STATEMENT OF MILLARD F. WEST, JR., GOVERNOR, ASSOCIATION OF STOCK EXCHANGE FIRMS Mr. WEST. My name is Millard West. I am a governor of the Association of Stock Exchange Firms, 120 Broadway, New York, and a general partner of Auchincloss, Parker, & Redpath, at 1705 H Street, here in Washington. I happen to be a native of Washington, and have been in the securities business since 1933. Our association is a voluntary nonprofit trade association of approximately 600 members. We are a nationwide organization, but we have some 21 members with offices in Washington and, in addition, other firms with offices in contiguous areas do business with District residents. I am appearing here today in support of H.R. 9419, the proposed District of Columbia Securities Act. Senator HARTKE. The buzzer has rung signaling the convening of the Senate. We will have to conclude at this time. Your entire statement will be printed in the hearing record at this point. (The statement referred to follows:) STATEMENT OF MILLARD F. WEST, JR., GOVERNOR OF THE ASSOCIATION OF STOCK EXCHANGE FIRMS, NEW YORK, N.Y. My name is Millard F. West, Jr. I am a governor of the Association of Stock Exchange Firms, 120 Broadway, New York, and a general partner of Auchincloss, Parker & Redpath, 1705 H Street, NW., Washington, D.C. I am a native Washingtonian and have been in the investment business here since 1933. The association is a voluntary, nonprofit trade association of approximately 600 members of the New York Stock Exchange. Our membership is nationwide and many of our members do business in the District of Columbia. At least 21 member firms have offices within the District. In addition, many other firms with offices in the contiguous areas do business with District residents. I am appearing here today in support of H.R. 9419, the proposed District of Columbia Securities Act. While it may appear strange for a member of the securities industry to appear before you requesting that another regulatory law be enacted, let me assure you that the members of our association and the other reputable brokers and dealers in the District area are in full support of this measure. At the present time there is no provision whatsoever in the District laws for regulating, on a local basis, the business of selling securities in the city of Washington. Just about anyone can qualify to sell securities here. Anyone can operate a firm on a shoestring. Anyone can defraud investors. It has long been an anomaly that the city in which both the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., are headquartered should be a haven for the unscrupulous fringe elements of the securities industry that have been driven out of other jurisdictions. It is true that the SEC and the NASD have some jurisdiction in this area, but it is limited, for most practical purposes, to locking the barn door after the horse has gone. A comprehensive local law such as H.R. 9419 is necessary to fully protect local investors. The legislation before this committee is based in great part upon the Uniform Securities Act. The Association of Stock Exchange Firms has supported the enactment of this act in a number of other jurisdictions, specifically the 16 States that have adopted the Uniform Act or locally appropriate versions of it. We feel that the enactment of such legislation for the District of Columbia will provide a sound means for regulating brokers dealing with the public. In addition, the licensing procedure prescribed for salesmen will assure that only qualified persons can engage in the securities business here. The District of Columbia Securities Act as passed by the House very closely parallels the provisions of the Uniform Securities Act. H.R. 9149 provides for (1) licensing requirements; (2) bonding; (3) minimum capital requirements; (4) proper recordkeeping; (5) inspection of sales and advertising literature; 32-278-647 (6) measures against false or misleading statements or documents; (7) measures dealing with misleading applications for licensing; (8) procedures dealing with denial, revocation, suspension, cancellation, or withdrawal of licensing; (9) administration of this act by the Public Service Commission; (10) investigatory powers to the Commission; (11) authorizing appropriation to enforce the act; and (12) judicial review. The bill as passed by the House brings variable annuities under the act's jurisdiction, and our association strongly urges the Senate to retain this allimportant provision. The legislation has been prepared in cooperation with numerous industry groups. It is hoped that this spirit of constructive liaison will continue through the Advisory Committee provided for in the bill. In closing and to repeat, I am authorized to state that this legislation has the full support of the Association of Stock Exchange Firms. It is contemplated that the entire cost of the administration of the act will be met by the registration fees. Although H.R. 9419 places a financial burden upon our member firms as well as other broker-dealers in the District, we feel that this burden will be alleviated in the long run by the fostering of higher standards of business conduct and a greater degree of investors' confidence and protection. Therefore, we recommend to you, your committee, and the Senate as a whole, that H.R. 9419 be enacted for the District of Columbia. Senator HARTKE. I also wish to include in the hearing record at this point a letter from Hon. John A. Gronouski, Postmaster General, and a communication from Mr. Robert W. Haack, chairman of the board of governors, National Association of Securities Dealers, Inc., endorsing H.R. 9419. Also letters from the Metropolitan Washington Board of Trade, Better Business Bureau of Metropolitan Washington, Indianapolis Bond & Share Corp., and Suter Associates, Inc. (The documents referred to follow :) Hon. ALAN BIBLE, OFFICE OF THE POSTMASTER GENERAL, Chairman, Committee on the District of Columbia, DEAR MR. CHAIRMAN: This is in reply to the request for our comments on H.R. 9419, an act 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. This measure passed the House of Representatives on February 24, 1964. We have no objection to the enactment of this legislation, since it would have no significant impact