views not only of the Securities and Exchange Commission but of most State securities administrators. I believe the public in the District is entitled to this protection which is afforded to the people in most of the States of the United States.

I appreciate the opportunity given me to speak here.

Senator HARTKE. The next witness is Mr. Gordon L. Calvert, municipal director and assistant general counsel, Investment Bankers Association of America.

Good morning, sir.

You may proceed in your own way.

STATEMENT OF GORDON L. CALVERT, MUNICIPAL DIRECTOR AND ASSISTANT GENERAL COUNSEL, INVESTMENT BANKERS ASSOCIATION OF AMERICA

Mr. CALVERT. Senator Hartke, Senator Dominick-Mr. Bernard Nees, who is chairman of the Washington Legislation Committee of the Investment Bankers Association, had hoped to be here to testify today. He attended your first hearing on this bill.

May I ask that his one-page statement be included in the record at this point?

Senator HARTKE. Without objection, it will be included as though it were read in person.

(The statement referred to follows:)

STATEMENT OF BERNARD J. NEES, CHAIRMAN OF THE WASHINGTON LEGISLATIVE COMMITTEE OF THE INVESTMENT BANKERS ASSOCIATION OF AMERICA

The Investment Bankers Association of America is a national voluntary association of investment banking firms. It has over 750 member firms with over 2,100 branch offices in all parts of the United States.

I am Bernard J. Nees, a partner of Johnston, Lemon & Co., an investment banking firm in the District of Columbia, where I have been actively engaged in the securities business for more than 35 years. I have served as president of the Washington Stock Exchange and as vice chairman of the Business Conduct Committee of District No. 10 of the National Association of Securities Dealers. Currently, I represent the securities industry on the board of directors of the Better Business Bureau of the Washington Metropolitan Area and appear before you as the chairman of the Washington Legislative Committee of the Investment Bankers Association of America, representing the 24 investment banking firms in the District of Columbia who are members of the association.

Five years ago Washington became the mecca of a large number of unscrupulous, high-pressure securities firms and salesmen whose activities cost Washington investors literally millions of dollars. H.R. 9419 represents several years of intensive effort on the part of the responsible elements of the industry to prevent a recurrence of these losses which were due primarily to the fact that the District of Columbia had no dealer licensing laws equivalent to the blue sky laws of the States. We reecived the support of the local press, the Washington Board of Trade, and the Better Business Bureau in focusing attention on the need for this legislation, and we urge its adoption.

Since it is important that there be no major gaps in the protection intended to be afforded to investors by the bill, and since based on the history of H.R. 9419 it is reasonable to assume that there may be proposed an amendment which would exempt variable annuities from the act, we want particularly to urge that such an amendment not be adopted if proposed and that the bill be approved exactly as it passed the House.

Gordon L. Calvert, assistant general counsel of the IBA, who specializes in work on State securities acts and was a member of the Advisory Committee for the Study of State Securities Regulation, which culminated in the preparation of the new Uniform State Securities Act, will summarize the statement submitted by the District of Columbia members of the IBA.

Mr. CALVERT. I am assistant general counsel of the Investment Bankers Association.

For the purposes of expediting the hearing, may I request that my full statement be included in the record, and I will simply summarize

it.

Senator HARTKE. Your request will be granted.

Mr. CALVERT. The Investment Bankers Association is a trade association of investment banking firms with about 750 member firms in all parts of the country and they have about 2,100 branch offices.

In general, the IBA position on this bill is that we endorse the bill exactly as it passed the House, so that our position is identical with the position taken by SEC Chairman William Cary, U.S. Attorney David Acheson, and in the letters that I believe have been furnished to the committee by the National Association of Security Dealers, and by the president of the North American Securities Administrators. We devote most of our statement to the variable annuity point. We endorse the bill exactly as it passed the House with the provision which would subject variable annuities to the proposed act.

After discussing what a variable annuity is, we refer to the Supreme Court decision in which they concluded that variable annuities are securities under the Federal Securities Act. We then, in subdivision (c), explain briefly how this act would apply to variable annuities.

In subdivision (d) we state that the IBA has been on record since 1955 taking the position that variable annuities should be subject to the same regulation as other securities.

In (e) we refer to the position of the North American Securities Administrators.

In (f) we discuss dual licensing, and I would like to come back to that point.

In section (g) we refer to the conclusion of the House committee that persons selling variable annuities should be regulated under this Act.

Now, if I may go back and hit the high spots briefly.

