authority to conduct the stop-order proceeding. The bar association proposal would incorporate into the statute the position rejected by the court of appeals for the fifth circuit, and would make the conduct of a stop-order proceeding dependent upon a "race" between the registrant and the Commission, with the interest of investors ignored." The purpose of a stop-order is not only to suspend a license but it also "operates as a warning to the investing public that the Commission has found that the statement is untrue or misleading and, therefore, unreliable." Oklahoma-Texas Trust v. S.E.C., 100 F. 2d 589, 591 (C.A. 10, 1959). The public interest considerations which have governed the Commission's action, and the need for rejecting the restraints which the bar association would impose upon the Commission, are fully stated by the court in the Columbia General decision, a copy of which has been offered for the record.

It must be emphasized that the very purpose of the registration process is to provide wide dissemination of the information contained in the registration statement. Section 8(a) of the Securities Act provides a waiting period during which dissemination of the information is to be accomplished, and section 6(d) of the act requires that the information be made available to the public. Indeed, the registration statement becomes a public document immediately upon filing and remains public. Even after the statement has been withdrawn it remains in the public files of the Commission, except that the fact of its withdrawal is noted.

In a variety of ways, the information in the registration statement may be disseminated to the public. The statement is available for public inspection, copies may be secured from the Commission, news stories frequently summarize the contents of registration statements as they are filed and financial reporting services publish the information disclosed in the registration statement. The registrant may distribute the prospectus which is a part of the statement and may even offer the security or solicit offers to buy.

To recapitulate, the bar association proposal would permit withdrawal as of right, at any time prior to the institution of a proceeding by the Commission, whether or not there was a public and investor interest in securities of the issuer and whether or not the information contained in the registration statement had in fact been broadly disseminated. The Commission cannot accede to such a proposal because it is contrary to a cardinal objective of the Securities Act to prevent public dissemination of misleading and fraudulent information which may become the basis for securities transactions by the investing public and would tend to make more difficult rather than to facilitate the Commission's efforts to combat the filing of false and misleading registration statements. As the court pointed out in the Columbia General case, 265 F. 2d at 564–565:

**** On the larger scene, the public interest is served because it [i.e.] the Commission's findings and opinion in the stop-order proceeding] stands as a deterrent to the filing of registrations by an issuer indifferent to the accuracy or honesty of the statement because he knows that if caught, or nearly caught, or threatened with being caught, or even investigated, he can withdraw the offensive statement at will. As a stop order prevents this, it will indeed promote truth in securities, and that is what Congress intended."

The bar association proposal further provides that, after the initiation of a proceeding by the Commission for the purpose of achieving correction of the defective registration statement, the registrant would have the right to withdraw the registration statement unless the Commission determined that such withdrawal would be contrary to the public interest and the protecion of the investors and issued an order prohibiting withdrawal, containing or accompanied by findings in support of such determination, within 15 days after the application for withdrawal is filed. The order denying withdrawal would be deemed a final order and appealable (Tr. p. 222ff., statement pp. 6, 8).

Apart from our disagreement with the merits of the bar association proposal, the proposal would present practical difficulties. Insofar as it is intended to require that the Commission order and determination be based upon a record,

• The bar association's draft amendment and the accompanying explanatory statement (p. 7) state specifically that absent a sale under the registration statement itself, the registrant would have an unqualified right to withdraw if no proceeding has been instituted. This is to be contrasted with the statement of Mr. Nelson, who testified on behalf of the bar association, that there would be a public interest in denying a withdrawal application and conducting a stop-order proceeding if the registrant had outstanding securities of the same class as covered by the registration statement (Tr., 224). Even this view takes a narrower approach of the public interest than has been recognized by the courts. See Fischman v. Raytheon Mfg. Co., 188 F. 2d 783 (C.A. 2, 1951).

it is difficult to see how the Commission could effectively, and within 15 days after the application for withdrawal is filed, conduct a hearing surrounded by the safeguards of administrative due process. Furthermore, should action upon applications for withdrawal require all the procedures necessary to hearings upon a record, briefs and argument before a hearing officer and the Commission, and before courts of appeal, this could have the unfortunate effect of delaying the Commission in carrying out its responsibility to reveal and seek prompt correction of misleading registration statements.

