issue here. I think the questions of the two Senators have indicated that this morning.

The contract there involved was an individual variable annuity with a variable buildup and a variable payout.

Different contracts of this type have been and will be developed. Already there are two other cases in the Federal courts questioning whether under the different circumstances the VALIC decision applies. There will undoubtedly be other contracts developed with different combinations of fixed and variable ingredients. It is impossible to say which of these contracts will ultimately be held to come within the Federal securities statutes.

Now, the paragraph here at the top of page 4, I think, is new material at least it certainly has not been discussed here this morning. But I think it should be understood that in our country the principal use to date of the variable contract has been in the field of what we have called in life insurance the segregated account.

Now, I don't think that is really too good a term.

Senator HARTKE. In this day and age, I wouldn't think it would be, either.

Mr. STEERE. What we are talking about really are group annuity contracts. And it is in connection with the group mechanism that quite a little of this type of business has already been written in this country. And I think probably, taking the whole life insurance business, there are possibly more companies today that have had interest in writing the group variable annuity, the segregated accounts, than any other type.

Now, one such type of group contract involves a variable buildupyou have it variable during the accumulation period. But when the individual employee reaches the retirement age, his particular annuity comes out of the group and begins to get his payments, then those are fixed. In other words, during the duration of his life, based on the mortality element in the annuity tables, the group annuity tables, this is a fixed payout.

Now, the SEC has already by rule exempted this type of contract, with certain qualifications, from the Securities Act of 1933 and the Investment Company Act of 1940.

Undoubtedly, there will be other types of segregated account group annuity contracts that will be developed in the future.

We assume there is no intention that H.R. 9414 should apply to this type of contract-although the language of the bill-leaves some doubts in our mind even here.

We mention this to indicate the complications involved in attempting to require dual licensing of life insurance agents selling a particular kind of annuity contract when they are simultaneously selling many other types of insurance and annuity contracts.

We might finally add that whether the SEC does or does not assert jurisdiction over a specific type of variable contract has little to do with the issue here.

It seems to us that the issue is whether dual local regulation of life insurance agents is necessary to protect the public. We think it is not, and that it would in fact lead to confusion and conflict. And I was influenced by Commissioner Jordan pointing out where the Congress really is the author of both types of the local regulation that

might be involved here as Commissioner Jordan was saying, if he felt there was any inadequacy in the regulation, that he would be the first to bring it to the attention of the Congress.

For these reasons, we join the Commissioners of the District of Columbia in urging this subcommittee to amend H.R. 9419 to eliminate the dual regulation of life insurance agents who sell variable annuities.

And then we have added specific language which would amend the bill to meet the viewpoint which we have expressed in this statement. (The statement referred to follows:)

STATEMENT OF ALLEN C. STEERE ON H.R. 9419

My name is Allen C. Steere. I am vice president of the Lincoln National Life Insurance Co. I am appearing today on behalf of the Life Insurance Association of America, which has a membership of 127 life insurance companies having in force approximately 84 percent of the legal reserve life insurance in the United States.

We address ourselves only to those provisions of H.R. 9419 which would require duplicate licensing of the agents of life insurance companies who sell insurance, endowment, or annuity contracts payable on other than a fixed sum basis, once by the Insurance Department of the District of Columbia and again by the proposed Public Service Commission. We believe this dual regulation is unnecessary and undesirable. Our reasons are as follows:

(1) No need has been shown for regulation by the Public Service Commission of life insurance agents selling such contracts. In the case of securities salesmen, there has to date been no District regulation. It is asserted that as a result abuses have arisen in that area. But the situation is entirely different in the case of life insurance agents. For years, every life insurance agent in the District has been licensed by the Superintendent of Insurance. The written and sworn application for a license must cover a great variety of matters, including the qualifications and experience of the agent. He must be vouched for by the company for which he proposes to act. The license must be renewed each year and may be suspended or revoked by the Superintendent of Insurance on a great number of grounds. Among these grounds are that the license was obtained by misrepresentation, that the agent has violated any insurance law of the District, that he has made misleading representations to policyholders, that he has failed to deliver to the company any premiums paid by policyholders, that he has been convicted of a felony, or that he has in any way shown himself to be "untrustworthy or incompetent" to act as an agent.

(2) A second reason for our position is that the Congress has already-and recently decided that the sale of variable annuity contracts in the District by life insurance companies is to be regulated by the Insurance Department, and also that variable annuities are to be included along with regular annuities in the taxation of life insurance companies. The life Insurance Company Income Tax Act of 1959 specifically covers the taxation of variable annuities (Internal Revenue Code, sec. 801 (g)), and the report of the Senate Finance Committee on that bill expressly stated that: "Your committee has added a provision to the House bill to make it clear that variable annuities are in general to be taxed in the same manner as other annuities" (S. Rept. 291, 86th Cong.). Also, in 1960 Congress amended the District Insurance Code to give to the Superintendent of Insurance detailed authority to regulate the issuance of variable contracts by life insurance companies (D.C. Code, sec. 35-541). If the companies are to be regulated in this fashion, it would seem to follow that the agents of the companies should be regulated by the Superintendent of Insurance and not by anyone else. (3) In the States which have considered this question, the great majority support our position. In 23 of these States the licensing of life insurance agents, whether they sell variable or regular annuities, is by statute specifically con fined to the State insurance department.'

