The New York Stock Exchange believes that the new penalty should be limited only to the exempt offering documents, rather than apply to all reports.

F. Contribution to the defendant from other guilty parties.-Section 5 of S. 1178 also provides for contribution to the defendant from other guilty parties. The last sentence of the proposed 12 (b) says that any person who is found liable and is not primarily at fault may get contribution (as in cases of contract) from any other guilty party who if sued separately would have been liable to make the same payment.

This provision for contribution somewhat parallels the one for full registration in section 11 (f) of the 1933 act, and section 18(b) of the Exchange Act of 1934. Both contribution sections are in harmony with the modern theory of contribution among joint tortfeasors, abolishing the common law doctrine where there was none. The phrase, "as in cases of contract," means that parties liable on the statements filed may equitably recover from one another.

The question of who is "primarily at fault” may bring more complication into the second suit than intended, says the National Association of Securities Dealers. If the defendant does not avail himself of third-party practice under the Federal rules, his separate suit for contribution may raise the issue of primary fault, properly the issue of the first suit.

G. Vagueness of “Any document filed.”—The new section speaks of any statement or document filed with the SEC in connection with exempt stock offerings containing an untrue statement of a material fact. Objection of the industry is to the vagueness of “any statement or document filed." For under section 11, liability exists in regard to only one document, the registration statement. It is feared that later regulations may include too many documents. Under present regulations, there must be filed a notification, an offering circular and amendments, newspaper and radio advertisements, and semiannual reports during the offering. The industry insists that the exemption of regulation A is hardly preferable to full registration because there are so many requirements; therefore, in the opinion of the NASD, the liability should cover only the offering circular.

In response the Commission answers that it would be unduly restricted if obliged to name each document which is "required." And the proposed language gives the Agency some of the power it has under full registration. For under section 7 it may alter some of the requirements for registration statements.

Due to the increased liability to companies offering small issues, the Small Business Administration, the NYSE, and the NASD oppose this amendment. SECTION 7: CREATION OF POWER TO GRANT AN INJUNCTION FOR PAST VIOLATION OF THE ACT

An injunction has been traditionally granted to prohibit a person from continuing an unlawful activity. The defendant is enjoined because a criminal penalty for his past offenses may not stop future ones. Indeed he may pay a fine for the past offenses while being presently enjoined from committing the same one in the future. Thus an injunction is in no way a criminal sanction. (U.S. v. Oregon State Medical Society, 343 U.S. 327, 333 (1952).)

However, though the offense is no longer being committed, an injunction may also issue when there exists a likelihood of repetition. This likelihood is proved by the facts existing at the time of seeking the injunction-not necessarily the amount of time which has elapsed since the last violation. For example, voluntary discontinuance of itself may not suffice (SEC v. Lawson, 24 F. Supp. 360 (1938)). Nor is it forestalled merely because the threat of SEC investigation induces cessation of violation (SEC v. Torr, 87 F. 2d 446, 449 (1937)). Other circumstances might be the willful or careless nature of defendant's misdeeds. A district court has added that a statutory injunction should be granted not only in terms of defendant's cessation, but in terms of protection of the public (Lawson, supra); in regard to proving future repetition under another statute, see Ring v. Authors' League of America, 186 F. 2d 637 (1951).

Historically, one could not get an injunction from the court as a matter of right. As a matter of equity, the court issued it in its discretion, taking into account the above-named circumstances (U.S. v. W. T. Grant Co., 345 U.S. 629, 633 (1953)).

Following these concepts, the 1933 act in section 20 (b) allows the SEC to seek an injunction when the defendant "is engaged" or "about to engage" in a violation of the act. These words refer to present activity and include likelihood of repetition. In 1940 the Investment Company Act and the Investment Advisers

Act added the words “has engaged" (sec. 42(d) and sec. 208(d), respectively). In the suggested amendment, section 7 of S. 1178, the Commission proposes to change the earlier Securities Act to conform with the later acts it administers. The words "has engaged" in a violation or "has failed to comply" with the act, would be added. The justification for conformity is that defendants have argued that Congress intended in the later acts to allow an injunction for past violations related to likelihood of repetition; therefore, the absence of "has engaged" in the earlier Securities Act meant it did not so intend therein. No cases have been cited adopting the argument.

