Columbia had created a serious gap in the protections available to investors. This is true both for those who live in the District of Columbia and those outside the District of Columbia who may be solicited by brokers within the District. H.R. 9419, which passed the House of Representatives on February 24, 1964, would remedy this gap.

On May 21, 1962, I testified before a subcommittee of the Committee on Interstate and Foreign Commerce of the House of Representatives on this subject. A copy of my statement on that occasion has been submitted to this committee.

I pointed out that a serious problem existed in the Metropolitan Washington area with respect to the conduct and qualifications of numerous broker-dealers, that the lack of local regulation appeared to be a factor in that problem since it attracted substandard firms to this area and that the Commission has been compelled to devote a disproportionate part of its enforcement effort to the local area. For example, during recent years the Commission had brought more enforcement actions against District of Columbia brokerage firms than against firms in Maryland, Virginia, West Virginia, Delaware, and Pennsylvania combined, this being the area served by our Washington regional office. The National Association of Securities Dealers, which is a self-regulatory body for the securities industry, established pursuant to section 15A of the Securities Exchange Act of 1934, has had a similar experience.

I urged the enactment of a strong "blue sky" law for the District to be administered by the District government, and do today.

Thereafter, Mr. David C. Acheson, U.S. Attorney for the District of Columbia, took the leadership in drafting such a bill with the cooperation of representatives of all interested groups, including the Commission. I think we in the District owe a great deal to the responsible, public-spirited, and effective way in which Mr. Acheson has handled it.

The resulting bill was introduced in the House of Representatives as H.R. 4200 and in the Senate as S. 1001. I testified in support of that bill before the Committee on the District of Columbia of the House of Representatives on May 2, 1963. A copy of my statement at that hearing has likewise been furnished to the subcommittee.

I concluded that enactment of H.R. 4200 would furnish the local regulation necessary to complement the Federal statutes and would contribute significantly to the protection of investors in the District of Columbia and of persons in adjoining States who may have dealings with such broker-dealers. I stated that the Commission strongly favored enactment of the bill.

H.R. 9419, now before this committee, is substantially the same as H.R. 4200, except for the treatment of persons engaged in selling variable annuity contracts mentioned below, and, as I stated to the House committees, the Commission urges its enactment.

I understand that the only feature of this legislation which presently is in any way controversial involves the regulation of persons engaged in selling so-called variable annuities. In my testimony before the House Committee on the District of Columbia I pointed out that the Supreme Court has held that, for purposes of the Federal securities laws, variable annuities are securities and not insurance, and therefore are subject to regulation by this Commission. I stated

that in our view persons who sell variable annuity contracts may be more appropriately regulated by a securities commissioner but indicated that the Commission was not primarily concerned with the choice of regulatory authorities on a local level. Subsequently, when I learned that efforts were being made to resolve the difference of opinion with respect to this matter, I wrote to the Honorable Walter Tobriner, President of the Board of Commissioners of the District on July 3, 1963, to advise him that the Commission believes that the appropriate position is to treat variable annuities in the same manner as other securities. I would like to elaborate on this.

As I mentioned, the Supreme Court held in the case of Securities and Exchange Commission v. Variable Annuity Life Insurance Company of America et al., that variable annuities were securities for the purposes of the Federal securities laws and that they were not entitled to the exemptions provided in those laws for insurance or for insurance policies and annuity contracts. A principal reason for this holding was the fact that a variable annuity differs from a conventional annuity, in that the risk of change in the value of the portfolio of equity securities underlying variable annuities is borne by the purchaser of the contract rather than by the insurance company. In the case of conventional annuities and insurance policies the investment risk is borne by the insurance company and not the policyholder. Because of this, as pointed out in more detail in the concurring opinion of Mr. Justice Brennan, the scheme of Federal securities regulation was found to be better suited to the protection of such purchasers than conventional insurance regulation which is primarily designed to insure the solvency of the insurance company. A principal reason for the regulation of securities brokers and dealers, as contemplated by H.R. 9419, is to endeavor to insure that they are competent to advise investors with respect to the risks and advantages inherent in investment in equity securities. By reason of the fact that variable annuities, unlike conventional annuities, involve both such risks and such. advantages, I believe it more appropriate that the sellers of such contracts be regulated as sellers of securities rather than as sellers of insurance. As the Supreme Court pointed out, conventional insurance or annuities do not involve this element of participation in the investment experience of a pool of equity securities which is similar to a mutual fund.

