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JOVERN ME N» FOR THE DISTRICT OF COL UMBIA

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DIS CUSS IO N OF T II E SEC U R IT IE S REG ULA TI ONS FO R TH E 

D IS T R IC T O F CO LU MB IA

MAY 21, 1962

P ri n te d fo r th e use of th e 

Com mitt ee on In te rs ta te and For ei gn Co mm erc e

84366

U.S . GOVERNMENT PRINTING OFFICE

WASHINGTON : 1962
COMMITTEE ON INTE RSTATE AND FOREIGN COMMERCE

ORE N HAR RIS , Arkansas, Chairman

JO HN B E LL W IL LI AM S, Mississippi

P E T E R F. M ACK, Jr., Illinois

K E N N E T H A. ROBE RT S, Alabama

M OR G AN M. M OULD ER , Missouri

H A R L E Y O. ST AGGER S, West Virginia

W A L T E R RO GE RS , Texas

SA M U EL N. FR IE DEL, Mary land

T O R B E R T H. M ACD ON ALD, Massachusetts

GEO RGE M. RH OD ES , Penn sylvania

JO HN JA RM AN , Oklahoma

LE O W. O’BRIE N, New York

JOHN E. MOSS. California

JO HN D. DI NG ELL , Michigan

JO E M. KI LG ORE, Texas

PA U L G. RO GE RS , Florida

R O B E R T W. H EM PH IL L, South Carolina

DAN RO ST EN KO W SK I, Blinois

JA M ES C. H E A LEY, New Y ork

H O RACE R. K O R N E G A Y, North Carolina

JO HN B. B E N N E T T , Michigan 

W IL LI AM L. SPR IN G ER , Illinois 

PAU L F. SCH E N CK , Ohio 

J. A R TH U R YO U N G ER , California 

H AR OLD R. CO LLIE R , Illinois 

M IL TO N W. G LEN N , New Jersey 

SA M U EL L. D EV IN E, Ohio 

AN CH ER N ELS EN , Minnesota 

HAS TI NGS K E IT H , Massachusetts 

W IL LA RD S. CU R TIN , Pennsylvania 

A BN ER W. SI BAL , Connecticut 

VERN ON W. TH OM SO N, Wisconsin 

P E T E R H. D O M IN IC K , Colorado

W. E. Williamson, Clerk

K enn eth J. Pain ter, Assistant Clerk

Professional Staff

Andrew Stevenson Sam G. Spal

Kurt Borchardt Martin W. Cunningham

Subcomm ittee on Commerce and F in an ce

P E T E R F. M A C K , Jr., Illinois, Chairman

JO HN D. D IN G ELL, Michigan

JO E M. KIL G O R E, Texas

R O B E R T W. H EM PH IL L, South Carolina

JA MES C. H E A L E Y , New Yor k

M IL TO N W. G LEN N , New Jersey 

HAS TI NGS K E IT H , Massachusetts 

W IL LA R D S. CU R T IN , Pennsylvania
C O N T E N T S

Sta tem ent of— P aK«

Brown, Alexander J., Jr., Acting Regional Adm inistrator, Washington

regional office, Securities and Exchange Commission____________ 2

Bryan, Irving, Chief, Legislation and Opinions Division, Office of

Corporation Counsel, District of C olumbia____________________ 26

Cary, William L., Chairman, Securities and Exchange Com mission .. 2 

Cohen, Manuel F., Commissioner, Securities and Exchange Commission__________ _____________________ ___________________ 2

Fleischer, Arthur, legal assista nt to the Chairman, Securities and

Exchange Commission______________________________________ 2

Fulton, Wallace H., executive director, National Association of

Securities Dealers, Inc______________________________________ 20

Ilgenfritz, Joseph J., Director of Licenses and Inspections, Distric t of

Columbia_________________________________________________ 26

Kneipp, Rob ert F., Assistant Chief, Legislation and Opinions Division,

Office of Corporation Counsel, District of Colu mbia_____________ 26

Korm an, Milton D., Principal A ssistant C orporation Counsel, District

of Columbia__________________________ •____________________ 26

Law, Stu art, attorn ey, Division of Trad ing and Exchanges, Securities

and Exchange Commission__________________________________ 2

Loomis, Philip A., Dire ctor, Division of Trad ing and Exchanges,

Securities and Exchange Commission_________________________ 2

Nottingham, C. T., Superintend ent, License and Permit Division,

Department of Licenses and Inspections, District of Columbia___ 26

Peters, Richard, secretary , distric t No. 10, National Association of

Securities Dealers, Inc______________________________________ 20

White, Marc A., counsel, National Association of Securities Dealers,

Inc _______________________________________________________ 20

Additional information sub mitted for the record:

Gray, Chester H., Corporation Counsel, District of Columbia, lett er

from, transm itting dra ft of proposed regulations, April 20, 196 2.. 30

“Investors Beware,” series of articles by Miriam Otte nberg_______ 49-59

n i

SECURITIES REGULATIONS FOR THE DISTRICT OF

COLUMBIA

MON DA Y, M AY 21 , 19 62

H ouse of Representatives,

Subcommittee on Commerce and F inance of the

Committee on I nterstate and F oreign C ommerce,

TV ashington, D.C.

The subcommittee met at 10:30 a.m., pursuant to call, in room 1334, 

New House Office Building, Hon. Peter F. Mack, Jr . (chairman of 

the subcommittee), presiding.

Mr. Mack. The subcommittee will come to order.