The proposal that an order denying withdrawal be immediately appealable would overrule judicial precedent and the approach that the judiciary has taken with respect to review of interlocutory agency orders. In the classic case of Myers v. Bethehem Corp. (303 U.S. 41, 50), the Supreme Court declared: *** no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted." This principle was characterized by the Court as “a long-settled rule of judicial administration." Consistent with this long-settled rule the courts have held that an order denying withdrawal is an interlocutory order not subject to judicial review. Jones v. S.E.C., 79 F. 2d 617, 619 (C.A. 2, 1935), cert. denied 297 U.S. 705; Resources Corporation International v. 8.E.C., 97 F. 2d 788, 789-790 (C.A. 7, 1938).

II. PROPOSAL WITH RESPECT TO WITHDRAWAL OF APPLICATION FOR REGISTRATION AS BROKER-DEALER

The statute does not now provide the conditions under which an application for registration as a broker-dealer may be withdrawn. Section 13 of S. 1179 would codify the existing administrative practice by providing that an application for registration may be withdrawn only with the consent of the Commission if the request for withdrawal is received after the Commission has instituted a proceeding to deny registration.

As a substitute for the Commission's recommendations, the bar association has submitted a proposal which would grant the applicant an absolute right to withdraw unless the Commission determined that such withdrawal would be contrary to the public interest and the protection of investors and issued an order denying withdrawal, containing or accompanied by findings in support of such determination. The substance of this concept is followed in the present practice of the Commission, which is to grant requests to withdraw applications unless it believes that under the facts of the particular case such action would be contrary to the public interest. We have pointed out above certain of the difficulties which are created by the manner in which the proposal is framed.

The proposal of the bar association, and particularly the testimony of its representative, seem to be based on the idea that there is rarely, if ever, any public interest in the activities of an applicant for registration prior to the time when he becomes registered, and that consequently going forward with the proceeding to deny registration where the applicant has requested withdrawal would in almost every case be merely a waste of time and effort and a harassment of the applicant. The Commission agrees that in some cases this may be so and, as pointed out hereafter, it has granted a number of requests for withdrawal filed under such circumstances.

To assume, however, that this would be desirable in every case misconceives both the practical requirements of the public interest and the nature of the scheme of broker-dealer regulation and registration embodied in the Securities Exchange Act. Section 15(b) of the act contains a number of grounds upon which registration may be denied, of which perhaps the most significant is a determination that the registrant or applicant, or any partner, officer, director, branch manager, or any other person, controlling or controlled by the applicant, has willfully violated the Securities Act or the Securities Exchange Act.

The purpose of this statutory provision is to provide for exclusion from the securities business of those persons who by their violations of law have demonstrated their unfitness to engage in that business. The statute recognizes that no scheme of broker-dealer registration can be effective unless the sanctions and disqualifications reach not only business entities such as partnerships and corpo

There is no need to discuss the proposal to amend the Investment Advisers Act in this area, since the reasons for this proposal are substantially identical to those under the Securities Exchange Act.

8 Tr.. pp. 220, 224–225.

rations, which can be formed or dissolved at will, but reach also the individuals who own and operate such entities. In many cases there will be a substantial public interest in proceeding with the determination of these questions once they are raised. The considerations referred to above in connection with the proposal for amendment of the Securities Act of 1933 are applicable here. Public investors may well be concerned with the prior unlawful activities of the applicant, and may have the same interest in having the facts with regard to such activities brought to light as they would have in having the false and misleading character of a registration statement brought to light. In addition there is a public interest in not frustrating the purpose and object of the statute. If the applicant is allowed to withdraw with the intention of applying again at a time more convenient to him, it may be that it will be impossible to develop the case at this later date and thus he will gain entrance to the securities business although he is in fact disqualified under the congressional standards. The representative of the bar association appears to regard this consideration as unimportant. We do not believe it unimportant, since we do not regard compliance with the mandate of the statute as unimportant.

