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Mr. BASTABLE. Well, informal backing in talking with other members in the profession.
Mr. SPRINGER. Do you have that in the State of New York?
Mr. BASTABLE. I am frankly not familiar with the State of New York, sir.
Mr. SPRINGER. Isn't that where your company is headquartered !
Mr. BASTABLE. Virginia requires a broker-dealer to have 3 consecutive years of experience in the broker-dealer business before he can register.
Mr. SPRINGER. Thank you.
Mr. KEITH. What was the title of the book from which you gave that information!
Mr. BASTABLE. "Investors Beware."
Mr. ABERNETHY. Thank you, sir.
SHAW & CO., WASHINGTON, D.C. Mr. Shaw. I certainly appreciate the opportunity to appear here. .
I am Clarence E. Shaw, president of the Clarence E. Shaw Co., 729 15th Street, Northwest.
It is a short statement. May I read it, sir?
Mr. Shaw. Ever since the Washington Evening Star series on securities dealers in Washington, the need for better law enforcement has been clear. Congress has enacted a comprehensive scheme of Federal legislation to protect the investing public.
All of these laws apply to the District of Columbia, since it has the unique status of a Federal District under the Federal Constitution and is under the exclusive legislative responsibility of Congress.
There is no such thing in the District as “intrastate” activity, which must be regulated by State, county, or municipal laws or regulations, and a "blue sky” law patterned on State intrastate laws may not be the answer.
All Federal laws have immediate and total application in the District of Columbia. All Federal agencies established by Congress to administer Federal legislation have the responsibility to see that those laws are applied in the Nation's Capital.
The Federal laws affecting securities include the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and Investment Adviser Act of 1940, all of which rest upon the constitutional provisions vesting in the National
Government power to legislate with respect to use of the mails and of the means and facilities of interstate and foreign communications and transportation. Under each of these statutes which are administered by the SEC, the Commission is vested with authority to investigate complaints and other indications of possible violations of law.
State blue-sky laws undertake to regulate the intrastate securities business as a supplement to the regulation of intrastate securities business by Federal law. Since there is no intrastate business in the District of Columbia, any reasonable basis for H.R. 4200, the District Commissioner's bill to license persons engaged in the business of selling securities in the District and to regulate the securities business in Washington would seem doubtful, unless the Federal laws are inadequate. Pursuant to House Joint Resolution 438, the SEC is presently completing a thorough study of securities markets for the purpose of determining this important question. SEC Chairman Cary has stated he will propose legislation to provide minimum capital and character competence requirements for brokers and dealers.
Under section 15 of the Securities Exchange Act of 1934, the SEC has adopted regulations providing for the registration of brokerdealers and for the denial or revocation of such registration on specified grounds.
Section 15 denies registration to anyone falsifying an application, or who has been convicted within 10 years of a crime involving securities transactions or the conduct of a broker-dealer business, or is permanently or temporarily enjoined from engaging in any conduct or practice in connection with securities transactions, or has willfully violated the Securities Act of 1933 or the Exchange Act of 1934, or any rule thereunder, upon a finding that denial or revocation of registration is in the public interest.
Under section 15 of the 1934 act, brokers or dealers are prohibited from effecting transactions by means of any manipulative, deceptive, or other fraudulent device or contrivance. SEC regulations require applications for registration of brokers and dealers to be filed on a special form (form BD), which requires a complete disclosure of information relating to the statutory requirements. SEC rule 15(b)-8 requires every broker or dealer who files an application for registration to file a statement of financial condition under oath. Under section 15A of the Securities Exchange Act of 1934 provision is made for a self-regulating association of brokers or dealers pursuant to which the National Association of Securities Dealers, Inc., 1707 H Street NW., has been organized to police and supervise the activities of broker-dealers in the over-the-counter market.
The NASD has a very rigid character and competence examination. If the Federal securities laws are not working in the Federal District, or if the NASC is not functioning properly in the Nation's Capital, it should be a matter of concern to the entire Congress, because it can only mean that the Federal regulatory scheme is either inadequate or not being properly enforced. Congress should not take action on H.R. 4200 until it has had an opportunity to see what regulatory or legislative proposals the SEC will make later this year in connection with the securities markets investigation Congress has authorized, and review Chairman Cary's proposal for Federal licenses, minimum capi
tal, compulsory NASD membership, and character and competence requirements.
Apart from these broad policy considerations, other aspects of H.R. 4200 must be considered in the light of whether they tend to give a monopoly to the large well-financed and long-established securities dealers, and foreclose a fair business opportunity to qualified business people who may wish to enter the field. For example, most of the provisions of H.R. 4200 duplicate existing provisions of Federal securities laws or regulations, or Mr. Cary's proposals.
H.R. 4200 would require a filing fee of $100 plus $10 for each person in the firm every second year.
This fee might be unduly burdensome to some of the smaller but qualified reputable broker-dealers.
Section 10(a) (9) of H.R. 4200 would establish rather vague standards of character or competence as a prerequisite to a license. Federal securities laws have no similar requirement.
Also such factors as training, experience, and knowledge of the securities business might be unfairly construed to exclude on the basis of lack of qualification a lot of persons who are quite properly registered under the Federal law as broker-dealers. The requirement in section 10(b)(2) does not help much with its protection against denial of a license despite experience, if a showing of training or knowledge is made.
These are very vague statutory standards. The provision for an examination, written or oral, or both, as provided in section 10(b) (4) might give rise to certain abuses.
