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entire country, or is Mr. Loomis referring specifically to the District of Columbia ?
Mr. Cary. The case that I was referring to is a problem which could happen throughout the country, and I think Mr. Loomis, in his testimony before the special study, was likewise speaking to that problem.
For example, we might enjoin a firm, but then in order to put the individuals who are salesmen in the firm out of business, we would have to go through a revocation proceeding of the broker-dealer firm which might take as much as 3 years or so, and at the same time, in that revocation proceeding find these persons to be so-called willful violators or causes.
Under those circumstances, once they are causes, then they would not be in a position to work for any other firm or organize their own without our approval.
But until the salesmen are found to be causes, there would not be a basis for disqualifying them at the present time under the existing laws. It is that kind of question, of course, that we have to examine on a broad scale in the special study.
Mr. Loomis might want to make a comment further on this.
Mr. LOOMIS. I think that the instance that I referred to in my testimony before the study is the same one that the Chairman referred to in his statement on page 4.
On the other hand, as the Chairman has said, this is a thing that can happen outside the District, and there have been instances of it. Perhaps not as dramatic mathematically, but definitely instances of it in other parts of the country.
Mr. Mack. This could happen in States which do have "blue sky" laws?
Mr. Cary. Yes, it could. Although, of course, a "blue sky" administrator, having the suspensory power, might be able to put a particular person out of business immediately if he found that there was a basis for it in the light of his past conduct or financial history or background.
Mr. Mack. But these new firms would also be registered with you as brokers?
Mr. Cary. The new firms would be registered with us; yes, sir.
Mr. Mack. And they would be members of the National Association of Securities Dealers ?
Mr. Cary. They might be or they might not be. I might ask Mr. Loomis whether he knows whether most of those would have become or did become members of the NASD.
Mr. LOOMIS. I would suppose that most of them would have at least applied and may well have become members. As the Chairman pointed out, while we took action against the firm, we did not have then time to make a case against each salesman in the firm and prove that he, individually, violated the law.
Mr. Mack. Could I interrupt to ask if you ever do that?
Mr. Loomis. Well, we have tried it both ways. In New York, where this problem arose, we would sometimes proceed against all the salesmen.
As the Chairman says, this makes a very complicated trial, with 20 respondents, each of them having his own attorney, and all wrapped up in one case it can go on for years. We have sometimes tried to move faster against the firm and pick up the salesmen later.
Mr. MacK. Mr. Chairman, do you feel there is any necessity or justification for additional legislation to deal with this problem, or is this one of the matters that you presently have under study with your special investigation ?
Mr. Cary. I would say, sir, that this is a matter which we have presently under study. Therefore, I cannot speak to any immediate concrete legislation. It certainly is a matter which was clearly involved in the public hearings which we have been holding in the last 2 weeks.
Mr. Mack. Then this problem nationally will be dealt with, undoubtedly, in your report?
Mr. CARY. It will be; yes, sir.
Mr. MacK. On page 7, you refer to the underwriting group. An underwriting broker had a deficit of $12,000.
Mr. Cary. Yes, sir. It is the company, not the brokerage firm. It is the so-called issuer.
Mr. Mack. The issuer had the deficit of $12,000? Mr. Cary. Yes, sir. Mr. Mack. Then, the underwriting group received $120,000, or 50 percent, of the proceeds received by the issuer?
Mr. Cary. Yes, sir.
Mr. Mack. Do not you or the NASD have rules concerning the amount of commissions charged ?
Mr. Cary. In answer to that, first of all, we do not. What we do, under the Securities Act of 1933, is to force disclosure of that on the front page of the prospectus.
In other words, we bring it to light so that it is clearly known.
Mr. CARY. That would be the 30,000 shares, and that would be the 40 cents per share as well. All of that would be clearly spelled out. But that is all we would do at this time.
The NASD, on the other hand, has moved ahead in the last specifically, and is beginning to study these problems of underwriters compensation, and are taking some action in that area.
It is an area, by the way, in which we, ourselves, are doing further study in connection with the special study.
Mr. Mack. But you have no rules regarding either the minimum or the maximum commission?
Mr. Cary. No, sir. Generally, not at all.
Mr. Mack. You mentioned there are two other States that have no “blue sky” laws. Do those two States rely on the Federal Government for enforcement and regulation of securities?
Mr. Cary. Those two States, sir, are Nevada and Delaware. I would say the answer in general is yes.
Now, whether or not their attorney general operates under just a general fraud provision which he might interpret broadly, I cannot speak. But I would say, in general, that, or the regulation of securities selling is primarily left in the Federal Government's hands.
Mr. MacK. Do you have any problems in those two States similar to the ones you have in the District of Columbia ?
Mr. Cary. I think in view of the fact that I have only been here a year, I might ask Mr. Loomis to speak to that question.
Mr. LOOMIS. We have not had any particular problem in regard to Delaware. I am not quite sure why, but there has not been much that has come to our attention. We have from time to time had enforcement problems in Nevada, as elsewhere.
But, of course, Nevada is not a metropolitan State. It is a small State, spread out over a wide area, and there is less likely to be a concentration of securities activity there. In fact, there is not. But we have had our problems from time to time.
Mr. Mack. Do you have a regional office in Nevada?
Mr. LOOMIS. No, sir. We have an office in San Francisco and a branch of that in Los Angeles. Nevada is handled out of the Los Angeles branch, primarily.
Mr. Mack. Would you need additional legislation for the Securities and Exchange Commission to act as the "blue sky” law administrator?
Mr. CARY. Of the District of Columbia ?
