The Commissioners of the District of Columbia strongly believe that the attached draft bill establishing a Securities Act for the District of Columbia will go far toward correcting certain unhealthy conditions which have grown up in the District of Columbia with respect to the business of dealing in securities. Acocrdingly, the Commissioners urge the Congress to enact the attached proposed legislation at the earliest possible moment in order to afford adequate protection to the public against unqualified or unscrupulous persons who may engage in the business of dealing in securities in the District of Columbia. The Commissioners have been advised by the Bureau of the Budget that, from the standpoint of the administration's program, there is no objection to the submission of this legislation to the Congress. Very sincerely yours, F. J. CLARKE, Acting President, Board of Commissioners, District of Columbia. Hon. ALAN BIBLE, DEPARTMENT OF JUSTICE, Washington, D.C., April 16, 1963. Washington, D.C. DEAR SENATOR: This is in response to your request for the views of the Department of Justice with respect to S. 1001, a bill to provide for the regulation of the business of selling securities in the District of Columbia and for the licensing of persons engaged therein, and for other purposes. The District of Columbia presently has no laws regulating the business of selling securities or the licensing of persons engaged in the sale of securities. The purpose of the proposed District of Columbia Securities Act is to control the activities of local broker-dealers by the establishment, under the jurisdiction of the Public Service Commission of the District of Columbia (the bill provides for this change of name of the Public Utilities Commission), of procedures to license broker-dealers, to require the filing of periodic reports, and to make examinations of records and accounts. The proposal also provides for prosecutions by the U.S. attorney for fraud in the sale or purchase of securities, and civil liabilities for fraudulent sales. Judicial review of the administrative proceedings of the Commission will be had in the Court of General Sessions of the District of Columbia. A serious problem exists in the District of Columbia with respect to the conduct, business methods, ethics, and qualifications of broker-dealers engaged in the securities business. Forty-eight of the fifty States have "blue sky" laws regulating local securities firms. The District does not now have such a law governing securities businesses, and has had to rely on applicable provisions of the Federal securities laws for protection, but these statutes are not, and were not intended to be, complete instruments for local regulation but as supplements thereto. The Federal statutes are largely punitive or remedial, not preventive, and provide only limited control over entrance into the securities business. The proposed act was drafted by the U.S. attorney, District of Columbia, with the assistance of officials of the Securities and Exchange Commission, and other attorneys practicing in the securities area. Attorneys in the Department have reviewed drafts of the bill, as have members of local bar association committees and securities organizations. The proposed act is based on the Uniform Securities Act, a model law proposed for State legislation by the National Conference of Commissioners on Uniform State Laws, that has been adopted for local needs and government. No attempt is made in the act to require the registration of securities, since the Securities and Exchange Commission has jurisdiction in this field and to require registration would raise serious problems of budget and staff. Section 3: Fraud, is similar to section 17(a) of the Securities Act of 1963 (15 U.S.C. 77q (a)), and the penalties, section 13 (b), are the same as in section 24 of the Securities Act of 1933 (15 U.S.C. 77x). The Department of Justice recommends passage of S. 1001. The Bureau of the Budget has advised that there is no objection to the submission of this report from the standpoint of the administration's program. Sincerely, NICHOLAS DEB. KATZENBACH, STATEMENT OF IRVING SCHLAIFER My name is Irving Schlaifer. I live at 1344 Kennedy Street NW., Washington, D.C. I agree with the need for the proposed legislation regulating the business of selling securities in the District of Columbia. Therefore, it is of the utmost importance that we have three full-time Commissioners in the Public Service Commission. The overall responsibility of the Public Service Commission is too important to overtook this recommendation. The Engineer Commissioner is a member of the Board of Commissioners for the District of Columbia. He must automatically serve as a Commissioner of the Public Utilities Commission, or, what will become known as the Public Service Commission. The Engineer Commissioner serves on 22 different commissions, on many of which he serves as their chairman. I realize that the Engineer Commissioner is a dedicated man and I do not question his integrity, but in my opinion, and I trust that you will agree with me, that it is virtually impossible to serve on so many Commissions and render the best of official decisions, in the public interest. The adoption of this proposed legislation will place additional responsibilities upon the Public Service Commission and it will be in the public interest to have three full-time Commissioners. WASHINGTON, D.C., March 4, 1964. Re H.R. 9419-District of Columbia securities regulation-Exclusion of variable annuities. Hon. ALAN BIBLE, Chairman, Senate Committee on the District of Columbia, New Senate Office Building, Washington, D.C. Attention: Hon. Vance Hartke DEAR SENATOR: Our firm is counsel for the Variable Annuity Life Insurance Co. of America. The purpose of this letter is to urge your committee to exclude variable annuities from H.R. 9419. 