Section 16. Creation of jurisdiction to decide who was a "cause" of brokerdealer revocation

Section 15A (b) (4) now provides, in general, that a person who was the "cause" of the entry of an order of suspension, expulsion, denial, or revocation, against a broker or dealer, shall be ineligible for membership in a national securities association, and shall be barred from employment by such a member in certain capacities, unless SEC otherwise directs, in the public interest.

The statute is silent as to when, how and by whom this determination of "causation" is to be made. Analogy must be made to section 15(b) (2) (D) which gives SEC quasi-judicial jurisdiction, after notice and hearing, to revoke registration of broker-dealers for willful violation of the securities acts.

Where a proceeding is in session to revoke a broker-dealer firm's license, it may be an officer who was the controlling person or cause. SEC cannot now try the issue of causation in the original proceeding against the firm since the officer is not a party and thus a determination would not be res judicata.

It is true that in case the officer himself later applies for registration, SEC has the power to find that he was the cause of a willful violation and thus deny it. But this may be too late since the evidence might be gone.

To promote the efficiency of a single proceeding on both questions, SEC has made associates parties to the revocation action against the broker-dealer. But in Wallach v. SEC, 202 F. 2d 462 (C.A. D.C. 1953), the court of appeals rejected this procedure. It pointed out that section 15(b) revocation applied only to applicants or registrants, not to such associates as the officer in question. The court said that the act gave SEC a proper remedy-to enjoin violating associates under section 21(e) or prove a willful violation of the act subject to criminal penalties under section 32(a). Such an injunction or a conviction may be the basis for refusal of their later application or revocation of registration. Although no similar cases have arisen under the "cause" section of 15A (b) (4) in the situation of membership of a national securities association, presumably the rationale of the Wallach case would apply. It would forbid SEC from making the person causing the membership or registration revocation a party to the proceeding.

To remedy this failure, section 16 of S. 1179 would add a phrase allowing SEC, a national securities association, or an exchange to have jurisdiction to determine who was a cause of the revocation order. Notice and opportunity for hearing will be given the associate. Thus the order will be made, and should the associate later apply for membership or registration there will be no relitigation of the same facts. SEC contemplates that the associate under the new proceeding will still not become a party.

Section 17. Provision for review of the SEC of action by a national securities association against registered representatives

Sections 15A (g) and (h) provide for review by SEC of disciplinary action taken by a national securities association against its members and of denial of membership in such association. The National Association of Securities Dealers, Inc., the only national securities association, has provided in its rules, adopted pursuant to section 15A of the statute, for the registration with it as "registered representatives" of certain individuals employed by or associated with its members. Where the association takes disciplinary action against both a member and one or more of its registered representatives, its action may now be reviewed by the Commission under subsections (g) and (h) of section 15A. Because there is no provision in the act for review of disciplinary proceedings against registered representatives, there is serious question whether the association can take action against registered representatives without joining a member.

It is proposed to add a new section 15A (o) to afford registered representatives full rights of review in all cases, whether or not related action is taken against a member.

Section 3.-The registration of a national stock exchange with SEC is provided for by section 6 of the Exchange Act of 1934. In order to register a new or consolidated exchange, the agency must under the statute satisfy itself that the applicant's rules are just and adequate to insure fair dealing and to protect investors. To do this appraisal there must be an order granting or denying registration within 30 days-but a denial may only issue after an investigation, a hearing on adequate notice, and a review of the record, all in accordance with the Administrative Procedure Act.

On account of this burden the amendment would lengthen the period from 30 days to 90 days in which the agency must grant or deny registration. The 1957 proposal of the SEC gave it unlimited time.

Inquiry might be made as to the number of applications by exchanges for registration. Although there were 30 applications in 1934, there are now through mergers and dissolutions only 25 exchanges. More consolidations as is possible in western exchanges may occur. But none would attempt to register without many informal consultations with SEC. Therefore, it seems that 3 months may be an invitation to administrative delay. The reply of SEC is that occasionally an applicant will not confer in advance, and without the extra time, would have to incur denial proceedings.

Section 18. Expansion of the Commission's authority to suspend or withdraw the registration of a national exchange

Under section 6 of the act the registration of a national securities exchange may be granted only if its rules contain specified provisions, it is so organized as to be able to comply with the act and SEC's rules thereunder, and the rules of the exchange are just and adequate to insure fair dealing and to protect investors. Section 19 (a) (1) of the act authorizes SEC to suspend or withdraw the registration of a national securities exchange for violation of the act or SEC's rules thereunder, or for failure of the exchange to enforce compliance therewith by a member or by an issuer of a security registered thereon.

