strengthen the statutory provisions relating to manipulation and to the financial responsibility of brokers and dealers; (3) authorize the Commission by rule to regulate the borrowing, holding or lending of customers' securities by a broker or dealer; (4) make it clear that attempts to purchase or sell securities are covered by the antifraud provisions of the statute; (5) revise the provisions relating to broker and dealer registration in several respects; (6) authorize the Commission to suspend or withdraw the registration of a securities exchange when the exchange has ceased to meet the requirements of its original registration; (7) clarify the Commission's authority to suspend a security from exchange trading where there has been a failure to comply with the act and where otherwise necessary in the public interest; (8) prohibit trading in the over-the-counter market for limited periods where the public interest and the protection of investors so requires; (9) provide that an insolvent broker or dealer may be adjudicated a bankrupt in an injunctive proceeding instituted by the Commission; and (10) provide for a forfeiture of $100 for each day that any report required under the act is delinquent.

The proposals we have made regarding the Trust Indenture Act, the Investment Company Act, and the Investment Advisers Act will, as you have suggested, be the subject of our testimony before you on June 18. Unfortunately, because of previous commitments, of which the staff of this committee has been advised, I will be unable to appear at that time. I have asked Commissioner Orrick, who is thoroughly familiar with this legislative program, to present our testimony at this later hearing.

We have arranged to have a statement with respect to the details of the specific bills to be made by the Director of the Division charged with responsibility for operations under the statute which is the subject of the particular bill. This morning Mr. Byron D. Woodside, Director of our Corporation Finance Division, will address himself to S. 1178, and Mr. Philip A. Loomis, Jr., Director of our Trading and Exchange Division, to S. 1179. With your consent, I will ask Mr. Woodside to proceed.

Senator WILLIAMS. Would you prefer to deal with questions now or wait until later?

Mr. GADSBY. I would suggest that the questions could be directed later after Mr. Loomis and Mr. Woodside have had an opportunity to testify.

Senator WILLIAMS. All right, we will proceed in that way. Mr. Byron D. Woodside.

STATEMENT OF BYRON D. WOODSIDE, DIRECTOR, DIVISION OF CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION

Mr. WOODSIDE. Mr. Chairman and members of the subcommittee, there have been prepared and submitted to the committee a comparative print showing the changes in the Securities Act which are proposed by S. 1178 and a statement containing a section-by-section analysis which sets forth as to each proposal for amendment a summary of the present law, the problem sought to be met by the amendment, and the remedy provided for in the bill as submitted. With your permission I should like to request that this comparative print

and analysis be incorporated into the record of this hearing. (See appendix, pp. 253 and 256.)

Chairman Gadsby has explained the broad objectives of the Securities Act of 1933 and the background and general purposes of the proposed amendments now being considered. In my statement I will endeavor to describe the proposals in some detail and indicate how they are intended to fit onto and strengthen the existing statutory provisions.

S. 1178, the enactment of which is being urged by the Commission, would amend eight of the existing sections of the Securities Act and add a new section 29.

Section 3(a) of the Securities Act lists certain classes of securities as to which, except as expressly provided, "the provisions of this title shall not apply." In general, these classes of securities may be described as exempt from the registration and prospectus requirements of the act. These securities are not, however, exempt from the prohibitions against fraudulent transactions in section 17 of the act, nor, with the exception of "governments," from the civil liability provisions of section 12(2).

Section 3(b) of the act provides that the Commission may by rule and regulation, and subject to such terms and conditions as may be prescribed, add any class of security to those specifically exempted by section 3 upon a finding that registration "is not necessary in the public interest and for the protection of investors by reason of the small amount involved, or the limited character of the public offering," provided no issue shall be exempted, the aggregate offering price of which exceeds $300,000. Securities so exempted from registration remain subject to the civil liability provisions of section 12 (2) and the antifraud provisions of section 17.

As originally enacted, section 3(b) authorized the Commission to exempt securities where the aggregate amount of the public offering did not exceed $100,000. In 1945 this section was amended to increase this maximum limit to $300,000.

