Mr. KORMAN. The most we could do would be to require an application from each one that wanted to be licensed and have that application processed by our police department, which would screen their own files to see what, if anything, they could find on it.

Mr. MACK. In other words, if they had a police record, you would not grant them a license?

Mr. KORMAN. That would probably be one of the provisions.

Mr. MACK. If they did not have the police record, they would probably get the license?

Mr. KORMAN. Probably so; yes, sir. I will not say in all instances; they might have some other shortcomings.

For instance, if we required them to get recommendations from others or required them to show that they had experience and they were unable to get recommendations, or the recommendations did not show them to be people who were trustworthy, I think we might be able to put such a limitation on within our present authority.

Or if they were unable to show that they had experience in the field, we might be able to deny them a license. But if you had someone who had no experience and wanted to enter the business for the first time, we have no facility, for instance, without legislation, to give them an examination.

Mr. MACK. As I understand, you are now studying the problem and you are going to make some recommendations of some kind; is that correct?

Mr. KORMAN. That is right, Mr. Chairman.

Mr. MACK. You have been studying the problem since February? Mr. KORMAN. I will not say we have been studying the problem since February. At some time, the date of which I do not have before me, subsequent to the appearance of these articles, the Commissioners sent the problem to us.

In that interim, our office has been doing a great many other things and we have had, I think, either three or four meetings with this group over a period of about a month and a half, I would say.

There have been, between meetings, anywhere from a week to 10 days to 2 weeks. We also sent this out to the interested parties to study before we held any of these meetings, or after having had one meeting.

Mr. MACK. I want to thank you for your testimony.

Personally, I favor an amendment to the Securities and Exchange Act, but I do get the impression that the District government has not been sufficiently interested in this problem.

Mr. KORMAN. I think they have been, since the matter was called to their attention. Yes, they have been, indeed.

Mr. MACK. I also have the impression that they are extremely reluctant in assuming the responsibility for solving this problem on the local level?

Mr. KORMAN. On the contrary, Mr. Chairman, where situations of this sort have been pointed out to the Commissioners in other areas, and the matter has been studied, the Commissioners have come forward and sought legislation from the Congress, or have taken action on their own to remedy conditions.

One of those areas was that involving the sale and financing of automobiles, which, incidentally, was also brought forcibly to the attention of the Commissioners by a series of articles by Miss Ottenberg.

We went to the Congress and got authority to act in that case, and came up with a complete set of regulations, which took considerable time to frame, with the help of people in the industry.

We think we have corrected a great many, if not all, of the difficulties and problems in that industry.

A similar situation arose in connection with the home improvement contract business. We took similar action in that and have issued regulations to cover the situation.

In those instances, however, we were able, we thought, to take care of it entirely by comparatively simple regulations which could be administered by our Superintendent of Licenses, and simply by the issuance of licenses with certain limited restrictions.

But the securities business is one which is not quite so easy to regulate as is the sale of automobiles, or the repair of houses. It requires a setting up, we think now, of a department with experts who are thoroughly familiar with the industry, rather than simply setting it into our Licensing Department where complaints of factual situations can be resolved without a great deal of expertise.

This presents a problem which is not quite as simple as those others are. But in any event, the District is not treading water on this. The Commissioners have issued the instructions to us to investigate, and that is what we are doing.

We try not to act precipitously, but to act only after careful study. Mr. Kneipp has an observation. I would be happy to have him make it to you directly, Mr. Chairman.

Mr. MACK. We will be glad to hear from you.

Mr. KNEIPP. Thank you, Mr. Chairman. I am sorry the clerk is not here. I would like to offer for the record, if I may, copies of what Mr. Korman has just referred to, the two sets of regulations and the two laws that were enacted by the Congress.

Mr. MACK. We will accept those for our files.

Mr. KNEIPP. The purpose in offering those, Mr. Chairman, is to demonstrate to the committee how the District has proceeded in matters of this kind heretofore.

