its responsibility to reveal and seek prompt correction of misleading registration statements.

The proposal that an order denying withdrawal be immediately appealable would overrule judicial precedent and the approach that the judiciary has taken with respect to review of interlocutory agency orders. In the classic case of Myers v. Bethlehem Corp. (303 U.S. 41, 50), the Supreme Court declared: "*** no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted." This principle was characterized by the Court as "a long settled rule of judicial administration." Consistent with this long settled rule the courts have held that an order denying withdrawal is an interlocutory order not subject to judicial review. Jones v. S.E.C. (79 F. 2d 617, 619 (C.A. 2, 1935), cert. denied 297 U.S. 705); Resources Corporation International v. S.E.C. (97 F. 2d 788, 789-790 (C.A. 7, 1938)).

II. Proposal with respect to withdrawal of application for registration as

broker dealer ®

The statute does not now provide the conditions under which an application for registration as a broker-dealer may be withdrawn. Section 13 of H.R. 2480 would codify the existing administrative practice by providing that an application for registration may be withdrawn only with the consent of the Commission if the request for withdrawal is received after the Commission has instituted a proceeding to deny registration.

As a substitute for the Commission's recommendations, the bar association has submitted a proposal which would grant the applicant an absolute right to withdraw unless the Commission determined that such withdrawal would be contrary to the public interest and the protection of investors and issued an order denying withdrawal, containing or accompanied by findings in support of such determination. The substance of this concept is followed in the present practice of the Commission, which is to grant requests to withdraw applications unless it believes that under the facts of the particular case such action would be contrary to the public interest. We have pointed out above certain of the difficulties which are created by the manner in which the proposal is framed. The proposal of the bar association, and particularly the testimony of its representative during the Senate hearings seems to be based on the idea that there is rarely, if ever, any public interest in the activities of an applicant for registration prior to the time when he becomes registered, and that consequently going forward with the proceeding to deny registration where the applicant has requested withdrawal would in almost every case be merely a waste of time and effort and a harassment of the applicant. The Commission agrees that in some cases this may be so and, as pointed out hereafter, it has granted a number of requests for withdrawal filed under such circumstances.

There is no need to discuss the proposal to amend the Investment Advisers Act in this area, since the reasons for this proposal are substantially identical to those under the Securities Exchange Act. 7 Senate hearings, tr., pp. 220, 224-225.

To assume, however, that this would be desirable in every case misconceives both the practical requirements of the public interest and the nature of the scheme of broker-dealer regulation and registration embodied in the Securities Exchange Act. Section 15 (b) of the act contains a number of grounds upon which registration may be denied, of which perhaps the most significant is a determination that the registrant or applicant, or any partner, officer, director, branch manager, or any other person, controlling or controlled by the applicant, has willfully violated the Securities Act or the Securities Exchange Act.

The purpose of this statutory provision is to provide for exclusion from the securities business of those persons who by their violations of law have demonstrated their unfitness to engage in that business. The statute recognizes

that no scheme of broker-dealer registration can be effective unless the sanetions and disqualifications reach not only business entities such as partenerships and corporations, which can be formed or dissolved at will, but reach also the individuals who own and operate such entities. In many cases there will be a substantial public interest in proceeding with the determination of these questions once they are raised. The considerations referred to above in connection with the proposal for amendment of the Securities Act of 1933 are applicable here. Public investors may well be concerned with the prior unlawful activities of the applicant, and may have the same interest in having the facts with regard to such activities brought to light as they would have in having the false and misleading character of a registration statement brought to light. In addition there is a public interest in not frustrating the purpose and object of the statute. If the applicant is allowed to withdraw with the intention of applying again at a time more convenient to him, it may be that it will be impossible to develop the case at this later date and thus he will gain entrance to the securities business although he is in fact disqualified under the congressional standards. The representative of the bar association appears to regard this consideration as unimportant. We do not believe it unimportant, since we do not regard compliance with the mandate of the statute as unimportant.

These considerations are emphasized by the requirements of section 15A (b) (4) of the Securities Exchange Act of 1934. That subsection deals with the eligibility of individuals to be members or employees of members of a registered national securities association-in practice the National Association of Securities Dealers, Inc.-which includes among its membership the overwhelming majority of over-the-counter brokers and dealers. A person is ineligible if, by his conduct, he was a cause of an order of the Commission denying registration as a broker-dealer. If a denial proceeding is commenced, based upon the contention that someone connected with the applicant has willfully violated the Federal securities laws, there will also be presented the issue of whether that person is to be found to be a cause of any order of denial which may be entered. That issue can be adjudicated only in the denial proceeding.

