Mr. McCORMICK. I think so; yes, sir.

Senator WILLIAMS. Thank you ever so much. We are grateful for your help on these problems.

Our final witness this morning is Mr. Alexander Yearley IV, chairman of the board of governors of the National Association of Securities Dealers, Inc.

We are pleased to have you with us this morning, Mr. Yearley. Mr. YEARLEY. Thank you, sir.

Senator WILLIAMS. Will you proceed?

STATEMENTS OF ALEXANDER YEARLEY IV, CHAIRMAN; JAMES G. DERN, MEMBER, BOARD OF GOVERNORS; WALLACE H. FULTON, EXECUTIVE DIRECTOR; AND MARC A. WHITE, COUNSEL, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

Mr. YEARLEY. Mr. Chairman and members of the committee, I am Alexander Yearley IV, and am serving this year as chairman of the board of governors of the National Association of Securities Dealers, Inc. Here with me today are James G. Dern, on my left, a member of the board of governors and chairman of the association's legislation committee; Wallace H. Fulton, at my extreme left, the executive director of the association; and Marc A. White, counsel for the association, on my right.

The Securities and Exchange Commission has requested legislation on five of the acts which it administers and, at its request, various bills have been introduced, both in the Senate and in the House of Representatives.

The comments of the association will be limited to those bills which involve the Securities Act of 1933 and the Securities Exchange Act of 1934.

As a background for our comments, it might be well, however, to call the committee's attention to a subcommittee reprint of the House of Representatives entitled, "History of National Association of Securities Dealers, Inc., Its Activities, Membership Data, Sanctions Imposed, Members Expelled, Financial Statements, Liaison, and Supervision by SEC From 1936 to November 30, 1958." This document gives the background and history of the association and statistics concerning the disciplinary work conducted by the association.

A copy of that, as I understand, has been furnished to each member of the committee.

Senator WILLIAMS. We have the copies. That document and the other material you have furnished us will be placed in the committee files. Thank you.

Mr. YEARLEY. In view of the association's duties and interests, it naturally considers of vital concern any proposal for legislation relating to the securities industry.

We have given this committee and the Subcommittee on Commerce and Finance of the House memorandums which summarize the effect of each section of the bills on the Securities Act of 1933 and the Securities Exchange Act of 1934. These memorandums also state the position of the association on the proposals and I would like to offer these for the record.

Senator WILLIAMS. We will receive them for the record. They will appear at the conclusion of your remarks.

Mr. YEARLEY. Thank you, sir.

With the permission of the chairman, I respectfully request that Mr. Dern read a statement on the Securities Act of 1933, then I will read general comments on the Securities Exchange Act of 1934 after which time any of us at this table will answer your questions to the best of our ability.

Have I your permission?

Senator WILLIAMS. Very well. Do you want to proceed?

Mr. DERN. Mr. Chairman and members of the committee, as Mr. Yearley has told you, I am James G. Dern from Illinois, a member of the Board of Governors. I would like to comment on certain proposed amendments to the Securities Act of 1933. Many sections of the bill are not controversial; therefore, our comments will be limited to the sections in which the association is particularly interested.

Section 3 of the bill would amend subsection (b) of section 3 and raise from $300,000 to $500,000 the size of an issue that may be exempted under regulation A. The association is in favor of this proposal. However, Congress should be aware that the imposition of additional liabilities or requirements, such as proposed later in the bill, might have the effect of limiting the use of the exemption. This proposal is presumably designed to make more funds available to smaller businesses and also to provide a more simplified procedure for those small issues than of the procedure required for a full registration.

The next section of interest is section 5 which would amend section 12 of the 1933 act. The proposal to designate a section 12(a) "to eliminate a jurisdictional ambiguity" would give the Commission the power to act when the mails are used in connection with any phase of a securities transaction. This would appear to be constructive.

