The reference to mandamus contained in section 21(f) should be eliminated in view of the fact that the Federal Rules of Civil Procedure have abolished the writ as a separate and distinct type of action and provision for mandatory relief by an appropriate order should be included in the injunctive provisions of the statute, i.e., section 21(e).

Remedy in the bill.-The proposed amendment would add in section 21(e) the phrase "has engaged" to insure that an injunction may be obtained in an appropriate case, and add a provision giving the Commission authority to seek enforcement of compliance with the act or any rule and regulation or Commission order thereunder.

Section 25. Addition of provisions for appointment of receiver and the application of Federal Bankruptcy Act

Present law.-Where the Commission institutes an injunctive action against an insolvent broker or dealer, the court may appoint a receiver under its inherent powers as a court of equity, but no express provision for the appointment of a receiver is contained in the act.

Problem. As the law now stands such a receivership may be governed by State law, rather than by the standards which the Congress has written into the Federal Bankruptcy Act with reference to bankrupt stock brokers. It is anomalous for State law, rather than Federal law, to be applicable in a proceeding of this type instituted by a Federal agency in a Federal court, particularly in view of the fact that the Congress has dealt specifically and in detail with the problems of bankrupt stock brokers in section 60e of the Bankruptcy Act. Remedy in the bill.—It is proposed to provide in section 21(f) that, if the court has jurisdiction over an insolvent broker or dealer in an injunctive action under section 21(e), it may upon application of the Commission adjudge such broker or dealer a bankrupt if it finds that he is unable to meet his debts as they mature and that such a receivership shall be administered as provided in the Bankruptcy Act.

As pointed out in the discussion under the preceding section, the reference to writs of mandamus now contained in section 21(f) would be deleted, since a comparable remedy would be provided in the amended section 21(e).

Section 26 and 27

Would change the reference in section 25(a) and 27 to the United States Code to reflect modifications made in the numbering of its pertinent provisions. Section 28. Revision of provisions relating to the validity of contracts

Present law.-Section 29 provides that contracts made in violation of the the act shall be void in certain respects. It contains exceptions, one being that no contract shall be void because of violation of any rule under section 15(c) (3), which authorizes the Commission to adopt rules to provide safeguards with respect to the financial responsibility of brokers and dealers. It does not provide any such exception for contracts to violation of section 8(b), the other provision of the act dealing generally with financial responsibility.

Problems. It is proposed to consolidate sections 8(b) and 15(c)(3) and to designate the consolidated provisions as section 8(b). Since the consolidated provision may be more closely akin to the present section 15 (c) (3) than the present section 8(b), the policy already indicated by the Congress in section 29 should be adhered to and provision made that no contract shall be void because of violation of any rule under section 8 (b).

Remedy in the bill.-The proposed amendment would provide that no contract shall be void by reason of section 29 (b) because of any violation of any rule or regulation under section 8(b), and would delete the reference to section 15 (c) (3). Section 29. Revision of provisions relating to penalties

Present law. Subsection (c) of section 32 provides that the criminal penalties prescribed therein shall not apply to violations of the Commission's rules regarding financial responsibility of brokers and dealers under present section 15(c) (3) with certain stated exceptions.

Problems.—The proposed amendments relating to sections 8(b) and 15(c) (3) of the act which consolidate in section 8(b) the provisions regarding financial responsibility of brokers and dealers make the reference to section 15(e) (3) inappropriate. In addition, this section should be redesignated in view of section 30 of the bill, which will add a new section 32(c) to the act.

Remedy in the bill.-The present section 32 (c) would be redesignated as section 32(d). Reference to section 8(b) would be substituted for the present reference to section 15 (c) (3).

Section 30. Additional enforcement measure for failure to comply with reporting requirements of the act

Present law.-Section 32(a) provides criminal penalties for willful violations of any provisions of the act or any rules or regulations thereunder. Section 32(b) provides for a forfeiture of $100 for each day for delinquent reports required pursuant to an undertaking provided in section 15 (d) of the act. That section requires that a registration statement filed pursuant to the Securities Act of 1933 shall contain an undertaking by the issuer to file the same reports required pursuant to section 13 of issuers with listed securities, if the offering price of the securities covered by the registration statement plus the aggregate value of other securities of the same class amounts to $2 million or more. The $100 a day forfeiture provided in section 32(b) is in lieu of any criminal penalty which might be deemed to arise under section 32 (a).

