ment he absconds. Under the present wording the promotor may escape because there was no final buyer to make a purchase or sale. No cases are cited to this effect. However, such operators are sometimes reached because a contract for the sale of stock is defined as a "sale."

In the proposed amendment the words, "any attempt to purchase or sell," would be added which presumably would reach the hypothesized promoter. In 1957 language suggested was any "proposed" purchase or sale. Such language according to the Commission, will place fraudulent nonbrokers on an equal plane with brokers or dealers who are forbidden manipulative acts in over-thecounter transactions under SEC rulemaking power by section 15 (c) (2). The words there are "attempt to induce the purchase or sale of, any security."

Industry objection is related to the narrow construction of the general antifraud provision of section 10(b). The fraudulent promoter in the example is really dealing with one other person, the issuer. There has been no securities transaction involved, much less one involving the public, the organized exchanges or the over-the-counter market. Such a malefactor is the proper concern of the Criminal Code, not the 1934 act. The reply comes back that Congress opposed fraud wherever it was practiced.

The second justification of SEC is that the amendment will reach manipulative and deceptive activities in connection with attempts to buy or sell stocks as well as in connection with consummated transactions. Courts have held that violations of one of the rules promulgated under the section 10(b) rulemaking power, rule X-10(b)-5, give rise to civil liability (despite the fact that none was indicated by Congress in the statute). Therefore the industry fears it is difficult to predict how far this proposed amendment may extend civil liabilities.

Lastly, SEC feels that the amendment will avoid any proof of elements of conspiracy, often difficult to make out. The law of attempt is well defined by criminal precedent and will transfer to this provision. Industry replies that the U.S. Criminal Code contains adequate power to reach a false pretense or a conspiracy. In the opinion of the NASD, 25 years experience under the general rulemaking power of section 10(b) is sufficient to enable the Commission to write final standards into the act, even if they are the presently operative rules.

Section 30. Addition of $100-a-day fine for late filing of any report

Criminal penalties of fine and imprisonment are provided by section 32(a) for willful violation of the act of 1934 or any rule thereunder. Section 32(b) provides for a forfeiture of $100 each day for delinquent reports required under section 15(d) of the act. Under that provision, whenever a company files a registration statement under the Securities Act of 1933 it must keep that statement up to date by filing certain reports in case the offering price of the stocks in the registration statement plus the aggregate value of other securities of the same class amounts to $2 million or more. (This section attempts to put issues truly national in character on the same footing with those listed on a national exchange similarly required by section 13 of the 1934 act.) The $100-a-day forfeiture in section (b) is in lieu of any criminal penalty under (a).

The reports required are an annual report, and the current reports filed 10 days after the end of any month in which important changes occur. Included are a change in control, etc.

The proposed section 30 of S. 1179 would add a new subsection (c) to section 32. An imposition of a $100-a-day fine would be made for failure to file any information, documents, or reports under the 1934 act or any regulation thereunder. Thus the fine would be extended from section 15 (d) filings ($2 million or more) to all stocks registered on a national exchange, to change in beneficial ownership under section 16(a), or broker-dealer annual financial reports (sec. 17(a)), and to any other reports required. In addition, this fine would not be in lieu the criminal penalty of section 32(a). It would be recoverable by SEC in its discretion in a civil suit on behalf of the United States, whereas the existing section 32(b) fine was recoverable by the Justice Department.

A somewhat similar penalty for delinquent reports was recommended by the House Special Subcommittee on Legislative Oversight after investigation revealed that Bernard Goldfine's company had not filed its annual reports for 7 years. SEC points out that it may grant an extension if necessary or institute suit for the fine in its direction.

Industry objection to this new remedy is strong. The ever-changing multitude of documents suggested above requires a specification of those to be "filed."

Moreover, neither the issuer nor SEC is always aware when the document is overdue. Therefore, industry insists, the burden should be on SEC to give by registered mail notice to the delinquent filer that the assessment will begin to run. That might protect the innocent delinquent. SEC says it cannot know of changes such as beneficial ownership section (16(a)). Another suggestion is that SEC should have more discretion to remit or mitigate the penalty as done under customs or maritime law. Or there should be a limit on the overall size of the forfeitures. Again, SEC should perhaps be required to start suit after a certain length of time. The industry's last suggestion was that choice should be made between the civil or criminal sanctions. The reply of SEC is that if it chose the civil sanction in lieu of the criminal, it would appear to have the power of pardon. Moreover, there is rarely the occasion to assess a criminal sanction for a willful misstatement section (32(a)). Industry concludes that the fine should not apply to change in beneficial ownership reports of section 16(a).