In order to facilitate access to the public capital markets by more small- and medium-sized firms, section 3 of the present bill proposes that the present $300,000 ceiling be increased to $500,000. A similar proposal was included in the statutory amendment program in 1954 and was adopted by the Senate. This amendment, however, was not acceptable to the House. The Senate passed the same proposal in 1957 but no action was taken by the House of Representatives.

The present bill, to afford added investor protection in this area, would provide added specific civil and criminal liability in connection with offerings exempt under section 3 (b).

I might mention that the proposal we are now making with respect to increasing the provision with respect to civil liabilities for exempt offerings was not included in the 1954 program.

The purpose of section 3 (b) was to afford small business a relatively simpler access to the capital market, and the Commission accordingly adopted various regulations governing the sale of securities within the established limits. The most important of these is the general exemption provided by regulation A, which is designed largely as a protection against fraud and which requires the use of an offering circular containing certain prescribed minimum disclosure of pertinent

information about the offering and the business of the issuer. Under this regulation, a form of notification, copies of the offering circular, and certain specified exhibits are filed with one of the Commission's regional offices.

The regulation further provides that the Commission may by order suspend the exemption for failure to comply with the stated conditions. The entire procedure provides a method, less expensive and time consuming than registration, by which issuers seeking relatively small amounts of money may sell their securities in interstate com

merce.

In 1956, regulation A was revised in various respects. Under this revision, the exemption is not available for offerings for the account of persons other than the issuer-sometimes called bail-outs-unless the Issuer has had a net income from operations in at least one of the last two fiscal years. Securities issued to promoters, underwriters, and others for property and services must be included in determining whether the offering is within the dollar limitation specified in section 3(b), unless appropriate arrangements are made, by escrow or otherwise, to keep these securities off the market for 12 months.

Additional provisions make the exemption unavailable where promoters, management officials, large stockholders, or underwriters have a record of past securities violations.

With these provisions in the rules, and a vigilant enforcement program, the Commission believes that increased investor protection has been provided in the area of small- and medium-sized issues of securities without raising unreasonable impediments to the raising of equity and other capital by smaller business enterprises.

I might note that there are also other exemptive regulations арplicable to special types of offerings, such as fractional interests in oil, gas, assessable mining stock, and certain real estate notes.

Section 5 of the bill, which is concerned with civil liabilities, is intended to accomplish two purposes. It should be considered in connection with the proposal to amend section 3(b) just mentioned and section 24 to which I will refer in a moment.

First, it would add a new provision to section 12 that would provide for clear civil liability on the part of those responsible for untrue statements of material facts or omissions to state material facts in any statement or document filed with the Commission in connection with an offering pursuant to an exemption under section 3(b) or section 3(c) of the statute. Section 3 (c) was added in connection with the Small Business Investment Act of 1958 and provides for a conditional exemption for small business investment companies organized under that statute. Pursuant to this section 3(c) the Commission has adopted a regulation E, which is essentially similar to regulation A. As they presently stand, section 11 of the act provides civil liabilities in the event of false or misleading statements or omissions in a registration statement, and section 12(2) contains civil liability provisions which are applicable to the offer and sale of securities generally, whether or not they are registered.

Under section 12(2), "any person who offers or sells" a security by false or misleading statements is liable, subject to certain defenses, "to the person purchasing such security from him." Where an issuer sells to a dealer and the dealer in turn sells to an investor upon the

basis of literature or other representations of the issuer, it is not clear on the face of the statute that the investor, in bringing an action under section 12(2), can go beyond his immediate seller, usually the dealer, and recover from the issuer, who may be the person actually responsible for the false or misleading information used in the sale. Thus, if the dealer turns out to be insolvent, so that adequate recovery cannot be obtained from him, it is not clear that the investor could recover directly from the issuer or the individuals actually responsible for the false or misleading statements. While it is believed that in a proper case all such persons in the stream of distribution may be liable, the proposed amendment would make this clear on the face of the statute.

Senator BUSH. In other words, go right back to the issuer himself? Mr. WOODSIDE. Yes, sir.

Senator BUSH. All the way back?

Mr. WOODSIDE. Yes, sir; in the case where the literature originated with the issuer.