The industry, however, insists the change would have the drastic effect of allowing the issuance of an injunction for a past violation without a showing of likely repetition.

Although the statute says an injunction "shall be granted" when certain facts are proved, the Supreme Court has construed a similar statute to mean that the discretion of the Court was not changed by such language. Thus, the issuance is not automatic. (Hecht v. Bowles, 321 U.S. 321 (1944).)

Nevertheless, even though a court retains its equity jurisdiction, the industry feels a judge may believe himself justified under the new language in issuing an injunction unrelated to any showing of future violation (see latter part of Bowles case, p. 331).

Throughout the SEC has recognized that equity jurisdiction exists and in a conference with the industry on March 7 it gave assurance that there was no desire to change this basis. Therefore, it may be objected that the Commission does not need this amendment. That is, it may now obtain an injunction any time it can show the danger of repetitive violations (SEC v. Torr, supra, p. 449; SEC v. Franklin Atlas Corp., 154 F. Supp. 395 (1957), p. 401)). To recapitulate, industry argues that if the agency really seeks to use the injunction as a preventive remedy, it has all the power needed at present. The danger is felt that it seeks to use the injunction as a punitive remedy. If punitive remedies are needed, under section 24 the agency may ask for a fine or an imprisonment for a willful violation of the act. Fraudulent bucketshop operators may be rapidly indicted when it can be proved they have infringed the law.

It may be asked why the SEC uses an injunction as a punitive remedy rather than resort to its criminal remedies. The reason is that an injunction is much swifter than the cumbersome administrative procedures which may also be applicable. For instance, in the case of a broker-dealer who violates the act by selling unregistered stock, an injunction is more expeditious than revocation of his license. The latter requires notice to the dealer, opportunity for hearing, and a finding of violation.

In support of its request, the Commission points out that an injunction only forbids illegal selling. But, industry responds, the adverse publicity of an injunction practically puts a broker out of business in the stock market. For the adverse effects of publicity under the OPA statute, see Brown, Price Ad., O.P.A. v. Purvin, 52 F. Supp. 348 (1943). Under the pressure of the market to sell stock, an injunction may be consented to, rather than contested.

Moreover it is not clear whether the defendant can contest the validity of an agency order in a suit for injunction based on an alleged past failure to comply. 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 the order 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. NASD urges that consideration should be given to including in this section a provision that would suspend the doctrine of exhaustion of administrative remedies, to permit the defendant to contest the validity of the order in the injunction proceeding; and that the language of this section directing that the court "shall" grant the injunction or restraining order, should be changed to "may."

More important, once an injunction is granted, it is grounds for revocation or denial of various privileges under the other SEC Acts. For example, a broker or dealer's registration may be denied or revoked if he is enjoined from a practice in connection with the purchase or sale of any security (sec. 15(b) (2) (C), Securities Exchange Act of 1934). And under the proposed amendments to the 1934 act, the SEC seeks the same power when an injunction relates to conduct of business of a broker, dealer, or investment adviser (sec. 13 of S. 1179). An investment adviser's registration may now be denied or revoked if he has been enjoined in the same way (sec. 203(d) (2), Investment Advisers Act of 1940).

Summary of industry arguments.-The injunction is an historically discretionary measure. The new language "has engaged" might give a court impetus to enjoin without proof of threatened repetition. If so, it may be used as a punitive penalty by an agency. It already has adequate criminal remedies.

Suggestions of industry.-1. Delete "has engaged" in the later acts. 2. Pass the amendment, but add in this act and the 1940 acts the necessity of proving likelihood of repetitive violation, "a proper showing of equity." 3. Change "shall" to "may."

Summary of SEC arguments.-The 1933 act should be conformed to congressional intention expressed in the 1940 acts. The power is needed to stop fraudulent sellers who will continue to harm the public when the SEC fails to get an injunction under present law.