After these objections, the SEC agreed that

(1) The forfeiture be limited to the reports under sections 13 and 16, periodic reports of issuers and ownership reports of "insiders".

(2) Recovery of the forfeiture would bar a criminal prosecution for the failure to file the report, with the option in the SEC to proceed civilly for the forfeiture or criminally under section 32(a) of the act.

(3) In the case of beneficial ownership reports of section 16 the forfeiture would not exceed $50 per day, in the discretion of the court.

Section 31. Addition of prohibition against larceny and embezzlement

The 1934 act now contains prohibitions against fraudulently obtaining customers' funds or securities (section 15(c)), but does not contain an express prohibition against embezzling or converting them. The distinction between the concepts is a technical one. It may depend on whether the defendant had a wrongful intent at the time he induced a customer to entrust stock to him, or only after he got possession of the stock.

Consequently, a new section, section 35, would prohibit any person from stealing, willfully converting, or embezzling any funds or stock belonging to or in the custody of a national exchange member, a broker or dealer doing business through him, or any registered broker or dealer. Conviction of such a crime would involve fine or imprisonment of section 32. This provision, modeled in part after section 37 of the Investment Company Act of 1940, removes the technical distinctions of the common law.

Its effect is to create and superimpose a Federal crime of embezzlement of stock over comparable State laws. The separate State laws defining the same crime in different ways would still apply. Presumably, then, an embezzler could be convicted under both Federal and State authority. The comparable section in the Investment Company Act of 1940 adds that a State conviction bars any subsequent Federal prosecution. The same provision might be added here.

The SEC's experience is that in treating brokers and dealers it is easier to apply Federal law rather than State law. Moreover, the new Federal crime is somewhat like the Federal crime of embezzling, converting, etc., from the national banks. Though Federal jurisdiction in the new section is tied to national exchanges or broker-dealer registration in interstate commerce (see sec. 4 of S. 1179), there may be some feeling of Federal crowding of State criminal law boundaries.

Section 25. Creation of power to have broker adjudged a bankrupt

When a broker-dealer becomes insolvent, SEC is able to obtain an injunction against further continuation of business. But neither the act of 1934 nor the other SEC acts provide for the appointment of receivers for preservation of assets and eventual liquidation of the business. However, as ancillary relief to the granting of an injunction, a court of equity has appointed receivers. In numerous cases the Supreme Court has sustained such an appointment.

A receiver may not only preserve the business, but may liquidate it for the benefit of creditors. But even a Federal court receivership may be governed by State law. Where the assets are large, creditors may file claims under many conflicting State provisions. SEC feels that in some instances a State judge may be more favorable to the over-extended broker-dealer than would be one governed by Federal standards.

A Federal standard has been supplied by section 60(e) of the Bankruptcy Act. It specifies in detail what property makes up a fund which will be shared ratably by the creditors and how preferential transfer may be avoided. SEC therefore asks for the power to seek an adjudication from the court that the broker or dealer is a bankrupt. A trustee would be appointed (who may be the receiver previously appointed) to administer the estate of the bankrupt under the Federal Bankruptcy Act. (The language of the third sentence should specify "sec. 60(e), and other pertinent sections.")

The novelty of this proposal is that no Government agency has ever been able to ask a judge to adjudicate a debtor a bankrupt. Under the Bankruptcy Act a bankrupt may file a voluntary petition himself, or three creditors to whom is owed $500 may initiate the petition (sec. 95 (a) and (b) of the Bankruptcy Act). They must allege that the bankrupt has committed an "act" of bankruptcy (sec. 3(b) of the Bankruptcy Act). Note that under the proposal the Commission would not be a creditor. It is true that SEC is often a party and expert adviser under the reorganization chapter of the Bankruptcy Act (ch. X). SEC points out that the delay of waiting for three creditors to file a petition may harm the assets of the debtor.

Justification for the power, according to SEC, is in the efficiency of protecting the public by enjoining further broker-dealer business, and at the same time terminating his affairs for the benefit of creditors in one proceeding by a judge familiar with the facts.

The second innovation is the test of bankruptcy which must be satisfied to enable SEC to invoke the Bankruptcy Act. The new standard would be the socalled equity test of insolvency, the inability to pay one's debt as they mature. Therefore the acts of bankruptcy (sec. 3 of the Bankruptcy Act) would no longer be applied. They consist of concealment of property by the debtor to defraud his creditors, or preferential transfer to any creditor, a general assignment for creditors, the voluntary appointment of a receiver while insolvent or admission of inability to pay his debts.