On the question of dual licensing, I would like first to quote from the decision of the U.S. Court of Appeals for the Third Circuit, where they said:

One of the principal arguments of Prudential in favor of exclusion is that the existence of adequate State regulation was the basis for the exemption of insurance securities. But this line of argument was conclusively rejected by the Supreme Court in VALIC for the reason that variable annuities are securities, and involve considerations of investment not present in the conventional contract of insurance.

I would concur with some of the answers which Mr. Augenblick gave, in that the problem is basically whether any additional pro tection to investors in the District would be provided by requiring them to register under this act as well as under the Insurance Act.

I agree with Mr. Augenblick that additional protection would be provided under the Securities Act that is not provided under the Insurance Act. He pointed out that the proposed securities law before you specifically states that fraud under it shall not be limited to the common law definition of fraud. It goes on to state what shall be considered fraud, and includes not only misrepresentations, but failure to disclose information necessary in order to make other representations not misleading. This is not in the insurance code in the District

of Columbia, so the proposed Securities Act would provide a higher standard for those engaging in the securities business.

Now, Senator Dominick has appropriately asked if there have been complaints about the present administration under the Insurance Act. I think that the answer without exception has been that they don't know of any complaints. This is understandably so, because there have been very few variable annuities sold. It has been so easy to sell anything that looked like a security in the District up to this point, because there has been no local securities law. If this act is adopted and you except variable annuities, then is when the complaints will come because variable annuities would be the easy way to sell something that is basically a security without regulation under this act.

If you adopt strict regulation of the sale of securities here and leave an out for variable annuities, then will be when you may get the complaints.

It is quite possible, in answer to your question, Senator Hartke, that a man might well meet the standards for insurance and certainly not be qualified to sell securities. There are two different fields. As you point out, this has aspects of both securities and insurance. The courts on several occasions have concluded that variable annuities basically are securities.

There is not any fixed dollar amount guaranteed. The value may go up or down.

Now, turning to the question that was just asked, about how other States treat this, I had occasion to check the current State securities laws on this.

Senator DOMINICK. I would disagree with some of the information that was furnished to you. For example, your list of States which specifically exempt variable annuities includes Alaska. That is not so. Section 301 (k) of the present Alaska Securities Act specifically includes in the definition of "security" this provision:

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 for some other specified period.

So Alaska has used the provision that is in the bill as it passed the House and that we would like to see kept there. The Alaska act in section 302 (a) (7) includes insurance or annuity contracts among securities which are exempt from securities registration, but it does not exempt from registration the persons selling them.

Turing to a general breakdown of what the other States do, let me point out that in most of the States there are three types of regulation, two of which are in the bill before you, antifraud provisions, and the second, requirements for the licensing of dealers and salesmen. That is as far as this act goes. Most of the other States, including the acts in both of your States, Colorado and Indiana, include provisions for the registration of securities.

This becomes important because in the State securities acts where all three types of regulation are required they exempt certain classes of securities, in many of them including securities issued by an insurance company. But here is the key point: Those securities are exempt only from the third type of regulation; that is, from registration as securities. But persons selling exempt securities in practically all States are not exempt.

The fact that a security issued by an insurance company is exempt from securities registration does not thereby exempt the sellers of such securities from licensing.

Using that as a preface, a rough breakdown would show this: Putting aside Delaware, which has no securities act, there are 13 States: which at present, by specific statutory provisions, exclude variableannuites from the definition of securities. These would be Alabama, Arkansas, Colorado, Indiana, Maryland, Montana, Nevada, New Jersey, Oklahoma, South Carolina, Tennessee, Utah, and Washington. Three additional States reach the same result by administrative interpretation. The other States could be grouped into three groups.

First there are those States which adopt substantially the definition of "security"; that is, in the House-passed version of H.R. 9419, which includes variable annuities. This would include Alaska, Georgia, Hawaii, Kansas, and Kentucky.

The second group, including 13 States, would be those States which have the usual definition of securities similar to that in the Federal act, which presumably would be interpreted to include a variable annuity as the Supreme Court did in interpreting the definition under the Federal act, and in which States there is no exemption for securities issued by an insurance company.

The third group, including 15 States, would be those States which have a customary definition of securities but have an exemption for securities issued by an insurance company. But, bear in mind that this is the group which I referred to where an exemption for securities issued by an insurance company would exempt those securities only from securities regulation and would not exempt the person selling them from licensing as agents under the act.

Thank you very much.