First, an effort is made to mark out the limits of the Commissioner authority. That is what is in process now in that draft of April 20 that was furnished the chairman.

Then, having determined what existing law offers the Commissioners in the way of the authority, it is the practice of the Commissioners to go to the Congress and seek supplementary legislation. In the case of the Home Improvement Contractors, Public Law 86-715 was a relatively simple bill to draft and to process through the Congress.

But in the case of the sales finance legislation, Public Law 86-431, it was a very complicated law. The Commissioners had to be given considerable additional authority over and above what they possessed under existing law.

I think, as Mr. Korman has indicated, it is anticipated now that additional authority to flesh out what the Commissioners now have in the way of dealing with securities dealers would be a rather complicated act to draft.

But the District is in process-the Corporation's Counsel's Office is in process of reviewing what is necessary to the end that a determination can be made as to the kind of law that may be necessary to give the Commissioners adequate authority in the field.

Mr. MACK. When do you expect to make your recommendations? Mr. KORMAN. Mr. Kneipp has been carrying the laboring oar in this field. I would like him to answer the question.

Mr. KNEIPP. Mr. Chairman, as you can see, that draft is, I believe, about 40 pages in length. The group that Mr. Korman mentioned earlier has been working on that. We have not gotten very far because the problems that do come up create some difficulty in their determination.

It is a little hard to point out just how long, or to say just how long, it is going to be before we come up with some recommendation. It might be that rather than try to deal with the matter by an adaptation of the Uniform Securities Act, to work just under the Commissioners' existing authority, which would allow them to require a showing of experience and character, require fingerprinting, reports, and fees, and then seek legislation, simple legislation, authorizing the Commissioners to require a bond and minimum capital of persons entering this field.

And also authorizing the Commissioners to set up an administrative agency with authorization for funds.

Mr. MACK. I cannot see any objection to doing that.

Mr. KNEIPP. That would be relatively simple to do.

Mr. MACK. At the same time, if the Congress would come in on it, I cannot see any objection to some type of local activity on the part of the District of Columbia government; that is, a recommendation for legislation.

Mr. KNEIPP. We could, Mr. Chairman, come up with relatively simple recommendations, merely "fleshing" out the authority of the Commissioners in certain limited respects, but not anything so complicated and detailed as the Uniform Securities Act.

This is the policy decision that has to be made at this time. Should we do it simply as we have done, for example, in the case of the home improvement contractors and the sales finance organizations?

Mr. MACK. I got the impression from Mr. Korman that if the Congress acted in regard to section 15 of the SEC, the District government would make no recommendations at all.

Mr. KORMAN. I think that would take care of the situation, Mr. Chairman, and I see, frankly, no reason why there should be two sets of regulations.

I would like to have the expression of the Congress as to what their will is. If they think that the Securities and Exchange Commission can better handle it, it would be certainly not our policy to try to take an opposite position.

Mr. MACK. I would not want that to be implied, even if the amendment were approved. I would not want it implied that the Congress felt that the District government should not interest itself in this

matter because we have merely amended the Securities and Exchange Act.

Mr. KORMAN. I do not think they would divorce themselves of it. Unquestionably, they would not. But merely licensing is one thing; regulating is another.

The regulation of an industry as complex as this may require a complete "blue sky" law and the setting up of another deparment of the District government.

This, I would say, requires rather careful study. That is what we are giving to it now.

Mr. MACK. Thank you, gentlemen, for your testimony.

I feel that the District should be a shining example of high, ethical standards. That is with regard to the securities business as well as other businesses.

I know the Congress has a responsibility. I furthermore feel that the District government has a responsibility of looking into matters of this nature, to see how we can improve a situation here in the District of Columbia.

This is our Nation's Capital, and the capital of the world, you might say. It disturbs me when we permit such an operation as this in the Nation's Capital.