In the second place, persons engaged in the sale of variable annuities in the District are required to register as broker-dealers under the Securities Exchange Act of 1934 and are thus regulated as sellers of securities. It should prove easier to coordinate local regulation of these firms with the regulation under the Federal securities laws to which they are already subject if they are regulated under the securities laws of the District rather than under the insurance laws.

For the above reasons, the Commission believes that the House of Representatives arrived at an appropriate solution of the variable annuity question in H.R. 9419. We, accordingly, believe that it would be in the public interest for the Senate to concur in the decision of the House, rather than to entangle this important legislation in a controversy as to which local agency should regulate this relatively small group, a controversy which, in comparison with the important public protection which this legislation would afford, seems relatively insignificant.

I would say, therefore, that this should not founder on an intramural dispute.

Thank you, Mr. Chairman.

Senator HARTKE. Thank you, Mr. Cary.

Senator Dominick, any questions?

Senator DOMINICK. Thank you, Mr. Chairman.

Mr. Cary, it is always a pleasure to see you again.

I have a few questions on your statement, just for the purposes of the record, to clear up some of the confusion in my mind.

Is it my understanding that the Securities and Exchange Commission at the present time has jurisdiction over the sale of securities within the District?

Mr. CARY. Yes, we do have with respect to broker-dealers in the District of Columbia. We would have jurisdiction under the 1934 act, and with respect to the issuance of securities under the 1933 act, we similarly have jurisdiction.

Senator DOMINICK. So, as a mater of fact, the people who are engaged in selling securities in the District are already under regulation which is applicable on interstate sales countrywide?

Mr. CARY. They are under the limited kinds of regulation we can afford, Senator Dominick. We feel very strongly indeed that our jurisdiction should be supplementary to that of local-of a local blue sky law or securities law which would offer far more protection to the investor with respect to the selling by security people.

Senator DOMINICK. Then in your opinion the local enforcement of these provisions are far more effective than national enforcement? Mr. CARY. They are totally different, Senator, and as a consequence we feel that they should be supplementary-in other words, one very definite thing we feel is that we should not be taking over the total jurisdiction of this activity, and that they should work together rather than one excluding the other.

Senator DOMINICK. Now, would this require the establishment of a new body in the District of Columbia?

Mr. CARY. I am not really as competent to speak on that as the persons who are in the District of Columbia.

As I understand it, the Public Service Commission, as it is now called, Senator Dominick, is really made up of the persons who formerly were members of the Public Utilities Commission of the District of Columbia.

Now, whether or not it will be supplemented by individual persons, I cannot say. But this is a change in name, first of all, and an addition in their function.

However, I don't want to-this is not my area of competence, and so I think that ought to be answered more effectively by Mr. Acheson and others.

Senator DOMINICK. Does the Public Utilities Commission of the District of Columbia have expertise in the question of securities sales?

Mr. CARY. I do not know one way or the other. They have some expertise in financial matters, by definition of their work with respect to public utilities regulation.

I cannot speak on that point.

Senator DOMINICK. Now, Mr. Cary, the SEC, as I understand it, has enforcement provisions within its organization, not only with

respect to the sale of securities and following through on the regulations under the 1933 act, but also in order to make sure that the broker-dealers under the 1934 act are in conformance with the statute, is that not right?

Mr. CARY. We have a staff, that is correct. But in every jurisdiction-there are only two States, Senator Dominick-two jurisdictions, in which there is not some securiteis law; namely, Delaware and the District of Columbia.

In all those others, States there is a securities law, there is a securities commissioner, and there is a group, sometimes limited, but nevertheless a group, enforcing a law applicable to broker-dealers. Now and that law, by the way, is more thorough in its scope. It deals with, for instance, immediate withdrawal of licenses and the like of securities dealers under certain circumstances in many cases. It is a licensing law, and has other features, which our law does not have at the present time.