Mr. Cary. Yes. To exercise full “blue sky” powers in the District, we would need additional legislation. Our question is whether we should establish rules for the District of Columbia which we have not established yet for the other parts of the country?
Mr. Mack. My point is you would need additional authority other than the amendment to section 15 of the Securities and Exchange Act?
Mr. Cary. If there were amendments to section 15, I think that would be enough to give us substantial authority. It would not give us authority over issues of securities, but perhaps that would not be necessary.
Mr. Mack. Do you feel that that would give you authority that would be necessary to substantially eliminate the practices now engaged in in the District of Columbia ?
Mr. Cary. If it were the choice of the Congress to place this responsibility on the Securities and Exchange Commission, we think that we would receive adequate powers under certain amendments to section 15 to the 1934 act.
Mr. Mack. I thank you, Mr. Chairman, for your testimony. I do feel that some action needs to be taken here in the District of Columbia. At least, I have been somewhat favorable to granting additional authority to the Securities and Exchange Commission. But if some other action is forthcoming that will solve the problem, we might defer to the other organization or group that made the proposal.
Mr. Cary. Thank you, Mr. Chairman.
Mr. MacK. Our next witness is Mr. Wallace Fulton, executive director, National Association of Securities Dealers.
STATEMENT OF WALLACE H. FULTON, EXECUTIVE DIRECTOR, NA
TIONAL ASSOCIATION OF SECURITIES DEALERS, INC., ACCOMPANIED BY MARC A. WHITE, COUNSEL, AND RICHARD PETERS, SECRETARY OF THE ASSOCIATION'S DISTRICT NO. 10
Mr. Mack. Mr. Fulton, we are happy to welcome you again before the Commerce and Finance Subcommittee.
I know you have been quite familiar with the problem existing here in the District of Columbia.
We will be happy to have your testimony at this time.
Mr. Chairman and members of the subcommittee, I am Wallace H. Fulton, of Washington, D.C., executive director of the National Association of Securities Dealers, Inc.
I have with me Marc A. White, counsel, and Richard Peters, secretary of the association's district No. 10 which includes Washington, D.C.
We are here to discuss securities regulations for the District of Columbia designed to protect the public in the purchase and sale of securities. The need for corrective measures arises, in part, from the great increase of broker-dealers in the Washington area in the immediate past, coupled with the lack of regulations applicable locally to protect the public from the dishonest or the grossly inexperienced securities dealer.
I have stated in the past that the District of Columbia would benefit from additional regulations, provided they are properly administered.
Most State securities laws have three major classifications. These are: (1) the area of registration and licensing of broker-dealers and salesmen, (2) the registration of securities, and (3) establishment of provisions having to do with fraud.
Any consideration of additional regulations for the District of Columbia should be made with a recognition that the Federal securities acts are administered in Washington and all broker-dealers in the District must be registered with the Securities and Exchange Commission.
All new issues of securities sold must be registered with the Commission or offered under a regulation A exemption obtained through the regional office of the Commission, also located in Washington.
Proceedings based upon violations of the Securities Act, which include fraud, are instituted by or at the behest of the Securities and Exchange Commission.
Thus, the two of the three areas covered in any State securities law seem to be amply covered by present laws. The one feature of certain State laws not covered relates to registration and licensing of broker-dealers where the requirements in a given State are greater than those now in effect for registration with the Securities and Exchange Commission.
It should be recognized that no salesman registers as such with the Commission.
Thus, there would appear to be a need for regulation to set certain standards for entry into the business as a dealer or as a registered representative which do not exist in the District of Columbia. Such additional requirements and standards may relate to minimum capital, prior experience, education, and character.
In connection with the administration of any regulation, I believe that the Securities and Exchange Commission should be the administering power because of its expertness in the field and the present existence of a regional office which, in my opinion, is competent to handle the problems of registration, to hold proceedings on revocations or denials of registration and related activities.
It would not, however, be difficult to organize a competent local administration if a law were to be adopted for the District of Columbia. In some States which have securities laws, their administration may be inadequate if legislatures do not appropriate the necessary funds.
In other words, if an adequate job is to be done here, it will require money and, above all, experienced personnel.
It is hoped the SEC study group functioning under House Joint Resolution 438 will make recommendations to the Commission and Congress for national standards for entry into the securities business, and these standards would be applicable to the District of Columbia.
In summary, I suggest that regulations for securities dealers who operate in the District of Columbia be adopted and be administered by the Securities and Exchange Commission.
I realize that this means additional work for an already hardpressed agency, but it would seem that the Commission is the ideally suited body with the existing capabilities to perform this service.
Mr. Mack. Does that conclude your statement?
What effort, if any, have been made by our association to police this problem in the Washington area?
Mr. FULTON. The percentage of members examined by the association in 1960—the association as a whole was 33 percent.
In district No. 10, and that is this district, including North Carolina, Virginia, Maryland, and the District of Columbia, 56 percent; in Washington, D.C., 64 percent
In 1961, the comparable figures were association 31 percent; district No. 10, 62 percent; and Washington, D.C., 107 percent. Several members were reexamined during the year.
So far this year we have examined 13 percent of our members in Washington, D.C.
Of the 29 new members from Washington, D.C., in 1960, 20 had been examined by April 5, 1961. On the average, the 20 were examined 412 months after becoming members. But this figure ranges from 2 months to 11 months.
Of the 27 new members in Washington, D.C., in 1961, 15 had been examined by December 31, 1961. On the average, the 15 members were examined within 5 months from the date of membership. This figure ranges from 1 to 6 months.
Of the 10 new members from Washington, D.C., in 1962, 3 had been examined by April 30, 1961. These three members were examined within 1 to 3 months of membership.