tions for amendments of the securities laws, and, second, if there are any suggestions within our competence relating to the broader holding of securities for investment by individuals.

Mr. YEARLEY. We shall be delighted to do so, Senator Javits.

(The information requested had not been received at the time of going to press.)

Senator JAVITS. I too wish to join in our comment that of the three witnesses this morning representing such important securities marketing media, your presentation seems to be the most intensive analysis and critique with the largest number of objections to the recommendations made by the SEC.

May I ask you this, therefore. Do you feel that the recommendations of the SEC are especially directed at the unlisted field?

Mr. YEARLEY. I can only make a very general statement there, sir, and I must say it would be really a personal opinion. I would say, "Yes." But that is a personal opinion.

Senator JAVITS. What is really being sought is tighter regulation by the SEC, as they define tighter regulation, of the unlimited securities field; is that correct?

Mr. YEARLEY. I think that is a correct statement.

Senator JAVITS. Do you feel that this is brought on by any marked increase in securities frauds or defalcations or bankruptcies? In other words, has there been any marked increase in that field, in your opinion, which requires remedial legislative action, a broad increase in the excesses or derelictions which we generally associate with the need for legislative reform?

Mr. YEARLEY. May I have that directed to Mr. Wallace Fulton, the executive director of the association?

Senator JAVITS. Certainly.

Mr. FULTON. To answer that question correctly would take quite a long time. Undoubtedly, there has been some considerable increase in the incidence of fraud in the securities market, particularly in the operation of the so-called boiler houses. I think some of the proposals of the Commission, particularly those that we do not object to, will help in correcting some of that situation.

In connection with insolvencies, I don't think the record would show that there has been any considerable increase in the last 2 years over the preceding 2 years.

I think that about answers you.

Senator JAVITS. When I was attorney general of the State of New York and had charge of the investigating of security frauds, I too had experience which confirms your statement that there has been a material increase in securities fraud operations. Therefore, it is as a practical matter necessary that we consider what we can do in terms of legislation to help meet it on the Federal level.

I found, however, when I was attorney general that the field of this fraud originated outside of the United States. Could you direct yourself specifically to what the SEC has recommended which in your opinion might deal with and counter that kind of fraud?

Mr. FULTON. I can find nothing specifically directed to counter that type of fraud.

Senator JAVITS. Do you people have a recommendation to deal with that situation?

Mr. FULTON. No, we have not.

Mr. YEARLY. We have not at this time. We will be glad to attempt to make a recommendation to the committee. We have nothing at this time.

(The information referred to had not been received at the time of going to press.)

Senator JAVITS. I would like to pay a tribute to our Canadian colleagues in the securities regulation field in policing this business. They have cooperated in late years very closely with similar law enforcement authorities in the United States. Nevertheless, if there is anything legislatively that we might do along that line, I as one Senator would certainly be interested, based upon my own experience. I think therefore it is a fair conclusion to state from what you gentlemen have said, and you are knowledgeable in the field, and borne out by my own experience, that there is a need for legislation to deal with a recurrence of securities frauds on a broad enough scale to warrant new legislation.

We can agree on that, can't we?

Mr. YEARLEY. My answer is "Yes," sir.

Senator JAVITS. Thank you, Mr. Chairman.

Senator WILLIAMS. Just one or two things, gentlemen: First, Mr. Yearley, I wonder if you could supply for the record a copy of your organization's rules of fair practice.

Mr. YEARLEY. We will be delighted, sir.

(The document referred to will be found in the files of the committee.)

Senator WILLIAMS. Getting to some of the comments of Mr. Dern, wasn't the purpose of the regulation A exemption to reduce the amount of information necessary to encourage issues of smaller organizations, smaller issues?

Mr. DERN. That has always been my understanding, sir.

Senator WILLIAMS. There is no suggestion that it was for the purpose of making it easier for a person to make a misstatement.

Mr. DERN. No, sir. I don't believe that would be true. It is more a question of expense and time.

Senator WILLIAMS. And the proposals here only run to those liable for misstatements; isn't that true, gentlemen?

