Senator JAVITS. So that you do feel that, one, the amendments sought in no way interfere with your particular disciplinary authority, and, two, that should such regulations be deemed by us to be desirable, amendment to the law is neded to make them really effective?

Mr. GRAY. I would say this, Senator Javits, that I believe the associations should be in the position of imposing their own discipline and to the extent that it is possible to appeal from the decision of an association to the Commission, it, I think, to that extent takes away that voluntary self-discipline which I think is essential.

Senator JAVITS. Now, also, do you wish to add any recommendations to those made to us by the SEC in view of the fact that the SEC approaches this matter as an overhauling, as it were, of all of the applicable regulatory statutes? If you have read Mr. Gadsby's statement and that of his associates given for the Commission yesterday, you will know that that is the way they flag this whole enterprise. As long as we are going to do that, it seems to me that it would be also apposite to ask the exchanges and the unlisted securities dealers associations what they have to recommend. If we are going to pass an omnibus bill, let us see what everybody wants. Do you have any recommendations?

Mr. GRAY. Well, Senator Javits, we would be glad to consider it. Offhand I would say that this committee, over the past several years, has considered legislation which would impose similar requirements on unregistered companies as applied to registered companies, and we would be delighted to have the committee again review those proposed amendments to the act.

Senator JAVITS. I would say, for one, I would like you to submit your suggested amendments to the securities laws, just as the Securities and Exchange Commission has submitted its suggestions. I shall ask this of every one of the witnesses representing either an exchange or an association. It is my conviction if we are going to go ahead and and overhaul these laws, we should overhaul them completely. While I do not consider the SEC as the only repository for knowledge in this field, I regard their recommendations with respect, and I shall certainly give them earnest time and attention. (See p. 635.)

Senator JAVITS. I have just one other question. While you are here and dealing with the Commission, do you have any recommendations for us in the area of encouraging securities ownership on an investment basis by individuals?

I happen to be convinced that our society is moving in the direction or should move in the direction of what has been called "people's capitalism," where the people own, through stocks and bonds, the enterprises in which they work. I know the New York Stock Exchange-I know Mr. Funston very well, he is one of my prize constituents has been waging a campaign along this line for a long time. So when you give us your recommendations, if you are in no position to testify to it now, could you also give us your ideas on how we can make our contribution toward more and broader investment security ownership or security ownership for investment by people? Let me ask you a practical question. Many people do not buy securities because they do not know where to put them. If they own a

couple of hundred dollars' worth of securities and pay $6 or $8 annually for a strongbox, it is expensive. That is a problem, and it is a problem which actually interferes with ownership of securities, in my opinion, by hundreds of thousands, perhaps millions of individuals. What can they do with them physically? I think if there is any helpful suggestion we ought to have it. I think the only suggestion is a practical business suggestion, transfer agents or registrars or companies themselves. But if there is anything you feel the Government can do to facilitate the holding of securities for investment, I would appreciate it very much if you would tell us.

Mr. GRAY. Senator Javits, we will be glad to. Of course, I would just be repeating the Exchange's position that much can be done by the Congress to make a more favorable climate for the investor by revising some of its tax laws, the dividend credit, the capital gains

tax.

Senator JAVITS. You are aware, sir, of the fact that that is not within the competence of this committee. Senator Bush suggested, being himself very experienced in that, something of that nature.

On whatever is within our competence that relates to the securities laws, methods of holding, methods of registration, we would appreciate your help.

Mr. GRAY. We shall try to do everything we can.

Senator JAVITS. Thank you, Mr. Chairman.

Senator WILLIAMS. I would like to come back to your suggestion that in an injunction proceeding the opportunity to test the validity of an order should be made clear. Is the opportunity to test an order available to an individual charged on a criminal complaint for violation of an order?