Conversely, in only four States do the statutes seem to require the dual licens ing of life insurance agents selling variable annuities."

1 Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Florida, Indiana, Maryland, Mississippi, Montana, Nevada, New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, and West Virginia. 2 Georgia, Hawall, Kansas, and Minnesota.

Moreover, the Commissioners on Uniform State Laws who developed the Uniform Sales of Securities Act of which H.R. 9419 is a modification recognized that this problem might be raised and left the decision to the several States. The note of the Uniform Commissioners under section 401 (1) contained in volume 9C of the Uniform Laws Annotated contains the following statement with reference to the words "a fixed sum of": "If it is desired to exclude variable annuities along with orthodox annuities on the ground that the former are specifically regulated by the insurance authorities in the particular State, the bracketed language should be deleted."

(4) Those who argue for dual regulation seem to base their contention on the fact that in the VALIC case (SEC v. Variable Annuity Life Insurance Company (359 U.S. 65 (1959)) the Supreme Court held that the variable annuity there involved came within the scope of the Federal securities statutes. But that decision has little to do with the issue here. The contract there involved was an individual variable annuity with a variable buildup and a variable payout. Different contracts of this type have been and will be developed. Already there are two other cases in the Federal courts questioning whether under the different circumstances there involved the VALIC decision applies. There will undoubtedly be other contracts developed with different combinations of fixed and variable ingredients. It is impossible to say which of these contracts will ultimately be held to come within the Federal securities statutes.

We might also point out that segregated account group annuity contracts are growing rapidly. One type of such group contract involves a variable buildup and a fixed payout. The Securities and Exchange Commission has already by rule exempted this type of contract, with certain qualifications, from the Securities Act of 1933 and the Investment Company Act of 1940. Undoubtedly other types of segregated account group annuity contracts will be developed in the future. We assume there is no intention that H.R. 9419 should apply to this type of contract, although the language of the bill leaves some doubt even here. We mention this, however, to indicate the complications involved in attempting to require dual licensing of life insurance agents selling a particular kind of annuity contract when they are simultaneously selling many other types of insurance and annuity contracts.

We might finally add that whether the SEC does or does not assert jurisdiction over a specific type of variable contract has little to do with the issue here. The issue here is whether dual local regulation of life insurance agents is necessary to protect the public. We think it is not, and that it would in fact lead to confusion and conflict.

For these reasons, we join the Commissioners of the District of Columbia in urging this subcommittee to amend H.R. 9419 to eliminate the dual regulation of life insurance agents who sell variable annuities. More specifically, we request the deletion of the words "a fixed sum of" on line 5 of page 10 of the bill; the words "any contract issued by an insurance company pursuant to section 41 of chapter III of the Life Insurance Act (D.C. Code, sec. 35-541)” at lines 20-22 on page 9; and section 22 at pages 41-42 of the bill.

Senator HARTKE. Thank you, Mr. Steere.

I do think this, with regard to your statement on page 4-whether or not you are going to regulate life insurance agents is not the question here. The question is what you are going to do about those individuals, whether they are life insurance agents or whatever they are, security agents, or anybody else dealing in variable annuities. This is the touchy ground, and this is the problem.

As I said before, if we had a question of definition there, maybe we could get over it and settle it.

I just make that statement.

Senator Dominick?

Senator DOMINICK. I have a couple of questions.

I want to continue to be the devil's advocate here for a minute. Suppose you had salesmen of a licensed security dealer who knew about some of the investment that might be made in variable annuities, and went out and convinced some of his clients that they ought to

buy some of these contracts. It is your position that that salesman would have to be licensed under the insurance regulation?

Mr. STEERE. Yes, Senator Dominick.

Senator DOMINICK. So under that circumstance, then, you say he has to have double regulation. And it is only the other way that you say you need single regulation.

Mr. STEERE. Senator Dominick, let me try to get my understanding of the question that is troubling you and prompts the inquiry.

I think you have got to start back a long way-maybe 12, 14 years ago-when we first really started talking about the variable annuity in the life insurance business, and there was initially somewhat of a split of viewpoint between two very fine and very reputable companies, leaders in the industry.

Now, the split really wasn't over the variable annuity; that is, I mean the idea. It was not over the idea of whether you would have an increased opportunity based on equity investments. It was the problem, the worry, you might say, the concern of the life insurance business about what would be the impact on public thinking if we really did have a great economic upheaval and equity investments materially lost in value, because the life insurance business traditionally has prided itself on always being able to meet its fixed dollar obligations.