Mr. YEARLEY. That is correct.

Mr. DERN. Yes, sir.

Senator WILLIAMS. In your comments with reference to the suspension of trading over the counter, the criticism is that it is conferring a broad power without specifics included in it; is that right?

Mr. YEARLEY. That is correct.

Senator WILLIAMS. Do you have any suggestions in specific terms as to the limitations that should be put on this rulemaking power? Mr. YEARLEY. I would like to ask Mr. White, our attorney, if he has any suggested wording on that.

Mr. WHITE. We haven't given any thought to that, Senator, but we will be happy to supply some suggestions.

Senator WILLIAMS. I think we would appreciate hearing from you on that. (See p. 68.)

Senator WILLIAMS. Gentlemen, we have no further questions and, if we can have the material requested, thank you very much for a very excellent review and thoughtful analysis of these two measures.

Mr. YEARLEY. Thank you for your kindness in hearing us, sir.
Mr. DERN. Thank you very much.

(The memorandums referred to in Mr. Yearley's statement follow :)

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

MEMORANDUM ON SEC LEGISLATIVE PROPOSALS S. 1178 AND H.R. 5001

On February 26, 1959, at the request of the Securities and Exchange Commission, Senator Robertson, of Virginia, and a member of the Subcommittee on Securities in the Senate, introduced S. 1178, which contains 11 amendments to the Securities Act of 1933 proposed by the Securities and Exchange Commission. The same bill, H.R. 5001, was introduced in the House by Representative Harris. This memorandum will summarize the effect of these amendments.

Section 1 would amend paragraph 5, section 2: "Definitions" to substitute the "Securities and Exchange Commission" for the original designation of the "Federal Trade Commission."

Section 2 would amend paragraph 6 of section 2 to eliminate the words "Alaska" and the "Philippine Islands' 'from the definition of the term "Territory."

Section 3 would amend subsection (b) of section 3 to raise from $300,000 to $500,000 the size of an issue that may be exempted under rules and regulations of the Commission such as the present regulation A. The NASD and the securities industry, generally, have been in favor of previous proposals to raise the amount of the exemption authorized by this provision.

In its comments on this proposal, the Commission states that during the 85th Congress two bills were introduced which would have increased the civil liabilities under regulation A and made the requirements equivalent to a full registration. The Commission has taken some of these suggestions into account in its proposed amendment to section 12(b) of the act discussed below. In its comments, the Commission goes on to state that, "It may be that Congress will give consideration to revising the civil liability provisions ***." As will be discussed below, the imposition of additional liabilities or requirements under regulation A might have the effect of doing away with the exemption; hence, the increase from $300,000 to $500,000 might be meaningless.

Section 4 would amend section 9(a) relating to "Court Review of Orders" merely to substitute correct references to applicable provisions of the United States Code for the reason that there are present references to sections that have been repealed since the act was passed.

Section 5 would amend section 12 relating to "Civil Liabilities in Connection With Prospectuses and Communications" in two substantial respects.

First, it would designate the present section 12 as section 12 (a) and would change the manner in which it refers to the use of the mails or of instruments of transportation or communication in interstate commerce.

According to the Commission, the objective of this change is "to eliminate a jurisdictional ambiguity." There has been a split in the courts on the question whether, in order to give rise to the section 12 (2) liability, it is necessary that the mails or interstate facilities must be used in making a misrepresentation, or whether it is sufficient that the mails or interstate facilities are used in delivering the securities or in some other phase of the transaction. The amendment is intended to resolve this question in favor of the view that the use of the mails or interstate facilities in connection with any phase of the transaction is sufficient to create the civil liability provided by the section.

This is said by the Commission to bring section 12 into conformity with the jurisdictional requirement of section 17(a).

The second amendment to section 12 proposed to be made by section 5 of the bill would broaden the section 12 civil liabilities by adding a new subsection (d), imposing a liability similar to that now provided for use of a false prospectus, in case there is a misleading statement or omission in any statement or document filed with the Commission in connection with any offering of securities made under regulation A (or any other regulation hereafter issued under sec. 3(b)) or in connection with any offering exempt under sec. 4 (which would include a private offering, an intrastate offering).