A question may be raised as to the reason for dispensing with carefully worked-out standards. SEC contends that since it is difficult to prove insolvency, the equity test will make the application of the Bankruptcy Act more rapid. Moreover, the tests of bankruptcy in the act include the appointment of a receiver while the alleged insolvent is "unable to pay his debts as they mature."

Another criticism leveled may be the wisdom of making an important change in the Bankruptcy Act by SEC amendments, the NASD suggests. Such a proposal might more appropriately be made by amendment of the Bankruptcy Act, including section 60(e), and other pertinent sections relating to bankrupt brokers. For there exist many hidden provisions of other acts not directly inIcluded in the Bankruptcy Act which in a piecemeal manner affect it. Section 24. Creation of power to grant an injunction for past violation of the act Under section 21(e) of the 1934 act, SEC is authorized to request, and the district courts to issue, an injunction when a person is engaged or about to engage in violations of the act or regulations issued under it. This is in accordance with the usual principles applicable to the granting of injunctions.

SEC recommends that it also be allowed to obtain an injunction where there have been past violations, in accordance with the comparable provisions of the Investment Company Act and Investment Advisers Act.

A full discussion of the principles involved in this amendment is set forth in the memorandum on the Securities Act of 1933, and will not be repeated here. The section references to the 1934 act are different, and should be changed in the memorandum on the 1933 act in the following order: on page 286, 4th full paragraph, 20(b) to 21(e); on page 287; 5th full paragraph, 24 to 32(a). Section 22. Addition of prohibition against aiders and abettors

Section 22 would add prohibitions on aiders and abettors and other aspects of doing indirectly what is prohibited indirectly. A full discussion of this subject is set forth in the memorandum on S. 1178, in the comments on section 11 at page 288, and it will not be repeated here. Section references in that discussion in the 3d paragraph should be changed as follows: 20(b) to 21(e) and 15 to 20 (a).

Section 16. Creation of jurisdiction to decide who was a "cause" of brokerdealer revocation

Section 15A (b) (4) now provides, in general, that a person who was the "cause" of the entry of an order of suspension, expulsion, denial, or revocation, against a broker or dealer, shall be ineligible for membership in a national securities association, and shall be barred from employment by such a member in certain capacities, unless SEC otherwise directs, in the public interest.

The statute is silent as to when, how and by whom this determination of "causation" is to be made. Analogy must be made to section 15(b) (2) (D) which gives SEC quasi-judicial jurisdiction, after notice and hearing, to revoke registration of broker-dealers for willful violation of the securities acts.

Where a proceeding is in session to revoke a broker-dealer firm's license, it may be an officer who was the controlling person or cause. SEC cannot now try the issue of causation in the original proceeding against the firm since the officer is not a party and thus a determination would not be res judicata.

It is true that in case the officer himself later applies for registration, SEC has the power to find that he was the cause of a willful violation and thus deny it. But this may be too late since the evidence might be gone.

To promote the efficiency of a single proceeding on both questions, SEC has made associates parties to the revocation action against the broker-dealer. But in Wallach v. SEC, 202 F. 2d 462 (C.A. D.C. 1953), the court of appeals rejected this procedure. It pointed out that section 15 (b) revocation applied only to applicants or registrants, not to such associates as the officer in question. The court said that the act gave SEC a proper remedy-to enjoin violating associates under section 21(e) or prove a willful violation of the act subject to criminal penalties under section 32 (a). Such an injunction or a conviction may be the basis for refusal of their later application or revocation of registration. Although no similar cases have arisen under the "cause" section of 15A (b) (4) in the situation of membership of a national securities association, presumably the rationale of the Wallach case would apply. It would forbid SEC from making the person causing the membership or registration revocation a party to the proceeding.

To remedy this failure, section 16 of S. 1179 would add a phrase allowing SEC, a national securities association, or an exchange to have jurisdiction to determine who was a cause of the revocation order. Notice and opportunity for hearing will be given the associate. Thus the order will be made, and should the associate later apply for membership or registration there will be no relitigation of the same facts. SEC contemplates that the associate under the new proceeding will still not become a party.

