Commission, notwithstanding if the rule, form, or order may later be amended or rescinded, or be determined to be invalid.

Let's take the converse of that.

Suppose you have a very definite feeling that some rule or order is invalid, and you don't comply with it, because by so doing you may put yourself in a very serious spot. If it is later determined that your position is right, this hasn't done you a bit of good as far as the suspension or the revocation or the denial of your license originally— not a particle bit of good-because the order of the Commission is still in effect, and there isn't anything you can do about suing the Commission.

Mr. CARY. In that case, sir, wouldn't it have been in good faith? I didn't quite get your question.

Senator DOMINICK. No. I would have been a willful violation of a rule of the Commission which he believed to be completely invalid, and later it was found that the rule was completely invalid.

Mr. CARY. He believed it invalid, and so stated. Then would this not be an act done

Senator DOMINICK. No; it would be a willful violation.

Mr. LOOMIS. I think if a rule is adjudged to be invalid, a violation of it is not an offense. I think that is the general rule. And, therefore, if the reviewing court concluded that the Commission's rule that you had violated is invalid, they would set aside the revocation of your registration.

Senator DOMINICK. That is dandy. In the meanwhile, you are out of business.

Mr. LOOMIS. Unless they gave you a stay.

Senator DOMINICK. All right. But this is part of the points that I am making.

I just tell you that I am probably going to do something about trying to fix that, at least.

Senator HARTKE. The sum and substance, as I understand, of what you are really saying is that what you are trying to do is clear out the fast operators. As soon as you get rid of those basically, then you feel that this will be run in much the same fashion as it is being run in most jurisdictions where they have laws which are either like this or similar to it. And the net result will be then after you have once established a set of procedures for the issuance of the license on a local level, that you hope that you don't have the higher incidence here in the District of Columbia than you do in other jurisdictions. In other words, the abuses are so much higher here, that it is evident that something must be done. Isn't that what you are saying? Mr. LOOMIS. Yes, sir.

Mr. CARY. That, in general, is correct; yes, sir.

Senator HARTKE. All right.

Senator DOMINICK. One more question, Mr. Chairman.

Other than for political purposes, is there any purpose in section 18? Mr. LOOMIS. I think that also was drawn from the Uniform Act. I am no expert on it, but I think it is simply designed to allow persons in the securities business and the bar to consult with the Public Utilities Commission and sort of be heard and endeavor to make sure that nothing happens out of ignorance.

Senator DOMINICK. Well, it is a heck of a note when you put in a public agency to regulate the securities business and then say they

have to have an advisory committee because the Commission is ignorant.

Mr. LOOMIS. Well, I don't know why the draftsmen of the Uniform Act put that in.

Senator DOMINICK. I don't think it is in the Uniform Act. It is not in the State of Colorado, I know.

Senator HARTKE. I want to thank you gentlemen for coming, and thank you for your testimony.

Mr. CARY. Thank you very much, sir.

Senator HARTKE. The next witness is Mr. David Acheson, representing the Department of Justice.

STATEMENT OF DAVID C. ACHESON, U.S. ATTORNEY, REPRESENTING THE DEPARTMENT OF JUSTICE

Mr. ACHESON. Good morning, Mr. Chairman.

Mr. Chairman, I thought that time would not allow a discussion of every detail that I would like to discuss in connection with this bill. I have prepared a supplementary written statement for the record, which I would like to submit, which will cover some of those details. Senator HARTKE. This may be included as though it were delivered orally.

(The statement referred to follows:)

WRITTEN STATEMENT OF DAVID C. ACHESON, U.S. ATTORNEY FOR THE DISTRICT OF COLUMBIA ON H.R. 9419

My statement is directed to H.R. 9419, a bill for the licensing and regulation of securities dealers in the District of Columbia. I would like to indicate the problems with which the bill is intended to deal, and then point out the principal aims and features of the bill, with reference to several of its particular provisions. Unlike 49 of the 50 States, the District of Columbia has no local securities legislation or “blue sky” law.1 Not surprisingly, this fact, coupled with the relatively high average income level of the population of this metropolitan area, has aggravated here the problems that are apparent in the Nation's securities business generally. In several of the ways by which the health of the securities business can be measured, Washington, D.C., compares very unfavorably with the national average performance in the percentage of its securities dealers against which complaints have been made by the National Association of Securities Dealers, the percentage which have failed, and the percentage which have been the subject of injunctive proceedings by the SEC.