These considerations are emphasized by the requirements of section 15A (b) (4) of the Securities Exchange Act of 1934. That subsection deals with the eligibility of individuals to be members or employees of members of a registered national securities association-in practice the National Association of Securities Dealers, Inc.-which includes among its membership the overwhelming majority of overthe-counter brokers and dealers. A person is ineligible if, by his conduct, he was a cause of an order of the Commission denying registration as a brokerdealer. If a denial proceeding is commenced, based upon the contention that someone connected with the applicant has willfully violated the Federal securities laws, there will also be presented the issue of whether that person is to be found to be a cause of any order of denial which may be entered. That issue can be adjudicated only in the denial proceeding.

The short answer to the bar association's assertions that the Commission is seeking "absolute authority" under its proposal is to consider the manner in which the Commission has handled applications for withdrawal under its present administrative procedure, which the bill would codify.

During the fiscal years 1957, 1958, and 1959, 2,320 applications for registration were filed. Requests for withdrawal prior to the institution of any proceeding numbered 51, and the requests were granted without objection. In 27 cases denial proceedings were commenced during the 3-year period, and 11 requests for withdrawal were filed after the institution of the proceedings. Eight were denied and three were granted. This was not an exercise of absolute authority to deny. The Commission's conclusions were premised on the appropriate action necessary in the public interest.

The inapplicability of the Jones case to the type of situation here involved and the importance of making the findings in the denial proceedings were cogently stated in Neustein v. Mitchell, 52 F. Supp. 531, 532 (D.C., S.D.N.Y., 1943), where an analogous situation was considered. In that case an admin

istrative action was brought to remove an employee for alleged violations of the Hatch Act, and the court held that the resignation of the employee after institution of the proceeding, but before the hearing, did not deprive the Civil Service Commission of jurisdiction to adjudicate the allegations. The Court stated, inter alia:

**** It is clear, also, that the Commission's function did not end with a determination that the petitioner had violated the statute, for under section 12(b) a removed employee could not be reemployed within 18 months of the Commission's determination. The proceeding before the Commission was in no sense a mere adjudication of private rights; it had a broader purpose in the enforcement of the Hatch Act in the public interest. Jones v. Securities and Exchange Commission (298 U.S. 1, 56 S. Ct. 654, 80 L. Ed. 1015), is plainly distinguishable."

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 17218

COLUMBIA GENERAL INVESTMENT CORPORATION, PETITIONER, VERSUS SECURITIES AND
EXCHANGE COMMISSION, RESPONDENT

Petition for Review of Orders of Securities and Exchange Commission.
(April 6, 1959.)

Before HUTCHESON, Chief Judge, and CAMERON and BROWN, Circuit Judges. BROWN, Circuit Judge: This is a Petition for Review of a stop order issued by the Securities and Exchange Commission suspending a registration by Columbia General Investment Corporation (Columbia) for the sale of 100,000 shares of stock at a specified price. Columbia's principal contention is that SEC lacked jurisdiction to issue the stop order because, prior to the effective date of the registration, Columbia voluntarily requested its withdrawal. This was, it claims, its absolute right, unfettered by any agency discretion whether innate or pursuant to SEC's express regulation 477.' If that result was not automatically required as of the time of the notice of the stop order hearing, Columbia next asserts that it became such by the subsequent filing of a substantive amendment which SEC had mandatorily to accept under Section 8(a).2 A somewhat subsidiary but related contention is that SEC denied Columbia an effective opportunity for penitence and voluntary adjustment under Section 5(b) of the Administrative Procedure Act, 5 USCA Section 1004 (b).

