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

reveals no reason why the exemptions in section 2 for transactions with employees of the issuing corporation should not extend to employees of its subsidiaries.

The law seems clearly to be aimed at protecting the public from inexperienced, financially irresponsible, and unqualified persons engaging in the securities business. If this protection is deemed to be unnecessary in the case of purchases of stock by direct employees under employee stock purchase plans, it should likewise be unnecessary in the case of purchases by employees of subsidiaries under the same plan. Accordingly, we recommend that sections 2(a) (3) and 2(f) (8) be revised as follows:

On page 2, line 7, after the word "issuer", insert the words "or any of its subsidiaries."

On page 6, line 23, after the word "issuer", insert the words "or any of its subsidiaries."

Under the stock purchase plan of the American Telephone & Telegraph Co., all Bell System employees are eligible to purchase A.T. & T. stock through payroll deductions. Each of the 7,100 regular employees of the Chesapeake & Potomac Telephone Co. is eligible to participate, and, under the plan, all are treated exactly the same as direct employees of the parent company. The stock is offered on a nondiscriminatory basis, and no commissions are charged. Yet, by referring only to "employees *** of the issuer," the language of the proposed act might give rise to a question as to whether the employees of my company who help to administer the plan would be required to register as "agents." It hardly seems that such a result is intended.

There is no active solicitation by any officer or employee of A.T. & T. or any of its subsidiaries for the purchase of stock, and, therefore, it is my company's view that no registration would be required under the Uniform Securities Act even apart from the specific exceptions provided in section 2. In fact, the Uniform Act has been adopted in a number of States without the clarification we are suggesting.

The broadening of the exemption to include employees of subsidiaries would become of much greater importance in the event that the materials and information which we disseminate were even construed to be active solicitation. Thus, our suggested amendment is somewhat technical.

However, apart from technical accuracy for its own sake, there is one important consideration which prompts us to urge this change. State governments are placing more and more emphasis on the need for well written, workable "blue sky" laws. It can surely be anticipated that many of the States which have not adopted the Uniform Act will be considering some revision or improvement. The version of the Uniform Securities Act which has passed the scrutiny of the U.S. Congress will undoubtedly be used as a model wherever such changes are contemplated. For this reason this technical change is particularly important.

Thank you again for the opportunity to appear before you.

Senator HARTKE. Thank you for your very logical suggestion. I know of no reason why such a change cannot be made, but we will review it at the time we meet in executive session. Thank you, sir.

Mr. ZAHN. Thank you.

Senator HARTKE. We will hear next, Mr. Larry D. Gilbertson, for the Variable Annuity Life Insurance Co. of America.

Good morning, sir.

STATEMENT OF LARRY D. GILBERTSON, VICE PRESIDENT AND GENERAL COUNSEL OF VARIABLE ANNUITY LIFE INSURANCE CO. OF AMERICA

Mr. GILBERTSON. Good morning, sir. My name is Larry D. Gilbertson and I am vice president and general counsel of the Variable Annuity Life Insurance Co. I have also been authorized to speak on behalf of the Equity Annuity Life Insurance Co., the other variable annuity company organized in the District of Columbia. Our company was organized in 1955 and has been licensed as a life insurance company in the District of Columbia since that time. Our company is authorized by its charter to write not only variable annuity contracts but a full line of life insurance contracts as well. We are presently licensed in 30 States as a life insurance company. And I might say at that point, because the hearings have extended this morning we have increased our number from, when we originally prepared this statement,

28 to 30.

I would like to express our views on H.R. 9419 and S. 1001, a bill to provide for the licensing and regulation of security dealers in the District of Columbia.

I think it is important to consider what fundamentally is the issue involved in H.R. 9419. Before answering this question, I think it is more important to determine what the real issue was in the introduction of H.R. 4200 and S. 1001. Without repeating the information given to you by other representatives before the committee, I think it is simply this H.R. 4200 was introduced to provide regulation where none existed. These bills were introduced partially as a result of the series of articles entitled "Investors Beware" by Miriam Ottenberg, which were published in the Washington Star.

