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Examinations are assigned selectively, based on the secretary's knowledge of the members' type and business activity,
Now, as to complaints which came about as a result of these examinations, in 1960, district No. 10 ranked fourth in total number of complaints filed.
In 1961, district 10 ranked fourth, again. The first four, district 12, New York, district 7, district 8, the Middle West, and district 10, this district 30.
As of April 30, 1962, District 10 ranked fifth.
In Washington, D.C., we filed in 1960, 25 complaints as of the percentage of members examined. In 1961, 18.3 percent, and in 1962, so far, 7.7 percent.
From another view, in 1960—this is the percentage of members, the first one, and the next one is the percent of examinations—21.6, 17.3, and this year, 24.2.
In 1960, 1961, and 1962, we expelled 29 members of the association from the District of Columbia. Last week, the district committee met and four were expelled by action of the district committee, which action, of course, will not become final because they have the right to appeal to the board of governors and from there to the SEC.
So I think it is right to say, it is fair to say, that quite a bit has been done in the way of examinations of these members by the association, and there have been resulting complaints and decisions, resulting in pretty drastic penalties.
Mr. HEMPHILL. If 1 of those 29 that your association suspended set
up his own shop and began doing business in securities, as I understand it, the most he could be fined is $300; is that correct? What could be done to him?
Mr. WHITE. I think, Congressman, that $300 figure relates to the penalty section of the District of Columbia laws. Our penalties range from censure to a fine of $1,000 per violation, to a suspension from membership, and to an expulsion.
If your question relates to the effect on people in a firm, when we expel a firm, if we name the principals, officers, and salesmen implicated in the violations, we normally revoke their registration, if that penalty fits the dereliction.
If we name them as a cause of the expulsion, under our bylaws, article I, section 2 of the bylaws, they cannot come back into the business as principals or as salesmen unless they go through a membership continuance procedure set up under the law and are finally approved by the Securities and Exchange Commission.
Mr. HEMPHILL. That is what I wanted to know.
Mr. MacK. Mr. Fulton, what would be the situation if you and the District government recommend that the Securities and Exchange Commission have this responsibility, and the Securities and Exchange Commission feels that the District government should have this responsibility?
Does that mean that we should not change the law in either direction?
Mr. FULTON. No, Mr. Mack; I do not think so. I think the law should be changed
and I think it can be changed without much difficulty, to give the Commission the power, as Mr. Cary stated on page 12 as one of his alternatives.
The expanded jurisdiction could be affected by an amendment to section 15 of the Securities and Exchange Act of 1934, which would provide rulemaking power in the Commission with respect to brokerdealers doing business in the District of Columbia.
That is our position exactly expressed by Mr. Cary in his No. 2 alternative. We think it is the thing to do.
Mr. Mack. Is there need for additional legislation besides the amendment to section 15 of the Securities and Exchange Commission Act?
Mr. FULTON. In my opinion, no.
Mr. Mack. Do you feel that if the amendment is adopted, the Commission will then be in a position to fully protect the investors in the District of Columbia ?
Mr. Fulton. I think if an appropriate amendment is adopted, that the Commission could act as a "blue sky" administrator and would accomplish that which could be accomplished by an independent administrator, operating under the District of Columbia law.
Mr. MacK. On page 1, you stated :
I have stated in the past that the District of Columbia would benefit from additional regulations, provided they are properly administered.
Were you then referring to the amendment to the Securities and Exchange Act?
Mr. FULTON. The inference is "Yes." That is correct.
Mr. Mack. Were you referring to the Securities and Exchange Commission when you mentioned, “provided they are properly administered" ?
Mr. FULTON. Yes, because I think the Securities and Exchange Commission could properly administer the law.
Mr. MacK. You think that they would?
Mr. Mack. Were you implying that if the District government had the same authority they might not properly administer it?
Mr. FULTON. No, I am simply saying they do not have the experience.
Mr. Mack. If the Congress decided not to amend the Securities and Exchange Act to give them this rulemaking authority, then would you favor some type of legislation to provide for å "blue sky" law here for the District of Columbia ?
Mr. FULTON. Yes, if Congress decided not to give the Commission
Mr. Mack. Are you in a position to state whether you have a similar problem in Delaware and Nevada?
Mr. FULTON. No, we do not have a problem in Delaware, and I have no knowledge of a problem in Nevada.
We have very few members in Nevada, and very few in Delaware.
Mr. Mack. In other words, you do not have the volume of business in those two States; is that correct?
Mr. FULTON. That is correct.
I recall in previous testimony a representative of your group said that they are obligated to permit anyone or practically anyone to become a member of the NASD.
Is that a true statement?
Mr. FULTON. That is correct. There are only certain so-called statutory bars which, if they exist, would act to prohibit, or we could then refuse to allow that person against whom the bars exist to become a member of the association.
Mr. MACK. By law?
Mr. WHITE. We have certain prohibitions to the entry into business on the part of a member and of an individual. They are granted under section 15 (a) of the Securities and Exchange Act of 1934.
Those bars are that a person where action has been taken against him by the Commission, by us, or by a stock exchange, which has revoked his license, operates as a permanent bar to membership in the association.
There are additional standards. If an individual was found guilty of a misdemeanor or a felony in connection with the securities business, or he was found guilty of a misdemeanor or felony in connection with fraudulent conversion, embezzlement, and so forth.
Unless a person falls within those particular areas, he must be admitted to membership under the act under which the association is registered.
