PREVENTION OF FRAUD IN PROMOTION OR SALE OF

SECURITIES

FRIDAY, JANUARY 16, 1931

UNITED STATES SENATE,

SUBCOMMITTEE ON INSURANCE AND BANKS,

COMMITTEE ON THE DISTRICT OF COLUMBIA,

Washington, D. C.

The subcommittee met, pursuant to call in the committee room of the Committee on the District of Columbia, Capitol, at 10 o'clock a. m., Senator John J. Blaine, chairman, presiding.

Present Senators Blaine (chairman), Kean, and Glass.

Mr. O. H. Brinkman, special counsel to the subcommittee.

The committee had under consideration S. 1332 and S. 3491, which are here printed in full, as follows:

[S. 1332, Seventy-first Congress, first session]

A BILL To prevent fraudulent practices in the promotion or sale of stocks, bonds, and other securities sold or offered for sale within the District of Columbia; to register persons selling stocks, bonds, or other securities; and to provide punishment for the fraudulent or unauthorized sale of the same

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

DEFINITIONS

SECTION 1. (a) When used in this act the following terms shall, unless the text otherwise indicates, have the following respective meanings:

(1) "Security" shall include any note, stock, Treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation, certificate of interest in a profit-sharing agreement, certificate of interest in an oil, gas, or mining lease, collateral trust certificate, preorganization certificate, preorganization subscription, any transferable share, investment contract, or beneficial interest in title to property, profits, or earnings or any other instrument commonly known as a security.

(2) "Person shall include a natural person, a corporation created under the laws of the United States or of any State, country, sovereignty, or political subdivision thereof, a partnership, an association, a joint-stock company, a trust, and any unincorporated organization. As used herein the term "trust shall be deemed to include a common-law trust, but shall not include a trust created or appointed under or by virtue of a last will and testament, or by a court of law or equity, or any public charitable trust.

(3) Sale" or "sell" shall include every disposition, or attempt to dispose, of a security or interest in a security for value. Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value. "Sale" or "sell" shall also include an exchange, an attempt to sell, an option of sale, a solicitation of a sale, a subscription or an offer to sell, directly or by an agent, or a circular, letter, advertisement, or otherwise. The offering of securities by any person in conjunction with a registered dealer by use of advertisement, circular, or pamphlet, shall not be deemed to be a sale, provided such person does not otherwise

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attempt to sell such securities in the District of Columbia, and that the name of such registered dealer appears in such advertisement, circular, or pamphlet. (4) "Dealer" shall include every person other than a salesman who in the District of Columbia engages either for all or part of his time directly or through an agent in the business of selling any securities, including securities issued by such person; or who in said District engages in offering, buying, selling, or otherwise dealing or trading in securities as agent or principal for a commission or at a profit. Registered dealer" shall mean a dealer registered under the provisions of this act.

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(5) "Issuer shall mean and include every person who proposes to issue, has issued, or shall hereafter issue any security. Any natural person who acts as a promoter for and on behalf of a corporation, trust, or unincorporated association or partnership of any kind to be formed shall be deemed to be an issuer. (6) Salesman shall include every natural person, other than a dealer, employed or appointed or authorized by a dealer or issuer, to sell securities in any manner in the District of Columbia. The partners of a partnership and the executive officers of a corporation or other association registered as a dealer shall not be salesmen within the meaning of this definition, nor shall such clerical or other employees of a registered dealer as are employed for work to which the sale of securities is secondary and incidental: Provided, however, That the Commissioners of the District of Columbia shall have the authority, in their discretion, to require the registration of any partner, executive officer, or employee hereinabove exempted as they may determine that the protection of the public requires such registration. 'Registered salesman" shall mean a salesman registered under the provisions of this act.

(7) "Broker shall mean dealer as herein defined.

(8) "Agent shall mean salesman as hereinabove defined.

(9) "Mortgage" shall be deemed to include a deed of trust to secure a debt. (b) The term "include " when used in a definition contained in this act, shall not be deemed to exclude other things or persons otherwise within the meaning of the term defined.

REGISTRATION OF DEALERS AND SALESMEN

SEC. 2. (a) No person shall sell any securities within the District of Columbia except in transactions exempt under section 3 of this act unless and until he has been registered as a dealer or salesman pursuant to the provisions of this act and such registration is in force.