This morning we have scheduled a hearing on the securities regulations in the District of Columbia. It has been called to the attention of this committee that there has been an unusual amount of questionable activity here in the District of Columbia.

The Securities and Exchange Commission and the National Association of Securities Dealers have taken certain action in recent months 

to correct the situation.

This committee feels tha t whatever action is necessary to solve the

g

robleni in the District should be taken. We recognize tha t the 

ecurities and Exchange Commission has auth ority over vast areas, 

prim arily interested in the regulation of securities on an interstate 

basis. But there does not seem to be any justification for having a 

situation existing righ t here in the Nation’s Capital tha t is not regulated, to have an area which is not regulated, and to have situations 

existing here that are worse or as bad as any other areas of the 

country.

For that reason, we have scheduled the hearings today to determine 

what action should be taken to solve this problem.

Our first witness today will be Mr. William L. Cary, Chairman, 

Securities and Exchange Commission.

1
2 SECURITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA

STATEMENT OF W ILLIA M L. CARY, CHAIRMAN, SECURITIES AND

EXCHANGE COMMISSION; ACCOMPANIED BY MANUEL F. COHEN,

COMMISSIONER; PH IL IP A. LOOMIS, DIRECTOR, DIVISION OF

TRADING AND EXCHANGES; ARTHUR FLEISCHER, LEGAL ASSISTANT TO THE CHAIRMAN; ALEXANDER J. BROWN, JR., ACTING

REGIONAL ADMINISTRATOR, WASHINGTON REGIONAL OFFICE;

AND STUART LAW, AN ATTORNEY IN THE DIVISION OF TRADING

AND EXCHANGES

Mr. Cary. Mr. Chairman and members of the committee, I am 

William L. Cary, Chairman of the Securities and Exchange 

Commission.

I have with me my colleague, Commissioner Manuel F. Cohen, 

also Philip Loomis, the Director of the Division of Trading and 

Exchanges; my legal assistant, A rthur Fleischer; our Acting Regional 

Administrator of the Washington district, Alex Brown, and Stu art 

Law, an attorney in the Division of Trading and Exchanges.

I am here to testify on the problems of securities regulations in 

the District of Columbia. I have a prepared statement, which I 

believe you have copies of. I will expect to proceed through that 

with minor deviations.

The Commission believes tha t a serious problem existed in the 

Metropolitan Washington area with respect to the conduct, business 

methods, ethics, and qualifications of numerous broker-dealers engaged in the securities business.

This situation has been graphically and thoroughly discussed in a 

series of articles by Miriam Ottenberg in the Washington Star.

It has been reflected in the great number of enforcement actions 

brought by the Commission and the National Association of Securities 

Dealers against local firms; by the crescendo of illegal and unethical 

practices; by the number of local brokerage firms that have gone out 

of business; and by the substantial number of new firms managed 

by inexperienced personnel.

Apparently vigorous enforcement action has measurably reduced 

the present gravity of the situation, although we have no illusions 

it is entirely cured. We cannot be assured there will be no recurrence 

unless additional corrective action is undertaken. It is my unde rstanding tha t a main purpose of these hearings is to assist in the 

determination of what such action might be.

I wish to point out tha t the problems of securities regulation in 

the District of Columbia are not unique. As the committee knows, 

the Commission is presently engaged in a broad study of the securities 

markets pursuant to Public Law 87-196, a bill introduced by Congressman Mack.

One of the important reasons for this study was evidence of a general breakdown of controls and lowering of standards in various sectors of the securities markets. The situation in the D istrict of Columbia appears to represent a particularly intensified and extreme example 

of a national problem.

Why has there been an acute problem in the District ?
SECURITIES REGULATIONS FOR TH E DISTRICT OF COLUMBIA 3

I do not have any scientifically developed correlations. But I do 

believe tha t there are certain factors peculiar to the Metropolitan 

Washington area which aggravate problems normally present in securities regulation.

In the first place, th e District of Columbia has no local securities 

regulation—no ‘‘blue sky” law. There are only two States without 

this type of legislation. Its absence in the District appears to have 

been a substantial inducement in encouraging both the formation of 

substandard new brokerage firms and the movement of undesirable 

persons from other areas to here. Convincing evidence is seen in the 

fact tha t nearly all new brokerage firms have located within the 

boundaries of the District, rather than in Maryland or Virginia.

Moveover, principals and salesmen from outside the District with 

so-called boilerroom backgrounds became participants in local firms. 

The District had become a haven for a developing breed—the migratory broker-dealer who flocks to the place of minimum interference 

with his operation.

I might say in that connection, there have been quite a few homegrown ones, too.

Secondly, the metropolitan area would generally be attractive to 

broker-dealers. Its comparatively high-income military and Government population, largely transient and allegedly somewhat unsophisticated in investing, and its large number of retired people, interested 

in supplementing fixed income, obviously present a prime target for 

unscrupulous brokers and their salesmen.

While this potential appears not to have been fully appreciated 

until recently, the phenomenal sprouting of local brokerage houses in 

the past few years attests to the fact tha t the possibilities offered by 

the market here have become well known. The new firms, some of 

which enjoyed rapid apparen t growth for a time, in turn, trained 

new salesmen. Then the salesmen, upon exposure to the prospects 

offered, frequently opened up firms of their own.

The problems of securities regulation in the District of Columbia 

may be illustrated in numerous ways. The growth of the brokerdealer community in itself is exceptional.