Mr. Mack. Then, under present law, you have no way of keeping out the undesirable members who have been involved in an operation similar to the one referred to by the chairman on page 4 of his statement?
Mr. FULTON. If those people have had their registration revoked by the Commission, that acts as a statutory bar.
Mr. MACK. But all their salesmen seem to be free to come over and join your association.
Mr. Fulton. That is absolutely correct, unless they have been named.
Mr. WHITE. In our actions, Mr. Chairman, we name as many individuals who we think are implicated in the alleged violations. If we take an action which either revokes their registration or names them as a cause of the expulsion, if the final action is expulsion, we have a bar, a disqualification under our bylaws to prevent their reentry.
In the Commission's actions, if they name a person as a cause of the action, that operates as a bar, too. As I understood the Chairman of the Commission's testimony and that of Mr. Loomis, to be that in some cases they do name these people. In others, because of the difficulty of proof, they do not.
Mr. MACK. Then, it would be more difficult for them to name them than for your organization?
Mr. WHITE. I think that is a correct statement.
Mr. Mack. Are you familiar with the case to which they referred this morning?
Mr. FULTON. Yes, we are familiar with that case.
Mr. Mack. Did the NASD take any action prior to the time that the Commission revoked the registration ?
Mr. PETERS. Yes, sir.
Mr. Mack. Did your association make any reference to the salesmen?
Mr. PETERS. We revoked the principal officers.
Mr. PETERS. Not on that particular action, but on subsequent ones we did.
Mr. Mack. You did subsequently?
Mr. Mack. This is with regard to different broker-dealers but not to the representatives of this broker-dealer!
Mr. PETERS. That is correct.
Mr. KEITH. You spent some time with us on the details of an instant which I will identify as the Late T'ape incident. Do you recall ?
Mr. FULTON. Yes, I remember it now. The incident of a registered representative, whose registration had been revoked by us and who then appeared in southern California performing the same sort of operations as he had performed in Florida, and which were very successful so far as he was concerned.
Mr. KEITH. Yes. In trying to recall the circumstances, this owner of the Late Tape, the yacht, put into Los Angeles Harbor and had a dinner party for acquaintances and others who were registered brokers, and during the course of this dinner party one of the friends of the owner left the table and completed a phone call and returned and related the substance of the phone call, which pertained to a rather large offering of stock that was available.
During an interchange of information there was a lot of enthusiam shown by the owner of the boat. The next day, these eight or nine dinner guests moved into the market and picked this stuff up, causing the market to rise substantially.
This was the kind of thing which you illustrated could happen amongst your membership, and you used it as an illustration of how the association was on its toes and alerting its membership to this kind of thing so it would not happen again; is that correct?
Mr. FULTON. Mr. Keith, the people who became enthusiastic were young, somewhat inexperienced, registered representatives of member firms of the association, who were induced to put orders in for the purchase of this stock through their respective firms, and they did so.
Apparently, the gentleman who had chartered the yacht-we have since learned that he did not own it—then unloaded his own securities as the market went up as a result of these buying orders.
We have alerted our members to that effect.
Mr. Keith. If I remember rightly, you then said he went to San Francisco and did the same thing?
Mr. FULTON. He did, that is correct. And then he went to France. I do not think he is back.
Mr. KEITH. About how long ago did this take place?
REGULATIONS FOthat they are obligated to permit anyone or practically anyon the ASD take a I recall in previous testimony a representative of your group
the registration become a member of the NASD.
Is that a true statement?
Mr. FULTON. That is correct. There are only certain so-Tour association : statutory bars which, if they exist, would act to prohibit, could then refuse to allow that person against whom the barretoked the principal
as of the repretr to become a member of the association.
that partvular arti Mr. MACK. By law?
Mr. FULTON. Yes, sir; by law. ness on the part of a member and of an individual. They are
Mr. WHITE. We have certain prohibitions to the entry ir under section 15(a) of the Securities and Exchange Act of its regard to different
Those bars are that a person where action has been take him by the Commission, by us, or by a stock exchange, revoked his license, operates as a permanent bar to mem the association.
There are additional standards. If an individual was fr of a misdemeanor or a felony in connection with the seci
Pok. Ja min.li. ness, or he was found guilty of a misdemeanor or felon tion with fraudulent conversion, embezzlement, and so Unless a person falls within those particular areas, he.
br. 1.13* *.:roll mitted to membership under the act under which thes registered.
Mr. Mack. Then, under present law, you have no w out the undesirable members who have been involved i similar to the one referred to by the chairman on page ment?
Mr. FULTON. If those people have had their registra the Commission, that acts as a statutory bar.
Mr. MacK. But all their salesmen seem to be free t join your association.
Mr. Fulton. That is absolutely correct, unless named.
Mr. WHITE. In our actions, Mr. Chairman, v individuals who we think are implicated in the alle we take an action which either revokes their reg them as a cause of the expulsion, if the final acti have a bar, a disqualification under our bylay reentry.
In the Commission's actions, if they name a per action, that operates as a bar, too. As I underst the Commission's testimony and that of Mr. Loo cases they do name these people. In others, be of proof, they do not.
Mr. MACK. Then, it would be more difficult than for your organization ?
a Mr. WHITE. I think that is a correct stateme Mr. FULTON. I think so, yes.
Mr. Mack. Are you familiar with the case this morning?
Mr. FULTON. Yes, we are familiar with th