It is the Commission's view that persons who sign a document filed with the Commission pursuant to an exemptive rule containing an untrue statement or material omission, any person who makes or causes to be made an untrue statement or material omission, every controlling person and the issuer should be civilly liable to any person who is not aware of such untruth or omission and who receives or is shown a copy of the statement or document in connection with a purchase of such securities, or who relies directly or indirectly on such untrue statement or omission in connection with such purchase.

The Commission also believes that, as to the issuer, there should be no defense to actions based on any untruth or omission in a document filed with the Commission on the ground of lack of knowledge. On the other hand, it seems reasonable that liability for false or misleading statements in an exempted offering should not be imposed on any officer, director, or other individual associated with the offering, provided he can sustain the burden of proving that he acted in good faith and did not know of the untruth or omission on which the action is based. Thus, directors and other individuals under the proposed amendment would not be liable in the absence of actual misconduct or bad faith, but the issuing corporation would have an absolute liability for any false or misleading statements, even if innocently made.

A new section 12(b), which would be added to the statute by section 5 of the bill, would accomplish these purposes.

A further purpose of section 5 of the bill would be to resolve any existing ambiguity as to the jurisdictional application of the civil liability provisions of the existing section 12(2) of the act. It has been held in one circuit-seventh; 1949-that this section applies only if the fraudulent or misleading statements are made by the use of the mails or facilities of interstate commerce. However, three courts of appeals have rejected this view and have held essentially that jurisdictional grounds exist if interstate facilities are used in connection with the sale or delivery of the security.

Section 5 of the bill would rearrange the jurisdictional language of the statute to resolve any ambiguity and to conform it to the majority judicial view, which in the opinion of the Commission effectuates the congressional intention.

It is also proposed to enlarge the criminal provisions of the statute to cover any false and misleading filings made with the Commission, including filings in connection with exempt offerings. Section 24 of the act now makes it a criminal offense for any person willfully in a registration statement filed under the act to make any false or misleading statements. Section 10 of the bill would amend the foregoing provisions to encompass not only a registration statement, but any application, report, or other document filed under the act.

The Commission recommends that the proposed extension of civil and criminal liabilities with respect to exempt offerings should be enacted independent of whether the ceiling on section 3(b) exemption is raised to $500,000.

Section 7 of the bill is designed to strengthen the Commission's enforcement activities through the use of the injunctive remedy. Section 20 (b) of the act now provides for granting an injunction when it appears that a person is engaged in or is about to engage in a violation of the act, or any rule thereunder.

In the normal situation, the staff learns of a violation of the act after it has occurred. Past violations are considered by many courts as affording a sufficient basis for an injunction, since they indicate the possibility of a future violation. However, there is some reluctance to adopt this position in some jurisdictions, and it is believed that enforcement would be aided and strengthened if it were expressly stated that a past violation is a basis for an injunction, even though the violations as to a particular issue or security may have since been discontinued, as so often occurs.

To this end it is proposed that the Securities Act-as do the Investment Company Act and Investment Advisers Act already-state specifically that injunctive relief may be obtained against a person who has engaged in a violation. The absence of such language has at times caused the enforcement staff to be reluctant to recommend injunction suits in cases where an injunction, with its threat of contempt proceedings for violation, might serve as a desirable deterrent. This is particularly true as regards that element who engage in a general course of conduct in violation of the act but whose activities shift from security to security or from one company to another with considerable rapidity. Of course, any injunctive relief is always subject to the general discretionary power of the court, and therefore it would still be true that not every violation would be a basis for injunction. A related amendment found in section 8 of the bill would repeal section 20 (c) of the statute which refers to writs of mandamus, and this now obsolete procedure would be replaced by appropriate changes in section 20(b) by section 7 of the bill authorizing the Commission to seek a mandatory injunction.

Section 11 of the bill would, as the Securities Exchange Act of 1934 now provides in section 20 (b), expressly prohibit any person, indirectly or through any other person, from violating the act. This same recommendation is being made under the Investment Advisers Act.

In addition, section 11 would also explicitly make aiders and abettors liable in civil and administrative proceedings. A similar proposal with respect to aiders and abettors is included in the recommendations for amendment to the Securities Exchange Act.

Thank you.