of Commission authority in this respect with regard to exchange members.

This small but potent amendment would not only give the Commission sweeping authority over segregation of customers' securities, but would even afford the authority to prohibit brokers from holding such securities at all.

Within the framework of the proposal is also the power to regulate the borrowing and lending of customers' securities. Section 8(c) of the act and the rules already adopted thereunder, contain specific regulations governing the pledging of customers' securities, and the existing section 8 (d) prohibits the loan of customers' securities without the written consent of the customer. I believe that this field is well covered, at present, by existing regulations of the Congress, the Commission, and the exchanges what different or more stringent rules may be contemplated by the Commission as applicable to exchange members, I do not know. They do not say. If, after 25 years' experience with the statute, revision is needed in this area, we and the Congress should be afforded some ideas of what the Commission has in mind. If no specific rules are in contemplation or are now deemed necessary as regards exchange members-then the authority as to them is not necessary and should not be granted.

Section 30 of the bill proposes a new section 32 (c) under which the Commission would be authorized, in its discretion, to recover by civil. suit a $100-a-day forfeiture from any person who fails to file information, documents, or reports under the act or the rules of the Commission adopted thereunder. Unlike, strangely, the comparable provisions of section 32 (b) which apply to failure to file equally important reports pursuant to an undertaking under 15 (d) of the act, this new provision for forfeiture would not be in lieu of criminal penalty. Since the failure to file in each case is equally culpable, I see no reason why the detriment incurred should be greater in the proposed section 32 (c) than in section 32(b). The Commission should in each case be required to determine whether to proceed by way of criminal penalty or forfeiture.

I have no further comment on the proposed legislation and I thank you again for hearing me.

Senator WILLIAMS. We thank you very much, Mr. McCormick.
Senator Bush?

Senator BUSH. I have no questions. I would make the same request I did of the former witness; namely, that the Commission be required to advise the committee of its comments on the specific recommendations or actions recommended by Mr. McCormick.

Senator WILLIAMS. We will ask the staff to do that, sir. (See pp. 47, 48, and 55.)

Anything else?

Senator BUSH. No, sir.

Senator WILLIAMS. Senator Javits?

Senator JAVITS. Mr. McCormick, we are glad to welcome you in a representative capacity for all your colleagues who are so important to the life of New York. I would like to address the same request to you that I addressed to Mr. Gray on the part of the stock exchange. Could you let us have the affirmative suggestions, not only the comments on what the SEC proposes, but any affirmative suggestions for

changes in the securities law proposed by the American Stock Exchange?

Mr. McCORMICK. Senator, that would be a simple matter, because, so far as concern the statutes, the proposals that have been made by the Commission and are now on the books, we have no objection, we want no deletions, we are requesting no deletions or additions.

The only three points on which we do quarrel with the SEC are the three points I have brought out in my statement, and we would be very happy, Senator, to prepare specific language to cope with those three objections.

Senator JAVITS. Also, as I suggested to Mr. Gray, could you let us have any recommendations you think might fall within our competence for facilitating or enlarging securities ownership on an investment basis by the broad base of the people generally?

Mr. MCCORMICK. Very definitely, sir.

(The following was later received for the record:)

Hon. HARRISON A. WILLIAMS, Jr.,

Subcommittee on Securities,

Committee on Banking and Currency,

U.S. Senate, Washington, D.C.

AMERICAN STOCK EXCHANGE,

July 9, 1959.

DEAR SENATOR WILLIAMS: During the course of the hearing on June 16, 1959, before your subcommittee, the question was raised whether any of the persons submitting statements before you had further suggestions for amendment of the Federal securities laws.

I wish to note for the record at this time that your subcommittee should reconsider prior proposals in previous sessions of the Congress, to amend the Securities Exchange Act of 1934, by a requirement that those large corporations with a significant amount of assets and a large body of stockholders, which do not at present have any of their securities listed on a national securities exchange, should be made subject to the financial reporting and proxy requirements of the act to which listed corporations are subject.