At the end of 1958, there were 71 D istrict firms who were members 

of the NASD. At the end of 1961, this number had increased over 

47 percent to 104.

In this connection, it should be borne in mind that in the interim a 

large number of firms had failed—23 in 1961 alone. By contrast, the 

net gain in NASD membership for the Nation as a whole was only 

22 percent—and the failures were correspondingly lower.

The genesis—and subsequent history—of many new firms reflects 

what has caused our anxiety and resulted in our actions. A staff 

study of the past 5 years shows th at many local brokerage firms have 

been formed by persons formerly associated with houses tha t the Commission had closed.

Approximately one-third of the 67 that went out of business in the 

past 5 years had an officer, director, or owner who had previously 

worked for a firm against which the Commission had brought proceedings. Ha lf of this group had two such persons.
4 SECURITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA

As a dramatic instance of how substandard firms have grown, 

hydra-like, from the pieces of revoked firms, let me give the following 

example: A large District broker-dealer recently was put out of business by the Commission’s Washington regional office. Investigation 

of possible fraud in the operations of this firm had barely begun when 

a number of salesmen and others connected with it opened new offices 

of their own.

Indeed, even before the firm closed, its salesmen were setting up 

firms. Altogether, at least 16 new houses were started by alumni of 

the original alma mater. Of this group, nine have either gone bankrup t, been forced to sell out, become dormant, or been put out of 

business.

Proceedings have been brought against several of this group of 

nine, and investigation is in progress with respect to 011161*8.

A barometer of what the District securities problem was may be 

seen in the great number of enforcement actions brought by the Commission and complaints filed by the NASD against District 

broker-dealers.

During the 4-year period up to June 30, 1959, a total of 12 administrative proceedings were brought by the Commission against 

District firms.

From July 1, 1959, to May 7, 1962, a period of less than 3 years, a 

tota l of 20 such proceedings were brought, nearly twice tha t of the 

previous period. Similarly, from Jul y 1, 1955, to June 30, 1959, only 

two injunctive proceedings were brought against local firms.

From July 1, 1959, to May 7, 1962, 18 such actions have been 

brought, an increase of 900 percent. The Commission’s Washington 

regional office has brought more of these actions against District brokerage firms than firms in all other States for which this particular 

regional office is responsible (Maryland, Virginia, West Virginia, 

Delaware, and Pennsylvania).

Data furnished to the Commission by the NASD is likewise illuminating. The NASD has indicated that, over the past 5 years, the 

number of complaints filed against District broker-dealers increased 

650 percent, over three times the national increase of 215 percent.

Further, in 1960, the NASD filed complaints against 8 percent of 

its members nationally, whereas, for the District, the figure was 25 

percent.

Thus, one out of four District firms was the subject of an NASD 

complaint involving some infraction of its rules. In 1961, possibly 

because of the increase in the number of local firms t hat went out of 

business, the District’s percentage dropped to 18 percent, but this was 

still twice the number of complaints per member as the national 

percentage.

The number of local broker-dealer firms tha t have gone out of business is an additional measure of what has been the poor health of the 

broker-dealer community here.

Nationally, in 1961, approximately 8 percent of the firms admitted 

to the NASD failed. In the District, 18 percent of NASD member 

firms failed.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 5

This rate of failure has presented a grave danger to the investing 

public and has resulted in substantial losses by many investors. One 

recent District broker-dealer, which is now in bankruptcy, has debts 

of well over $1 million, and few assets.

Hundreds of individual public investors dealing with this firm 

failed to receive certificates for which they paid, or proceeds from 

stock which they sold. It is doubtful whether they will receive anything on their claims filed in the bankruptcy proceedings.

There is evidence to demonstrate th at these failing firms were characterized by management which had little or no prior experience. 

Such experience as existed was too frequently with a firm tha t had 

been involved in Commission proceedings.

Nearly half of the firms which commenced business in the past 5 

years and failed had no executive with any previous experience except 

in a firm involved in revocation proceedings or injunctive action.

The consequences attendant upon minimal standards of qualification for the securities business—so graphic here—are the subject of 

major concern in the special study now being conducted by the 

Commission.

The unhealthy state of the securities business here in the District is 

also illustrated by the types of securities broker-dealers have been 

selling. In many cases, for example, the insiders and underwriters 

have taken for themselves what might appear to be an unconscionable 

amount of the proceeds of a public offering of securities and have left 

little for the benefit of the company and its public shareholders.

Thus, in one case, a company which had an operating deficit of 

over $12,000 was underwritten by a local broker. The total issue 

was for 150,000 shares at $2 per share. The underwriting group 

received 40 cents per share as commission and expenses and 30,000 

shares of stock at a penny and a half a share, a total compensation 

of approximately $120,000 or 50 percent of the net proceeds received 

by the issuer.

Seven months afte r the stock was issued, the price had risen over 

500 percent to more th an $11 per share. The issuer is now the subject of bankruptcy proceedings.

In another case, the public paid nearly $175,000 for what eventually 

was a 30-percent interest in a company which had less than $3,000 in 

the bank, less than $200 worth of office furniture, and a net loss for 

the 6 months in which it had been in business of over $6,000. The 

insiders received the other 70 percent of the company for less than 

$500. The issuer is now bankrupt.

Securities problems in the District are perhaps most acutely demonstrated by the allegations, and evidence, of widespread fraudulent 

conduct on the part of certain local broker-dealers. Because of the 

Commission’s quasi-judicial functions, it is not appropriate for me 

to comment on any pending cases or active investigations.

