size of the orders placed by a manipulator at a given time is not the determining factor as to the effectiveness or misleading character of the manipulation.

For this reason, the Commission proposes to delete the words "of substantially the same size." Nothing else in the section will be changed, and to constitute a violation the activity must still be for the purpose of creating a false and misleading appearance in the market.

The amendments in section 9 of the bill relate to sections 9(a) (2) and 9(a) (6) of the act. Section 9(a) (2) is one of the most important prohibitions against manipulation and section 9 (a) (6) covers the stabilization of securities prices on an exchange. Each of these sections now requires proof of a series of transactions to establish a violation. One manipulative transaction, however, can affect the overall price as effectively as a series, where the price at which a large distribution is going to be made is keyed to the market price existing at the commencement of such distribution.

Consequently, the Commission recommends that sections 9(a) (2) and 9(a) (6) should be made applicable even where there is only a single manipulative transaction involved. I might note that this would be a codification of the principle embodied in the detailed rules with regard to manipulation and stabilization which the Commission has adopted pursuant to section 10(b) of the act.

Under section 15 of the act, brokers and dealers doing business otherwise than on an exchange are required to be registered with the Commission if they use the mails or facilities of interstate commerce. In order to protect investors by eliminating from the securities business unworthy persons, the Commission is given the power under certain circumstances to revoke or deny such registration.

Experience has demonstrated the need for tightening these provisions and such proposals are found in section 13 of the bill. The present law provides that the Commission shall, after appropriate notice and opportunity for hearing, deny or revoke the registration of any broker or dealer if it finds that such denial or revocation is in the public interest and that such broker or dealer, or any person directly or indirectly controlling or controlled by such broker or dealer, is subject to certain specified disqualifications. Procedurally, it also provides, among other things, that pending final determination whether registration shall be denied, the Commission may by order postpone the effective date of registration for a period not to exceed 15 days, but if, after appropriate notice and opportunity for hearing, it appears to the Commission to be necessary or appropriate in the public interest or for the protection of investors to postpone the effective date of registration until final determination, the Commission shall so order.

The Commission's proposals in this area would affect the basis on which registration may be denied or revoked, the sanctions which the Commission may impose, the postponement of the registration where it appears to be necessary to institute proceedings to deny registration, and the conditions under which an application for registration may be withdrawn.

The existing disqualification for past criminal misconduct is limited to a conviction within 10 years of a crime "involving the purchase

or sale of any security or arising out of the conduct of the business of a broker or dealer."

It is recommended that this disqualification be extended to include also a conviction arising out of conduct as an investment adviser or involving embezzlement, fraudulent conversion or misappropriation of funds, securities, or other property, or a violation of the mail fraud statute. Persons who have been convicted of crimes of this nature. should be excluded from registration when the Commission finds that this is necessary in the public interest.

It is also recommended that misconduct as an investment adviser should constitute a disqualification. To that end, it is proposed (1) that the criminal bar just referred to should also include a conviction arising out of an investment advisory business; (2) that the existing disqualification stemming from a finding by the Commission that there has been a willful violation of the Securities Act or the Securities Exchange Act should be extended to include a violation of the Investment Advisers Act; and, (3) that the existing disqualification resulting from an injunction, which is now limited to judicial restraint in connection with the purchase or sale of a security, should be expanded to cover the investment advisory business. In this connection, the bill would also add as a disqualification an injunction arising out of the broker-dealer business.

Section 13 of the bill would provide (1) greater flexibility in the imposition of sanctions by authorizing the suspension of the registration of a broker or dealer in circumstances where there is no need for the drastic sanction of revocation, the only remedy now provided under section 15(b); (2) a more workable procedure in denial proceedings by authorizing the Commission, pending final determination, to postpone the effective date of registration for a period not to exceed 90 days instead of the present 15 days; and (3) codification of the existing procedure which permits an application for registration to be withdrawn only with the Commission's consent if such application is received after a proceeding has been commenced.

Sections 6, 7, and 14 of the bill deal respectively with capital requirements for brokers and dealers, the handling of customers' securities, and the practice of "when issued" trading over-the-counter.

