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"shall" must be changed to "may." But I don't personally see any great objection to permitting an equity judge to have evidence before him of past violations.

That brings us to the second phase of this problem, which I think is much more troublesome. Under the present statute the Commission has the authority to seek an injunction for a violation of the law or rule or regulation of the Commission. I think that there is no doubt that in that injunction proceeding the accused-and that is really what he is; calling him a respondent doesn't, I think, adequately describe him-he is the accused, I think there is no question of validity that cannot be raised before the court, constitutionality, if you will, of the law or the validity of the rule or regulation the violation of which is claimed as the basis for the injunction.

I would also contend that if the addition which the Commission asks is added, they also want power to seek this injunction for violation of an order of the Commission, as well as a rule or regulation. Now, I think and I would contend that in a proceeding to enjoin a man for violating a past order of the Commission the man has the right to raise the question of the validity of that order. The only thing that gives me pause, however, is that we made this point repeatedly with the staff of the Commission, and I am not clear whether they think he has or should have that right or not, but that, to me, is another thing that is very important. I don't think that anyone ought to be subject to an injunction proceeding without having his day in court before the judge to test the validity of the statute, rule, regulation, or order that is the basis of the proceeding, and I think that it is clear that he can contest the statute, the rule, or regulation. I am not sure what the Commission's position is on the order.

Senator WILLIAMS. That will be a constitutional test?

Mr. ROSENBERRY. I think the problem is this, that where a party to a proceeding before the Commission wants to test it in court, he has to appeal within 60 days, and that goes normally to the circuit court of appeals.

Senator WILLIAMS. You are talking about testing an order now? Mr. ROSENBERRY. Yes; an order of the Commission.

There may be an order in a proceeding which has, in the present state of facts, so little importance to me, that I don't want to spend the time and the money to appeal it. These things are expensive. But then the situation changes and the time comes when I do want to. I want to be sure that at that time I can have a court pass on the validity of that order and not be met with the claim that I should have appealed within 60 days or that I failed to exhaust my administrative remedies, and you get quite a confused area.

Senator WILLIAMS. Could this be made plain with a change of language in the proposed amendments?

Mr. ROSENBERRY. I have no doubt that the Commission draftsman could do it very easily.

Senator WILLIAMS. Do you have any language you would like to submit?

Mr. ROSENBERRY. I would be glad to suggest some.

Senator WILLIAMS. If you do, we would be glad to receive it.

(The following was received in response to the above :)

Hon. HARRISON A. WILLIAMS,
U.S. Senate, Washington, D.C.

NEW YORK STOCK EXCHANGE,
New York, N.Y., June 19, 1959.

DEAR SENATOR WILLIAMS: In the course of our testimony before the Securities Subcommittee of the Senate Banking and Currency Committee on June 16, 1959, we opposed the suggested amendment of section 8(d) of the Securities Exchange Act of 1934 and expressed our view that the suggested amendment of section 21(e) of that act should be modified. You requested us to draft alternative proposals.

The Securities and Exchange Commission has pointed out that the New York Stock Exchange, and some other exchanges, require the segregation of customers' fully paid and excess margin securities. It has indicated that it seeks authority to impose similar requirements on all registered broker-dealers. If the subcommittee is persuaded that the Commission should have such authority, we would suggest the addition of a new section 8(e) instead of the sweeping authority the Commission seeks through its proposed amendment of section 8(d). The new section 8(e) might read as follows:

"SEC. 8. * * * (e) To carry for customers' accounts fully paid and excess margin securities in contravention of such rules and regulations providing for the segregation of such securities as the Commission may prescribe as necessary and appropriate in the public interest and for the protection of investors."

In discussing the proposed amendment of section 21(e) of the 1934 act, we suggested that it should be clear that a court retains its discretion whether to grant or deny an injunction, and that a person alleged to have violated, or to be about to violate, an order of the Commission be permitted to challenge the validity of the order in a court action. We think these possible ambiguities would be cleared up if the proposed amendment were redrafted to read as follows:

"SEC. 21. *** (e) Whenever it shall appear to the Commission that any person has engaged, is engaged or is about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this title, or of any rule or regulation thereunder, or that any person has failed to comply with the provisions of this title, any rule or regulation thereunder or any order of the Commission made in pursuant thereof or with any undertaking contained in a registration statement as provided in section (d) of section 15 of this title, it may in its discretion bring an action in the proper district court of the United States, [the Supreme Court of the District of Columbia] or the proper United States court[s] of any Territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices and to enforce compliance with this title or any rule, regulation or order thereunder, and upon a proper showing a permanent or temporary injunction, [or] restraining order, or other order, may [shall] be granted without bond. In any such action so brought such person may contest the validity of the provision of this title, or of the rule or regulation thereunder which the Commission alleges has been, is being or is about to be violated and the validity of the provision of this title, or of the rule or regulation thereunder, or of the order which the Commission alleges has not been complied with, as the case may be. The Commission may transmit such evidence as may be available concerning such acts or practices to the Attorney General, who may, in his discretion, institute the necessary criminal proceeding under this title." (Words not in present section 21(e) are italicized; bracketed words would be removed from present section 21(e).)