But, speaking generally, the erosion of standards which has occurred 

to some extent on a national level appears to have been magnified 

in the District. Just as the broker-dealers seem to have found a 

center of operations in the District, so have all of the unsavory 

practices which the Commission is constantly trying to extinguish.

The aforementioned conditions lead to the question of whether 

some type of legislative action is called for.
6 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

The District of Columbia, unlike virtually all of the States, is 

without legislation of its own, and must rely on the Federal securities laws for protection.

In this connection, it should be emphasized that, as a practical 

matter, investors in the Maryland and Virginia suburbs are affected 

by the situation in the District, inasmuch as the “blue sky” laws of 

these States do not effectively reach District brokers.

The Commission has attem pted to meet the challenge of the problem 

without any new legislation. We have taken concentrated enforcement action in this area, which I believe has been at least temporarily 

productive in diminishing the unhealthy practices and creating a new 

environment.

Some of the specific steps that we have taken include the follow ing:

(1) The assignment of personnel to the Washington regional office 

from the national office and other regional offices.

(2) The institution, since Jan uary 1, 1961, of 23 administrative 

and injunctive proceedings against District broker-dealers, involving 

a total of 79 persons from the local area, and 23 parties from other 

areas.

Indicative of the complexity of these administrative cases is one 

pending broker-dealer proceeding involving some eight firms, including four local ones, and some 20 salesmen and principals, of whom 

9 are from the Washington area. Another case new pending took 

over 9 months to investigate.

(3) Various investigations are in the final stages. It is anticipated 

tha t a number may result in reference for criminal prosecution to 

the U.S. attorney, Mr. David C. Acheson, who is giving us his full 

cooperation.

However, despite the important steps we have taken and the appare nt general improvement in the conduct of local broker-dealers, 

the situation still presents many difficulties—which can be expected 

to increase to the extent th at th e market for over-the counter securities 

moves up.

Vigorous enforcement can never be a permanent substitute for 

high regulatory standards. If there is a relaxation of our present 

efforts, and our national enforcement responsibilities might make 

this necessary, there could be a renaissance of past unsavory practices, 

hopefully now substantially curtailed.

The Federal securities acts do not presently appear to be a full 

answer. The legislative history and the language of the Federal 

statutes make clear tha t they are not, and were not intended as, 

complete instruments for local regulation.

They contemplate concurrent jurisdiction by the Securities Commission of any State or the District of Columbia. Although specifically designed to supplement, rather than supplant, local 

securities legislation, the Federal acts have been forced to function 

in the District of Columbia as a local “blue sky” law without the 

provisions which “blue sky” laws normally have.

Under the Federal acts, the Commission’s power is largely punitive 

or remedial, not preventive. There are only limited controls over 

entrance into the securities business.

Usually, we cannot act until violations have taken place, and investors have suffered—until the fraud has been committed, or the 

firm’s net capital depleted beyond the limit allowed by law.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBLA. 7

Furthe r, revocation and suspension proceedings before the Commission, and injunctive and criminal actions filed by the Commission 

in Federal courts, necessarily must follow prescribed procedures and 

meet high standards of proof which, in turn , frequently delay appropriate action and impose a heavy burden on our staff.

By contrast, local “blue sky” administrators ordinarily have far 

greater control over those desiring entry into the business. Character 

or experience requirements may be imposed as they may not under 

the Federal law as it presently stands.

Furthermore, the administrators may exercise summarily many 

enforcement powers. Frequently, registration of securities is required, with controls over unconscionable transactions.

The Commission does not believe it can achieve the full degree of 

securities regulation—realized in other jurisdictions with local regulation—through continuation of its present intensive enforcement 

program without impairing its ability to meet our national 

responsibilities.

Accordingly, the Commission recommends that some further regulator powers over broker-dealers in the District of Columbia be 

established.

Several alternatives are ope n:

(1) The District of Columbia is presently exploring the extent 

of its power under its licensing statute, section 47-2344, to license 

broker-dealers and establish standards with respect to character and 

capital, if adequate standards can be developed in this manner 

swiftly, we shall be hapy to work with the District authorities. However, they have indicated substantial doubts as to the extent of their 

authority under the existing licensing statute. Furthermore, rules 

are not enough, and experienced personnel would have to be available 

to the District for the administration of any rules.

Finally, under the District Code, the only penalty for operating 

without a license appears to be a fine up to $300 or imprisonment for 

not more than 90 days.

While conviction for such a violation, being a misdemeanor in the 

securities field, would probably be a ground for a broker-dealer revocation by this Commission, we believe it would be much more effective if the local authorities themselves could put an unlicensed securities firm out of business.

(2) Another possibility is to have local broker-dealers regulated 

by the Commission acting as a “blue sky” administrator. Expanded 

SEC jurisdiction could be effected by an amendment to section 15 

of the Securities Exchange Act of 1934, which would provide rulemaking power in the Commission with respect to broker-dealers doing 

business in the District of Columbia.

This power would permit the Commission to establish standards 

for qualification of broker-dealers and their salesmen with respect 

to net capital, character and experience. It would also give us increased powers for takin g immediate action to suspend operations of 

a firm.

(3) We believe the preferable solution is a strong “blue sky” statute 

for the District of Columbia to be administered under the District 

of Columbia Government by an administrator with an adequate 

enforcement staff.
8 SECURITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA

Such a statute could l)e based upon the uniform “blue sky” law, 

which offers several alt ern ati ves as to statutor y provisions.