(The statement referred to follows:)

STATEMENT SUBMITTED BY GORDON L. CALVERT, ASSISTANT GENERAL COUNSEL, INVESTMENT BANKERS ASSOCIATION OF AMERICA FOR THE DISTRICT OF COLUMBIA MEMBERS OF THE IBA

INTRODUCTORY COMMENTS

The Investment Bankers Association of America is a national association of investment banking firms. It has over 750 member firms with over 2,100 branch offices in all parts of the United States. The IBA has worked with the administrators of State securities acts and members of State legislatures in many States to obtain the adoption of complete new securities acts or amendments to existing acts to provide effective protection for investors with a minimum of restraint on the conduct of legitimate business by reputable securities dealers.

IBA SUPPORTS H.R. 9419 AS IT PASSED THE HOUSE

The original bill in the House to provide a securities act for the District of Columbia was H.R. 4200, which was substantially identical with S. 1001. After hearings before a subcommittee of the House Committee on the District of Columbia, several desirable changes were made in the bill and a clean bill, H.R. 9419, was reported and passed the House.

H.R. 9419 includes antifraud provisions, requirements for the licensing (and the suspension or revocation of licenses) of persons engaged in selling securities in the District of Columbia, standards of conduct, and civil liability and penal provisions applicable to persons who violate the act in securities transactions. We believe that this bill would do much to protect investors in the District of Columbia and we urge that H.R. 9419 be adopted promptly as it passed the House and without further amendments.

Since it is important that there be no major gaps in the protection intende be afforded to investors by the bill, and since there may be proposed ar

ment which would except variable annuities from the act, we want particularly to urge that such an amendment not be adopted and that the bill be approved exactly as it passed the House.

APPLICATION OF H.R. 9419 TO PERSONS SELLING VARIABLE ANNUITIES

(a) What a variable annuity is

A variable anuity is an investment contract whereby the purchaser acquires units which represent an interest in a diversified fund of common stocks. Fundamentally, his investment is very similar to an investment in mutual fund shares. He is not guaranteed a significant fixed dollar payment and he may obtain a profit or suffer a loss dependent upon whether the aggregate value and income of the common stocks in the underlying diversified fund increases or decreases. It is, therefore, in the public interest that the investor in variable annuities receive the same protections afforded purchasers of mutual fund shares by H.R. 9419.

(b) U.S. Supreme Court held that variable annuities are “securities”

The Supreme Court of the United States on March 23, 1959, in S.E.C. v. Variable Annuity Life Insurance Co. of America and the Equity Annuity Life Insurance Co. held that variable annuity contracts are securities subject to registration under the Federal Securities Act of 1933 and that the issuers of the contracts before the Court (Variable Annuity Life Insurance Co. of America and Equity Annuity Life Insurance Co.) must comply with the requirements of the Federal Investment Company Act of 1940.

The Supreme Court, in holding that variable annuities are not insurance within the exemptions of the Securities Act of 1933 or the Investment Company Act of 1940 or within the meaning of the McCarran-Ferguson Act, stated that:

"For in common understanding ‘insurance' involves a guarantee that at least some fraction of the benefits will be payable in fixed amounts (citing authorities). The companies that issue these annuities take the risk of failure. But they guarantee nothing to the annuitant except an interest in a portfolio of common stocks or other equities-an interest that has a ceiling but no floor. There is no true underwriting of risks, the one earmark of insurance as it has commonly been conceived in popular understanding and usage."

(c) Application of H.R. 9419 to persons selling variable annuities

Subdivision 2(1) of H.R. 9419 defines "security" to mean: "any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing 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, any contract issued by an insurance company pursuant to section 41 of chapter III of the Life Insurance Act (D.C. Code, sec. 35-541); 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."

Variable annuities are specifically included in this definition of "security" by including "any contract issued by an insurance company pursuant to section 41 of chapter III of the Life Insurance Act (D.C. Code, sec. 35-541)"; and variable annuities would also be included by general language of the definition as investment contracts.

The last sentence of the definition excludes annuity contracts if the insurance company promises to pay a fixed sum of money, but variable annuities are not excepted by this provision because the issuing company does not promise to pay a significant fixed sum of money.

Since a variable annuity is basically an interest in a diversified fund of common stocks, which may increase or decrease in value, it is important that this provision of the bill be retained exactly as it passed the House so that a variable annuity is included as a "security" and the purchasers of variable annuities are afforded the protection which will be afforded to other investors under the act.