The basic aim of H.R. 9419 is to regulate the conduct of broker-dealers and agents by the creation of a licensing and enforcement power. It would appear that the heart of the securities problem in the District is the problem of unqualified or unscrupulous broker-dealers and agents. This is not to ignore the problems of unseasoned issues of securities. Rather, the control of licensing and operations of broker-dealers and agents which is afforded by the bill will go a long way to cure the related problem of the distribution of unseasoned issues, normally accomplished through dealers or agents of issuers. The bill focuses the regulatory power there provided upon the segment of the securities business that deals with the public -the seller, rather than the issue itself. Ideally a “blue sky" law would provide complete powers over every phase of the securities business, but there are compelling reasons for H.R. 9419 to deal selectively with that aspect of the securities business which is the particular area of abuse. Considerations of budget and staff of the District of Columbia government suggest that some selection of measures is desirable Selers' co; det as the area of regulation, rather than se urities issues, is also suggested by the fact that very few issues originate in the District of Columbia. Public offerings of securities in the District are often subject to the controls of the States in which they originate or

1 The one State that has none is Delaware.

are sold, and they are always subject to the disclosure requirements of the Federal Securities Act of 1933.

The bill is based upon the Uniform Securities Act, a model law proposed for State legislation by the National Conference of Commissioners on Uniform State Laws. The Uniform Act is in four basic parts: (1) a fraud section; (2) a part providing for registration of broker-dealers, agents, and investment advisers; (3) a part providing for registration of securities issues; and (4) a part providing for procedures, subpenas, penalties, and liabilities, judicial review, and administration. H.R. 9419 is an adaptation of the Uniform Act that eliminates part III and makes the necessary allowances for the unique circumstances of the District of Columbia.

By way of brief summary, H.R. 9419 provides a licensing system in terms very similar to those of the Uniform Act. Three broad categories of fraud are made unlawful (sec. 3). It is made unlawful for a broker-dealer or the agent of a broker-dealer or agent of an issuer to do business without a license (sec. 4). To get a license, an applicant must make detailed disclosures about his business and history and pay a filing fee (sec. 5). A surety bond, a minimum capital, and a ratio between net capital and aggregate indebtedness are provided for (sec. 5). Records and records examinations of applicants are provided for (sec. 7). Licenses may be denied, suspended, or revoked for specified causes, including incomplete or misleading statements in the application, substandard qualifications, involvement in certain criminal or enforcement or disciplinary proceedings, inadequate finances or supervision of employees, fraud or violations of the act (sec. 10). The bill provides for a power of summary suspension pending final determination of action against an applicant or licensee (sec. 10). Because this highly necessary provision occasioned some comment in House hearings and may here as well, I am attaching an appendix to this statement dealing with the summary suspension provision (subsec. 10(c)), the case law on summary suspension and the importance of such a provision to an adequate protection of the public.

The bill provides for administrative investigation and subpenas and contains a particularly careful provision for the compelling and immunity of certain witnesses (sec. 11). Injunctive proceedings are authorized (sec. 12), criminal penalties are carefully geared to those provided for comparable Federal violations (sec. 13), and civil rights and remedies are spelled out (sec. 14).

The bill is to be administered by the Public Utilities Commission of the District of Columbia, renamed the Public Service Commission (secs. 16 and 21). The powers of the Commission under the bill are provided for in terms designed to achieve protection of the public while affording protection to the rights of applicants and licensees (secs. 11(a), 16, and 17). Broker-dealers are protected against unwarranted and injurious public disclosures (subsec. 11(a)), are assured of judicial review of administrative action (sec. 17) and any person appearing in an administrative proceeding is accorded the right to have counsel present (subsec. 11(e)). An advisory committee is created for continuing advice to the Commission (sec. 18).