Th e act follo wed a 2-y ear stud y of State legislation. Par t 1 of the 

Unifo rm Act proh ibits fra ud in the sale or p urchase of any securities. 

P art 2 pro vid es for the reg ist ratio n of bro ker-dealers and th eir salesmen, and of investm ent advisers.

Inc lud ed in this pa rt are sections d ealin g with den ials , suspensions, 

and revo cations. If c ontrol of s ecu rities issues is desired, pa rt 3 p ro ­

vides three alt erna tiv e methods fo r regi stra tio n: by notification , by 

coord ina tion, o r by qu alifications.

It should he noted th at this legisla tion has various pro vision s fo r 

pay me nt of fees which pre sum ably could he set at a sufficiently hig h 

amoun t to perm it adequa te ag ency staffing.

The Commission recommends a local “blue sky” statute with local 

ad minist rat ion for several reasons.

If the Congress desires th at local government in the Dist ric t should 

be strength ened, it would seem ap pr op riate for the District to have 

its own “blue sky ” laws and “blu e sky” ad minist rator. All hu t two 

States hav e such a law and feel it necessary to reg ula te the conduc t 

of bro kers and dea lers doing business in th ei r juris dic tio n. To the 

exten t th at the prese nt Distri ct pro blem aris es from a lack of local 

leg islation, it would seem pr op er for the Di str ict to hav e a law and 

build a staff in o rder to meet fu ture recu rrence o f the presen t prob lem.

Most im po rta ntly, I mu st emp hasize that the Com mission ’s res ponsib ilit ies are national. As I have sta ted , we accelerate d our enforc eme nt prog ram in the Di str ict of Columbia, and I believe th at thi s 

acti on has pro duced noticeable res ult s and cre ated a change in the 

envir onme nt here. How ever, if we were to con tinu e ou r activities on 

the same inte nsive basis, this concentration would ten d to im pa ir our 

na tio na l en forcem ent obligation s.

Simila rly , we pr ef er n ot to assum e a pa rticul ar res ponsibility with 

res pect to a region where we re ga rd our main job to be one of e sta blis hing natio nal stan da rds. Indeed, in many ways, this would dive rt us 

fro m t he pr im ary prog ram to which we are committed—as evidenced 

by ou r marke t stu dy, which was initiated by this very committee.

Ma ny of the issues ap pa re nt in the Dist ric t sit ua tio n are being 

stu died as nat ion al prob lems. By way of example, an im po rta nt aspec t of the marke t stu dy is an ana lysis of the qua lification, training , 

super vision , and financial res ponsibility of bro ker-d eal ers and th ei r 

salesmen. Our studies might lead us to the conclusion th at prese nt 

req uir em ents for entrance into the securities busines s sho uld he 

strength ened. I f th at be so, we would then pr op erly be me eting a 

pro blem, ap pa rent not only in the Di str ict , hu t on a na tio na l basis.

A t the same time, I wa nt to emp hasize ou r belief th at any new 

Fe de ral legislation w ill n ot, an d should not, sup ersede local reg ula tio n. 

Th ey should be co ncu rrent.

Were the Comm ission to assum e the res ponsibi lity of local regu latio n, we would, in effect, be ad mi niste rin g tw o d iffere nt typ es of laws— 

one based on th e “blue s ky” pa tter n and t he other based on the natio nal 

pa tte rn .

The confusion tha t would be created, and the anomalous picture 

that would be presented, of a single agency administering two different sets of rules is evident. The same person who was unfit for the
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 9

securities business under District standards might become fit federally 

upon moving across Eastern Avenue to Silver Spring.

Furthermore, the Commission is reluctant to assume normal “blue 

sky” controls over securities issuers. These controls often go beyond 

the Federal reliance on full disclosure and may entail the power to pass 

on the merits of issues—for example, whether the compensation to the 

underwriters or insiders is exorbitant. Clearly, here the assumption 

of another type of power could only engender difficulties.

The creation of a strong District “blue sky” administration would 

help plug the existing gap in securities regulation. Virginia has the 

Uniform Securities Act and Maryland has recently adopted it.

Suburban investors could lodge complaints with the District authority, and District investors with the two State administrators. It 

is likely that the several administrators would be able to work in 

close cooperation. And, of course, the Commission itself would 

continue to carry on its present function of enforcing the Federal 

securities laws in all three jurisdictions, thus giving an added layer 

of investor protection.

I should like to point out here th at the above considerations militate 

against exercise of our present rulemaking powers so as to adopt 

special regulations for the District of Columbia.

Under present law, we could undoubtedly issue particu lar rules 

with respect to the District under the Securities Act of 1933. That 

would lie with respect to new issues of securities.

However, there may be some question as to our power to single out 

local broker-dealers under the Securities Exchange Act of 1934. Fu rthermore, our powers under the Exchange Act are limited: by way 

of example, we cannot impose character and experience requirements 

as a condition to entry into the securities business. Moreover, if we 

single out the District because problems develop here, would we not 

have the obligation to give individual treatment to other areas to the 

extent they manifest serious problems of securities regulation? We 

feel obligated to operate on a national basis and exercise of our present rulemaking authority for the District would raise all the problems 

atten dant upon dual regulation.

We recognize that, to some extent, the establishment of a local 

securities authority might appear unnecessarily in light of the presence of the Commission itself here, as well as the existence of a Washington regional office. Shortrun budgetary savings might be effected 

if the Commission assumed the powers of local regulation, rather 

than a separate agency. However, in the long run, a disproportionate 

part of our budget might end up in being allocated to regional problems at the expense of our nationwide program.