And I would say that this would offer an increase in protections to investors which our law cannot afford, including, for instance, the qualification of persons entering the business. And there have been horible examples of people in the business here in the District of Columbia, which we cannot control.

Senator DOMINICK. Mr. Cary, just to explain the basis of some of the questions I am asking, as I think you know, one of the basic things which I think is important is not to duplicate regulations and not to regulate unless it is necessary.

Now, taking that into account, is the scope of the securities situation, both in sales and in violations, sufficient, in your opinion, to make it necessary to regulate it here rather than the District itself?

Mr. CARY. Senator Dominick, I believe it is necessary. Indeed I think this would be directly in conformity with your own philosophy, because of the fact that there ought to be some of this handled at the local level as distinguished from having everything centered in the Federal level. We are not attempting to increase, shall we say-to build our empire. On the contrary, we believe that some of the local features should be handled at the local level, and we ought to deal with policy matters and some of the major issues at the national level.

Mr. Loomis, I think, might want to supplement my remark on this point.

Mr. LOOMIS. The only thing I would add is that the thrust of local securities regulation everywhere, in all the States that have it, is to license people, to pass on their character, their qualifications, their experience, matters of that type.

Our statutes do not provide for anything of the sort.

Our main function with respect to broker-dealers is fraud enforcement-that is, catching and punishing frauds, unfortunately after they happen. And we think that the supplement of the initial screening is very valuable.

Senator DOMINICK. Thank you. I think that pinpoints the very position that I wanted to have developed.

I have just a couple more questions.

Do you have any statistical information on the number of complaints that have been received and investigated in your office out of the District of Columbia over the last 5 years?

Mr. CARY. We had-Senator, I am not sure I can provide that at this very moment. When I spoke before the commitee-the subcommittee of the Committee on Interstate and Foreign Commerce of the House of Representatives, we did provide certain statistics-I am not sure that they would give you quite what you are driving at. if you would give me one moment here.

But

I think I might start, if I may, Senator Dominick, at page 4 of my written testimony before the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce of the House of Representatives, on May 21, 1962, when I urged the need for this legislation.

And, at that time-if I may, I would like to read excerpts from my discussion at both pages 4 and 5, which gives some statistics. And I might say that Mr. Brown, who is here and handling our regional area, might be able to give you some practical situations which would further amplify the point.

We say here the genesis and subsequent history of many new firms reflects what has caused our anxiety and resulted in our actions.

A staff study the past 5 years shows that many local brokerage firms have been formed by persons formerly associated with houses that the Commission has closed. Approximately one-third of the 67 that went out of business in the past 5 years had an officer, director, or owner who had previously worked for a firm against which the Commission had brought proceedings. Half of this group had two such persons.

Then, if I may skip over to other statistics or points made at page 5 of my manuscript, I say here:

A barometer of what the District's security problem was may be seen in the great number of enforcement actions brought by the Commission, and complaints filed with the NASD against District broker-dealers. During the 4-year period up to June 30, 1959, a total of 12 administrative proceedings were brought by the Commission against District firms. From July 1, 1959, to May 1962, a period of less than 3 years, a total of 20 such proceedings were brought, nearly twice that of the previous period. Similarly, from June 1, 1955

Senator DOMINICK. Could I interrupt you, Mr. Cary?

Those proceedings that you refer to, from July 1 of 1959 to 1962, were they proceedings against an alleged broker-dealer?

Mr. CARY. That is correct, yes.

Senator DOMINICK. Thank you.

Mr. CARY. Administrative proceedings.

Similarly, from June 1, 1955, to June 30, 1959, only two injunctive proceedings were brought against local firms. From July 1, 1959, to May 7, 1962, 18 such actions had been brought, an increase of 900 percent. The Commission's Washington Regional Office has brought more of these actions against District brokerage firms than firms in all other States for which it is responsible— Maryland, Virginia, West Virginia, Delaware, and Pennsylvania.

I think that is as close to statistical information as I can furnish. Mr. Brown, who has been working very actively in this field, could supplement it with cases, if you wish to pursue them.

Senator DOMINICK. I think for my purpose that is satisfactory. I just wanted something in this hearing record which would give the background of this.

Now, let me go on, if I may, to the variable annuity problem.
Mr. CARY. Yes, sir.

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