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 omission 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. Apparently the primary objective of this amendment is to extend the section 12 civil liability to misleading material filed in connection with regulation A offerings and other offerings under the provisions for exemption. In attempting to provide for that result the terms of this particular proposal generate many practical complications.

For example, the remedy of suit is available not only to a person who receives or is shown the statement but also to persons who, though they may never see it, rely upon it. It is understood that this is intended to include, for example, persons who rely upon oral statements made by salesmen who have seen the statement. This suggests the obvious possibility of suits being brought by persons who never, in fact, saw or heard of the statement or its contents before they bought the securities.

If the issuer is the defendant there is no defense of lack of knowledge, even though some other person concerned with the preparation of the document was primarily responsible for the misstatement. It would be virtually impossible for the issuer to prove that the purchaser actually had no knowledge of the erroneous statement even if that were the fact. When the trouble with the statement is an omission, rather than an affirmative misstatement, the problems of an effective defense by an innocent defendant might be almost insurmountable. The complications and cost of the litigation that might result if contribution were sought by the unsuccessful initial defendant against others concerned with the preparation or filing of the statement would be likely to bring more tangible satisfaction to lawyers than to anyone more directly concerned.

The Commission, in its justification of this proposal, has said merely that it believes this provision would furnish investors additional protection where securities are sold under the exemption provisions. Such protection is desirable where a purchaser of an unsatisfactory security sold under one of the exemptions actually saw and relied upon a statement concerning a material fact that was misleading, but it would appear that as the section is now written it goes far beyond what reasonable protection of investors requires. There is a distinct possibility that defending against an original suit or subsequent suits for contribution would impose burdens upon innocent persons with valid defenses out of all proportion to the protection afforded investors.

It is suggested that this language of section 12(b) as proposed by the Commission 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 liability 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 in 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 6 would merely amend section 13 to bring its reference to other sections of the act into conformity with the revised numbers of such sections that would result from the amendments proposed in this bill.

Section 7 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 no need for the injunction to assure future compliance.

Moreover, it is not clear 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 the order 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. 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 proceeding. Further, the language of this section directs that the court "shall" grant the injunction or restraining order, which language is mandatory.

In view of the above, the association is opposed to enactment of this section. Section 8 would repeal subsection (c) of section 20, which granted the courts jurisdiction to issue writs of mandamus commanding compliance with the act and orders under it. The writ of mandamus is no longer available under the Federal Rules of Civil Procedure. The same results can be achieved by an order of the court under subsection (b).

Section 9 would merely amend subsection 22(a) to substitute references to present provisions of the United States Code for those now referred to in this subsection which have been repealed.

The

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. 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 provided by the act to cover material misstatements or omissions willfully made in offering circulars or other documents filed in connection with an offering of securities under regulation A or other exemptive provisions of the act, as well as in any other documents filed under this act. One question which is raised by this proposal is just what the Commission means by a "report or document." It is suggested that if words such as these are used with reference to filing under regulation A, the language be limited to the exact documents which are filed pursuant to that regulation. The same general statements which were made above concerning the amendment to section 12 and the availability of regulation A apply to this proposed change.

For these reasons the association is opposed to the enactment of this section. Section 11 would add to the act a new section 29, making it unlawful to do indirectly or through any other person acts which would be unlawful under the act if done directly.

This new section would also make it unlawful to aid, abet, counsel, command, induce or procure violations by other persons. This provision is similar to section 20(b) of the 1934 act.

The stated purpose of these amendments is to remove any doubts as to the Commission's authority to enjoin or to punish persons who aid or abet violations of the act as well as those who commit violations directly.

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

MEMORANDUM ON SEC LEGISLATIVE PROPOSALS, S. 1179 AND H.R. 2480

Senator Robertson for himself and Senator Capehart, at the request of the Securities and Exchange Commission, introduced S. 1179 to amend certain provisions of the Securities Exchange Act of 1934 as amended. A similar bill, 42560-59- -6