Section 8(b) of the present act makes it unlawful for a member of a national securities exchange, or any broker or dealer who transacts a business in securities through the medium of any such member, to permit, in the ordinary course of business as a broker, his "aggregate indebtedness" to exceed 2,000 percent of his "net capital," or such lesser percentage as the Commission may prescribe by rule. This provision is ambiguous and ineffective. It takes into account aggregate indebtedness arising only in the ordinary course of business as a broker, but not as a dealer, and the scope of the Commission's rulemaking power is not clear.

Under section 15 (c) (3) of the statute the Commission has general rulemaking power to provide safeguards with respect to the financial responsibility of brokers and dealers effecting transactions in the overthe-counter market. Pursuant to this section, the Commission has adopted rule 15c3-1 which has the same purpose as section 8(b), but which specifies in detail what is to be included in the concepts of "aggregate indebtedness" and "net capital."

We have prepared a memorandum which outlines the history and operation of this rule which might be helpful to the committee, and which I would like to offer for the record.

Senator WILLIAMS. We will receive that for the record. (See appendix, p. 352.)

Mr. LOOMIS. Section 6 of the bill would transfer to section 8(b) of the statute the provisions relating to financial responsibility of brokerdealers which now appear in section 15 (c) (3) of the act, so that regulation under the new section 8(b) could be applicable no matter where the transaction is effected. Rule 15c3-1 now exempts the members of exchanges whose rules have been found by the Commission to impose requirements more comprehensive than those in the Commission's rule, and no change in this regard is contemplated. As I have already indicated, section 5 of the bill will add all registered brokers and dealers to the group subject to section 8 of the act. I might note that they are already subject to the existing subsection 15 (c) (3) which is being transferred.

Since it is not contemplated under this amendment to abandon the basic policy of framing capital rules in terms of a ratio of aggregate indebtedness to net capital, which policy has been successfully employed in the Commission's rules ever since they were adopted and which Congress specified in the existing section 8(b), the Commission has concluded upon reconsideration, to add language at the end of section 6 of the bill to specify that the rules and regulations should not provide a ratio of aggregate indebtedness to net capital more restrictive than 20 to 1. This would not in any way limit the Commission's authority to define the terms "aggregate indebtedness" and "net capital," which authority includes the power to provide for the exclusion of certain assets in computing net capital wherever this appears necessary to insure that brokers and dealers maintain an entirely liquid position.

With respect to the handling of customers' securities, section 8 (c) of the statute prohibits the lending of such securities without the customers' written consent. The statute nowhere requires the segregation of customers' fully paid securities or excess collateral. Under section 7 of the bill, brokers and dealers could not borrow, lend, or hold customers' securities in contravention of such rules as the Commission might adopt to provide safeguards in this area.

The callous disregard with which some broker-dealers handle customers' securities is illustrated by a recent case. Upon investigation of complaints from customers of a broker-dealer that they had failed to receive securities they had purchased, we discovered violations of several provisions of the securities laws. The Commission applied for and secured an injunction and the appointment of a receiver. During the course of the investigation, we found that the firm did not segregate customers' fully paid securities.

Senator BUSH. Do they not have to under existing law?

Mr. LOOMIS. No, sir. Only the stock exchange has rules about that applicable to their members, but there is nothing in existing law about it.

Senator BUSH. But a stock exchange firm would be required by existing regulation to make that segregation?

Mr. LOOMIS. By the regulations of the exchanges, not by the provisions of this act.

Senator BUSH. All right.

Senator WILLIAMS. All exchanges, or just some?

Mr. LOOMIS. All the major exchanges have such rules. I am not sure about some of the small ones.

As an example, the firm received from a customer 3,000 shares of a certain stock with instructions to apply 1,000 shares against a purchase of other securities, and to return 2,000 shares registered in the customer's name. Instead of this, the firm delivered the 3,000 shares in question to another broker-dealer to cover a short sale that it had made. The firm followed the same practice in connection with other customers.

