SECURITIES AND EXCHANGE COMMISSION-EXPLANATION OF AMENDMENTS TO SECURITIES EXCHANGE ACT OF 1934

GENERAL OBJECTIVE OF STATUTE

The general objective of the Securities Exchange Act of 1934 is to protect the public and investors against malpractices in the securities and financial markets. The statute provides for disclosure of information concerning securities listed on exchanges and for the regulation of trading in securities on exchanges and in over-the-counter markets. The statute contains provisions for enforcement by the Commission through administrative and injunctive actions and for the referral of information concerning violations to the Department of Justice for criminal prosecution.

WHAT THE BILL WILL DO

The amendments embodied in the bill are recommended by the Securities and Exchange Commission. A substantial number of the proposed amendments are designed to make the Commission's enforcement activities more effective by providing additional remedies and eliminating or minimizing various problems which have come to light in the course of Commission enforcement over the past several years. Some of the proposed amendments are designed simply to recognize changes that have taken place since the original adoption of the statute. In brief, the more significant of the proposed amendments would (1) clarify and strengthen the statutory provisions relating to manipulation and to the financial responsibility of brokers and dealers; (2) authorize the Commission by rule to regulate the borrowing, holding, or lending of customers' securities by a broker or dealer; (3) make it clear that attempts to purchase or sell securities are covered by the antifraud provisions of the statute; (4) revise the provisions relating to broker and dealer registration with respect to (a) the basis on which action for denial or revocation may be taken, (b) the sanetions which may be imposed by the Commission, (c) the conditions under which an application for registration may be withdrawn, and (d) the postponement of the effectiveness of an application for registration; (5) prohibit trading in a security in the over-the-counter market for limited periods where the public interest and the protection of investors so requires; (6) clarify the Commission's authority to suspend a security from exchange trading where there has been a failure to comply with the act and where otherwise necessary in the public interest; (7) authorize the Commission to suspend or withdraw the registration of a securities exchange when the exchange has ceased to meet the requirements for original registration; (8) implement the injunctive provisions of the statute and make it clear that a showing of past violations is a sufficient basis for injunctive relief and also that aiders and abettors may be responsible in civil and administrative proceedings; (9) provide that an insolvent broker or dealer may be adjudicated a bankrupt in an injunctive proceeding instituted by the Commission; (10) make it a violation of this act to embezzle moneys or securities entrusted to the care of an exchange member or a registered broker or dealer; and (11) provide for a forfeiture of $100 for each day that any report required under the act is delinquent.

The provisions of each section are explained more fully below.

EXPLANATION BY SECTIONS

Section 1. Modification of definition of term “member” of an exchange

Present law.-Section 3(a)(3) of the act defines the term "member" of an exchange and expressly includes each partner of a member firm but does not include officers and directors of a member corporation.

Problem. Since national securities exchanges now provide for corporate memberships, the Commission believes that officers and directors of a member corporation should be required to meet the same standards and be subject to the same sanctions as partners of a member firm.

Remedy in the bill.-To accomplish the foregoing result, it is proposed to amend the definition of the term "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" it is also proposed to exclude limited partners from the definition.

Section 2. Elimination of references to the Philippine Islands and Alaska in the definition of "State"

Present law.-Section 3 (a) (16) of the act defines the term "State" to include any State of the United States and in addition, among others, the Philippine Islands and Alaska.

Problem.-The Philippine Islands are no longer a possession and Alaska is now a State.

Remedy in the bill.-The amendment would delete these references.

Section 3. Extension of time in which Commission may grant or deny application for registration of an exchange

Present law.-Section 6 of the act provides for the registration of securities exchanges. It requires the applicant exchange to file certain agreements and certain information, and it further provides, as a condition to registration, that it must appear to the Commission that the exchange is so organized as to be able to comply with the act and the Commission's rules thereunder and that the rules of the exchange are just and adequate to insure fair dealing and to protect investors. Subsection (e) provides that the Commission shall enter an order either granting or denying registration within 30 days after the application is filed. Denial of registration must be preceded by “appropriate notice and opportunity for hearing."

Problem. The requirement that an order denying registration of an exchange must be entered within 30 days after the application is filed has created serious administrative difficulties. It has meant that within that 30-day period the Commission must examine the application to determine whether the rules of the exchange meet the statutory standards, conduct an investigation, order a hearing (allowing adequate notice), conduct a hearing, review the record, and enter an order, all in accordance with the Administrative Procedure Act; and it must also prepare an opinion where this is appropriate.

Remedy in the bill.-It is proposed to amend subsection (e) of section 6 to change from 30 to 90 days the period within which the Commission's order granting or denying registration must be entered.

Section 4. Clarification and extension of coverage under margin requirements Present law.-Section 7(c), which deals with the extension of credit on securities, now applies only to members of a national securities exchange and to brokers and dealers who transact a business in securities through the medium. of any such member.