Problem. As already indicated, the $100 a day forfeiture for delinquent reports is applicable only to limited filings required under the act. The imposition of a comparable assessment generally would strengthen the enforcement techniques available to the Commission to assure timely filings as required by the statute or the rules thereunder.

Remedy in the bill.-The proposed new section 32 (c) would authorize the Commission in its discretion to recover on behalf of the United States $100 per day for the failure to file any information or reports required by the act or rules thereunder for each and every day such failure to file continues beyond the time prescribed for the filing or beyond any time extension granted by the Commission. This payment would not be in lieu of any criminal penalty under section 32 (a).

Sec. 31. Prohibitions against larceny and embezzlement

Present law.-The act now contains prohibitions against fraudulently obtaining customers' funds or securities, but does not contain an express prohibition against embezzlement or converting them.

Problem.-The distinction between fraudulently obtaining customers' funds or securities and embezzling or converting them is a thin and technical one. It may depend upon the technical question of whether the defendant is assumed to have had a wrongful intent at the time when he induced a customer to entrust securities to him in connection with a securities transaction, or whether the idea of converting the securities first occurred to him after he got possession. Remedy in the bill.—It is proposed to add a new section, designated section 35, which would prohibit any exchange member, broker or dealer, or any other person from wrongfully taking, converting, or embezzling money or securities of, or entrusted to the care of, any member of a national securities exchange, any broker or dealer who transacts business through the medium of such member or any registered broker-dealer. A somewhat similar provision now appears in the Investment Company Act of 1940.

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION ON AMENDMENT PROPOSED IN SECTION 7 OF S. 1179

COMMISSION RULEMAKING POWERS RELATING TO THE BORROWING, LENDING, OR HOLDING OF SECURITIES CARRIED FOR THE ACCOUNT OF CUSTOMERS

Existing section 8(d) of the Securities Exchange Act makes it unlawful for certain broker-dealers, including exchange members, to lend or to arrange for the lending of any security carried for the account of any customer without the written consent of such customer. Section 1 of S. 1179 would expand this narrow provision to make it unlawful to borrow, lend, or hold any securities received or 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 to provide safeguards with respect to securities carried for the account of customers.

As indicated in the Commission's statement containing a section-by-section analysis of S. 1179, which was included in the record at the beginning of the hearings, the principal purpose of the amendment proposed by section 7 of S. 1179 is to authorize rules requiring the segregation of customers' fully paid securities and excess collateral and to regulate the lending by broker-dealers of their customers' securities. Some exchanges already have rules covering this subject, but no provision of the law is directly applicable thereto.

At the hearings, representatives of the New York Stock Exchange, the American Stock Exchange, and the National Association of Securities Dealers, Inc., objected to this proposal, primarily upon the ground that the grant of rulemaking power was too broad and that the amendment should be limited more specifically to the problems with which it was intended to deal.1

Since the question was discussed most thoroughly in the testimony of Mr. Edward C. Gray of the New York Stock Exchange, primarily, consideration will be given to his objections. Mr. Gray stated that if, as indicated in prior testimony of the Commission, a principal purpose of the amendment was to give the Commission power to require brokers and dealers generally, and particularly over-the-counter brokers and dealers, to segregate customers' fully paid securities and excess margin in essentially the same manner as is now required by the rules of the exchange, then the amendment should so state specifically. The Commission would have no objection to indicating specifically that its rules in this area should deal with the matter of segregation of such securities. As Mr. Gray himself pointed out, it would probably not be feasible to write detailed rules on this subject into the statute and it would be better merely to spell out the area in which the rulemaking power would operate."

We are unable, however, to agree entirely with the comments of Mr. Gray in regard to the lending of customers' securities. Existing section 8(d) is certainly specific on this topic, but is also inadequate. Its requirements can probably be satisfied by simply having the customer sign a blanket authorization for the lending of his securities at the time when he opens his account. The rules of the New York Stock Exchange itself go beyond existing section 8(d) and provide that customers' fully paid securities and excess margin may not be loaned by a member unless "a specific written agreement designating the particular securities to be loaned is first obtained from the customer." 5 Consideration might be given to the question of whether even this goes far enough, or whether the customer should also be informed of the transaction in which the securities are to be loaned. The principal importance of the borrowing and lending of securities is in connection with short sales rather than with the other types of transactions referred to by Mr. Gray. The Commission has no desire to interfere with the mechanism of short selling and the lending of securities, but does believe that additional safeguards are necessary to protect customers whose fully paid securities are borrowed by the broker-dealer himself, or loaned to others for delivery against short sales. Obviously, such borrowing may subject the customers' securities to considerable risk.