The short answer to the bar association's assertions that the Commission is seeking "absolute authority" under its proposal is to consider the manner in which the Commission has handled applications for withdrawal under its present administrative procedure, which the bill would codify.

During the fiscal years 1957, 1958, and 1959, 2,320 applications for registration were filed. Requests for withdrawal prior to the institution of any proceeding numbered 51, and the requests were granted without objection. In 27 cases denial proceedings were commenced during the 3-year period, and 11 requests for withdrawal were filed after the institution of the proceedings. Eight were denied and three were granted. This was not an exercise of absolute authority to deny. The Commission's conclusions were premised on the appropriate action necessary in the public interest.

The inapplicability of the Jones case to the type of situation here involved and the importance of making the findings in the denial proceedings were cogently stated in Neustein v. Mitchell (52 F. Supp. 531, 532 (D.C., S.D.N.Y., 1943)), where an analogous situation was considered. In that case an administrative action was brought to remove an employee for alleged violations of the Hatch Act, and the Court held that the resignation of the employee after institution of the proceeding, but before the hearing, did not deprive the Civil Service Commission of jurisdiction to adjudicate the allegations. The Court stated, inter alia:

*** It is clear, also, that the Commission's function did not end with a determination that the petitioner had violated the statute, for under section 12(b) a removed employee could not be reemployed within 18 months of the

Commission's determination. The proceeding before the Commission was in no sense a mere adjudication of private rights; it had a broader purpose in the enforcement of the Hatch Act in the public interest. Jones v. Securities and Exchange Commission (928 U.S. 1, 56 S. Ct. 654, 80 L. Ed. 1015), is plainly distinguishable."

Mr. GADSBY. The lone dissenter to our proposals for amendment of the Trust Indenture Act of 1939 is also the American Bar Association. It objects to the proposed amendment of section 305 (b) of the Trust Indenture Act as embodied in section 3 of H.R. 5002. As more fully pointed out in the memorandum which I now offer for the record, this amendment is merely intended to conform the administrative procedures under the Trust Indenture Act to those relating to stop orders under section 8 (d) of the Securities Act.

May that be included in the record at this point, Mr. Chairman. Mr. MACK. Without objection, it will be included at this point in the record.

(The information referred to follows:)

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION ON AMENDMENT PROPOSED IN SECTION 3 OF H.R. 5002

The American Bar Association objects to the proposed amendment to section 305(b) of the Trust Indenture Act of 1939, contained in section 3 of H.R. 5002. It seems to have lost sight of the fact that this amendment in general would. merely conform the operative administrative procedures under the Trust Indenture Act to those contained in the Securities Act of 1933.

1

Section 305 (b) of the act as presently in effect permits the Commission to test the conformance of the indenture with the requirements of the act and the eligibility and qualification of the trustee under the standards of the act in a proceeding equivalent to section 8(b) of the Securities Act of 1933. Because of the time limits imposed within which an action must be commenced under section 8(b) and in view of the opinion of the Supreme Court in Jones v. S.E.C., 298 U.S. 1 (1936), which recognizes the right of the Commission to institute a proceeding before the effective date of a registration statement under section 8(d) of the Securities Act, section 8(b) has not been utilized for many years as an administrative remedy under the Securities Act, the Commission relying upon its jurisdiction under section 8(d) to institute stop-order proceedings.

The bar association in essence would restrict the Commission to the unworkable section 8(b) procedures. The Trust Indenture Act does not now contain provisions comparable to section 8(d) of the Securities Act to test the adequacy of the indenture or the eligibility and qualification of the trustee. This therefore leaves the Trust Indenture Act without an effective administrative remedy after the first 10 days have expired from the date of filing with respect to the major areas in which the Commission must function under that act. In substance, once this first 10 days has elapsed (or 10 days after any amendment which may be filed) the Commission may in effect do no more than suggest certain changes with respect to the indenture or the qualification of the trustee. The proposed amendment would authorize the Commission to institute the administrative proceeding any time before the effective date of the application for qualification of the indenture. It should be noted that a clarifying modification was suggested by the Commission at the hearing on June 3, 1959. The amendment in the form now proposed by the Commission conforms the proposal generally in section 8(d) of the Securities Act with the exception that under the Securities Act a stop-order proceeding may be instituted both before or after the effective date of the registration statement. In this way the treatment under the Trust Indenture Act will be substantially equivalent to that provided under the Securities Act.

The changes embodied in the amendment are completely reasonable and necessary if the Commission is to have an effectual administrative remedy in this area.

1 Sec. 8(b) requires the issuance of the notice of hearing within 10 days after the filing of the registration statement and that the hearing be set for a time within 10 days after notice.