SECTION 11 ADDITION OF PROHIBITION AGAINST AIDERS AND ABETTORS

Section 11 of S. 1178 would add a new section to the 1933 act making it unlawful for persons to do indirectly acts which they are forbidden to do directly. In addition, the section makes it unlawful for any person to aid, abet, or induce another person to violate the act.

The new section does not limit the application of the criminal aiding and abetting statute of the United States Judicial Code. Rather the amendment borrows the concept of aiding and abetting from the criminal law and seeks to insure that persons will be liable in civil administrative actions by the SEC, as well as in criminal actions.

In the opinion of the industry, this provision should be limited under sections of the 1933 act which treat the problem in part. As an instance, the power could be inserted in section 20(b), discussed above, allowing the agency to seek an injunction against a person aiding and abetting a violator. Or again, it could be placed under section 15, which describes the liability of controlling persons. This section says the person who by stock ownership, agency, or otherwise, controls someone civilly liable under section 11 or 12 (the registration and seller sections previously studied) will be jointly liable with the person liable.

But the SEC insists that placing it under section 15, for example, would be unnecessarily restrictive, since that only applies to selling violations. This power is sought in order to penalize abettors of all violations. Amendments of S. 1179 will assist the SEC in denying or revoking a dealer-broker's registration in section 15(b) of the Securities Exchange Act of 1934 by showing under the new section that an abettor has willfully violated the Securities Act of 1933.

In addition, the industry fears that private litigants, not only the SEC, may find in this section a vehicle by which to sue aiders and abettors. For the statute does not say who can sue-it merely says "it shall be unlawful" (to aid or abet). The courts have extended from the SEC to private plaintiffs a right of suit under a comparably general antifraud provision of the 1934 Securities Exchange Act (sec. 10 (b)).

Suggestions of industry agreeable to SEC.-Make it clear that no civil liability is intended.

[S. 1179, 86th Cong., 1st sess.]

A BILL To amend certain provisions of the Securities Exchange Act of 1934, as amended Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That paragraph (3) of section 3(a) of the Securities Exchange Act of 1934, as amended, is amended to read as follows: "(3) The term 'member' when used with respect to an exchange means any firm, organization, corporation or other person permitted either to effect transactions on the exchange without the services of another person acting as broker, or to make use of the facilities of an exchange for transactions thereon without payment of a commission or fee or with the payment of a commission or fee which is less than that charged the general public, and any general partner, officer, or director of any such firm, organization, corporation, or other person.* SEC. 2. Paragraph (16) of section 3(a) of the Securities Exchange Act of 1934, as amended, is amended by striking out "Alaska," and "the Philippine Islands,”. SEC. 3. Subsection (e) of section 6 of the Securities Exchange Act of 1934, as amended, is amended by striking out "thirty" and substituting in lieu thereof "ninety".

SEC. 4. The introductory paragraph of subsection (c) of section 7 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"(c) It shall be unlawful for any member of a national securities exchange, or any broker or dealer who transacts a business in securities through the medium of any such member, or any broker or dealer registered pursuant to section 15 of this title, directly or indirectly to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer-"”. SEC. 5. The introductory paragraph of section 8 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"SEC. 8. It shall be unlawful for any member of a national securities exchange, or any broker or dealer who transacts a business in securities through the medium of any such member, or any broker or dealer registered pursuant to section 15 of this title, directly or indirectly—”.

SEC. 6. Subsection (b) of section 8 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"(b) to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptance or commercial bills) in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility of brokers and dealers."

SEC. 7. Subsection (d) of section 8 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

“(d) To borrow, lend or hold any securities received or carried for the account of any customer, or any securities substituted therefor, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to securities carried for the accounts of customers."

SEC. 8. Clauses (B) and (C) of paragraph (1) of section 9(a) of the Securities Exchange Act of 1934, as amended, are amended by striking out the words "of substantially the same size".

SEC. 9. Paragraphs (2) and (6) of section 9(a) of the Securities Exchange Act of 1934, as amended, are amended by striking out "a series of" and inserting in lieu thereof “one or more".