Section 17. Provision for review of the SEC of action by a national securities association against registered representatives

Sections 15A (g) and (h) provide for review by SEC of disciplinary action taken by a national securities association against its members and of denial of membership in such association. The National Association of Securities Dealers, Inc., the only national securities association, has provided in its rules, adopted pursuant to section 15A of the statute, for the registration with it as "registered representatives" of certain individuals employed by or associated with its members. Where the association takes disciplinary action against both a member and one or more of its registered representatives, its action may now be reviewed by the Commission under subsections (g) and (h) of section 15A. Because there is no provision in the act for review of disciplinary proceedings against registered representatives, there is serious question whether the association can take action against registered representatives without joining a member.

It is proposed to add a new section 15A (o) to afford registered representatives full rights of review in all cases, whether or not related action is taken against a member.

Section 3.-The registration of a national stock exchange with SEC is provided for by section 6 of the Exchange Act of 1934. In order to register a new or consolidated exchange, the agency must under the statute satisfy itself that the applicant's rules are just and adequate to insure fair dealing and to protect investors. To do this appraisal there must be an order granting or denying registration within 30 days-but a denial may only issue after an investigation, a hearing on adequate notice, and a review of the record, all in accordance with the Administrative Procedure Act.

On account of this burden the amendment would lengthen the period from 30 days to 90 days in which the agency must grant or deny registration. The 1957 proposal of the SEC gave it unlimited time.

Inquiry might be made as to the number of applications by exchanges for registration. Although there were 30 applications in 1934, there are now through mergers and dissolutions only 25 exchanges. More consolidations as is possible in western exchanges may occur. But none would attempt to register without many informal consultations with SEC. Therefore, it seems that 3 months may be an invitation to administrative delay. The reply of SEC is that occasionally an applicant will not confer in advance, and without the extra time, would have to incur denial proceedings.

Section 18. Expansion of the Commission's authority to suspend or withdraw the registration of a national exchange

Under section 6 of the act the registration of a national securities exchange may be granted only if its rules contain specified provisions, it is so organized as to be able to comply with the act and SEC's rules thereunder, and the rules of the exchange are just and adequate to insure fair dealing and to protect investors. Section 19 (a) (1) of the act authorizes SEC to suspend or withdraw the registration of a national securities exchange for violation of the act or SEC's rules thereunder, or for failure of the exchange to enforce compliance therewith by a member or by an issuer of a security registered thereon.

SEC is not, but feels it should be, authorized to suspend or withdraw the registration of a national exchange if the exchange has ceased to meet the requirements for original registration, viz, if the exchange is no longer so organized as to be able to comply with the provisions of the Securities Exchange Act and the rules and regulations thereunder, or if the rules of the exchange are not just and adequate to insure fair dealing and to protect investors.

SEC recommends that section 19 (a) (1) be expanded so that SEC would be authorized, after appropriate notice and opportunity for hearing, to suspend or withdraw the registration of a national securities exchange when the exchange has ceased to meet the requirements for original registration.

Under 19 (b), though SEC is empowered to make sweeping changes in the rules of any registered exchange, the internal decay of the exchange often cannot

be cured by this power. It is anomalous to allow only a qualified exchange to register, but to be unable to cast off a decayed one, in the opinion of SEC.

The NASD feels there is a danger of capricious action under this order. Section 1.-As section 3(a)(3) of the Securities Exchange Act of 1934 now reads, a "member" of a stock exchange is defined to include each partner of a member firm. Since national stock exchanges now provide for corporation memberships, it is just, in the opinion of SEC, that officers and directors of a member corporation should meet the standards as partners of a member firm. Therefore, the amended section will define "member" to include any officer or director of any member firm, organization, or corporation. Since stockholders of corporate members are not included within the definition of "member," limited partners are excluded from the definition.

[S. 1180, 86th Cong., 1st sess.]

A BILL To amend certain provisions of the Trust Indenture Act of 1939, as amended

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That paragraph (8) of section 304 (a) of the Trust Indenture Act of 1939, as amended, is amended by striking out "$250,000" and inserting in lieu thereof “500,000".

SEC. 2. Subsection (c) of section 304 of the Trust Indenture Act of 1939, as amended, is amended to read as follows:

"(c) The Commission shall, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more provisions of this title any security issued or proposed to be issued under any indenture under which, at the time such application is filed, securities referred to in paragraph (3) of subsection (a) of this section are outstanding or on January 1, 1959, such securities were outstanding, if and to the extent that the Commission finds that compliance with such provision or provisions, through the execution of a supplemental indenture or otherwise

"(1) would require, by reason of the provisions of such indenture, or the provisions of any other indenture or agreement made prior to the enactment