With respect to "when issued" or "when distributed" trading, section 12(d) of the act specifically confers upon the Commission rulemaking authority with respect to such trading on an exchange, and the Commission has adopted fairly extensive rules designed to protect investors against abuses in connection with such trading on exchanges. This provision and the rules do not apply to trading over the counter. Section 14 of the bill reflects the view that the Commission should be given rulemaking power with respect to such trading over the counter. The amendment is not designed to prohibit such trading over the counter but is intended to provide the Commission with specific rulemaking power comparable to that existing in regard to such trading on national securities exchanges.

The bill contains three proposals found in sections 15, 19, and 20 with respect to the Commission's authority to suspend trading in a security. Section 19(a) (4) authorizes the Commission under certain circumstances summarily to suspend trading in a security on a national securities exchange for a period not exceeding 10 days. This power is of an emergency nature and has been exercised when developments with respect to the affairs of an issuer make it impossible for trading to be conducted on a fair and informed basis. Examples are situations where it is disclosed that there have been large defalcations and no one can tell what the financial condition of the company is. It is often impossible to get the facts and make them available to the public within a 10-day period and, accordingly, section 20 of the bill would make it clear that the Commission may summarily suspend trading under section 19 (a) (4) for successive 10-day periods where this is found necessary for the protection of investors.

Under section 19 (a) (2) of the act the Commission is empowered after opportunity for hearing to deny, suspend, or withdraw the registration of a security on an exchange under certain circumstances. It has frequently been necessary for the protection of investors to suspend trading in securities during the pendency of such proceedings and the Commission has accomplished this by exercising its summary power under section 19 (a) (4). Section 19 of the bill would expressly authorize the Commission to suspend trading in such a security pending final adjudication. Since it is usually impossible to complete such proceedings within 10 days, this change would avoid the necessity for repeated 10-day suspensions.

Section 15 of the bill would authorize the Commission to suspend summarily trading in any security in the over-the-counter markets

in the same manner as section 19 (a) (4) of the act authorizes suspension of trading on an exchange. Conditions requiring such suspension are as likely to arise in connection with trading over the counter as in connection with trading on an exchange. I should like to point out that on reexamination the Commission has concluded that, with the granting of this authority to suspend trading over the counter, there is no need for the proposals in the last sentences of both section 19 and section 20 of the bill that suspension of exchange trading in a security should automatically bar over-the-counter trading. The Commission will be able to deal with the necessity for the latter type of ban independently under the new provision relating to over-thecounter suspension.

With regard to the regulation of securities exchanges and registered associations of brokers and dealers, section 1 of the bill would modify the definition of the term "member" to reflect the fact that exchanges now admit, subject to various restrictions, corporations as well as partnerships to membership. Section 3 would extend the time in which the Commission may grant or deny application for registration of an exchange, thus providing a more workable procedure, and section 18 would authorize the Commission, after appropriate notice and opportunity for hearing, to suspend or withdraw the registration of an exchange where the exchange has ceased to meet the requirements for original registration. Under the present law, an exchange must meet the rather detailed requirements of section 6 of the act in order to become registered, including a requirement that it be so organized as to be able to comply with the statute and that its rules are just and adequate to insure fair dealing and to protect investors. Once an exchange becomes registered, however, the Commission cannot suspend or terminate its registration unless the exchange is found to have violated the law or to have failed to enforce the law so far as is in its power.

The amendments contained in sections 16 and 17 of the bill relate to section 15A of the statute, which deals with registered securities associations. Since enactment of section 15A, the National Association of Securities Dealers, Inc., which is the only registered association, has made provision for the registration with it not only of securities firms but also of individual salesmen and others who are qualified as registered representatives. Sections 16 and 17 of the bill would extend the provisions for Commission review of disciplinary action by an association to disciplinary action against such representatives, and would provide express jurisdiction for Commission determination as to the conduct of individuals in reference to the right of such individuals to continue to be connected with a member of an association. In addition to the proposed amendments of existing law, the bill adds two significant new provisions. The first of these, found in section 25, would authorize the Federal courts in a proceeding instituted by the Commission to adjudge a broker-dealer a bankrupt if such broker-dealer is unable to meet his debts as they mature. In actions commenced by the Commission against an insolvent broker-dealer, the courts have frequently exercised their general equity power to appoint a receiver, but in such cases the receivership may be governed by State law, and both the receiver and the Commission have, on occasion, had difficulty in determining exactly how to proceed. We