SEC is not, but feels it should be, authorized to suspend or withdraw the registration of a national exchange if the exchange has ceased to meet the requirements for original registration, viz, if the exchange is no longer so organized as to be able to comply with the provisions of the Securities Exchange Act and the rules and regulations thereunder, or if the rules of the exchange are not just and adequate to insure fair dealing and to protect investors.

SEC recommends that section 19(a) (1) be expanded so that SEC would be authorized, after appropriate notice and opportunity for hearing, to suspend or withdraw the registration of a national securities exchange when the exchange has ceased to meet the requirements for original registration.

Under 19 (b), though SEC is empowered to make sweeping changes in the rules of any registered exchange, the internal decay of the exchange often cannot be cured by this power. It is anomalous to allow only a qualified exchange to register, but to be unable to cast off a decayed one, in the opinion of SEC.

The NASD feels there is a danger of capricious action under this order. Section 1.-As section 3 (a) (3) of the Securities Exchange Act of 1934 now reads, a "member" of a stock exchange is defined to include each partner of a member firm. Since national stock exchanges now provide for corporation memberships, it is just, in the opinion of SEC, that officers and directors of a member corporation should meet the standards as partners of a member firm. Therefore, the amended section will define "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," limited partners are excluded from the definition.

[S. 1180, 86th Cong., 1st sess.]

A BILL To amend certain provisions of the Trust Indenture Act of 1939, as amended

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That paragraph (8) of section 304(a) of the Trust Indenture Act of 1939, as amended, is amended by striking out "$250,000" and inserting in lieu thereof “500,000”.

SEC. 2. Subsection (c) of section 304 of the Trust Indenture Act of 1939, as amended, is amended to read as follows:

"(c) The Commission shall, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more provisions of this title any security issued or proposed to be issued under any indenture under which, at the time such application is filed, securities referred to in paragraph (3) of subsection (a) of this section are outstanding or on January 1, 1959, such securities were outstanding, if and to the extent that the Commission finds that compliance with such provision or provisions, through the execution of a supplemental indenture or otherwise

"(1) would require, by reason of the provisions of such indenture, or the provisions of any other indenture or agreement made prior to the enactment

of this title, or the provisions of any applicable law, the consent of the holders of securities outstanding under any such indenture or agreement; or

"(2) would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors."

SEC. 3. Subsection (b) of section 305 of the Trust Indenture Act of 1939, as amended, is amended to read as follows:

**(b) If the Commission finds, after notice given prior to the effective date of a registration statement and after opportunity for hearing (at a time fixed by the Commission) within fifteen days after such notice, that

"(1) the security to which such registration statement relates has not been or is not to be issued under an indenture;

“(2) such indenture does not conform to the requirements of sections 310 to 318, inclusive; or

"(3) any person designated as trustee under such indenture is not eligible to act as such under subsection (a) of section 310 or has any conflicting interest as defined in subsection (b) of section 310;

the Commission shall issue an order refusing to permit the registration statement to become effective until the objections on which such order is based have been met. If and when the Commission deems that such objections have been met, the Commission shall so declare and the registration statement shall become effective at the time provided in subsection (a) of section 8 of the Securities Act of 1933, or upon the date of such declaration-whichever date is the later."

SECURITIES AND EXCHANGE COMMISSION-COMPARATIVE PRINT OF PROPOSED AMENDMENTS TO THE TRUST INDENTURE ACT OF 1939, as AMENDED

[Deletions in brackets; additions in italics]

Section 1 would amend paragraph (8) of section 304 (a) of the Trust Indenture Act of 1939, as amended, as follows:

"(a) The provisions of this title shall not apply to any of the following securities: ***

"(8) any security which has been or is to be issued otherwise than under an indenture, but this exemption shall not be applied within a period of twelve consecutive months to more than [$250,000] $500,000 aggregate principal amount of any securities of the same issuer; or"

Section 2 would amend subsection (c) of section 304 of the Trust Indenture Act of 1939, as amended, as follows:

"(c) The Commission shall, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more provisions of this title any security issued or proposed to be issued under any indenture under which, at the time such application is filed, securities referred to in paragraph (3) of subsection (a) of this section are outstanding or on January 1, 1959, such securities were outstanding, if and to the extent that the Commission finds that compliance with such provision or provisions, through the execution of a supplemental indenture or otherwise

"(1) would require, by reason of the provisions of such indenture, or the provisions of any other indenture or agreement made prior to the enactment of this title, or the provisions of any applicable law, the consent of the holders of securities outstanding under any such indenture or agreement; or

"(2) would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors."