Such legislation would in my mind fill to an important extent what is now a glaring gap in the shareholder protective and information provisions of the Securities Exchange Act of 1934.

Sincerely yours,

EDWARD T. MCCORMICK, President.

Senator JAVITS. Thank you very much.
Thank you, Mr. Chairman.

Senator WILLIAMS. One question, Mr. McCormick: I know you have expressed your concern to this committee on other occasions about the difficulties of small business in raising equity capital. I wonder if you feel that S. 1178, as it changes the present law, would have any effect on the opportunity of small business as to raising equity capital.

Mr. MCCORMICK. There are two important phases to that proposal: One, of course, is very helpful in that it increases the limit from $300,000 to $500,000.

I think that would be very helpful.

The other provision is the extension of liability to certain persons who make statements in the offering circulars who are not covered at the present time. I think it makes a lot of sense. I think the people who buy the small issues are entitled to the protection that is afforded in the full registration statement, and that is that they can sue the people directly responsible for misstatements.

Senator WILLIAMS. So you think it will have a beneficial effect.

Mr. MCCORMICK. I think so; yes, sir.

Senator WILLIAMS. Thank you ever so much. We are grateful for your help on these problems.

Our final witness this morning is Mr. Alexander Yearley IV, chairman of the board of governors of the National Association of Securities Dealers, Inc.

We are pleased to have you with us this morning, Mr. Yearley. Mr. YEARLEY. Thank you, sir.

Senator WILLIAMS. Will you proceed?

STATEMENTS OF ALEXANDER YEARLEY IV, CHAIRMAN; JAMES G. DERN, MEMBER, BOARD OF GOVERNORS; WALLACE H. FULTON, EXECUTIVE DIRECTOR; AND MARC A. WHITE, COUNSEL, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

Mr. YEARLEY. Mr. Chairman and members of the committee, I am Alexander Yearley IV, and am serving this year as chairman of the board of governors of the National Association of Securities Dealers, Inc. Here with me today are James G. Dern, on my left, a member of the board of governors and chairman of the association's legislation committee; Wallace H. Fulton, at my extreme left, the executive director of the association; and Marc A. White, counsel for the association, on my right.

The Securities and Exchange Commission has requested legislation on five of the acts which it administers and, at its request, various bills have been introduced, both in the Senate and in the House of Representatives.

The comments of the association will be limited to those bills which involve the Securities Act of 1933 and the Securities Exchange Act of 1934.

As a background for our comments, it might be well, however, to call the committee's attention to a subcommittee reprint of the House of Representatives entitled, "History of National Association of Securities Dealers, Inc., Its Activities, Membership Data, Sanctions Imposed, Members Expelled, Financial Statements, Liaison, and Supervision by SEC From 1936 to November 30, 1958." This document gives the background and history of the association and statistics concerning the disciplinary work conducted by the association.

A copy of that, as I understand, has been furnished to each member of the committee.

Senator WILLIAMS. We have the copies. That document and the other material you have furnished us will be placed in the committee files. Thank you.

Mr. YEARLEY. In view of the association's duties and interests, it naturally considers of vital concern any proposal for legislation relating to the securities industry.

We have given this committee and the Subcommittee on Commerce and Finance of the House memorandums which summarize the effect of each section of the bills on the Securities Act of 1933 and the Securities Exchange Act of 1934. These memorandums also state the position of the association on the proposals and I would like to offer these for the record.

Senator WILLIAMS. We will receive them for the record. They will appear at the conclusion of your remarks.

Mr. YEARLEY. Thank you, sir.

With the permission of the chairman, I respectfully request that Mr. Dern read a statement on the Securities Act of 1933, then I will read general comments on the Securities Exchange Act of 1934 after which time any of us at this table will answer your questions to the best of our ability.

Have I your permission?

Senator WILLIAMS. Very well. Do you want to proceed?

Mr. DERN. Mr. Chairman and members of the committee, as Mr. Yearley has told you, I am James G. Dern from Illinois, a member of the Board of Governors. I would like to comment on certain proposed amendments to the Securities Act of 1933. Many sections of the bill are not controversial; therefore, our comments will be limited to the sections in which the association is particularly interested.