Another feature of H.R. 4200 which seems to weigh heavily in favor of the large established broker-dealers and against the prospects of small or new broker-dealers, is the requirement in section 5(d) for minimum capital of $15,000 and 5(e) of a surety bond in amounts up to $50,000. I understand SEC Chairman Cary may suggest only $5,000, with exemptions for noncustodians, and no bond. The provision of section 5(d) that the Public Service Commission may fix a minimum capital in a lesser amount for a broker-dealer engaged in a limited phase of the securities business or where it is not necessary in the public interest, is discretionary and vague and might not provide adequate protection of a smaller and newer broker-dealer regardless of qualification.
The exemption should be absolute for those who do not handle funds. I would like to underscore that.
Finally, it seems rather anomalous to find responsibility for regulating the business of selling securities and licensing of persons in that business placed in the District of Columbia Public Utilities Commission under the new name of Public Service Commission of the District of Columbia, as provided in section 2(c) of the bill. The District of Columbia Public Utilities Commission is already overworked and understaffed, and has no experience or expertness in this field.
It would be far better, if legislation is necessary, to expend the authority of the SEC itself, so that it can properly meet its responsibilities in the District of Columbia with an experienced and expert staff.
Are there any questions, sir?
Mr. ABERNETHY. As I understand your statement, it is your feeling that this matter should be deferred awhile or left entirely to the juris
diction of the SEC under such amendatory legislation as might come from the Committee on Interstate and Foreign Commerce. Is that correct?
Mr. Shaw. That is correct, sir.
Mr. SPRINGER. Mr. Shaw, from your statement, I take it you are probably in the smaller class of dealers ?
Mr. Shaw. That is correct. We could not meet the $15,000 or $50,000.
Mr. SPRINGER. Are you the only Negro securities dealer in the District of Columbia ?
Mr. Shaw. The only one that I know of, sir.
Mr. SPRINGER. This bond of the size being talked about would strike you particularly hard !
Mr. Shaw. Very, very hard. I would have to go out of business. .
Mr. SPRINGER. There is a question you have raised here which I am not familiar with, and that is you are talking about a dealer who does not have custody. Would you tell this committee what you mean by that?
Mr. Shaw. What we mean by that is in other words, just in plain language, what we do, for example, if a customer comes to us and wants to buy 10 shares of XYZ stock, we bring the customer in contact with the securities. And usually, if it is over the counter, we get a commission for our fee. In other words, we don't hold it in custody, nor do we buy stock for our account. Mr. SPRINGER. Well, assume that John Jones comes to you
says, “I would like to buy 10 share of General Motors."
What you do then is take him down to Harris, Upham, & Co.?
Mr. Shaw. Oh, no; I get on the phone and call the company and get the price.
Mr. SPRINGER. You say, “I have a customer here who wants 10 shares of General Motors. I will bring him over to your place."
Is that in essence what is done?
Mr. Shaw. Not in essence. For example, say he wants to buy Hot Shoppes—one of the local. I haven't sold anything on the New York Stock Exchange. I know this from experience. If he wants to buy 25 shares of Hot Shoppes, which is over the counter, local, I look in the sheets and see what companies have Hot Shoppes. I call several of them. Then I take 10 prices and get the best price. Then I notify my customer and tell him where it can be bought, what the price is. He will send me a check for the amount of money. Then I will have the company, if it is Ferris & Co., send it to me, they will bill me for it and I will subtract my commission for it, which is 25-maybe $60 or $80 and they will send it to me and I will, in turn, give it to the customer.
Mr. SPRINGER. Who handles the stock?
Mr. SPRINGER. Technically, now, under the law, do you have custody in those circumstances?
Mr. Shaw. No.
Mr. ABERNETHY. The stock is not made out to the broker, it is made out to the customer.
Mr. SPRINGER. Let me ask you, do you have custody of his money in your own bank account?
Mr. SHAW. Yes; we do.
Mr. SPRINGER. Then you do have custody of his funds, is that correct?
Mr. Shaw. Yes; he does; he sends me the check for his money. But I would like to say 99 percent of our business is in the mutual funds.
Mr. SPRINGER. Would that make a difference?
Mr. Shaw. Yes; the type of business we do in mutual funds, for example, all checks are made payable to the fund, although we sell mutual funds. For example, we go out to your home and you want to buy XYZ mutual funds. Usually, you make your check payable to the fund.
Mr. SPRINGER. He does not give you $10 in cash?
Mr. SPRINGER. Now, the problem is probably, just looking at it as a practical matter, if this law is passed, the problem with which you are principally faced would be the size of this bond and the amount of the minimum capital requirement.
Mr. SHAW. Correct; yes, sir.
Mr. SPRINGER. As a general rule, without asking you in detail, would you carry very much capital in your account at one time?
Mr. Shaw. Not very much.
Mr. SPRINGER. This is one problem where you would borrow if, say, you were required to have $25,000 minimum capital? Mr. SHAW. I could not meet it.
Mr. SPRINGER. Now, the other would be a $50,000 bond which could be required in this instance?
Mr. Shaw. We could not meet that.
Mr. SPRINGER. In essence, then, what do you feel as a small dealer is the minimum requirement for capital?
Mr. Shaw. From our experience, I would like to say, gentlemen and ladies, we have been in business in the District for the past 5 years and we are licensed to operate in North Carolina and we have been without any complaints with the type of business we have been doing, we have been doing with a capital of $500 to $1,000.
Mr. ABERNETHY. Would you yield to me!