In this frontal attack no question is raised about the sufficiency of the evidence to sustain the findings of SEC. Hence, in reviewing the power of SEC to require and conduct the stop order proceedings, we accept as an established fact that the statements in the registration "were materially misleading" as to Columbia, its affiliate Columbia General Life Insurance Company (whose stock constituted a significant part of Columbia's asserted assets), Thomas E. Hand, Jr., J. Ed Eisemann III (the promoters and moving figures in these two corporations as well as others involved), and the Columbia Securities Company (a sole proprietorship set up by one of them for the purpose of maintaining and stabilizing the market in Insurance Company stock). The SEC's report contained an elaborate discussion of the details of many transactions, no part of which is questioned and upon which these sweeping condemnations were based.

As Columbia has chosen this narrow approach, only few facts are relevant and may be swiftly summarized. Columbia filed a Registration on March 29, 1956. Ordinarily it would have become effective 20 days thereafter. Section 8(a), note 2, supra. But by a succession of permissible "delaying amendments"3 the effective date was repeatedly postponed. Prior to the effective date, Columbia, on June 27, 1956, requested consent of SEC to withdraw the Registration pursuant to Rule 477, note 1, supra. SEC denied this on June 29 and simul

1 "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. The application for such consent shall be signed and shall state fully the grounds upon which made. The fee paid upon the filing of the registration statement will not be returned to the registrant. The papers comprising the registration statement or amendment thereto shall not be removed from the files of the Commission but shall be plainly marked with the date of the giving of such consent, and in the following manner: Withdrawn upon the request of the registrant, the Commission consenting thereto.'" Rule 477, adopted June 9, 1947, but substantially the same as the Rule first promulgated September 22, 1933, 17 C.F.R. §§ 230, 477 (1949). 2 "SEC. 8(a) Except as hereinafter provided, the effective date of a registration statement shall be the twentieth day after the filing thereof or such earlier date as the Commission may determine, having due regard to the adequacy of the information respecting the issuer theretofore available to the public, to the facility with which the nature of the securities to be registered, their relationship to the capital structure of the issuer and the rights of holders thereof can be understood, and to the public interest and the protection of investors. If any amendment to any such statement is filed prior to the effective date of such statement, the registration statement shall be deemed to have been filed when such amendment was filed: except that an amendment filed with the consent of the Commission, prior to the effective date of the registration statement, or filed pursuant to an order of the Commission, shall be treated as a part of the registration statement." 15 USCA § 77h (a). 3A "delaying amendment" is an amendment filed solely for the purpose of preventing a rezistration statement from becoming effective. Rule 473 of SEC's rules provides: "An amendment altering the proposed date of the public sale may be made by telegram or letter." 17 C.F.R. § 230.473 (1949). Columbia periodically filed amendments changing the proposed offering date to a date to be "decided upon" or "determined" after the effective date of the registration statement.

taneously issued an order for hearing under Section 8(d), as well as other sections of the Act, for July 10, 1956. By agreement the hearing was postponed. On August 15, a few days prior to the adjourned hearing, Columbia filed a substantive amendment to the Registration, together with a request for postponement of the hearing to permit examination of the amendment by the staff of SEC and for a conference with the staff thereafter. This was followed August 20 with another formal application to withdraw the Registration, and this was formally renewed after the Examiner's report. By these means and a formal motion to dismiss, Columbia adequately preserved its basic contention of lack of jurisdiction in SEC and alternatively an abuse of discretion under Rule 477, note 1, supra, if it were legally applicable.