Section 3 of the bill would amend subsection (b) of section 3 and raise from $300,000 to $500,000 the size of an issue that may be exempted under regulation A. The association is in favor of this proposal. However, Congress should be aware that the imposition of additional liabilities or requirements, such as proposed later in the bill, might have the effect of limiting the use of the exemption. This proposal is presumably designed to make more funds available to smaller businesses and also to provide a more simplified procedure for those small issues than of the procedure required for a full registration.

The next section of interest is section 5 which would amend section 12 of the 1933 act. The proposal to designate a section 12(a) "to eliminate a jurisdictional ambiguity" would give the Commission the power to act when the mails are used in connection with any phase of a securities transaction. This would appear to be constructive.

The second amendment to section 12 broadens civil liabilities under this section by adding a new subsection (d) proposing a liability similar to that now provided for use of a false prospectus, in the event there is a misleading statement or omission in any statement or document filed with the Commission in connection with any offering under regulation A.

The right to sue created by this amendment would be available to any person who receives or is shown a copy of such statement or who relies directly or indirectly on such a statement. The liability to suit falls upon the issuer, upon any person who signed the statement or document, and upon any person who made the untrue statement or caused it to be made. Any of these persons, other than the issuer, can avoid liability by showing that he acted in good faith and did not know about the untruth or omission on which the action is based.

The new subsection would provide also that anyone liable to make payment under this new section may, unless primarily at fault, recover contribution from others who would have been liable if they were sued separately.

This new subsection imposes a very substantial risk of new burdens on all persons who have any part in the preparation of offerings of securities under the several provisions for exemption, or in the offering of such securities, and creates possibilities of complicated litigation involving difficult questions of proof.

We believe that the language of section 12(b) should be limited to misstatements and omissions in the offering circular itself rather than having the section apply to "any statement or document filed with the Commission in connection with any offering ***"; also, that the concept extending the right to recover to any person who receives or is shown a copy of a statement or document be eliminated.

As was mentioned above, with every new amendment applicable to regulation A, there is a possibility that the original purpose of the exemption will be lost.

In view of the above questions and problems in connection with this proposed change, the association is opposed to its enactment.

Section 7 of the bill would amend section 20 (b) relating to injunctions in several respects.

First, it would provide for an injunction when a person has engaged in violations of the act or has failed to comply with the act, or with rules or regulations issued under the act, or with orders of the Commission made under the act.

This section's proposed amendment would authorize the courts to issue injunctions in cases where the violations or noncompliance had occurred long before. This may be read by courts as requiring some showing of the sort customarily required for an injunction that such things not only have happened in the past but are likely to recur and need to be prevented by injunctions, but such interpretation is by no means certain from this proposed language. In some courts this amendment might result in the granting of injunctions merely because of a past violation even though there is need for the injunction to assure future compliance.

Moreover, it is not clear to us whether the defendant can contest the validity of an order in a suit for injunction based on an alleged past failure to comply. Some orders of the Commission accomplish transitory results-like suspensions for a relatively brief period. Others may be accepted without contest because of economic pressures even though the person subject to the order is convinced the order is wrong and invalid. Acquiescence in the order may be less burdensome than contesting it at the administrative level or through the courts in a direct proceeding to test its validity.

If, thereafter, it is claimed that an order of the Commission was not complied with and an injunction is sought on the basis of the past failure to comply, ordinarily, the defense of invalidity of the order would be met by a claim that the defendant had failed to exhaust his administrative remedies by failing to contest the validity of the order directly.

If the above is the case, then, consideration should be given to including in this section, if it should be enacted, a provision that would suspend the doctrine of exhaustion of administrative remedies in such cases, and permit the defendant to contest the validity of the order in the injunction proceedings.

Section 10 would amend section 24 to add to the offenses subject to the criminal penalties specified in the section, the willful making of a material misstatement or omission in an application, report or document filed under the act. The present provision applies only to such statements made in a registration statement. This has the effect of extending both the criminal penalties and injunctive remedies pro