on the Post Office Department. Section 16 (m) of the act, requiring the Public Service Commission to comply with requests made by the Postmaster General for information or evidence acquired in administering the law, could in some instances prove of value to the Department in the investigation and prosecution of postal fraud matters. The Bureau of the Budget has advised that from the standpoint of the administration's program there is no objection to the submission of this report to the committee. DEAR SIR: We are writing this letter to urge your committee to retain section 2(1) as it now appears in H.R. 9419 which has passed the House of Representatives. Specifically, we ask that there be no change in the definition of “security” in section 2(1) which now includes variable annuities. We especially want to call this to your committee's attention and strongly urge this position because we noticed in the remarks on H.R. 9419 of Representative John L. McMillan, chairman of the House Committee on the District of Columbia, contained in the Congressional Record of February 24, 1964, at page 3232, that there was no reference to the opposition of this association to the exclusion of variable annuities from H.R. 4200 (the predecessor bill to H.R. 9419). The association did not appear at the hearing on H.R. 4200 but did submit to Chairman McMillan a letter dated June 4, 1963, in which the association urged that variable annuity contracts be deemed securities for the purpose of the regulation of the securities business in the District of Columbia. As we pointed out in the aforementioned letter, the board of governors of the association took no position on the remainder of the bill before your committee as normally the board does not comment upon State laws and the bill before your committee would be in the nature of a local securities or "blue sky" law. But the board has taken the position since 1957 that variable annuities are securities and in view of the fact that this bill, if adopted, would be a local securities law enacted by the Federal Government, we believe it is more than a matter of local concern and one in which we should again state our position. By the way of background as to its organization and functions, the association was organized under the laws of the State of Delaware in 1939, for the purpose of registering with the Securities and Exchange Commission under section 15A of the Securities Exchange Act and is now so registered. The association has approximately 4,235 members, all of which are securities brokers and dealers registered as such with the Commission pursuant to the requirements of section 15(b) of the Securities Exchange Act of 1934 (48 Stat. 881; 49 Stat. 1375; 15 U.S.C. 780 (b)). The functions and activities of the association constitute an integral part of the Federal system of securities regulation. The association's certificate of incorporation provides that its objectives and purposes, in part, are to "promote through cooperative effort the investment banking and securities business, to standardize its principles and practices, to promote high standards of commercial honor and to encourage and promote among members observance of Federal and State securities laws." The certificate of incorporation also requires the association to provide “a medium through which its membership may be enabled to confer, consult, and cooperate with governmental and other agencies in the solution of problems affecting investors, the public, and the investment banking and securities business." As pointed out in report No. 1102 of the House of Representatives, 88th Congress, 2d session, on H.R. 9419, at page 4, the Supreme Court of the United States in SEC v. VALIC, 359 U.S. 65 (1959) held that variable annuity contracts come within the provisions of the Securities Act of 1933 and the Investment Company Act of 1940. The association was an active intervenor in support of the Securities and Exchange Commission in this litigation from the district court through the Supreme Court of the United States. Since this House report was prepared, the U.S. Court of Appeals for the Third Circuit on January 20, 1964, affirmed an order of the Securities and Exchange Commission which had held that the Prudential Insurance Co. of America must comply with the Investment Company Act of 1940 in the sale of that insurance company's variable annuity contracts to the public. The court, in upholding the Securities and Exchange Commission opinion and rejecting the arguments of Prudential, stated at page 10 of the opinion: "Considerations of logic and policy provide further support for our conclusion. The Investment Company Act of 1940 contains significant safeguards for the protection of those who, like the purchasers of variable annuities, invest in 'securities.' These safeguards, characterized by the Commission as insuring 'corporate democracy,' include disclosure of investment policy and operating practices, and the regulation of fees, trading practices, and changes in investment policy. See VALIC, 359 U.S. at 79. The mere fact that the investment program in the case at bar is under the aegis of an insurance company ought not to negate compliance with these controls in the absence of compelling circumstances. We find no such circumstances here." We support the conclusion arrived at by the House Committee on the District of Columbia in its report at page 5 where the House committee resolved the treatment of variable annuity contracts "by determining that under the present court decisions and law, agents or broker-dealers offering variable annuity insurance contracts to the public in the District of Columbia shall be required to secure licenses and will be subject to the provisions of this act." We request that in the public interest and in conformity with a growing body of law, your committee and the Senate continue variable annuity contracts within the definition of "security" as now set forth in H.R. 9419. Very truly yours, ROBERT W. HAACK, Chairman of the Board of Governors. Hon. VANCE HARTKE, THE METROPOLITAN WASHINGTON BOARD OF TRADE, Chairman, Subcommittee on the Judiciary, District of Columbia Committee, DEAR SENATOR HARTKE: The board of directors of the Metropolitan Washington Board of Trade has carefully reviewed the provisions of 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, and recommends its passage with the following changes: 1. The bill requires $15,000 minimum capital of broker-dealers licensed in the District. The board of trade recommends this be raised to $25,000. The same recommendation was made to and adopted by the House of Representatives committee. 