Mr. KORMAN. I may say this much: I do not like to use the words "in defense," because it sounds like we have been amiss in our approach to this. I think this should be said, however, that with the presence of the Securities and Exchange Commission here in the Nation's Capital, with our knowledge of their general supervision of this business, I think possibly there may have been an assumption, not necessarily on the part of the District Commissioners, but on the part of the people generally, that this subject was taken care of here.

Not until the situation was called to our attention comparatively recently was there a realization that something more needed to be done.

Mr. MACK. I did not mean to be critical of the inaction on the part of the District government. But at the same time we have the Secret Service here, the Federal Bureau of Investigation, the Park Police, the Capitol Police, and in addition to that, you decided or we decided to have the Metropolitan Police.

You have a similar problem here with regard to regulations.

As I have indicated, I slightly favor the expansion of Federal jurisdiction.

I want to be certain, first, that the Securities and Exchange Commission has been diligent, has discharged its responsibility.

Personally, I favor the amendment which would expand jurisdiction with regard to the Securities and Exchange Commission.

But I also feel that the District government ought to interest itself in this area, and that they ought to make some kind of recommendations to the Congress, if we are in need of additional legislation.

Mr. KORMAN. We shall not discontinue what we are doing now. We shall carry it on to conclusion as quickly as possible, Mr. Chairman. Mr. MACK. Thank you very much.

That concludes our hearing on this subject.

The committee stands adjourned.

("Investors Beware," by Miriam Ottenberg, follows:)

INVESTORS BEWARE

(By Pulitzer Prize Winner Miriam Ottenberg, Star staff writer)

A series exploring the practices of questionable investment firms, published by the Washington Star

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

The series of articles entitled "Investors Beware" written by Miriam Ottenberg for the Washington Star describe a situation of which every investor in Washington, D.C., should be informed. Growth in the number of securities firms operating here on the fringe of established ethics and the law has been of great concern to the vast majority of firms in the securities business, the NASD, and the SEC. Increased enforcement activity by NASD and the SEC has been effective; however, this alone cannot provide the full measure of protection which is needed.

An informed investor is capable of exercising commonsense when approached by a stranger representing the securities business who promises great profits in a short period. Miss Ottenberg's articles contain basic facts which could prove invaluable to investors.

Also, an informed investing public is essential if Washington is to have the right kind of securities law, properly administered.

If we are to deal promptly and well with the problems created by marginal firms moving into this area and realize the standards for which both the NASD and the SEC are striving, it will be in the light of analyses such as the "Investors Beware" series.

These articles deserve careful reading.

INVESTORS BEWARE

WALLACE FULTON, Executive Director. [From the Washington (D.C.) Star, Feb. 4, 1962]

-ONE OF THREE DISTRICT OF COLUMBIA BROKERS FOUND TO BE
UNSAFE

(By Miriam Ottenberg, Star staff writer)

More than 100 firms are dealing in stocks and bonds in Washington, but onethird of them couldn't operate in most of the States.

That means the chances are one in three that the unwary Washington investor may run into a broker-dealer who knows nothing about the business or who pays the rent with his customer's investment money or who applies highpressure tactics to sell questionable stocks.

The present danger to Washington investors is emerging in investigations conducted by the Securities and Exchange Commission, the National Association of Securities Dealers and the better business bureaus.

The steadily-worsening situation here in the promotion and sale of low-priced, over-the-counter securities lay behind the SEC's recent decision to send a task force of investigators into Washington on a clean-up mission.

The National Association of Securities Dealers, self-policing organization in the securities field, reports that, in its regular examinations of more than 100 investment firms here, it has recently been taking action against one out of three firms.

The better business bureau hired an ex-FBI agent to investigate Washington securities firms. On the basis of his findings of shoddy and unethical practices, the bureau called on the SEC and the dealers' association to increase their investigative staffs and step up enforcement activities here.

The bureau cited "the promotional activities and business methods of some of these securities firms (that) have resulted in severe losses to the investing public in this area."