The bill is to become effective upon approval in its provisions regarding fraud and preliminary administration, and effective 180 days from approval in respect of its provisions for licensing and enforcement. This preparation period was provided to allow the responsible local agency time to organize and process applications prior to the deadline for licensed operation. I believe that the public will greatly benefit from the provisions of this bill, and that legitimate securities broker-dealers here in the District will benefit commensurately. A broker-dealer house, however small, which is adequately financed, staffed, and supervised, with no history of irresponsibility or fraudulent practices, should not have any difficulty obtaining a license to carry on a securities business. By eliminating the fly-by-nights and the black mark which they lend to the securities business as a whole, the bill will be good for business as well as for the public.

APPENDIX

For the sake of completeness of the record, the subcommittee should know the considerations that underlie the summary suspension provision of H.R. 9419, section 10(c).

1. The power of interim suspension, prior to hearing, is essential in many cases for the protection of the public while the administrative proceeding is underway. Of course the suspension power involves a risk of serious injury to the business of a broker-dealer, but the consideration of protection of the public

is at least as important as the property interests of the broker-dealer. Where there is strong evidence of illegal activity by a broker-dealer, such as would persuade the Commission that it should initiate a proceeding to permanently revoke the license, and particularly where the violation is of a provision designed to protect investors from injury, it would be unconscionable to permit the brokerdealer to continue those operations while the administrative proceeding is pending. Particularly is this true where the broker-dealer could protract the proceeding and delay final determination by dilatory tactics, or threatens to frustrate a court injunction by a demonstrated disposition to commit new violations other than those specifically enjoined. Both the Federal SEC and the Securities Administrator for the State of Maryland feel strongly that the power to suspend prior to hearing is absolutely essential to put effective teeth into securities regulation on a local level and to insure compliance. The Maryland statute contains a provision (sec. 18(c)) identical to that in H.R. 9419. The drafters of the Uniform Securities Act (sec. 204 (c)) believed that this power was necessary, as did the Commissioners on Uniform State Laws, who approved the act. 2. The argument has been made that court injunctive proceedings provided for by section 12 of the bill would give the Commission sufficient power to stop illegal practices pending final determination of Commission proceedings. But there will be many cases in which this is not true. Under familiar equity principles, injunctions run to particular violations alleged, not against all illegal conduct in whatever form. Thus, if the Commission had evidence that a brokerdealer was making fraudulent representations in selling stock in X company to the public, an allegation of those facts would be made under section 12 of the bill in the U.S. district court, setting forth those violations of the act and asking for a temporary restraining order. If the Commission obtained the temporary restraining order from the court, the order would normally forbid the acts alleged or conceivably would be broad enough to restrain any sales to the public of stock X. However, the broker-dealer would be entirely free under the court order to commence fraudulent representations and sales with respect to stock Y, and new injunctive proceedings would have to be initiated against those practices. The suspension power in H.R. 9419 would prevent the brokerdealer from being able to leapfrog the Commission in the equity courts by this means. It is for this reason that the Commissioners on Uniform State Laws and the Securities and Exchange Commission and the Maryland administrator all have thought that the power of suspension before hearing is essential, and it is for this reason that courts have thought that the need for public protection outweighs the property interest of the broker-dealer.

3. There is no doubt of the constitutionality of section 10(c) of H.R. 9419. In determining the constitutionality of comparable provisions, the type of inquiry the courts have made is to weigh the need for summary suspension against the damage to the broker-dealer and determine whether the need for public protection outweighs the private interest involved. This is precisely the inquiry that, for example, the Supreme Court of Wisconsin made 30 years ago, in a leading securities case, sustaining the constitutionality of a summary suspension order of the Public Service Commission of Wisconsin. Halsey, Stuart & Co. v. Public Service Commission of Wisconsin, 248 N.W. 458 (1933). In that case the court disposed of the argument that summary suspension prior to hearing gave arbitrary power to the commission:

"It is said that there is no provision for a hearing. It is true that there is none prior to suspension. We do not regard this as fatal to the validity of the law. Having in mind that this is an exercise of the police power, and that it is valid insofar as it is reasonably necessary and appropriate to the promotion of the public welfare, it seems to us that the act must be sustained. The court may take notice of the fact that much harm may come to the citizens of the State, and that they may be the victims of much fraud and imposition unless they are speedily protected from improper practices in the sale of securities. Having in mind modern sales methods and the speed at which the business of today is done. promptness of action on the part of the commission may be the measure of its effectiveness. While the suspension may seriously damage the business of a particular broker, this consideration is not fatal to the validity of the act, provided it is reasonably necessary to protect the public. The rights of the public to exercise the police power in its own protection are superior to those of any individual broker to sell under his license or certificate.