In connection with the Commission's proposal that it be given authority to impose a forfeiture of $100 per day for failure to file information, documents or reports on time, we suggested that the Commission should specify, at least in general terms, the documents or reports to which the forfeiture might apply. You requested us to submit our own suggestions in this connection. We are considering this matter and will send you a further letter as soon as possible. We appreciated the subcommittee's courtesy in permitting us to express our views, and I hope our further suggestions in this letter may prove helpful. Sincerely,

EDWARD C. GRAY.

Mr. JOHN H. YINGLING,

NEW YORK STOCK EXCHANGE,
New York, N.Y., August 5, 1959.

Chief of Staff, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.

DEAR MR. YINGLING: Thank you for your letter to Mr. Etherington concerning the Securities and Exchange Commission's proposed modifications of the amendments now being considered by the Subcommittee on Securities. We welcome the opportunity to present our views on the suggested changes of sections 7 and 30 of S. 1179, which would amend sections 8(d) and 32(e) of the Securities Exchange Act of 1934.

SECTION 7 OF S. 1179

Section 8(d) of the 1934 act now makes it unlawful for a member of a national securtiies exchange, or a person transacting business through a member, to lend or arrange for the lending of a customer's securities without the written consent of the customer. The Commission's original proposal was to substitute a new section 8(d) making it unlawful for any broker or dealer to borrow, lend, or hold a customer's securities in contravention of such rules and regulations as the Commission might prescribe.

The Commission has observed that some stock exchanges require their members to segregate customers' fully paid and excess collateral securities and that it seeks authority to impose similar requirements on all registered brokerdealers. We have taken the position that the amendment, if any, should be limited to this area.

On June 19, 1959, we wrote Senator Williams to suggest that the Commission could be given the authority it seeks by the addition of a new section 8(e) which would make it unlawful for a broker-dealer to carry for customers' accounts fully paid and excess margin sceurities in contravention of such rules and regulations providing for the segregation of such securities as the Commission may prescribe as necessary and appropriate in the public interest and for the protection of investors.

If Congress is persuaded that the Commission should have authority to re quire all registered broker-dealers to segregate customers' fully paid and excesscollateral securities, the amendment we have drafted would grant such authority without going beyond the problem area.

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The Commission's modification of its original proposal would not confine the amendment to the problem area. The new section 8(d) would make it unlawful for a broker-dealer to "borrow, lend, or hold" customers' securities in contravention of rules and regulations prescribed by the Commission "to provide for the segregation of fully paid securities and excess collateral It is difficult to see why the Commission uses the words "borrow" and "lend" if it does not have some type of regulation beyond mere segregation of fully paid and excess collateral securities in mind. Moreover, the second part of the amendment would authorize the Commission, without any reference to the segregation problem, to prescribe rules and regulations "to provide safeguards with respect to securities carried for the accounts of customers." This language seems as broad as that originally proposed in section 7. It would leave Congress and the regulated industry without any inkling as to what rules and regulations this or some future Commission might prescribe.

It is necessary for us to qualify our comments on the second part of the amendment because two different versions of the proposal are printed in the appendix to the Commission's memorandum. In the comparative print, the language refers to safeguards with respect to "the lending and borrowing of" securities carried for the account of customers. If the Commission means to add the quoted words, the amendment would be somewhat more limited than the version printed earlier in the appendix. In any case, however, both versions go beyond the problem area in the Commission's original justification.

It remains our view that Congress should not approve the substitution of such a broad delegation of authority for the precise legislative requirement in the present section 8(d). We oppose both versions of the Commission's modified amendment for the same reasons we oppose section 7 of S. 1179 in its original form. A new subsection 8(e) such as we have suggested is all that is needed to give the Commission the authority it seeks.

SECTION 30 OF S. 1179

The Commission first proposed to add a new section 32(c) to the 1934 act permitting it to recover a forfeiture of $100 per day for every day that any person failed to file information, documents, or reports required under the act. The Commission now purposes to limit the forfeiture provision to information, documents, or reports required under sections 13 and 16 of the act. The fine would be $100 per day in the case of filings under section 13. It would be a sum not to exceed $50 per day, as determined in the discretion of the court, in the case of filings under section 13. In either case, recovery of the forfeiture would bar any criminal penalty under section 32(a).