The second amendment to section 12 broadens civil liabilities under this section by adding a new subsection (d) proposing a liability similar to that now provided for use of a false prospectus, in the event there is a misleading statement or omission in any statement or document filed with the Commission in connection with any offering under regulation A.

The right to sue created by this amendment would be available to any person who receives or is shown a copy of such statement or who relies directly or indirectly on such a statement. The liability to suit falls upon the issuer, upon any person who signed the statement or document, and upon any person who made the untrue statement or caused it to be made. Any of these persons, other than the issuer, can avoid liability by showing that he acted in good faith and did not know about the untruth or omission on which the action is based.

The new subsection would provide also that anyone liable to make payment under this new section may, unless primarily at fault, recover contribution from others who would have been liable if they were sued separately.

This new subsection imposes a very substantial risk of new burdens on all persons who have any part in the preparation of offerings of securities under the several provisions for exemption, or in the offering of such securities, and creates possibilities of complicated litigation involving difficult questions of proof.

We believe that the language of section 12(b) should be limited to misstatements and omissions in the offering circular itself rather than having the section apply to "any statement or document filed with the Commission in connection with any offering ***"; also, that the concept extending the right to recover to any person who receives or is shown a copy of a statement or document be eliminated.

As was mentioned above, with every new amendment applicable to regulation A, there is a possibility that the original purpose of the exemption will be lost.

In view of the above questions and problems in connection with this proposed change, the association is opposed to its enactment.

Section 7 of the bill would amend section 20 (b) relating to injunctions in several respects.

First, it would provide for an injunction when a person has engaged in violations of the act or has failed to comply with the act, or with rules or regulations issued under the act, or with orders of the Commission made under the act.

This section's proposed amendment would authorize the courts to issue injunctions in cases where the violations or noncompliance had occurred long before. This may be read by courts as requiring some showing of the sort customarily required for an injunction that such things not only have happened in the past but are likely to recur and need to be prevented by injunctions, but such interpretation is by no means certain from this proposed language. In some courts this amendment might result in the granting of injunctions merely because of a past violation even though there is need for the injunction to assure future compliance.

Moreover, it is not clear to us whether the defendant can contest the validity of an order in a suit for injunction based on an alleged past failure to comply. Some orders of the Commission accomplish transitory results-like suspensions for a relatively brief period. Others may be accepted without contest because of economic pressures even though the person subject to the order is convinced the order is wrong and invalid. Acquiescence in the order may be less burdensome than contesting it at the administrative level or through the courts in a direct proceeding to test its validity.

If, thereafter, it is claimed that an order of the Commission was not complied with and an injunction is sought on the basis of the past failure to comply, ordinarily, the defense of invalidity of the order would be met by a claim that the defendant had failed to exhaust his administrative remedies by failing to contest the validity of the order directly.

If the above is the case, then, consideration should be given to including in this section, if it should be enacted, a provision that would suspend the doctrine of exhaustion of administrative remedies in such cases, and permit the defendant to contest the validity of the order in the injunction proceedings.

Section 10 would amend section 24 to add to the offenses subject to the criminal penalties specified in the section, the willful making of a material misstatement or omission in an application, report or document filed under the act. The present provision applies only to such statements made in a registration statement. This has the effect of extending both the criminal penalties and injunctive remedies pro

vided by the act to cover material misstatements or omissions willfully made in offering circulars or other documents filed in connection with an offering of securities under regulation A or other exemptive provisions of the act, as well as in any other documents filed under this act.

One question which is raised by this proposal is just what the Commission means by a "report or document." It is suggested that if words such as these are used with reference to filing under regulation A, the language be limited to the actual documents which are filed pursuant to that regulation. The same general statements which were made above concerning the amendment to section 12 and the availability of regulation A apply to this proposed change.

For these reasons, the association is opposed to the enactment of this section in its present form.