Now, as we considered the subject and kept going in our work, in the attempt to develop workable plans, we soon saw-and this is probably the great emotional difference between these conflicting viewpoints you get here this morning-that this really is insurance. That is, there are many insurance elements.

Now, when we get into that viewpoint, you see, then when we come to the licensing, the regulation of the sales personnel, we think that many of the security dealers, I mean the salesmen that represent the mutual funds, represent different security transactions that they really are not skilled in the life insurance mechanisms.

Senator DOMINICK. Well, aren't you, in effect, saying that you are cutting out a certain segment of the investment world to be monopolized by the life insurance companies?

Mr. STEERE. No, Senator; not from our viewpoint, sir. I think this is where we get to the fundamentals.

There is a very considerable difference between the investment in the mutual fund and the investment in a variable annuity. I think that is at the base of what we are talking about here, and then when you go this next step-when you go into the group areas, and it is in the group areas where the real use has been made in this country to date you will see that there are far more incidents of insurance, life insurance, than there is in the security idea.

Now, the importance of your decision here in the District, of course, is that we feel that congressional action could be held up as a pattern for others. And we think when the Congress is really making the local law it is of considerable importance to us.

Senator DOMINICK. Thank you.

Senator HARTKE. Thank you. Mr. Steere.

Anybody have a statement they are prepared to submit in less than 3 minutes?

We have several witnesses here.

Anybody want to try?

Mr. WEST. I would like to try.

STATEMENT OF MILLARD F. WEST, JR., GOVERNOR, ASSOCIATION OF STOCK EXCHANGE FIRMS

Mr. WEST. My name is Millard West. I am a governor of the Association of Stock Exchange Firms, 120 Broadway, New York, and a general partner of Auchincloss, Parker, & Redpath, at 1705 H Street, here in Washington.

I happen to be a native of Washington, and have been in the securities business since 1933.

Our association is a voluntary nonprofit trade association of approximately 600 members. We are a nationwide organization, but we have some 21 members with offices in Washington and, in addition, other firms with offices in contiguous areas do business with District residents.

I am appearing here today in support of H.R. 9419, the proposed District of Columbia Securities Act.

Senator HARTKE. The buzzer has rung signaling the convening of the Senate. We will have to conclude at this time.

Your entire statement will be printed in the hearing record at this point.

(The statement referred to follows:)

STATEMENT OF MILLARD F. West, Jr., Governor of the ASSOCIATION OF STOCK EXCHANGE FIRMS, NEW YORK, N.Y.

My name is Millard F. West, Jr. I am a governor of the Association of Stock Exchange Firms, 120 Broadway, New York, and a general partner of Auchincloss, Parker & Redpath, 1705 H Street, NW., Washington, D.C. I am a native Washingtonian and have been in the investment business here since 1933. The association is a voluntary, nonprofit trade association of approximately 600 members of the New York Stock Exchange. Our membership is nationwide and many of our members do business in the District of Columbia. At least 21 member firms have offices within the District. In addition, many other firms with offices in the contiguous areas do business with District residents.

I am appearing here today in support of H.R. 9419, the proposed District of Columbia Securities Act. While it may appear strange for a member of the securities industry to appear before you requesting that another regulatory law be enacted, let me assure you that the members of our association and the other reputable brokers and dealers in the District area are in full support of this

measure.

At the present time there is no provision whatsoever in the District laws for regulating, on a local basis, the business of selling securities in the city of Washington. Just about anyone can qualify to sell securities here. Anyone can operate a firm on a shoestring. Anyone can defraud investors. It has long been an anomaly that the city in which both the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., are headquartered should be a haven for the unscrupulous fringe elements of the securities industry that have been driven out of other jurisdictions. It is true that the SEC and the NASD have some jurisdiction in this area, but it is limited, for most practical purposes, to locking the barn door after the horse has gone. A comprehensive local law such as H.R. 9419 is necessary to fully protect local investors.

The legislation before this committee is based in great part upon the Uniform Securities Act. The Association of Stock Exchange Firms has supported the enactment of this act in a number of other jurisdictions, specifically the 16 States that have adopted the Uniform Act or locally appropriate versions of it. We feel that the enactment of such legislation for the District of Columbia will provide a sound means for regulating brokers dealing with the public. In addition, the licensing procedure prescribed for salesmen will assure that only qualified persons can engage in the securities business here.

The District of Columbia Securities Act as passed by the House very closely parallels the provisions of the Uniform Securities Act. H.R. 9149 provides for (1) licensing requirements; (2) bonding; (3) minimum capital requirements; (4) proper recordkeeping; (5) inspection of sales and advertising literature; 32-278-64,