We have suggested that there should be a dollar limit on the total forfeiture which can be imposed, with discretion in the court to remit or reduce the forfeiture in all appropriate cases. The Commission's new proposal would give the court discretion in the case of filings required under section 16, but not in the case of filings acquired under section 13. We see no valid reason for such a distinction, or for a provision that the forfeiture can be $50 or less in the case of section 16 filings, while it must be $100 in the case of section 13 filings. It would be preferable to limit the fine to $50 per day under both sections, with discretion in the court to remit or reduce in all cases, and with a total dollar limit of no more than $10,000.

We will be happy to have this letter made part of the record, and we hope our comments may prove helpful to the subcommittee.

Sincerely yours,

JAMES B. GRAY.

Senator WILLIAMS. How do you construe the meaning of "upon a proper showing"?

Mr. ROSENBERRY. Well, that language has been in the act from the very beginning and I think that that means-and again I am not a trial lawyer and I have never appeared in one of these injunction proceedings, but to me that means that the court must be convinced that on the evidence before him that unless this man is enjoined he is going to go ahead and do what he is doing or what he has done in the past, if you add the "has" in there.

Šenator WILLIAMS. Senator Bush has a question.
Senator BUSH. You have suggested:

A specification, at least in general terms, of the documents or reports to which the $100 forfeiture is to apply.

Would you let us have suggestions specifying the forms that should be covered in that connection? You say a specification is needed. Well, what specification would you suggest? Possibly you would rather let the committee have that for the record than try to do it right now.

Mr. GRAY. We would prefer, if it is agreeable to you, to submit it, but I would also like to suggest, if I may, that the Commission itself also be asked to delineate those areas where they feel this $100 fine would apply and where they think, because of the minuteness of the situation, it would not apply. For example, like the change of address, for one.

Senator WILLIAMS. We would be happy to have your suggestions on this for our record, and we will probably proceed to see what the Commission can suggest. (See p. 48.)

We are glad to have Senator Javits here.

Senator BUSH. Mr. Chairman, I have one more question.

Senator WILLIAMS. Fine.

Senator BUSH. What do you consider to be the relationship between an over-the-counter broker-dealer and his customer with respect

to the fully paid securities that he may hold? Do you consider the broker in this case an agent or trustee or bailee? How would you classify that relationship?

Mr. GRAY. Senator, may I ask my counsel to answer that question? Senator BUSH. Yes.

Mr. ROSENBERRY. I think one would have to look at the particular facts. I wouldn't think that the legal relationship would be much different so far as the fully paid securities went, no matter whether he was a member of an exchange or an over-the-counter dealer.

Senator BUSH. Well, if they are not fully paid, he probably holds them as collateral.

Mr. ROSENBERRY. There is no question. This is a question that goes back in history to the New York case-Senator Javits is very familiar with it-Markham v. Saudon. I think it was decided by the New York Court of Appeals in 1868. I think it was a 4-to-3 decision as to what the legal relationship was between a broker and his customer in a margin account. It was there held-and I think the thing came back on rehearing-that in executing the purchase order the broker was the agent of the customer. Having used the broker's own credit to make the purchase, he was the pledgee of the securities to the amount of his credit which had been used in the purchase and that when the debit balance was paid, the broker became the bailee.

Senator BUSH. That really is a pretty good answer to my question. Mr. ROSENBERRY. I am glad.

Senator WILLIAMS. Senator Javits, do you have any comments? Senator JAVITS. I first wish to apologize, Mr. Chairman, for coming at this hour, but the Senate is a several-ring circus. A judiciary committee subcommittee held a hearing on the nomination of a judge for the southern district of New York, Judge Metzner, and Senator Keating and I had to introduce him in the subcommittee. So I regret that I did not get here in time to hear your statement.

I did want to ask Mr. Gray one question which has no direct relation to the statement, which I shall read very carefully. That is the question of how the rules and rulemaking power, the disciplinary authority of the exchange, ties in with the amendments which are proposed to us by the Securities and Exchange Commission? Do you feel, for example, that some of the things which they wish to do could better be done through the disciplinary authority of the exchange itself? Or do you feel that in all of the matters which they propose, whether you favor them or not-and I already know that some you do not favor-legislation is necessary. In other words, we may differ with you as to whether we do or do not agree with a particular attitude you take on a particular piece of legislation, but do I gather in all of these respects you feel that legislation is necessary, that it cannot be done by the rulemaking power of the exchange itself?

Mr. GRAY. Most of these amendments, Senator Javits, would not affect the disciplinary authority of the exchange. It would, however, bring under the authority of the Commission certain registered broker-dealers who are not members of national securities exchanges. The only disciplinary authority area here that I recall is this problem of the matter of appeal by registered representative of a decision of the National Association of Securities Dealers to suspend or revoke his registration. That authority does not cover exchanges.

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