The District of Columbia at the present time has no regulation over the sale of securities. Nowhere in the Ottenberg report was any mention made about abuses in the sale of variable annuities. No one has to date testified as to any such abuses. On inquiry from the committee to Mr. Acheson and Mr. Cary, as I recall, neither had any information as to any abuse whatever insofar as the sale of variable annuity contracts in the District of Columbia was concerned. I think it may be safely said that the purpose of the legislation as introduced was to remedy a need in the District of Columbia, that is to provide regulation where none existed.

This legislation is patterned after the Uniform Securities Act and it had been made clear by the Commissioners on Uniform Securities Act to quote their editorial comment:

If it is desired to exclude variable annuities along with orthodox annuities on the ground that the former are sufficiently regulated by the insurance authorities in the particular State, the bracketed language should be eliminated.

We submit that in view of this the proponents of the amendment to require variable annuities to be included in the definition of securities in H.R. 9419 are challenging the adequacy of the regulation by the Insurance Department in the District of Columbia of the sale of variable annuities. I feel confident that the committee recognizes the thoroughness of the regulation which exists in the District-few States have as adequate and thorough regulation. One witness questioned

32-278-64 -8

the ability of the Insurance Department to adequately regulate it when he said, and I quote his statement:

If we pass a bill with a legislative gap as to variables, I think we would find exactly the same think happening in the next few years as has happened with stockbrokers in the last 10. This vacuum would attract a lot of bums,

and the public will be hurt.

We do not believe this gives recognition to the type of regulation which we have here in the District.

It may be interesting for the committee to observe that since the hearing held before the House District Committee on May 2, 1963, on H.R. 4200, nothing new has happened nor has any new evidence been brought forward changing the picture, which has been brought to bear by the competitive industry association, namely, the Investment Bankers Association, as to regulation of variable annuities other than the pressures which have been brought to bear by a competitive industry association; namely, the Investment Bankers Association, whose members sell mutual funds. It is also interesting to observe that not one witness objected to H.R. 4200 as submitted by the District Commissioners at that hearing with the exception of the last witness to testify; namely, the Investment Bankers Association. This prompts us to review how the language of H.R. 4200 and S. 1001 was developed. This was not hastily drawn legislation. Mr. Acheson in his statement before the House committee pointed out in detail the work and study which had been given to the drafting of H.R. 4200 and S. 1001 in their original form.

To quote his statement:

This bill is a joint product of representatives of Government agencies and private bodies that have been most closely concerned with securities regulation. Prior to drafting, and during the preparation of three drafts, a thorough discussion of the basic plan and of specific provisions was had among members of the drafting committee. From time to time, naturally, there were minor differences among individual members of the drafting committee over particular provisions of the bill, but throughout its deliberations the drafting committee enjoyed a remarkable degree of cohesiveness of view.

The composition of the drafting committee was as follows (by alphabetical order):

David C. Acheson, U.S. attorney for the District of Columbia; Irving Bryan, Chief, Legislation and Opinions Division, Office of the Corporation Counsel for the District of Columbia;

Wallace Kirkpatrick, professor of law, George Washington University; formerly First Assistant to the Assistant Attorney General in charge of the Antitrust Division, Department of Justice;

Philip A. Loomis, Director, Division of Trading and Exchanges, Securities and Exchange Commission;

Ganson Purcell, member of law firm Purcell & Nelson; formerly Chairman, Securities and Exchange Commission; chairman, Committee on Securities of Bar Association of the District of Columbia;

E. Ladd Thurston, member of the law firm Purcell & Nelson; secretary, Committee on Securities of Bar Association of the District of Columbia;

Marc A. White, counsel, National Association of Securities Dealers. In addition, a number of lawyers, securities brokers, Government officials, and members of financial groups made themselves available