Mr. ROSENBERRY. I would think so. This is one of the problems in this field. I had always thought, through law school and just general reading, that the word "willfully" meant that someone was violating the law intentionally. Through the years the Commission has not so construed it. There is opinion after opinion of the Commission and in fairness to them the courts in some cases have sustained them in this, but their view of the word "willful" sometimes seems to mean that you weren't unconscious when you did it. You knew what you were doing. You had no idea that the action violated any act, order, rule or regulation of the Commission, and that is one of these things that bothers me so much about this $100 a day forfeiture.

When you get into that field and when you see the uncertainty that you are faced with every day-for instance, if you are in a control relationship with an issuer you have to file. If you are not, you don't. But you can't find anybody who will tell you what a controlled relationship is. If you own the company lock, stock and barrel, there is no question you are in control. But there are situations where you had people trying to take control. They have lost. You go to the Commission and say, "Look, this is clear. This is not control."

"No, we are not so sure."

So when you get into these areas where you are so indefinite, it seems to me that a 12-man jury is an awful lot of protection.

Senator WILLIAMS. Thank you very much.

If there is nothing further, we will say that we most appreciate this thoughtful, very helpful, testimony.

Mr. GRAY. Thank you very much, Mr. Chairman.
(The supplemental statement referred to by Mr. Gray follows:)

SUPPLEMENTAL STATEMENT OF THE NEW YORK STOCK EXCHANGE

COMMENTS ON S. 1179, TO AMEND THE SECURITIES EXCHANGE ACT

In our statement delivered by Mr. Gray, we have called attention to our serious reservations concerning sections 7, 20, and 30 of S. 1179 and have expressed our suport of section 6 as modified by the Securities and Exchange Commission. In addition to our comments in that statement, we wish to call attention to other provisions of the bill, some of which we support and some of which we feel should be modified or rejected.

Four amendments proposed in S. 1179 would extend to all registered brokers and dealers provisions which now apply only to members of national securities exchanges and those transacting business through such members. We have long felt that there is no valid reason in statutes designed to regulate the entire securities industry in the public interest to distinguish between broker-dealers who are connected with national securities exchanges and those who are not. The following amendments would eliminate such dual standards:

(1) Section 4 would amend section 7 (c), which now relates to the credit which may be extended, maintained, or arranged for a customer by a member of a national securities exchange or a broker or dealer transacting a business in securities through any such member. As a practical matter, most registered brokers and dealers do business through exchange members at least occasionally. The amendment would simply make it clear that the section applies to any broker or dealer registered under section 15. The exchange feels that it is in the public interest to assure consistent treatment of all brokers and dealers regarding extension of credit (margin requirements).

- (2) Section 5 would broaden the introductory paragraph of section 8, which sets forth restrictions on borrowing by members of national exchanges and brokers and dealers transacting a business through such members, to make it apply to all brokers or dealers registered under section 15 of the act. The exchange believes this step to assure equalization of regulation in the securities industry would also be in the public interest.

(3) Section 12 would amend section 14(b), which relates to the giving of proxies for customers' securities, to make the provision applicable to all registered brokers and dealers and not merely exchange members and those transacting through such members. The exchange feels that full disclosure to investors is in the public interest no matter who their brokers happen to be. Accordingly, we support the amendment.

(4) Section 14 of S. 1179 would add a new paragraph to section 15 (c) (3) to the 1934 act, to give the Commission power to write rules governing when-issued trading in the over-the-counter markets. This proposed amendment parallels section 12(d) of the act under which the Commission may regulate when-issued trading on a national securities exchange.

In addition to these amendments, we wish to make special comments concerning several other provisions of S. 1179.