As the alpha and omega of its argument, as its constant rod and staff, Columbia cleaves to Jones v. Securities & Exchange Commission, 1936, 298 U.S. 1, 56 S. Ct. 654, 80 L. Ed. 1015, as absolutely controlling. We agree with Columbia that, in the final analysis, the case is decisive, although in quite a different way from its contention. Columbia asserts that it is the classic case of a perfectly matching precedent which on stare decisis compels reversal. Because the case is emphatic in its ruling, our approach is to determine whether on facts and subsequent statutory developments, the parallel is really there. Finding differences of sufficient character, we conclude that the case is not mandatorily controlling. Once we determine that our action is not precisely circumscribed by Jones, we have no doubt that the orders of SEC withstand the attacks made here. In Jones the registrant, on the 19th day, one day prior to the effective date, requested permission of SEC to withdraw the Registration statement under the predecessor of Rule 477. This was denied and the SEC undertook to hold a stop order hearing. On registrant's refusal to attend the hearings, SEC sought and obtained in the district court orders compelling attendance and production of records. After affirmance by the Court of Appeals, the Supreme Court reversed. After concluding that notice of a stop order hearing by SEC had the effect of keeping the Registration from becoming effective, the Court then analogized the resulting situation to an equitable action in which, save for rare extraordinary factors not there present, the plaintiff has the unconditioned right of dismissal prior to answer, it held that the registrant had the absolute right to withdraw the Registration statement prior to its effective date.

Although invited by SEC to reject Jones because the Supreme Court itself has cast great doubts on the continued vitality of the case-a possibility which this Court and others have discussed-and then treat it as impliedly overruled, we find it unnecessary to accept or decline the invitation. Accepting the

4 (d) If it appears to the Commission at any time that the registration statement includes any untrye statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statement therein not misleading, the Commission may, after notice by personal service or the sending of confirmed telegraphic notice, and after opportunity for hearing (at a time fixed by the Commission) within fifteen days after such notice by personal service or the sending of such telegraphic notice, issue a stop order suspending the effectiveness of the registration statement. When such statement has been amended in accordance with such stop the Commission shall so declare and thereupon the stop order shall cease to be effective.' 15 USCA § 77h (d).

The order recited that the hearing and investigation was being ordered pursuant to Sections 5, 8(d), 17(a) and 20(a) of the Securities Act of 1933, Sections 10(b), 15 and 21 (a) of the Securities Exchange Act of 1934, and Sections 7 and 42(a) of the Investment Company Act of 1940.

In United States v. Morton Salt Co., 1950. 338 U.S. 632, 642, 70 S. Ct. 357, 94 L. Ed.. 401, the Court remarked: “More recent view s have been more tolerant of [the administrative process] than those which underlay many older decisions. Compare Jones v. S.E.C., 298 Ú.S. 1, with U.S. v. Morgan, 307 U.S. 183, 191."

In Lansky v. Savoretti, 5 Cir., 1955, 220 F. 2d 906, 909-910, this Court observed: "The district judge in the Minker case correctly pointed out that it is a far cry in time and a farther one in substance from the days of administrative exuberance, to put it mildly, and from Jones v. Securities and Exchange Commission, 298 U.S. 1, 56 S. Ct. 654, 80 L. Ed. 1015, with its organlike denunciations of, and Morgan v. U.S., 298 U.S. 468, 56 S. Ct. 906, 80 L. Ed. 1288, with its milder preachments against administrative usurpation and absolutism, to the decision in United States v. Morton Salt Co., 338 U.S. 632, 70 S. Ct. 357, 94 L. Ed. 401, and to the present, when the Administrative Procedure Act. 5 U.S.C.A. § 1005, and the decisions giving it effect, have brought substantially all administrative actions and their review within the compass of the Administro-Judicial Process." Footnotes 5 and 6 refer to Judging as Administration, Administration as Judging, 21 Texas L. Rev. (Nov. 1942), and New Instruments of Public Power, Alexander F. Morrison Lectureship Foundation. Proceedings of the 1946 Annual Meeting, California State Bar. See also Bowles v. Misle, 1946, D. Nebr., 64 F. Supp. 835, 841.

See, e.g.. Browder v. Gayle (3 judge district court), D. Ala., 1956, 142 F. Supp. 707, 716, especially footnote 14, discussing Barnette v. West Virginia State Board of Educa tion (3 judge district court), S.D. W. Va., 1942, 47 F. Supp. 251, 252-253; Fleming v. South Carolina Electric & Gas Company, 4 Cir., 1955, 224 F. 2d 752; Perkins v. Endicott Johnson Corp., 2 Cir., 1942, 128 F. 2d 208, 217–218.