The principal changes to the existing law are listed below:

1. Brokers and dealers who are registered with the Commission but who are not members of the NASD would pay such reasonable fees as may be necessary to defray the costs of the Commission in performing those additional regulatory duties which are required to be performed because such broker or dealer is not a member of such an association.

2. Any broker and dealer who is registered under section 15 but who is not a member of the NASD would be prohibited from using the mails or means of instrumentalities of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any securities except on a national exchange unless the broker or dealer and all natural persons associated (includes sales personnel) with it meet certain qualifications prescribed by the Commission. These qualifications would relate to training, experience, and such other qualifications as the Commission finds necessary or desirable.

3. In a disciplinary action, the Commission could proceed directly against an employee of a broker or dealer in lieu of proceeding against the entire firm, and the authority of a national securities association to do the same would be clarified. The Commission could also impose sanctions short of revoking registration, such as a temporary suspension, censure or bar a person directly.

4. In addition to other technical changes, certain provisions would broaden the Commission's powers to alter or supplement association rules relating to organization, discipline, and eligibility for membership; eliminate in the case of registered brokers and dealers the necessity for proving that the mails and instrumentalities of interstate or foreign commerce were used in a particular prohibited transaction; authorize a registered association to adopt rules under which it might exclude from membership persons who had been suspended or expelled from a national securities exchange; shorten the period for appeals to the Commission from action taken by a registered securities association from 60 to 30 days.

It is anticipated that the major expenses involved in this part of the bill will relate to the Commission's new responsibilities over brokers and dealers who are not members of the NASD. The aim of the bill will be, through Commission regulation, to have non-NASD brokers and dealers in the same position, and subject to equivalent fees, as NASD brokers and dealers. Here the Commission will in effect be taking the place of the NASD in establishing qualification standards, supervising selling practices, and developing and enforcing rules embodying just and equitable principles of trade. However, since certain data regarding brokers and dealers is not available, the Commission cannot estimate at this time the full impact of the bill for the remainder of fiscal 1965. In order to determine the workload involved, manpower required and accompanying costs (which will be recoverable) for fiscal 1966 to implement the various provisions of the bill relating to brokers and dealers, a group composed of six positions (three attorneys, two stenographers, and one clerk) will be required on or about October 1, 1964. It will be the responsibility of this group to develop rules and regulations, forms and internal procedures and fee schedules. It will be necessary to obtain a more detailed picture of the non-NASD brokers and dealers.

On January 1, 1965, it is anticipated that this group will be augmented by an additional six positions (one attorney, two investigators, two examiners, and one stenographer) for the following purposes: (1) establish the nucleus of a registration unit for nonmembers of a registered securities association; (2) develop inspection procedures regarding such nonmembers; and (3) perform a number of pilot inspections.

The initial cost of establishing this group in 1965 as well as the cost of administering the fully integrated regulatory program in 1966 and thereafter will be recovered annually from those regulated, by the imposition of appropriate fees in accordance with a schedule to be established. For 1965, the estimated cost is $90,000. The bill provides that fees are to be prescribed to defray such costs. Any fees so collected will be deposited to the general fund of the Treasury.

I have indicated generally the programs for which we are requesting 43 additional positions for the Division of Corporation Finance, 6 positions for our regional offices and 12 positions for the Division of Trading and Marketsa total of 61 positions. The remaining four positions are for administrative services.

The amount requested in this supplemental estimate for 1965 is required to enable it to conduct its operations in an efficient and adequate manner and in accordance with the expressed intent of the new legislation.

Since I will be leaving at the end of next week and as this budget relates to important operating matters of the Commission for the coming year, I thought it appropriate and advisable to request Commissioner Cohen, who has been designated as my successor by the President, to make the Commission's presentation before your committee. I shall, of course, accompany Commissioner Cohen to the hearing.

Sincerely yours,

ADDITIONAL POSITIONS

WILLIAM L. CARY,

Chairman.

Mr. THOMAS. You indicate you want $390,000 but that $90,000 will be recovered through fees.

You want 65 new jobs. As well as I remember only 10 percent will be in the field.

Mr. COHEN. That is right.

Mr. THOMAS. You break down your allocation on page 5. Let us insert table on page 5 in the record.

(The table referred to follows:)

Mr. THOMAS. It shows the distribution of your people in the Division of Corporate Finance, 43 people; 12 in the Division of Trading and Markets; and then you have 6 in the field, in the other objects, and

so on.

PURPOSES OF THE NEW LEGISLATION

The purposes can be summarized here (reading):

The first major aspect of the bill extends to investors in certain over-thecounter securities the same protections now afforded to investors in listed securities: namely, annual and periodic reporting; regulation of proxy solicitation; and restrictions upon "insider" trading. Initially, companies having total assets exceeding $1 million and a class of equity securities held of record by 750 or more persons would be required to register with the Commission and assume these obligations.

S. 1642 is designed also to raise the standards for entry into the securities business; to enlarge the scope of self-regulation; to refine Commission disciplinary controls over brokers, dealers, and their employees; to clarify and improve existing provisions dealing with related matters; and to permit the assessment of fees by the Commission for expenses incurred for the regulation of registered brokers and dealers who are not members of the NASD. The controls provided would have their primary impact upon those who deal in over-the-counter securities and would complement the protections recommended with respect to companies whose securities are traded in that market.

Are there any exceptions to the registration of over-the-counter companies? Are there two?

Mr. COHEN. Yes.

Mr. THOMAS. The bill exempts stock insurance companies under certain conditions.

What else?

Mr. COHEN. The administration of the statute so far as the banks are concerned will be in the hands of the Federal bank regulatory authorities, that is to say, the Federal Reserve System in the case of State member banks; Comptroller of the Currency for national banks and District of Columbia banks; and the FDIC for State nonmember banks whose deposit are insured by that corporation.

Mr. THOMAS. How badly do you need these 65 people? Don't you have about 1,465 there now?

Mr. COHEN. That is our maximum.