In summary, the Commission would have no objection to modifying section 7 of the bill to spell out more specifically the areas within which its rules should operate, which are primarily the segregation of customers' fully paid securities and excess collateral and the borrowing of customers' securities by the brokerdealer himself, or their lending to others. This could be achieved, as reflected in the appended modification of section 7 of the bill, by making it unlawful to borrow, lend, or hold customers' securities in contravention of rules that the Commission might prescribe as necessary in the public interest or for the protection of investors to provide for segregation of fully paid securities and excess collateral or to provide safeguards with respect to the lending and borrowing of securities carried for the account of customers. In this way controls with respect to segregation and lending which, for example, the New York Stock Exchange has adopted for its own members can be made generally applicable and not limited to the members of certain exchanges or left to the entire discretion of these exchanges. In such rules the Commission could no doubt

1 Transcript, pp. 88-92, 111-112, 120, 130, 131, 150, and 169.

2 Transcript. p. 91.

Transcript, p. 112.

It is very likely that the consent specified in this section would be required in any event since, as Mr. Rosenberry of the New York Stock Exchange pointed out (Transcript. p. 120), a broker-dealer probably holds customers' fully paid securities as a bailee, and if so, he probably could not in any event lend them to himself or to others without some type of authorization from the customer.

Rule 402 (d) of the general rules of the New York Stock Exchange.

exempt members of exchanges whose rules on the matter are deemed to be adequate.

At the hearing on June 15, Senator Williams requested a comparison between section 7 of S. 1179 and the Commission's proposal for amendment in the same area in 1941.

In 1941 the Commission proposed that a new subsection (e) be added to section 8 of the act, which would have provided as follows:

"(e) To borrow, lend, or hold in custody or under a lien, any money, securities, or other property received or purchased by such member, broker, or dealer, for the account of any customer, or sold by, or due from, such member, broker, or dealer, to any 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 to require such member, broker, or dealer to segregate or hold in trust or as an agent such money, securities, or other property, or any proceeds thereof, or any substitutes therefor, in accordance with such rules and regulations."

This proposal was opposed by representatives of the industry.

The 1941 proposal differs from section 7 of S. 1179 in two principal respects. First, the 1941 proposal extended not only to securities of customers, but also to money received by brokers and dealers for the account of customers or due by brokers and dealers to customers. Second, the purpose of the rules to be adopted by the Commission was spelled out in the 1941 proposal somewhat more specifically "to require such member, broker or dealer to segregate, or hold in trust or as an agent such money, securities, or other property ***"

APPENDIX

Section 7 of 8. 1179, modified to reflect the suggestion in the memorandum

Section 7 would amend subsection (d) of section 8 of the Securities Exchange Act of 1934, as amended, 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 for the segregation of fully paid securities and excess collateral or to provide safeguards with respect to securities carried for the accounts of customers." Comparative print

Section 7 would amend subsection (d) of section 8 of the Securities Exchange Act of 1934, as amended, as follows:

"(d) To borrow, lend or hold any securities received or [To lend or arrange for the lending of any securities] carried for the account of any customer [without the written consent of such 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 for the segregation of fully paid securities and excess collateral or to provide safeguards with respect to the lending and borrowing of securities carried for the account of customers."

MEMORANDUM OF SECURITIES AND EXCHANGE COMMISSION ON WITHDRAWAL OF REGISTRATION STATEMENTS AND APPLICATIONS FOR REGISTRATION

The Commission's recommendation for amendment of section 15(b) of the Securities Exchange Act of 1934 and section 203(g) of the Investment Advisers Act of 1940, embodied in section 13 of S. 1179 and section 5 of S. 1182, respectively, contain proposals which provide that an application for registration under those acts 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. The only industry objection to these proposals has been a general objection by the National Association of Securities Dealers, Inc. to the Securities Exchange Act amendment.' The opposition to these proposals has come from the American Bar Association. In addition, the American Bar Association has volunteered an amendment to section 6(c) of the Securities Act of 1933, to proscribe the Commission's authority

1 Tr. 153-154.

to deny applications for withdrawal of registration statements under that statute.2

I. PROPOSAL TO AMEND SECTION 6 (C) OF THE SECURITIES ACT OF 1933 The amendment proposed by the American Bar Association would, if adopted, interfere unduly with stop-order procedures now available to the Commission and in effect would, at least in part, negate or repeal juidical precedent in this area. Although premising its proposal on Jones v. S.E.C., 298 U.S. 1, the bar association proposal, as more fully discussed below, even goes beyond the restrictive holding of that case.

