We appreciate the opportunity you have afforded us to comment on the various proposals submitted by the Commission, and this further opportunity to suggest additional areas within which changes in the Federal securities laws might be considered. Sincerely yours, EDWARD C. GRAY. (Reply of NASD to SEC's revised amendments in supplemental memorandum on S. 1179. See p. 337.) SUPPLEMENTAL STATEMENT OF NATIONAL ASSOCIATION OF SECURITIES DEalers, INC., ON S. 1179 AND H.R. 2480 The Securities and Exchange Commission has made various changes in its final recommendation to the Senate and House on certain parts of the bill, introduced at the Commission's request, to amend the Securities Exchange Act of 1934. After hearing industry comment before the Senate Subcommittee on Securities of the Committee on Banking and Currency, the Commission, on June 25, 1959, informed the Senate that further consideration would be given to several sections of the bill. On August 4, 1959, Chairman Gadsby appeared before the House Subcommittee on Commerce and Finance and introduced memorandums on the matters which had been restudied. The comments here will be limited to the sections of the bill the Securities and Exchange Commission now proposes to amend prior to any possible action by Congress. Section 7 of the bill relates to Commission rulemaking powers in the matter of borrowing, lending, or holding of securities carried for the accounts of customers. In its memorandum on this section, the Commission states: "In summary, the Commission would have no objection to modifying section 7 of the bill to spell out more specifically the areas within which its rules should operate, which are primarily the segregation of customers' fully paid securities and excess collateral and the borrowing of customers' securities by the brokerdealer himself, or their lending to others." In the light of the Commission's position on this section, the association no longer opposes the Commission's request with the modification included. The Commission also reconsidered section 30 of the bill which would impose a forfeiture of $100 a day for failure to file information, documents or reports. (Transcript before House Subcommittee on Commerce and Finance, Aug. 4. 1959, p. 353, et. seq.) The Commission stated that upon reexamination, in light of industry comments, it would limit the filing requirements to reports filed pursuant to seetions 13 and 16 of the act and that recovery of the forfeiture would bar any criminal proceeding for the same delinquency but the Commission would have the option as to how it determined to proceed. This proposed change is under study at the Department of Justice but the Commission expects to receive that agency's approval of the section of the bill as amended. In view of the fact that the Commission stresses the court's discretion under this section, it is believed that the industry requests for notice to a party who may be inadverently delinquent is somewhat taken care of. In the light of the legislative history of this particular section, it is not believed a court would permit a forfeiture for the failure to file a report, due either to inadvertence or because of conflicting opinions upon the basic necessity of filing the report in the first instance. Therefore, the association is no longer in opposition to the enactment of this section as amended. It is interesting to note that the Commission does not accede to the associa tion's comments on section 14 of the bill which would grant the Commission rulemaking authority with respect to over-the-counter trading on a when-issued or when-distributed basis. The Commission states that the rules of the association (uniform practice code) in this regard are procedural rather than substantive and further do not apply to broker-dealers who are not members of the association. While on other issues where the Commission sought to ex plain the reasons for its proposals by substantial memorandums introduced before the Senate and House, there has been no such memorandum prepared on this 637 particular request. It may well be if the Commission could demonstrate the need for this section, the association would not be opposed to its enactment. However, based upon the information at hand, the association maintains its position with regard to this section. August 11, 1959. (The reports on the legislation from various Government agencies, ordered inserted in the record, follow :) SMALL BUSINESS ADMINISTRATION, OFFICE OF THE ADMINISTRATOR, Re S. 1178, S. 1182. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR SENATOR ROBERTSON: Further reference is made to your letters of April 16, 1959, requesting my comments on the captioned measures. These bills amend the Securities Act of 1933 and the Investment Advisers Act of 1940 in a number of respects. Of particular investment to this agency is section 3 of S. 1178 embodying a recommendation, made by the Cabinet Committee on Small Business in its progress report of August 7, 1956, that the maximum amount of an issue of corporate securities which the Commission may exempt from registration be increased to $500,000. Congress an identical proposal (S. 2299) was approved by your committee and You will recall that in the 85th enacted by the Senate. Unfortunately, the House took no action respecting it. Under the provisions of section 3(b) of the Securities