1. The District of Columbia is without a so-called blue sky law. A series of articles in the Evening Star titled "Investors Beware" focused attention to this fact in reporting the irresponsible and fly-by-night tactics of certain securities brokers and dealers in the city. After hearings, the House District Committee drafted H.R. 4200, the predecessor of H.R. 9419, to provide the necessary licensing and regulation. It excluded variable annuities from jurisdiction of the Public Service Commission over securities. The committee was concerned with three specific problems: (1) a high rate of failures resulting from inexperienced persons engaging in securities business; (2) lack of licensing controls which enabled persons without financial responsibility to engage in the securities business with consequent losses to the public; and (3) the influx into the District of unqualified or disqualified persons from other jurisdictions. (H. Rept. 1102 [to accompany H.R. 9419], p. 2.) The committee (through its subcommittee No. 2) received detailed testimony at a hearing on May 2, 1963, regarding the need for the legislation. There was absolutely no testimony or other evidence of inadequate protection of the public in the sale of the variable annuities, nor the slightest indication that the three problems outlined by the committee encompassed any activities in the variable annuity field. In fact, there has never been a reported incident of any fraud, deception, or other irresponsible action resulting in loss to any member of the public from the sale of variable annuities in the District of Columbia. The bill was supported by the Securities and Exchange Commission by the District of Columbia Commissioners who opposed dual regulations, and by the U.S. Attorney for the District of Columbia. The only opposition expressed at the hearing to the exclusion of variable annuities from the provisions of the bill was by the Investment Bankers Association (IBA), a trade association representing the mutual fund industry. After this public hearing, Chairman Abernethy appointed an ad hoc committee to discuss the proposed IBA amendments. Its recommendations were made to the District Commissioners and made available to the subcommittee. The Commissioners, by letter of July 22, 1963, advised the subcommittee that they had not changed their opposition to dual regulation of life insurance companies selling variable annuities. The amendments presently included in H.R. 9419 have not solved the problem of dual regulation. 2. The Superintendent of Insurance for the District of Columbia has adequate power to regulate salesmen of variable annuity contracts for the protection of the public. The Congress considered the questtion of local regulation of variable annuities in the District of Columbia in 1960, after the Supreme Court had handed down its decision in Securities and Exchange Commission v. Variable Annuity Life Ins. Co. of America, 359 U.S. 65, 79 S. Ct. 618 (1959). After careful consideration the Congress passed a broad amendment giving the Superintendent of Insurance all of the power he requested and all of the power that Congress thought was necessary to regulate the sale of variable annunties in the District. The Superintendent of Insurance has been effectively regulating variable annuities under this amendment to the Life Insurancce Act of the District of Columbia for almost 4 years. (Public Law 86-520, 74 Stat. 218, codified as title 35, D.C. Code, sec. 541 (1961 Ed.).) A reading of page 2 of the committee's report to accompany H.R. 9419 creates the inference that the Congress had enacted this local legislation prior to the Supreme Court decision. Such is not the case. The decision was handed down on March 23, 1959, and the amendment to the Life Insurance Act governing variable annuities became law on June 12, 1960, thereby showing that Congress, with full knowledge of the ruling of the Supreme Court, intended that the Superintendent of Insurance have jurisdiction over variable annuities at the local level in the District. The variable annuity in the Disttrict of Columbia is therefore, subject to all the requirements and regulations of the insurance laws of the District. The wisdom of the Congress in placing variable annuities under the jurisdiction of the Superintendent of Insurance is proven by the fact that there has not been cited a single instance where any person has been victimized in the sale of variable annuities in the District of Columbia. 