the Commission to act directly against offending individuals, where that course is appropriate, in lieu of proceeding against the entire firm. The power of the NASD so to act would also be clarified. Of course, this section would not in any way reduce the responsibility of a firm to supervise its employees-an obligation expressly recognized, as already discussed, in the bill.

Section 6(b) would also provide needed flexibility by authorizing the Commission to impose sanctions intermediate to putting a firm out of business. Short of such revocation, the Commission could temporarily suspend or censure. At present the Commission has only three alteratives: it may revoke registration and expel a firm from any exchange or association of which it is a member; it may, at the other extreme, impose no sanction at all; the only intermediate sanction is a suspension of membership in the NASD or an exchange if the firm happens to be a member. The effectiveness of a suspension from an exchange or the NASD as a meaningful sanction varies considerably in accordance with a firm's business and its reliance for profits upon professional price concessions from members of an exchange or securities association.

Another aspect of present law which dilutes the effectivness of Commission regulation is the exemption from registration for brokers and dealers doing an exclusively intrastate business, even though they use the mails and instrumentalities of interstate commerce to effect purchases and sales. This narrow exemption from registration would be eliminated. It creates a gap in the regulatory pattern for investor protection which would become more striking if all other brokers and dealers are required to become members of self-regulatory bodies. Since these intrastate brokers or dealers are presently subject to the antifraud and financial responsibility sections of the Exchange Act, the Congress has already placed a responsibility upon the Commission to assure that their operations are carried out in compliance with those sections. Registration will provide the Commission with means adequate to discharge that responsibility. Moreover, if the Commission suspends registration for a limited period, a firm should not be able to minimize the impact of this suspension by conducting an exclusively intrastate business during the period specified.

Finally, section 6(b) would dispense with proof of the use of the mails or jurisdictional facilities in the case of Exchange Act violations by federally registered brokers or dealers. This would avoid instances where fraud or other offenses by such firms go unpunished simply because use of these facilities in the particular transaction cannot be shown. It would also obviate the necessity of spending a substantial amount of time and effort in collecting evidence that the mails or facilities of interstate commerce were used in a transaction-an unnecessary waste of taxpayers' money and diversion of the Commission's enforcement resources from more productive tasks in protecting the investing public.

E. AMENDMENTS WITH RESPECT TO REGISTERED SECURITIES ASSOCIATIONS

In addition to those fundamental amendments already discussed which concern the NASD-required membership in a self-regulatory agency and the establishment of qualification standards-the Commission is also recommending a series of proposals designed in a few respects to clarify or strengthen present law with respect to self-regulatory associations.

First, an increasing scope for responsibility by the NASD is reflected in section 7(a)(6) requiring its adoption of rules designed to produce fair and informative quotations of over-the counter securities. The section is intended to clarify the NASD's authority in this area and further to impose upon it a responsibility to It is not a resolution of the problems affecting over-the-counter quotations, but a means for dealing with some of these problems.

act.

Second, section 7 (c) would shorten from 60 to 30 days the time for appealing to the Commission from disciplinary action taken by the NASD or its denial of membership. This reduction will expedite Commission review proceedings and still allow ample time for appeals. This section also provides that the Commission may order, after a hearing, that an appeal from an NASD disciplinary action will not stay the judgment of the NASD pending final decision on review by the Commission. At present, an appeal automatically operates as a stay. It is contemplated that this new power to lift the stay would be sparingly employed; however, its use would be proper where an appeal is clearly taken for delay and injury to the public should be prevented pending Commission action.

Finally, under section 7(a) (1), the NASD would be authorized to adopt rules, subject to Commission approval, which would permit exclusion from its membership of persons who have been suspended or expelled from an exchange for violation of any of the exchange's rules. It is anticipated that only serious misconduct of a nature affecting the protection of investors would be grounds for exclusion and any such action would be subject to Commission review. This section would resolve a problem existing primarily between the NASD and the New York Stock Exchange with regard to the collateral effects of the latter's disciplinary proceedings.

In concluding I would again note that S. 1642 is in response to a congressional directive to the Commission to evaluate the adequacies of present investor protection. That directive has produced a searching and intensive inquiry by the Commission's special study of securities markets. It also resulted in a firm conviction on the part of the Commission that the present statutory structure of the securities acts requires improvement in significant respects. The provisions of S. 1642 represents such a strengthening and the Commission strongly recommends its enactment.

(Whereupon, at 2: 50 p.m., the hearing was recessed, to reconvene at 10 a.m., Wednesday, June 19, 1963.)

SEC LEGISLATION, 1963

WEDNESDAY, JUNE 19, 1963

U.S. SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON SECURITIES,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10: 12 a.m., Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding. Present: Senators Williams and McIntyre. Also present: Senator Dominick.

Senator WILLIAMS. We will call the subcommittee to order and again consider the bill S. 1642. We began our hearings yesterday with the statement of Chairman Cary of the SEC.

We are honored this morning to have as our first witness Mr. Hudson Lemkau of the National Association of Securities Dealers. STATEMENT OF HUDSON B. LEMKAU, VICE CHAIRMAN, BOARD OF GOVERNORS, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; ACCOMPANIED BY AVERY ROCKEFELLER, JR., CHAIRMAN OF THE ADVISORY COMMITTEE TO THE BOARD OF GOVERNORS AND PAST CHAIRMAN OF THE BOARD OF GOVERNORS; A. JACKSON GOODWIN, JR., MEMBER OF BOARD OF GOVERNORS AND CHAIRMAN OF LEGISLATION COMMITTEE; ROBERT W. HAACK, MEMBER OF BOARD OF GOVERNORS AND CHAIRMAN OF NATIONAL BUSINESS CONDUCT COMMITTEE; WALLACE H. FULTON, EXECUTIVE DIRECTOR; AND MARC A. WHITE, GENERAL COUNSEL

Mr. LEMKAU. Mr. Chairman and members of the subcommittee, I am Hudson B. Lemkau of New York City. I am serving as a vice chairman of the Board of Governors of the National Association of Securities Dealers, Inc. The chairman of the board of governors, Merrill M. Cohen of Minneapolis, could not be present as he is hospitalized following a heart attack.