Act of 1933, the Commission is authorized to accept a simple notification statement in lieu of the full registration statement on issues of $300,000 or less. This limit has been in effect since 1945 and should be raised in recognition of the substantial increase in the price level that has occurred in the intervening years. As a rule, the notification statement substantially reduces the legal, engineering, and accounting costs involved in filing a registration statement. By raising to $500,000 the amount of an issue of securities that is exempted from registration, more small and medium-sized firms would find it practical to utilize the public markets for capital. For these reasons, I strongly favor the enactment of section 3. The benefits of the section, however, are largely offset by other proposals exposing small issuers to drastic civil and criminal penalties. Indeed, S. 1178 puts them on much the same footing, in this respect, as issuers of fully registered securities. Under the provisions of section 5, a company which makes a material misstatement or omits a material fact in any document filed with the Commission in connection with an issue of exempted securities is answerable not only to the immediate purchaser, as under existing law, but also to any remote purchaser who receives or is shown a copy of the document and to any person who purchases in direct or indirect reliance on such misstatement or omission. In further contrast to existing law, the liability of the company for false or misleading statements is absolute. nocently made, the issuer may be required to refund to the described purchasers Even though the misrepresentation was inthe consideration paid by them for the securities, together with interest thereon. Purchasers who have disposed of the securities are entitled to damages. Moreover, liability is extended to all persons responsible for the misstatement or omission and to persons who merely signed the document. Thus the executive officials and the directors of the issuer will be exposed to personal hazard. The same is true of lawyers, engineers, accountants, and other experts employed in the preparation of the documents. None of these individuals, caught in the net of section 5, can escape liability unless he sustains the burden of proof that he acted in good faith and did not know of the untruth or omission involved. Section 10 of S. 1178 establishes criminal penalties in those cases in which the misrepresentation is found to have been willful. It is hardly necessary to say that the establishment of these penalties would discourage small corporations from utilizing the public markets to obtain capital. To my knowledge there is no evidence that small issuances exempted from full registration, under the provisions of existing law, have contained misrepresentations in such volume and degree as to indicate a need for increasing the protection presently enjoyed by investors. Unless and until that need is clearly demonstrated, the liabilities now attending exempted issuances should not be expanded. For the foregoing reasons, I am opposed to the enactment of sections 5 and 10 of S. 1178. Our examination of the remaining proposals in the bills, to expand the coverage of the two acts and to strengthen their enforcement, reveals nothing clearly detrimental to the legitimate interests of small business. Therefore, unless and until apprised of a latent defect threatening serious injury to such interests, I should have no objection to the enactment of these amendments. The Bureau of the Budget has no objection to the submission of this report. TREASURY DEPARTMENT, May 12, 1959. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, MY DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on S. 1179, to amend certain provisions of the Securities Exchange Act of 1934, as amended. The proposed legislation would make various amendments to the Securities Exchange Act of 1934, as amended, which would appear designed to assist in the enforcement of that act by facilitating the prosecution of criminal, injunctive, and administrative actions under it, without materially altering the basic provisions and purpose of the act. The proposed legislation is not of primary interest to this Department and the Department has no comment to make as to its general merits. Very truly yours, NELSON P. ROSE, General Counsel. Hon. A. WILLIS ROBERTSON, BOARD OF GOVERNORS, OF THE FEDeral Reserve SYSTEM, Chairman, Banking and Currency Committee, DEAR MR. CHAIRMAN: Receipt is acknowledged of your letter of April 16, 1959, enclosing a copy of S. 1179 and requesting a report thereon. The bill would amend certain provisions of the Securities Exchange Act of 1934, which is designed to protect the public and investors against malpractice in the securities and financial markets. The amendments embodied in the bill are recommended by the Securities and Exchange Commission. They are technical in nature, and are designed to make the Commission's enforcement activities more effective by providing additional remedies and remedying various defects which have come to light. The Board would favor those portions of the bill which would amend the provisions of the Securities Exchange Act, principally sections 7 and 8, under which the Board has responsibilities; and the Board has no comments to offer with respect to the other portions of the bill. Sincerely yours, C. CANBY BALDERSTON, Vice Chairman. Hon. A. WILLIS ROBERTSON, FEDERAL DEPOSIT INSURANCE CORPORATION, OFFICE OF THE CHAIRMAN, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C. DEAR SENATOR ROBERTSON: In accordance with your request, we have reviewed the provisions of S. 1179, a bill to amend certain provisions of the Securities Exchange Act of 1934, as amended. We wish to advise you that we have no objection to the enactment of S. 1179. We have been advised by the Bureau of the Budget that it has no objection to the submission of this report. Sincerely yours, JESSE P. WOLCOTT, Chairman. DEPARTMENT OF JUSTICE, June 17, 1959. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR SENATOR: This is in response to your request for the views of the Department of Justice concerning the bill (S. 1180) to amend certain provisions of the Trust Indenture Act of 1939, as amended. The bill would amend the Trust Indenture Act of 1939, as amended (15 U.S.C. 77aaa et seq.), to exempt from registration offerings totaling less than $500,000 (as contrasted to the present $250,000 limit), to extend the time within which certain applications for exemption from the act might be filed, and to eliminate reference to provisions of the Securities Act of 1933 concerning administrative proceedings in order to allow the Securities and Exchange Commission adequate time to examine statements and information filed in connection with new offerings. The subject of this legislation is not a matter for which the Department of Justice has primary responsibility, and accordingly we make no recommendation as to the enactment of the bill. The Bureau of the Budget has advised that there is no objection to the submission of this report. Sincerely yours, LAWRENCE E. WALSH, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, May 6, 1959. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: Receipt is acknowledged of your letter of April 16, 1959, enclosing a copy of S. 1181 and requesting a report thereon. The bill would amend certain provisions of the Investment Company Act of 1940. The general objective of that act is to protect the public and investors against malpractices in the control, management, and operation of publicly owned investment companies. The amendments embodied in the bill are recommended by the Securities and Exchange Commission on the basis of its experience in the administering of the act, and are designed to further the objectives of the act by remedying certain defects which the experience of the Commission has brought to light. The proposed amendments would make no change in the basic objectives of the statute. It appears from an examination of the bill and the documents enclosed with your letter that the bill does not relate to any matter which has a direct or material bearing upon the responsibilities of the Board of Governors of the Federal Reserve System, and the Board has no comment to offer with respect to the bill. Sincerely yours, C. CANBY BALDERSTON, Vice Chairman. DEPARTMENT OF JUSTICE, June 10, 1959. Hon. J. W. FULBRIGHT, Chairman, Committee on Banking and Currency, DEAR SENATOR: This is in response to your request for the views of the Department of Justice concerning the bill (S. 1182) to amend certain provisions of the Investment Advisers Act of 1940, as amended. The amendments of the Investment Advisers Act of 1940 contained in the bill were recommended by the Securities and Exchange Commission and are designed to assist the Commission in enforcing the statute. The subject of this legislation is not a matter for which the Department of Justice has primary responsibility, and accordingly we make no recommendation as to the enactment of the bill. There is one provision of the measure, however, to which attention is directed. Section 8 of the bill would amend the introductory paragraph of section 206 of the act (15 U.S.C. 80b–6) by striking out the words “registered under section 203," so as to make the prohibitions in the section apply to all investment advisers, regardless of whether or not they are registered with the Securities and Exchange Commission. It is noted, however, that the caption of section 206 reads "Prohibited Transactions by Registered Investment Advisers." The Bureau of the Budget has advised that there is no objection to the submission of this report. DEAR MR. CHAIRMAN: Receipt is acknowledged of your letter of April 16, 1959, enclosing a copy of S. 1182 and asking for a report thereon. The bill contains several amendments to the Investment Advisers Act of 1940. The general objective of the act is to protect the public and investors against malpractice on the part of persons engaged in the business of advising others with respect to securities. The amendments embodied in the bill are recommended by the Securities and Exchange Commission, and are designed to assist it in enforcing the statute by remedying a number of technical defects which have been brought to light by the experience of the Commission in administering the statute. From an examination of the bill and the enclosures in your letter, it appears that the bill does not affect any matter which is particularly the concern of the Board of Governors of the Federal Reserve System, and the Board has no comment to make with respect to the desirability of enacting the bill. Sincerely yours, |