Section 1 would amend the definition of "member" in section 3(a)(3) by including references to officers and directors of member corporations and general partners of partnerships. These changes are actually "modernization" of the definition in light of the fact that broker-dealer firms are now often set up as corporations. The clear exclusion of limited partners would permit a bank serving as a trustee under the will of a deceased partner of a firm to become a limited partner, in accordance with the decedent's wishes, without making the bank a "member" of a national securities exchange subject to regulation T. Section 13 would amend the fourth paragraph of section 15(b) relating to the registration of brokers and dealers in several ways. One change, which seems both helpful and reasonable, would empower the Commission in certain cases to suspend registration of a broker or dealer for a period not exceeding 12 months after appropriate notice and opportunity for hearing. At present the Commission may deny registration or revoke it, but is powerless to suspend it. Under the amendment, the Commission could impose a lesser penalty in a proper case.

We have some question, however, about the wisdom of the second part of this amendment, which would permit the Commission, pending final determination whether the registration of a broker or dealer shall be denied, to postpone the effective date of the registration for a period not to exceed 90 days.

Since an application does not become effective, in any case, for 30 days, this would give the Commission a total of 120 days (30 plus 90) after the filing of the application within which to give notice and hold a hearing on the application. At present, the summary postponement is limited to a 15-day period giving the Commission a total of 45 days (30 plus 15) within which it must give notice and hold its hearing. The Commission states that this period is often inadequate. If so, an extension may be appropriate, but it would seem that the relaxation provided for by the proposed amendment is extreme. It should be adequate to change the present 15-day summary postponement period to a maximum of 45 days, giving the Commission a total of 75 days (30 plus 45) during which it must act if it wishes to deny registration or to postpone the effectiveness pending final determination whether to deny. This would assure applicants who are prepared to start their business that they will get reasonably prompt administrative action. It seems that the Commission should be required to act as promptly as possible on a matter of such importance to applicants.

Section 15 would add a new section 15 (c) (4), to permit the Commission to suspend trading in any security in the over-the-counter market, cutting off all trading in a security so suspended. It would parallel section 19(a) (4) of the act, which relates to the suspension of trading in any registered security on a national securities exchange. While we support the basic change, we feel the last sentence of section 15 may be unwise, in view of the fact that it might forbid all trading in a security which is subject to suspension. This prohibition might "lock in" a holder of the suspended stock even though he might have a willing buyer who is thoroughly familiar with the facts surrounding the suspension. We feel that flexibility should be introduced into the last sentence of the proposed amendment by allowing trading in such suspended securities if effected in accordance with rules and regulations adopted by the Commission. This would enable the Commission to give relief in appropriate cases.

Section 22 would amend section 20 (b) to make it clear that an indirect violation of the act is unlawful. While this would be a reasonable clarification of the statute, we question the wisdom of the second sentence which would make it unlawful to aid, abet, counsel, command, induce, or procure the violation of any provision of the act or of any rule or regulation by any other person. The Commission states that "there may exist some doubt as to the Commission's authority to obtain an injunction, or impose administrative sanctions, against persons aiding or abetting violations of the act." It appears to us that the proper way to make it clear that an aider or abettor can be enjoined is to amend section 21(e) of the act, which deals with obtaining injunctions.

The proposed amendment to section 20(b) specifically imposes criminal sanctions on an aider and abettor. We think the amendment should make clear that criminal liability arises only when one knowingly or intentionally aids or abets a violation of the act.

Section 10 would amend section 10(b), which now makes it unlawful to use or employ, in connection with any purchase or sale of a security, any manipulative or deceptive device or contrivance in contravention of Commission rules. The Commission asks that it be made unlawful to "attempt" to purchase or sell a security in contravention of its rules. The Commission's primary justification is that the amendment would make clear that the statute covers the so-called "front money racket," which is described as "obtaining money from an issuer for alleged services in arranging an underwriting or financing for the issuer, without actually intending to or being in a position to arrange the proposed underwriting or financing."

It is difficult to see how this form of common law fraud fits into the basic purpose of the act, i.e., to regulate transactions in securities as commonly conducted through securities exchanges and over-the-counter markets. By hypothesis there is no securities transaction involved in the front money racket-much less a securities transaction involving the public.