Here with me are Avery Rockefeller, Jr., of New York City, chairman of the advisory committee to the board of governors and past chairman of the board of govermnors; A. Jackson Goodwin, Jr., of Chicago, on the far right, a member of the board of governors and chairman of the association's legislation committee; Robert W. Haack of Milwaukee, on the far left, a member of the board of governors and chairman of the national business conduct committee; Wallace H. Fulton, executive director of the association next to Mr. Goodwin; and on my right, Marc A. White, general counsel.

Our association was established under the authority of the Maloney Act of 1938. It operates through local committees in 13 geographic districts, upon which serve 125 individuals actively engaged in the securities business, and through the board of governors, consisting of 21 such individuals. These groups are supported by many individuals serving on local quotations committees and by various other standing committees.

At May 31, 1963, there were approximately 4,680 members of the association and some 87,950 registered representatives of members. The association's certificate of incorporation provides that its objectives and purposes (in part) are to—

promote through cooperative effort the investment banking and securities business, to standardize its principles and practices, to promote high standards of commercial honor and to encourage and promote among members observance of Federal and State securities laws.

The certificate of incorporation also requires the association to provide

a medium through which its membership may be enabled to confer, consult, and cooperate with governmental and other agencies in the solution of problems affecting investors, the public, and the investment banking and securities business.

The functions and activities of the association constitute an integral part of the Federal system of securities regulation. By section 15A of the Securities Exchange Act of 1934, which authorized its creation, it has been empowered to require high standards and principles of trade on the part of underwriters, brokers, and dealers in securities. It has power to expel or suspend or visit other severe sanctions upon its members found guilty of violation of its rules of fair practice or of Commission rules.

Further information on the history and activities of the association is set forth in a reprint of the Subcommittee on Legislative Oversight of the Committee on Interstate and Foreign Commerce of the House dated 1959, copies of which have previously been supplied with our formal statement.

On June 3, 1963, the Securities and Exchange Commission submitted a bill which was introduced the next day by Senator A. Willis Robertson and which now bears designation S. 1642. A companion bill, H.R. 6789, has been introduced in the House of Representatives by Representative Oren Harris, chairman of the House Committee on Interstate and Foreign Commerce.

In sending the bills to Congress on June 3, 1963, Chairman Cary of the Securities and Exchange Commission stated in a transmittal letter that the legislative proposals are, in large part, based upon those sections of the "Report of the Special Study of the Securities Markets” which were delivered to the Congress on April 3, 1963.

Chairman Cary also said that the Commission's aim was to present to the Congress legislation representing important advances and which would be supported by the securities industry. Further, he noted that the Commission had assurances of support from the leaders of the major securities organizations.

Our comments today, on behalf of the board of governors of the association, will be addressed to certain substantive provisions of the bill in the order in which they are presented in the six-page statement of the Commission which accompanied the bill.

The first area covered is that pertaining to the extension of the reporting, proxy, and insider trading provisions of present law to certain companies whose securities are traded over the counter. Under present law, these requirements extend only to companies whose securities are listed upon national securities exchanges. It has been recognized for a number of years that the absence of financial reporting requirements in respect to over-the-counter securities has resulted in inadequate disclosures in some issues traded over the counter. The board supports the extension of the disclosure and reporting requirements to the over-the-counter issues.

Our board wishes to note, however, that in an effort to prevent onerous reporting, proxy solicitations, and insider trading reports for smaller and less actively traded issues, the board would raise the stockholder test from the 750/500 level proposed by the Commission to a minimum of 1,000 shareholders before making operative the requirements now imposed upon listed companies. We would favor modified reporting requirements to stockholders of companies with between 500 and 1,000 stockholders. We agree with the additional test in the bill that issuers required to report must also have assets in excess of $1 million.

The board of governors of the National Association of Securities Dealers, Inc., has been opposed to any blanket amendment to section 16(b) of the Securities Exchange Act of 1934 which would impose, without exception, the insider short term profit recapture provisions to officials of companies traded over the counter.

The Securities and Exchange Commission has recognized this viewpoint in the proposed bill which provides for an exemption from the operation of section 16 (b) for broker-dealers who make markets in the over-the-counter securities. The board thus supports this section of the bill in its present form.

We support the exemption of foreign securities from the requirements of this part of the bill. We note that should the Commission seek to remove the exemption in a given case, and to impose these requirements on securities of a foreign issuer, the procedures would afford opportunity to be heard before the Commission could make a finding.

In the event the Commission did find that the continuance of an exemption was not in the public interest, we recommend that the securities of a foreign issuer be afforded the same exemptions now given to listed securities of a foreign issuer under rule 3 (a) 12-3 of the Securities Exchange Act of 1934.

The second section of the Commission's statement deals with qualifications, standards, and controls of persons engaged in the securities business. The securities business has recognized, and it has been brought to the attention of a large segment of the investing public as a result of the special study, that presently there exists only a limited basis upon which the associaton or the Commission may bar inexperienced, undercapitalized, or otherwise unqualified persons from entering the business as proprietors or as employees of broker-dealers. Over a period of years the associaton has concerned itself with this problem. One of its earlier recommendations was the imposition of a $5,000 minimum net capital for members dealing directly with customers. This recommended requirement was disapproved by the