The objections to the sections designated above are made with the full realization of the Commission's disclosure and enforcement problems. However, it is believed that weighed against these problems are the problems of the industry unless specific evidence is presented as to the need to protect the public interest. We do not believe that the proposals we have commented on have been shown to be sufficiently necessary to protect the public to justify the additional requirements imposed and the problem of interpretation by issuers and their counsel and the always possible difference of interpretation among the members of the Commission's staff itself.

I thank the subcommittee for allowing me to be present and to make this statement and I now turn back to Mr. Yearley who has some comments on the Securities Exchange Act of 1934.

Mr. YEARLEY. Mr. Chairman.

Senator WILLIAMS. All right, proceed, Mr. Yearley.

Mr. YEARLEY. Mr. Chairman and members of the committee, I will follow the same procedure in this statement which Mr. Dern did in commenting on the Securities Act of 1933. The association will only cover those sections in which it has a particular interest or is taking a definite position.

Section 6 would transfer to section 8(b) essentially the language of the present section 15 (c) (3) which confers on the Commission broad power to prescribe rules to provide safeguards with respect to financial responsibility.

As this section was originally introduced, the association was opposed to its enactment due to the sweeping scope of the power which would be conferred upon the Commission without adequate standards to guide its exercise.

However, on June 15, 1959, Mr. Philip A. Loomis, Jr., Director of the Division of Trading and Exchanges of the Securities and Exchange Commission before the Subcommittee on Securities of the Committee on Banking and Currency of the U.S. Senate on S. 1179, 86th Congress, stated:

* 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.

In view of this modification, the association has no objection to the Commission's proposal as it relates to this section.

Section 7 would amend subsection (d) of section 8 to make it unlawful to borrow, lend, or hold customers' securities in contravention of such rules as the Commission may prescribe. This would replace the present provision which prohibits lending of securities without the customer's consent.

Again applied here to the borrowing or lending of securities is a grant of practically unlimited power to govern by rule in any way the Commission sees fit. Sufficient experience must have been accumulated in dealing with this problem over the years to make it possible to draft practical standards to guide the preparation of the required rules.

The association believes that in matters like this, the legislation should be enacted by Congress, not left to be enacted by the Commission without some definite guides or standards.

Section 10 would amend section 10 (b) by adding a prohibition of the use of manipulative or deceptive devices in connection with any attempt to purchase or sell securities, as well as in connection with actual purchases or sales, which it now covers.

This proposal appears to differ from an earlier proposal of the Commission to prohibit such devices in connection with any "proposed" purchase or sale to which substantial objection was expressed because of its breadth and indefiniteness.

This amendment appears somewhat more definite, but not much. less broad. Now that the rules issued under section 10(b) by the Commission have been the subject of extensive interpretation, it would seem that provision could be written that would codify the powers intended to be conferred in terms that would achieve the proposed objectives without perpetuating this extraordinarily broad power of legislative action by the Commission.

The association is opposed to the enactment of this section, in view of the above.

Section 13 would amend section 15 (b) to add to the present powers to deny or revoke the registration of a broker or dealer, authority to provide for a suspension for not more than 12 months.

This specifically gives the Commission a desirable alternative to the more severe remedy of revocation.

Section 13 would also add to the acts or situations that afford a basis for denial, revocation, or suspension of a broker's or dealer's registration, various acts involving misconduct related to the securities business that are not now included among the grounds for revocation. None of these new grounds appear objectionable.

Section 13 would also provide that the Commission may postpone the effectiveness of an application for a broker/dealer registration for not more than 90 days (instead of the present limit of 15 days) pending determination whether the application should be denied. It is questionable whether a total of 120 days (30 plus 90) is not longer than is necessary for the Commission to reach a decision.

Section 13 would also provide that after the Commission has commenced denial proceedings, an application for registration may be withdrawn only with the consent of the Commission. This is said to be designed to avoid expense and inconvenience resulting from the withdrawal of application after proceedings have been commenced, It is less broad than a provision previously proposed that would have