SEC. 10. Subsection (b) of section 10 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"(b) To use or employ, in connection with the purchase or sale of, or any attempt to purchase or sell, any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

SEC. 11. Subsection (d) of section 11 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

“(d) It shall be unlawful for a member of a national securities exchange, or any broker or dealer who transacts a business in securities through the medium of a member, or any broker or dealer registered pursuant to section 15 of this title, to effect (1) any transaction in connection with which, directly or indirectly, he extends or maintains or arranges for the extension or maintenance of credit to or for a customer on any security (other than an exempted security) which was a part of a new issue in the distribution of which he participated as a member of a selling syndicate or group within thirty days prior to such transaction: Provided, That credit shall not be deemed extended by reason of a bona fide delayed delivery of any such security against full payment of the entire purchase price thereof upon such delivery within thirty-five days after such purchase, or (2) any transaction with respect to any security (other than an exempted security) unless, if the transaction is with a customer, he discloses to such customer in writing at or before the completion of the transaction whether he is acting as a dealer for his own account, as a broker for such customer, or as a broker for some other person."

SEC. 12. Subsection (b) of section 14 of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"(b) It shall be unlawful for any member of a national securities exchange, or any broker or dealer who transacts a business in securities through the medium of any such member, or any broker or dealer registered pursuant to section 15

of this title, to give a proxy, consent, or authorization in respect of any security registered on a national securities exchange and carried for the account of a customer in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

SEC. 13. The fourth paragraph of section 15(b) of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"The Commission shall, after appropriate notice and opportunity for hearing, by order deny registration to, or suspend for a period not exceeding twelve months or revoke the registration of, any broker or dealer if it finds that such denial, suspension or revocation is in the public interest and that (1) such broker or dealer whether prior or subsequent to becoming such, or (2) any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), or any person directly or indirectly controlling or controlled by such broker or dealer, whether prior or subsequent to becoming such, (A) has willfully made or caused to be made in any application for registration pursuant to this subsection or in any document supplemental thereto or in any proceeding before the Commission with respect to registration pursuant to this subsection any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact; or (B) has been convicted within ten years preceding the filing of any such application or at any time thereafter of any felony or misdemeanor which the Commission finds (i) involves the purchase or sale of any security, or (ii) arises out of the conduct of the business of a broker or dealer or investment adviser, or (iii) involves embezzlement, fraudulent conversion, or misappropriation of funds, securities or other property, or (iv) involves a violation of section 1341, 1342, or 1343 of title 18, United States Code, as heretofore or hereafter amended; or (C) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or arising out of the conduct of the business of a broker or dealer or investment adviser; or (D) has willfully violated any provision of the Securities Act of 1933 or the Investment Advisers Act of 1940, or of this title, as any of such statutes heretofore have been or hereafter may be amended, or of any rule or regulation thereunder. Pending final determination whether any such registration shall be denied, the Commission may by order postpone the effective date of such registration for a period not to exceed ninety days, but if, after appropriate notice and opportunity for hearing, it shall appear to the Commission to be necessary or appropriate in the public interest or for the protection of investors to postpone the effective date of such registration until final determination, the Commission shall so order. Pending final determination whether any such registration shall be revoked, the Commission shall by order suspend such registration if, after appropriate notice and opportunity for hearing, such suspension shall appear to the Commission to be necessary or appropriate in the public interest or for the protection of investors. Any registered broker or dealer may, upon such terms and conditions as the Commission may deem necessary in the public interest or for the protection of investors, withdraw from registration by filing a written notice of withdrawal with the Commission. An application for registration may be withdrawn only with the consent of the Commission if the request to withdraw such application is received by the Commission after it has commenced a proceeding to deny registration. If the Commission finds that any registered broker or dealer, or any broker or dealer for whom an application for registration is pending, is no longer in existence or has ceased to do business as a broker or dealer, the Commission shall by order cancel the registration or application of such broker or dealer."

SEC. 14. Paragraph (3) of section 15(c) of the Securities Exchange Act of 1934, as amended, is amended to read as follows:

"(3) No broker or dealer shall make use of the mails or of any means or instrumentaliity of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) on a 'when issued' or 'when distributed' basis, otherwise than on a national securities exchange, in contravention of such rules and regulations with respect to 'when issued' or 'when distributed' trading as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."