Moreover, as I have attempted to demonstrate, local regulation in 

many respects differs from that contemplated by the Federal securities 

laws. It would seem anomalous for us to exercise one type of power 

regionally and another nationally. Most importantly, our emphasis 

has been, and should be, on national standards and national 

enforcement.

Accordingly, the Commission recommends the enactment of a “blue 

sky” law for the District of Columbia to be administered by a local 

administrator. This action would undoubtedly assist in meeting the 

local securities problems, would be consistent with our traditional
10 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

Federal pattern of dual regulation, and would permit our continued 

concentration on national problems.

In conclusion, I might just add tha t I am not trying to say tha t 

the “blue sky” law will completely eliminate the problem, but it will 

help in the process and, of course, we will be operating concurrently 

with it.

That is the end of my prepared statement, Mr. Chairman.

Mr. Mack. Thank you, Mr. Chairman. You have devoted a lot of 

time to this problem and we appreciate having your detailed statement 

on this matter.

Mr. Chairman, this problem is not completely new, is it? It has 

been existing for a number of years.

I recognize and appreciate the fact tha t you pointed out—that it 

has become almost uncontrollable in the last 3 years. At least we 

have had a tremendous number of violations and questionable activities, violations of ethical standards, in the last 3-year period.

Rut I am wondering if any thought has been given or if the question has been raised as to why we have not dealt with this matter at 

some point within the last 28 or 29 years since the Securities and 

Exchange Act was passed.

Mr. Cary. Mr. Chairman, I agree with you tha t the problem of 

the District of Columbia has always been one which the Commission 

has faced. I do not thin k it has been of the gravity that would warrant, for example, a special and major effort until the last few years.

We had a staff, back in J anu ary 1957, of 14 fo r the regional office, 

and tha t covered, by the way, not only the District of Columbia but 

Virginia, West Virginia, Maryland, Delaware, and, I believe, Pennsylvania. It seems, relatively speaking, tha t vis-a-vis those other 

areas, larger in size, most of the problems of the regional office have 

concentrated in the District and, indeed, have demanded more of our 

personnel. The local office has expanded at the moment, I believe, 

up to about 30.

During this past period, should we have put more people to work on 

District problems or ought we to have been thinking about special 

rules for the District? I would say tha t we are always having to 

put out fires in various areas; relatively speaking, I do not think the 

District was regarded as a major area requiring special consideration 

until the past 3 or 4 years.

Mr. Mack. Mr. Chairman, I concluded from your statement tha t 

you prefer a local “blue sky” law for the District of Columbia?

Mr. Cary. Yes, Mr. Chairman.

Mr. Mack. The question I want to raise is this : Was this necessary 

25 years ago, or did it just develop in the last 3 years?

Mr. Cary. Mr. Chairman, we have made some inquiry and found 

tha t there was some legislation introduced in Congress concerning a 

“blue sky” law for the District of Columbia around 1933, when the 

Securities Act of 1933 was passed.

So far as I know, nothing happened after the introduction of the 

bill. We cannot find its legislative history and do not have very much 

information concerning it.

I am quite sure you are correct that the need for a “blue sky” law 

in this jurisdiction, as in the only two others now th at do not have 

such a law, may have been apparent over this period.
SECU RITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA 11

I doubt wh eth er the need fo r local reg ulati on becam e as cru cial 

un til t his recent period. Th erefo re, it is only now th at we have r eal ly 

come out and tak en a pu blic position on this.

Mr. Mack. You ha ve also, evide ntly, ha d a op po rtu nity to research 

it, and there has no t been leg islati on introduced since th at tim e to 

provide a “b lue sky” law fo r th e D istri ct?

Mr. Cary. No t to o ur kn ow led ge ; no, sir.

Mr. M ack. T hat wo uld h ave been 28 o r 29 years ago.

Mr. Cary. I th in k there has been a vehicle fo r th is in recent times, 

Mr. Ch air ma n, which w as no t avail able ea rlier; nam ely, the Un ifo rm 

Securiti es Ac t, whi ch has been very carefully pr ep ared and offers 

alternative form s which can be used in enactin g such a law.

Mr. Mack. I j us t ha ve one final q ues tion at this time.

Do y ou feel that yo ur D istric t office, yo ur r epres entat ive s here, h ave 

devoted th ei r tim e to pr otec tin g the inv est ors here in the Dist ric t of 

Columbia du ring this qu ar te r o f a ce ntu ry when the y s hou ld hav e been 

interesti ng themselv es on in tersta te m atters ?

Mr. Cary. Tha t is a p re tty ha rd q ues tion to give a sure answ er to.

I will say th at up to th is time we hav e h ad a fa irly lim ited numb er 

of people wo rking exclusively on Distric t of Columbia ma tters. I 

think per son nel has been div ide d up, more or less in prop ortio n to the 

need ex isting at any pa rtic ul ar time. For example, the problems in 

New Yo rk, or in th e F ar W est du ring th e uranium period, as their 

seriousn ess became eviden t, jus tified a la rg er allo cation of our 

pers onnel.

Th ere fore, with ou t being positive ly sure of the accuracy of my 

answer in view of the fa ct th at I have only been at the Commission 

fo r a ye ar a nd a mo nth , I would say th at there has been a fairly reasonable allocation accordi ng to enfor ceme nt needs at any pa rticul ar 

time.