3. If the bill does not exclude variable annuities from its scope, it will impose an oppressive dual jurisdiction over their sale (that of the Public Service Commission, in addition to the Superintendent of Insurance). This not only is unnecessary and impractical, it is contrary to the sense of the bill for the following reason: The drafting committee, as page 3 of its report indicates, developed the language of the bill to parallel closely the Uniform Securities Act which is the model law proposed for State legislation. The Uniform Securities Act was proposed by the National Conference of Commissioners on Uniform State Laws after exhaustive study. The Conference provided that where variable annuities and their sale are sufficiently regulated by the insurance authorities in a particular jurisdiction they should be excluded from the definition of "security" in the Act.1 (See Official Code Comment). Recently an extensive study on the same subject was made in the State of Maryland. The Governor appointed a special commission to study the question. The commission recommended that variable annuities be left within the control of the insurance commissioner and not be brought within the scope of the "blue sky" law. The commission regarded dual regulation as both unnecessary and undesirable. The present bill, if enacted, would impose special jurisdiction of a commission of the local government over a subject already expertly regulated by another department of the local government, resulting in dual regulation by two local agencies, two separate local statutes, and two local sets of regulations. By way of emphasis, it is worthy of note that the proposed bill only requires that all broker-dealers maintain a minimum net capital of $25,000 whereas insurance companies are already required to have a capitalization of at least $100,000 and a bill, H.R. 8355, has passed the House of Representatives and is now pending in the Senate which would require a capitalization of at least $200,000. 4. All officials at the hearing on H.R. 4200 supported the exclusion of variable annuities from jurisdiction under the bill. Chairman William L. Cary of the Securities and Exchange Commission testified as follows: 1 The letter of June 4, 1963, to Chairman McMillan from the National Association of Securities Dealers, Inc., fails to set forth this fact. It merely states that the Uniform Act definition includes variable annuities. 66*** persons engaged in the business of selling variable annuity contracts who have complied with the local insurance law would be subject to regulation by the Superintendent of Insurance, rather than the Public Service Commission. It is our understanding that these provisions are designed to prevent the sellers of variable annuity contracts from being subjected to dual regulation by local authorities, and represent an effort to provide fair, but not oppressive, regulation on a local level pending further experience with variable annuity contracts. “*** Although in our view persons who sell variable annuity contracts may be more appropriately regulated by a securities commissioner, we do not believe that this provision of the bill will have any adverse impact upon our administration of the Federal securities laws. In any event, it is not our understanding that considerations leading to a choice of regulatory authorities on a local level are intended to have any significance with regard to our administration of a problem which is national in scope." [Emphasis supplied.] David C. Acheson, U.S. attorney for the District of Columbia, supported the exclusion of variable annuities. He pointed out that variable annuity contracts are now subject to regulation by the Superintendent of Insurance and that the provisions of H.R. 4200 excluding variable annuities represented an effort to find a solution that would assure effective, but not oppressive, local regulation pending further experience in the relatively new field. Subsequently, Walter N. Tobriner, President, District of Columbia Board of Commissioners, reported that the District Commissioners met specifically to consider the Investment Bankers Association's proposed amendment to include variable annuities in the bill. Mr. Tobriner stated that the Commissioners agreed that dual regulation was neither necessary nor desirable. He pointed out that if the Congress decides to impose any additional regulation, the Congress might do so by amending the Life Insurance Act. Significantly, Chairman McMillan of the House District Committee has voiced serious concern over H.R. 9419 insofar as it presently includes dual jurisdiction over variable annuities by the proposed Public Service Commission. When the bill reached the floor of the House on February 24, 1964, Chairman McMillan voiced his opposition in deference "to the position of the District Commissioners who are most directly affected" by the bill. (See Congressional Record, vol. 110, pp. 3232-3234.) Chairman McMillan said: "*** The variable