(b) Every applicant for registration as dealer shall file in the office of the Commissioners of the District of Columbia an application in writing in such form as the commissioners may prescribe, duly verified by oath, which shall state the principal office of the applicant, wherever situated; the location of the principal office and all branch offices in said District, if any; the name or style of doing business; the names, residence, and business addresses of all persons interested in the business as principals, copartners, officers, and directors; specifying as to each his capacity and title, the general plan and character of business, and the length of time the dealer has been engaged in business, and such other information as said commissioners may require as to applicant's previous history, record, and association as they may deem necessary to establish the good repute in business of the applicant, including the names and addresses of five persons in the District of Columbia of whom the said commissioners may inquire as to the character, reputation, and financial responsibility of the applicant; or, if the applicant be a person not resident of the District of Columbia, the names and addresses of five persons resident at the applicant's domicile, of whom the said commissioners may inquire as to the character, reputation, and financial responsibility of the applicant.

(c) If said commissioners shall find that the applicant for registration as a dealer is of good repute and has complied with the provisions of this section, they shall register such applicant as a dealer upon such applicant(1) Paying the registration fee hereinafter provided;

(2) Filing a bond complying with the provisions of section 5 of this act; and (3) If the applicant is not domiciled in the District of Columbia, filing an irrevocable written consent to service of process as provided in section 6 of this act.

(d) Upon the written application of a registered dealer and general satisfactory showing as to good character and the payment of the proper fee said commissioners shall register as salesmen of such dealer such natural persons

as the dealer may request. Such registration shall cease upon the termination of the employment of such salesman by such dealer or upon the written request of such dealer for such cancellation.

(e) The names and addresses of all persons registered as dealers and/or salesmen shall be recorded in a register of dealers and salesmen kept by said commissioners, which register shall be open to public inspection.

(f) Every registration under this section shall expire on the 31st day of December in each year, but new registrations for the succeeding year shall be issued upon written application and upon payment of the fee as hereinafter provided, without filing of further statements or furnishing any further information unless specifically required by said commissioners. Applications for renewals must be made not less than thirty nor more than sixty days before the first day of the ensuing year, otherwise they shall be treated as original applications.

(g) The fee for such registration and for each annual renewal shall be $50 in the case of dealers and $5 in the case of salesmen. Said fees shall be paid to the collector of taxes of the District of Columbia, and all money so received shall be deposited by him in the Treasury of the United States to the credit of the District of Columbia.

(h) Changes in registration occasioned by changes in the personnel of a partnership or in the principals, copartners, officers, or directors of any registered dealer may be made from time to time by written application setting forth the facts with respect to such change.

(i) Said commissioners may from time to time require a registered dealer to make within the time prescribed a report in relation to any security sold or offered for sale by the dealer or in relation to any security which the dealer proposes to sell or to offer for sale, but in no case shall any action or failure to act on the part of said commissioners be deemed to constitute an approval or recommendation of any security.

EXEMPT TRANSACTIONS

SEC. 3. The provisions of section 2 of this act shall not apply to the sale of any of the following transactions:

(a) At any judicial, executor's, administrator's, guardian's, or conservator's sale, or at any sale by a receiver or trustee in insolvency or bankruptcy, or at a public sale by auction held at an advertised time and place, or any sale of securities over an established stock exchange.

(b) By or for the account of a pledge holder or mortgage selling or offering for sale or delivery, in the ordinary course of business and not for the purpose of avoiding the provisions of this act, to liquidate a bona fide debt, a security pledged in good faith as security for such debt.

(c) An isolated transaction in which any security is sold, offered for sale, subscription, or delivery by the owner thereof, or by his representative for the owner's account, such sale or offer for sale, subscription, or delivery not being made in the couse of repeated and successive transactions of a like character by such owner, or on his account by such representative, and such owner or representative not being the issuer or underwriter of such security.

(d) The distribution by a corporation actively engaged in the business authorized by its charter of capital stock, bonds, or other securities to its stockholders or other security holders as a stock dividend or other distribution out of earnings or surplus; or the issuance of securities to the security holders or other creditors of a corporation in the process of a bona fide reorganization of such corporation made in good faith and not for the purpose of avoiding the provisions of this act, either in exchange for the securities of such security holders or claims of such creditors or partly for cash and partly in exchange for the securities or claims of such security holders or creditors; or the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock; or the issuance of securities to a predecessor corporation or the security holders or creditors thereof by a corporation organized for the purpose of taking over substantially all of the assets and continuing the business of such predecessor corporation; or the transfer of its own securities by or on account of one corporation to another corporation, or the security holders or creditors thereof, in connection with a consolidation or merger; or the issuance of securities of one class in exchange