Section 3 would amend subsection (b) of section 305 of the Trust Indenture Act of 1939, as amended, as follows:

"(b) [The Commission shall issue an order prior to the effective date of registration refusing to permit such a registration statement to become effective, if it finds that-] If the Commission finds, after notice given prior to the effective date of a registration statement and after opportunity for hearing (at a time fired by the Commission) within fifteen days after such notice, that

"(1) the security to which such registration statement relates has not been or is not to be issued under an indenture;

"(2) such indenture does not conform to the requirements of sections 310 to 318, inclusive; or

"(3) any person designated as trustee under such indenture is not eligible to act as such under subsection (a) of section 310 or has any conflicting interest as defined in subsection (b) of section 310;

[but no such order shall be issued except after notice and opportunity for hear ing within the periods and in the manner required with respect to refusal orders pursuant to section 8(b) of the Securities Act of 1933. If and when the Commission deems that the objections on which such order was based have been met, the Commission shall enter an order rescinding such refusal order, and the registration shall become effective at the time provided in section 8(a) of the Securities Act of 1933, or upon the date of such rescission, whichever shall be the later.] the Commission shall issue an order refusing to permit the regis tration statement to become effective until the objections on which such order is based have been met. If and when the Commission deems that such objections have been met, the Commission shall so declare and the registration statement shall become effective at the time provided in subsection (a) of section 8 of the Securities Act of 1933, or upon the date of such declaration, whichever date is the later.

SUPPLEMENT

In section 3, the language between the last bracketed material and the final sentence of the section should be revised to read as follows:

"the Commission shall issue an order suspending the effectiveness of the registration statement until the objections on which such order is based have been met."

SUPPLEMENT TO COMPARATIVE PRINT OF PROPOSED AMENDMENTS TO THE TRUST INDENTURE ACT OF 1939, AS AMENDED

[Deletions in brackets; additions in italics]

Section 1 would amend paragraph (8) of section 304 (a) of the Trust Indenture Act of 1939, as amended, as follows:

"(a) The provisions of this title shall not apply to any of the following securities: **

"(8) any security which has been or is to be issued otherwise than under an indenture, but this exemption shall not be applied within a period of twelve consecutive months to more than [$250,000] $500,000 aggregate principal amount of any securities of the same issuer; or".

Section 2 would amend subsection (c) of section 304 of the Trust Indenture Act of 1939, as amended, as follows:

"(c) The Commission shall, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more provisions of this title any security issued or proposed to be issued under any indenture under which, at the time such application is filed, securities referred to in paragraph (3) of subsection (a) of this section are outstanding or on January 1, 1959, such securities were outstanding, if and to the extent that the Commission finds that compliance with such provision or provisions, through the execution of a supplemental indenture or otherwise—

"(1) would require, by reason of the provisions of such indenture, or the provisions of any other indenture or agreement made prior to the enactment of this title, or the provisions of any applicable law, the consent of the holders of securities outstanding under any such indenture or agreement; or "(2) would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors."

Section 3 would amend subsection (b) of section 305 of the Trust Indenture Act of 1939, as amended, as follows:

"(b) [The Commission shall issue an order prior to the effective date of registration refusing to permit such a registration statement to become effective, if it finds that-] If the Commission finds, after notice given prior to the effective date of a registration statement and after opportunity for hearing (at a time fixed by the Commission) within fifteen days after such notice, that-"(1) the security to which such registration statement relates has not been or is not to be issued under an indenture;

"(2) such indenture does not conform to the requirements of sections 310 to 318, inclusive; or

"(3) any person designated as trustee under such indenture is not eligible to act as such under subsection (a) of section 310 or has any conflicting interest as defined in subsection (b) of section 310;

[but no such order shall be issued except after notice and opportunity for hearing within the periods and in the manner required with respect to refusal orders pursuant to section 8(b) of the Securities Act of 1933. If and when the Commission deems that the objections on which such order was based have been met, the Commission shall enter an order rescinding such refusal order, and the registration shall become effective at the time provided in section 8(a) of the Securities Act of 1933, or upon the date of such rescission, whichever shall be the later.] the Commission shall issue an order refusing to permit the registration statement to become effective until the objections on which such order is based have been met. If and when the Commission deems that such objections have been met, the Commission shall so declare and the registration statement shall become effective at the time provided in subsection (a) of section 8 of the Securities Act of 1933, or upon the date of such declaration, whichever date is the later."

SUPPLEMENT

In section 3, the language between the last bracketed material and the final sentence of the section should be revised to read as follows: "the Commission shall issue an order suspending the effectiveness of the registration statement until the objections on which such order is based have been met.”