3

First, it should be emphasized that the Commission in acting upon applications for withdrawal is governed exclusively by "the public interest and protection of investors," and the Commission has permitted withdrawal of statements after the institution of stop-order proceedings where consistent with the public interest. Essentially, the bar association quarrels with the Commission's view, which has been judicially sustained, of what action is necessary in the public interest and urges that a more restrictive approach be embodied in the statute.

Next, it should be observed that in considering the Jones case, the courts have consistently found a reason not to follow it. Indeed, the "Supreme Court itself has cast great doubts on the continued vitality of the case.' In United States v. Morton Salt Co., 338 U.S. 632, 642 (1950) the Supreme Court observed: "More recent views have been more tolerant of the [administrative process] than those which underlay many older decisions. Compare Jones v. S.E.C., 298 U.S. 1 with U.S. v. Morgan, 307 U.S. 183, 191." See also Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 203–204; Columbia General Inv. Corp. v. S.E.C., 265 F. 2d 559, 562 (C.A. 5, 1959); Lansky v. Savoretti, 220 F. 2d 906, 909 (C.A. 5, 1955); Bowles V. Misle, 64 F. Supp. 835, 841 (D. Nebr., 1946).

The proposal of the bar association to grant an absolute right to withdraw a registration statement before it has become effective so long as the withdrawal application precedes the institution of a stop-order proceeding under section 8 of the act and no securities have been sold under the registration statement, would produce a more restrictive result than contemplated by the Jones case and would specifically overrule the recent decision of the court of appeals for the fifth circuit in Columbia General Inv. Corp. v. S.E.C., supra.

The Jones case implicitly recognized that where there are investors, existing or potential, to be affected there is no absolute right to withdraw. Yet, under the bar association's proposal the impact on investors would be ignored if the application to withdraw were filed before a stop-order proceeding were instituted. This sequence of events was precisely before the court in the Columbia General case, and it was unsuccessfully argued, among other things, that since the registrant had acted before the Commission had, the Commission was without

The two resolutions adopted by the American Bar Association (Tr., p. 207 ff.) insofar as they deal with the Securities Act of 1933, relate not to the bills now before this subcommittee but to bills introduced in the 85th Congress. These bills (S. 2544 and H.R. 9326) embodied an amendment to sec. 6(c) of the Securities Act of 1933 to provide to a registrant a right to withdraw a registration statement in all cases except where a proceeding or examination initiated by the Commission under sec. 8 of the act was then pending, or was commenced within 15 days after the application for withdrawal was filed. or where the registration statement was already subject to an order of the Commission under sec. 8 of the act. The purpose of that limitation was to prevent unscrupulous persons from filing a false or misleading statement with the Commission, and then withdrawing it when the Commission instituted or deemed it necessary to institute proceedings under sec. S to disclose the false and misleading character of the statement and to ascertain the true facts. It was also proposed to prohibit withdrawal of an effective registration statement where part or all of the securities had been sold. in order to safeguard the rights of investors who had purchased such securities. Since the introduction of the bills in the 85th Congress, there has been addition judicial consideration of the subject of withdrawal, and in the Commission's view the judicially approved standards for denial of application for withdrawal are satisfactory, so that it is not necessary to seek statutory amendment in this area.

a Rule 477. which the Commission has adopted pursuant to the Securities Act, provides in pertinent part:

"Any registration statement or any amendment or exhibit thereto may be withdrawn upon application if the Commission, finding such withdrawal consistent with the public interest and the protection of investors, consents thereto."

Columbia General Inv. Corp. v. S.E.C., 265 F. 2d 559 (C.A. 5, 1959) Resources Corporation International v. Securities and Exchange Commission, 103 F. 2d 929 (C.A.D.C.. 1939): Oklahoma-Teras Trust v. Securities and Exchange Commission, 100 F. 2d 888 (C.A. 10. 1939); Securities and Exchange Commission v. Hoover, 25 F. Supp. 484 (N.D. Ill., 1938).

5 Columbia General Inv. Corp. v. S.E.C., supra, 265 F. 2d at 562.