A good dea l more ma npow er, of course, has been needed in the 

Di str ict d ur in g th e p as t 3 years.

Mr. Mack. Wou ld you agree , thou gh , th at yo ur pers onnel, when 

the y con cen trate on the Distri ct pro ble m, are quite successful in 

im prov ing the sit ua tio n?

Mr. Cary. I t hi nk th e pro ble m ha s been redu ced in ma gnitude. As 

I say, I w on’t a ssure you that i t won’t com e up aga in. To some exten t 

it is abated because the c ondition of t he ove r-the- cou nter mark et now 

is such th at pe rhap s there ha s been a little less enthusiasm fo r sales 

in th at area in the Distr ict .

Th us, u nd er those c ond itions, I w ould say at the m oment it has been 

reduced and aba ted , but 1 do no t w an t t o say it has been cured, by any 

means.

Mr. Mack. Th en, if it was im proved following the tim e th at yo ur 

enforceme nt officers came in, there mus t have been some vio lation s 

there at the tim e when it was no t be ing rig id ly enforced ?

Mr. C ary. Majo r v iol ati ons; yes, sir. In one example which I gave 

it ap pe ars that inves tors have lost a ve ry sub sta ntial a mo unt of money. 

Th is dem onstrate s, p erh aps, the us efu lne ss of the “blue sky” appro ach. 

We do no t h ave th e so-called suspen sory pow er t hat a “blue sk y” C ommissioner has. In th e event t ha t he finds evid ence of actual der eliction 

he just closes a firm down and h old s th e he aring subsequently. We do
12 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

not have that power. We have to have a suspension proceeding prior 

to taking any action with respect to the firm.

Mr. Mack. Mr. Hemphill ?

Mr. Hemphill. Thank you, Mr. Chairman.

Mr. Chairman, may 1 first say as a member of the subcommittee 

I have been most happy in noting the progress of your administration. 

I congratulate you and the members of your Commission.

1 gather from your statement that there is some doubt in your mind 

as to whether or not, under the 1934 act, the Commission has jurisdiction in the District of Columbia. Is tha t correct?

Air. Cary. To enact special rules with respect to the District of 

Columbia; yes, generally.

Mr. Il empiiill. As I understand it, the authority of your Commission is based on the interstate commerce feature of the transaction. 

That is the elementary principle, tha t these stock transactions are 

interstate commerce ?

Mr. Cary. Tha t is correct.

Air. Hemphill. The 1933 act defines interstate commerce for purposes of your jurisdiction as among or between the States or within 

the District of Columbia?

Air. Cary. Yes, sir.

Air. H emphill. It has been pointed out to me by our able staff th at 

tha t is in section 2, subparagraph 7, of the act?

Air. Cary. Yes, sir.

Mr. H emphill. Then, in the 1934 act, section 3, subparag raph (a) , 

subparagraph 16, defines a State as including or meaning the District 

of Columbia. But the next paragraph defines interstate commerce as 

among the several States.

If we pass some legislation here which definitely gives the Commission the rulemaking power within the District of Columbia and 

leaves no doubt about it, how f ar will that go in curing the situation 

which your presentation this morning seeks to cure?

Air. Cary. Well, sir, if I could divide the question up. As you 

have indicated, our jurisdiction is broader under the Securities Act 

of 1933 with reference to the District than under the Securities and 

Exchange Act of 1934. Certain sections of the 1933 act also undoubtedly give us the power to single out transactions in the District—particularly with respect to new issues of securities. This 

would not touch the broker-dealer problem, but only the distribution 

of securities.

I doubt whether we could have a whole different registration process 

with respect to the District. I have no doubt tha t we could have perhaps a firmer set of regulations with respect to what we call the 

Regulation “A” type of issuance, those offerings less than $300,000. 

But I am skeptical whether further regulation of new issues would 

meet the problems here th at we have previously indicated. It would 

only meet them on a very narrow base, and in a very limited area.

You are quite right, further, that our powers are not as broad 

with reference to the District of Columbia under the Securities and 

Exchange Act of 1934.

Perhaps we have not exercised our rulemaking power under the 

Securities and Exchange Act of 1934 with reference to the whole 

country as much as perhaps we should and shall.
SECURITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA 13

At this moment, out special study is trying to determine, to what 

extent, for example, should we, through legislation on the one hand, 

or through using our rulemaking powers on the other, raise the qualifications for entrance in the securities business.

What if you gave us a special broad power under the Exchange 

Act with reference to the District of Columbia. That would give 

us a mandate to go ahead and make rules more broadly in the Distric t than we could elsewhere.

Under the present statute, I thing there might be a question of 

power whether we could regulate certain activities here and not with 

respect to the whole country—on a disuniform basis.

But if you gave us tha t mandate, we could undoubtedly do it.

If you gave us powers, (1) with respect to qualifications of brokerdealers, and (2) even the suspensory power of the type I referred 

to, undoubtedly, it would help.

We would have to increase our manpower. We could exercise 

the power given by those rules to meet some of these problems. But 

we prefer to have the District problem handled by a “blue sky” 

administrator—we hesitate to pick out this area and operate, you 

might say, more as a day-to-day policeman, when, in fact, we think 

our big function is one of making rules that will cover the Nation.

Our big function, for example, in the case of the exchanges, is to 

see tha t those exchanges carry out their responsibilities; at the same 

time to work with the NASD—in other words, to supervise all those 

institutions organized for the purposes of self-regulation.