2. We also feel it is unnecessary to require a bond of a broker-dealer in the amount of $50,000 who has capital of at least that much. 3. We are opposed to inclusion of the provision in H.R. 9419, the House-passed bill, which would require dual licensing under this act and the life insurance laws of an agent or broker who offers variable annuity contract as well as standard life insurance policies. Sincerely, Re H.R. 9419. WILLIAM H. PRESS, Executive Vice President. BETTER BUSINESS BUREAU OF METROPOLITAN WASHINGTON, Hon. VANCE HARTKE, Chairman, Senate District Committee's Judiciary Subcommittee, MY DEAR SENATOR HARTKE: The Better Business Bureau of Metropolitan Washington wishes to endorse H.R. 9419 as passed by the House of Representatives and to urge its prompt enactment by the Senate. Inquiries and complaints received by us, together with surveys and investigations by our professional shopper, during the past 4 years, clearly indicate the need of this legislation for the protection of the public. For your information, I am enclosing a copy of a resolution adopted by our board of directors for submission to the appropriate authorities on March 27, 1961. The public interest requires the prompt enactment of this bill, as the District of Columbia sorely needs this legislation. Very truly yours, Enclosure. LELAND S. MCCARTHY, Managing Director. RESOLUTION The following resolution was unanimously adopted at a meeting of the board of directors of the Better Business Bureau of Metropolitan Washington, held on Monday, March 27, 1961: Whereas the number of securities firms and the number of securities sales personnel operating in the metropolitan area of the District of Columbia have risen rapidly in the past several years; and Whereas the promotional activities and business methods of some of these securities firms have resulted in severe losses to the investing public in this area; and Whereas inquiries and complaints filed with the Better Business Bureau, the general observations of members of the board of directors, and specific information developed by the staff of the bureau, all clearly indicate that the background of such firms and the nature of the securities being promoted by them require increased investigation and close surveillance by the regulatory authorities, so as adequately to protect the investing public; and Whereas a recent survey of the current activities of a number of such securities firms, made by a professional investigator for the bureau, confirms these observations: Now therefore be it Resolved That the board of directors of the Better Business Bureau of Metropolitan Washington record with the Securities and Exchange Commission and with the National Association of Securities Dealers, Inc., its deep concern over the foregoing situation: That the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., be advised that, in the opinion of the board of directors of the Better Business Bureau, increased investigation and more timely enforcement efforts are required in the public interest throughout the Metropolitan Washington area; That it is the firm belief of the board of directors of the Better Business Bureau that the staffing of the regional office of the Securities and Exchange Commission, and of the District Committee of the National Association of Securities Dealers, is inadequate to enable these organizations properly to discharge their assigned investigatory responsibilities and otherwise to cope with the serious securities problem which has developed in the Nation's Capital; and That the president of the Better Business Bureau be and he hereby is authorized and directed appropriately to convey the foregoing sentiments to the Chairmen of the SEC and of the NASD, in order to enlist the increased assistance and cooperation of their respective organizations. LELAND S. MCCARTHY, Secretary. INDIANAPOLIS BOND & SHARE CORP., Hon. VANCE HARTKE, U.S. Senator, Chairman, Judiciary Subcommittee of the Senate Committee for the District of Columbia, Senate Office Building, Washington, D.C. MY DEAR SENATOR HARTKE: I understand that your Judiciary Subcommittee of the Senate Committee on the District of Columbia is having hearings on H.R. 9419, proposed District of Columbia Securities Act. I believe this act as passed by the House has great merit and would urge that you and your committee approve it as passed by the House. I am particularly interested in the provision making variable annuities subject to the act. The variable annuity concept is an excellent one, and as a securities dealer I have no quarrel with it. However, I have a firm conviction that variable annuities are just a modified form of a mutual fund and therefore are a security and should be subject to the same regulation as any other securities. Furthermore, I believe that anyone selling variable annuities should be registered as a securities salesman. I believe that it is important that a proper pattern be set concerning this matter and can think of no more representative place for this to occur than in the Congress of the United States in creating a Securities Act for the District of Columbia. Very truly yours, FRANK L. REISSNER, President. SUTER ASSOCIATES, INC., Washington, D.C., February 28, 1964. Senator VANCE HARTKE, Washington, D.C. DEAR SENATOR HARTKE: I am writing in regard to the controversial H.R. 9419 which I understand will be considered by the Judiciary Subcommittee of the Senate District Committee. I believe that the purpose of this bill is to tighten up the regulation of securities dealers and salesmen in the District of Columbia. I have no fault to find with this objective. However, I strenuously object to the provision which will require licensed insurance agents and brokers, who have no desire to sell stocks, bonds, or mutual fund shares but who do wish to have the right to sell variable annuities issued by |