Problem.-Under section 15 of the act, brokers and dealers in the over-thecounter market must register as a condition to using the mails and facilities of interstate commerce. Most registered over-the-counter brokers and dealers do some business through the medium of exchange members. Technical questions have arisen as to how much business must be transacted in order to constitute transacting a business in securities through the medium of an exchange member. Remedy in the bill.-In order to obviate the question, it is proposed to amend section 7(c) so that these sections will also apply to registered brokers and dealers.

As noted below, this same problem is also presented by the provisions of sections 8, 11(d), and 14(b) of the statute and a comparable amendment is proposed.

Section 5

To meet the problem discussed under section 4 above, it is proposed to make section 8 of the act, dealing with financial responsibility, applicable to registered brokers and dealers.

Section 6. Integration and expansion of coverage under financial responsibility requirements

Present law.-Section 8(b) is intended to require a broker to limit his aggregate indebtedness so that it will not exceed 2,000 percent of his net capital or such lesser figure as may be prescribed by rules of the Commission.

Under section 15(e) (3) of the statute the Commission has general rulemaking power to provide safeguards with respect to the financial responsibility of overthe-counter brokers and dealers. Pursuant to this section the Commission has adopted rule 15c3-1 (17 CFR 240.15c3-1), which has the same purpose as section 8(b) but which specifies in detail what is to be included in the concepts of aggregate indebtedness and net capital.

Problem.-Section 8(b) is ambiguous and not effective as it stands. It takes into account aggregate indebtedness arising only in the ordinary course of business as a broker (not dealer), and some question has been raised as to the scope of the Commission's rulemaking power under this section.

Even rule 15c3-1 is not fully adequate because section 15(c) (3) is applicable only when the broker or dealer is effecting, inducing, or attempting to induce a transaction in the over-the-counter market. The rule cannot be made applicable when a broker or dealer effects a transaction on a national securities exchange.

Remedy to the bill.—It is proposed to transfer to section 8(b) the provision relating to the financial responsibility of brokers and dealers which now appears in section 15(c)(3) of the act, so that regulations under the new section could be applicable no matter where the transaction is effected.

The Commission's rule 15c3-1 now exempts the members of all exchanges whose rules have been found by the Commission to impose requirements more comprehensive than the Commission's requirements, and no change in this regard is contemplated.

Section 7. Tightening of the provisions relating to the handling of customers' securities

Present law.-Section 8(d) makes it unlawful for a member, broker, or dealer to lend a customer's security without the written consent of such customer. Problem.--Section 8(d) does not provide for the segregation of customers' fully paid securities or excess collateral. Some stock exchanges have rules which require members to segregate customers' fully paid securities and excess collateral, but they do not apply to brokers or dealers who are not members of such exchanges.

Remedy in the bill.-It is proposed to amend section 8(d) so as to make it unlawful for members, brokers, and dealers to borrow, lend or hold customers' securities in contravention of rules and regulations prescribed by the Commission to provide safeguards with respect to securities carried for the accounts of customers.

Section 8. Tighten antimanipulation provisions relating to “matched orders” Present law-Section 9(a) deals with the manipulation of the prices of securities which are registered on national securities exchanges. Clauses (B) and (C) of section 9(a)(1) prohibit manipulation by the use of what are commonly known as "matched orders."

Problem.-Section 9(a) (1) is designed to prohibit manipulation by arrangements, perhaps among confederates or coconspirators, to enter, by and sell orders at substantially the same time for the purpose of creating a false appearance of activity and influencing the price. In order to come within the prohibition, however, the section now requires that the orders must be of substantially the same size, entered at substantially the same time, and at substantially the same price. In Wright v. S.E.C. (112 F. 2d 89 (C.A. 2, 1940)), the court gave a restrictive interpretation to the phrase "of substantially the same size," which has precluded subsequent reliance on the statutory prohibitions against manipulation by "matched orders." In view of the fact that stock exchange rules and practices normally result in orders being executed in 100-share lots, the overall size of the buy and sell orders placed by a manipulator at a given time does not determine the effectiveness or misleading character of the manipulation by "matched orders."

Remedy in the bill.-It is proposed to delete the phrase "of substantially the same size", without changing the other requirements of section 9(a) (1), including the requirement that activity, in order to constitute a violation, must be for the purpose of creating a false or misleading appearance of active trading in the security or a false or misleading appearance with respect to its market. Section 9. Tighten general antimanipulation provisions and those relating to stabilization

Present law.-Section 9(a) (2) contains the more general antimanipulative provisions of the section. Section 9(a) (6) authorizes the Commission by rule to regulate the related problem of stabilization of securities.

Problem. As they stand, each of these subsections now requires proof of a series of transactions. The more detailed rules of the Commission with reference to manipulation and stabilization which have been adopted pursuant to the general antifraud and antimanipulative provisions of the act in section