An additional problem could arise if the statute were extended to reach manipulative and deceptive activities in connection with "attempts" to buy or sell securities. The courts have held that violation of the Commission's rule X-10B-5 gives rise to civil liabilities in connection with consummated transac tions. It is difficult to predict how far an amendment using the broad word "attempt" might go in extending civil liabilities.

So far as criminal proceedings are concerned, it would seem that the present conspiracy provisions of the Criminal Code provided adequate sanctions. If so, Congress may not want to open up potentially serious problems by inserting a parallel provision in the 1934 act.

COMMENTS ON 8. 1178 TO AMEND THE SECURITIES ACT OF 1933

Our comments concerning S. 1178 are confined to a few proposals which seem to us to call for particular consideration.

Section 3 would amend section 3(b) of the 1933 act to increase from $300,000 to $500,000 the amount of securities which may be offered to the public exempt from the registration requirements of the 1933 act. This appears to be a sensible adjustment of the dollar criterion in light of changed economic conditions. The amendment will be useful and in the public interest if it aids small businesses in attracting needed capital.

Section 5 would amend section 12, which specifies certain liabilities which may arise in connection with prospectuses and communications. The amendment is designed to clear up a conflict in the courts on the jurisdictional base in the present section 12(2), and to add a new subsection to impose civil liabilities, similar to those now contained in section 11, with respect to exempt offerings under section 3(b) or 3 (c) of the act. The proposal to clarify the jurisdictional question is clearly a useful one. We have some question, however, concerning the language of the proposed new subsection (b) of section 12. The defenses incorporated in section 11(b) of the 1933 act relating to civil liability arising from a full registration statement containing a material misstatement or omission have not been specifically incorporated in the proposed new section 12(b) related to exempt offerings. This raises the specter of broad liability so broad that, as a practical matter, regulation A offerings under section 3(b) of the act might be discouraged. Any such development would be a backward step undercutting the clear purpose of the statute to facilitate the raising of capital by small businesses.

Section 10 would amend section 24, which specifles the penalties which flow from a willful violation of the act. The Commission apparently seeks to extend the criminal liability imposed by section 24 to applications, reports and documents filed with the Commission in connection with offerings of securities exempted from the registration requirements of the act by sections 3(b) and 3(c). This proposal seems reasonable to us, but once again the proposed amendment goes much further than the stated purpose. It would apply the criminal liabilities of section 24 to any application, report or document filed under any rule or regulation under the act. This extension of section 24 is obviously not expressly limited to section 3(b) or 3(c) offerings. We think it should be so limited and that the proposed amendment should be no broader than is necessary to accomplish this result.

Section 11 of S. 1178 would add a new section to prohibit any person from violating the act through any other person, and would expressly state that an aider or abettor violates the act. The objections we expressed above with respect to section 22 of S. 1179 are equally applicable in this case.

(The following was received in response to the request on p. 43.)

JUNE 1959.

NEW YORK STOCK EXCHANGE RULES AND REQUIREMENTS RELATED TO THE SEGREGATION OF CUSTOMERS' SECURITIES

(Reproduced from New York Stock Exchange Guide, pp. 3695 to 3699, inclusive) SECTION 2402. RESTRICTIONS ON PLEDGE OF CUSTOMERS' SECURITIES

Rule 402

(a) No agreement between a member organization and a customer authorizing the member organization to pledge securities carried for the account of the customer either alone or with other securities, either for the amount due thereon or for a greater amount, or to lend such securities, shall justify the member organization in pledging or lending more of such securities than is fair and reasonable in view of the indebtedness of said customer to said member organization, except as provided in paragraph (d) of this rule.

Agreements for use of customers' securities

(b) No member organization shall lend, either to itself as broker or to others, securities held on margin for a customer and which may be pledged or loaned under paragraph (a) hereof, unless such member organization shall first have obtained a separate written authorization from such customer permitting the lending of such securities by such member organization.