annuity in the District of Columbia is subject to all the requirements and regulations of the insurance laws of the District. The In surance Department of the District is administered as efficiently as any State in the Union. Special regulations have been adopted which apply to the issuance of variable annuity contracts, and the sale of variable annuities is rigidly and effectively controlled. Nothing in the congressional hearings indicated any need for further regulation in this area." Those who would unnecessarily include variable annuities in this bill designed to regulate securities on a local level rely heavily on the decision of the Supreme Court, and tend to overlook the limitations of that decision. The Supreme Court did not decide that variable annuities are securities for all purposes. The U.S. attorney for the District of Columbia recognized the limitations of the decision. In his remarks on H.R. 4200, he stated: "It may be that variable annuties also may be regulated under the Securities Exchange Act of 1934, a question which the Courts have not thus far decided. The drafting committee did not attempt to decide whether variable annuities are securities for all purposes.' The Chairman of the Securities and Exchange Commission gave implicit recognition to this in his statement on H.R. 4200 when he said that "considerations leading to a choice of regulatory authorities on a local level are (not) intended to have any significance with regard to our administration of a problem which is national in scope." The inconclusiveness of the Supreme Court's decision on regulation of variable annuities at local levels is shown by acts such as that of the attorney general of Maryland, who on November 2, 1960, rendered his official opinion that variable annuities were subject to the jurisdiction of the insurance commissioner. 2 It is significant that variable annuities were not once referred to in the hearings on May 21, 1962, before a subcommittee of the House Committee on Interstate and Foreign Commerce on the subject of the regulation of securities in the District of Columbia. 32-278-64——5 And, most important, the Congress itself, has already seen fit to confer jurisdiction upon the Superintendent of Insurance for the District of Columbia over variable annuities since the Supreme Court decision, as pointed out above. It should also be noted that the bill, S. 1001, to regulate securities in the District of Columbia introduced in the Senate recognizes the fact that variable annuities should not be included in the coverage of the bill. The fact is that no one believes or has supported the position that variable annuities should be included, except their competitors in the mutual fund field. In conclusion, it is noted that to date, no one has solicited the views of the Superintendent of Insurance for the District of Columbia, who has been regulating variable annuities for approximately 4 years under a mandate of the Congress. The history of these 4 years has proven his regulation so effective that not one instance of malfeasance in the sale of variable annuities has been. cited. Inclusion of variable annuities in H.R. 9419 is, therefore, unnecessary, imposes a burdensome dual jurisdiction on their sale, is contrary to the sense of the Uniform Act on which the bill is based, and is vigorously opposed by those local officials primarily concerned with the question, including the District Commissioners who are supported by the chairman of the House District Committee. We, therefore, respectfully request that this committee amend H.R. 9419 to exclude variable annuities, or that this committee substitute its own bill, S. 1001, which contains the language of the original bill (H.R. 4200) excluding variable annuities. Sincerely yours, DAWSON, GRIFFIN, PICKENS & RIDDELL, By DONALD S. DAWSON. Senator HARTKE. We have exactly 2 minutes. Do you think, Mr. Bernstein, you can conclude in 2 minutes? Mr. BERNSTEIN. Yes, sir, I think so. Senator HARTKE. Mr. Edgar H. Bernstein, accompanied by Mr. Joseph S. Greco, District of Columbia Public Utilities Commission. STATEMENT OF EDGAR H. BERNSTEIN, VICE CHAIRMAN, DISTRICT OF COLUMBIA PUBLIC UTILITIES COMMISSION; ACCOMPANIED BY JOSEPH S. GRECO, EXECUTIVE SECRETARY Mr. BERNSTEIN. Thank you, Mr. Chairman. The Public Utilities Commission, of which I am a member, heartily endorses the enactment of H.R. 9419 enacted by the House of Representatives, and hopes this committee may expeditiously bring this matter to the Senate floor for passage by that body. The Commission as well as investment security dealers, responsible citizens, and civic citizens associations within its jurisdiction, are deeply concerned with the lack of security regulations within the District of Columbia, and our mail and telephone calls so state, other than that exercised by the SEC, and the constant erosion of standards to control the securities field here. We all feel that the residents of the District of Columbia should be afforded the opportunity of equal protection in this area as all citizens of the several States, except Delaware. Let me depart for a minute. |