“Further than this, there is a provision for hearing upon the suspension order. The statute provides that the certificate holder thus suspended may, within 30 days, serve upon the commission a demand for a public hearing, which must be

held within a reasonable time thereafter, and while there is no express provision terminating the period of suspension, we think it is evident from the statute that it was the legislative intent that when a hearing is demanded and had, it shall terminate either in a revocation of the license or a restoration. It is our conclusion that the statute does not deny due process. In the interest and protection of the public, provision is made for a summary suspension, followed by provisions for a speedy hearing upon the merits of the suspension order if and when demanded by the broker affected. This amounts to no more than a reasonable and valid exercise of the police power" (248 N.W. 458, 461).

Note that this type of analysis makes it possible for the court to prevent arbitrary abuses of the summary suspension power, by looking, as the Wisconsin court said, to whether the suspension "is reasonably necessary to protect the public" in a particular case. This type of approach gives the court enough latitude to review, on a case-by-case basis, the question whether the particular facts make the need for public protection weighty enough so that the broker may be suspended, prior to any hearing, without violation of due process. Naturally, an arbitrary or capricious or malicious suspension could not be sustained consistently with due process.

The committee should note that the provision in the Wisconsin statute (similar to that in H.R. 9419) for a hearing following suspension, when and if demanded by the broker, was an important factor in reconciling the broker's constitutional rights with the act.

A similar type of analysis of an SEC order was recently made by a Federal court in a case in which the SEC order had the effect of suspending all the broker's exemptions under Regulation A, and, in effect, working a suspension of the broker's business, prior to any final determination. In that case the U.S. Court of Appeals for the District of Columbia Circuit followed the Wisconsin Supreme Court's analysis and came to the same result. See R. H. Holman & Co. v. Securities and Exchange Commission, 299 F. 2d 127 (D.C. Cir. 1962) (Judges Prettyman, Washington, and Burger).

A similar due process issue was presented to the Supreme Court of California a few years ago, under a statute of that State authorizing the insurance commissioner to vest title (as conservator) to the assets of any insurance company which, in the judgment of the commissioner, is in a hazardous condition which jeopardizes the future of the company. The California statute provided that such a vesting should be accomplished by petition filed in court, the court order to continue in effect until, after a full hearing, it should appear that the ground for the order did not exist or had been removed. Upon such a vesting by the insurance commissioner, the company proceeded by mandamus to attack the vesting order, contending that due process required that the condition of the company be determined before the vesting order might issue. The court pointed out that the purpose of the statute was to protect the public interest in the assets of insurance companies and that to allow a delay in conservatorship, while a court examined the basis for the action of the commissioner, would effectively defeat that purpose. The petitioner's constitutional rights, held the court, were adequately protected by the postvesting hearing pursuant to the statute. The balance between possible injury to the company on the one hand and the public interest on the other did not require a hearing before the event. Financial Indemnity Co. v. Superior Court, 289 P. 2d 233 (1955) (following Rhode Island Insurance Co. v. Downey, 212 P. 2d 965 (1950)).

Mr. ACHESON. I have an oral statement which I will read, unless the committee feels pressed for time. If the committee is pressed for time

Senator HARTKE. We are pressed for time only to the extent that we do not have permission to meet after 11 o'clock. We are going to make such a request to the majority leader. But we do not know what the result will be.

Mr. ACHESON. Well, I will edit my prepared statement as I go along.

Senator HARTKE. Fine.

Mr. ACHESON. Going back to a question raised by Senator Dominick earlier, I was looking through a prior statement that I made in the House on this bill, and there is one piece of information that struck