Therefore, we do not deny that the powers th at you might choose 

to give us might not help the situation. But we think our job 

should be on the national level and that we should not be operating 

in the District in one way and the rest of country in another way. 

Accordingly, those powers tha t you refer to would better be in the 

hands of a “blue sky” administrator with whom we are working 

concurrently, just as they are in other States.

Mr. Hemphill. I had in mind asking a question perhaps giving 

you the elasticity to not only make the regulations apply nationwide, 

but to zero in on any given area by the power which you would 

have, and tha t would include the District of Columbia, which is a 

source of much concern to me because we have so many people here 

apparently who want local authority and are a little power-drunk 

with the idea.

If we create another commission here, it is another commission, 

something else to worry about. I am not against the proposal, but 

I hesitate to create something else here in the District which in 

my humble opinion, has deteriorated so as the Nation’s Capital with 

the growth of more local authority.

Mr. Cary. This question of zeroing in on the District and not 

having the power to zero in on the other areas is not quite what we 

would like.

We think tha t we ought to be operating on a national level. With 

the limited manpower we have, and the problems that are beginning 

to develop in our special study, I think we are going to be opera ing 

at a maximum burden in approaching each of the problems on a 

uniform and national basis.

84366— 62 3
14 SECU RITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA

Mr. Hemphill. My use of the term “zero in on the District” 

was not a play on semantics, I meant if we gave the powers not 

only to zero in on the District the unquestionable authority which 

the act of 1934 does not give to your satisfaction, but to zero in on 

any other area of the country.

It appears to me if you ever zero in on the District of Columbia, 

or if you needed to zero in on New York, Florida ; once you have 

done that, you are going to set the pattern in these day of 

communication.

It seems to me if you went into a place and cleaned it up, and 

threw these people out of business that are in the wrong business, 

took away their licenses or right to do business, from the national 

standpoint you could prohibit them from going back into business 

in Virginia, Florida, or any other place?

Mr. Cary. May I ask our Director of the Division of Trading 

Exchanges to comment on tha t furth er? He may have some idea 

1 had not thought of.

Mr. Loomis. If I understood the question, it appeared to be a suggestion that the Commission might be given greater powers which it 

could exercise anywhere whenever it thought there was a particular 

problem in a particular area.

Tha t might be of assistance in the District, and perhaps in some 

other places. It would produce, perhaps, the problems the chairman 

mentioned, of our treating different parts of the country in different 

ways, which, for a national agency, may present some questions.

I think in response to certain of the earlier questions asked, as an 

example of the problems tha t occur when you zero in on a partic ular 

area, that in the last year or so our Washington office has had to concentrate so on the problems of the District of Columbia tha t maybe our 

coverage in certain other parts of this region has not been all tha t 

we would like to see.

That is another aspect of the problem.

Mr. Hemphill. Suppose we broaden the definition of interstate 

commerce with reference to the 1934 act so that it would be unquestioned that you had the authority within the District of Columbia.

The District of Columbia is a creature of the Congress. Congress 

has power over interstate commerce and over the definitions of it. 

At least, the courts have said that. Once we have done th at, then 

you have all the authority you need ; is not that correct ?

Mr. Loomis. I am not quite sure. Our problem as to broker-dealers 

in the District and perhaps elsewhere is not so much finding jurisdiction in the sense of interstate commerce, because most broker-dealers 

do use the mails.

The mails are instrumentalities of interstate commerce. It is rather 

tha t the nature of our powers in connection with broker-dealers, as the 

chairman pointed out, are sort of punitive rather than preventive and 

remedial.

We do not have any power, even with regard to a broker-dealer in 

interstate commerce, to pass upon his character or require him to have 

a certain amount of experience, which powers “blue sky” Commissions 

commonly exercise.

So I am not sure tha t merely changing the definition of interstate 

commerce would fully meet the broker-dealer problem in the District.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 15

Mr. Hemphill. Thank you very much.

Mr. Mack. Mr. Keith?

Mr. Keith. Thank you, Mr. Chairman.

Are there any other areas which are without any supervision of the 

sort which result in “blue sky” laws? 1 am thinking particularly of 

military installations.

Mr. Cary. First of all, sir, in respect of the jurisdictions in which 

there is no “blue sky” legislation, those are only Nevada and Delaware, 

As to the application of “blue sky” laws on military installations, I 

have not given tha t any thought.

Is there any problem with respect to the application of the “blue 

sky” law on a military reservation ?

Mr. Loomis. That has been somewhat uncertain. There are some 

military installations, though I think it is a minority of them, where 

it is contended tha t they are exclusively Federal areas in which the 

State authority does not extend.

On the other hand, most military commanders have precluded, by 

order, the sale of securities on the reservation in violation of the laws 

of the part icular State in which the installation is located.

I suppose tha t the particu lar problem for military installations, 

from the viewpoint of the “blue sky” law, arises in connection with 

the installations in foreign countries where, of course, no State laws 

apply. . , . . Mr. K eith. 1 our hearings downtown have indicated that there are 

some abuses in this kind of installation. I think it might be appropriate for you to give the committee a memorandum as to your recommendations as to how, from a jurisdictional point of view, that situation might be improved.

Mr. Cary. Yes, sir; we will be glad to do so.

Let me say in general, with respect to this situation, tha t it is true 

tha t there have been, in our hearings, some evidence of salesmen— 

who are in the military—selling to military.

I suppose the grea ter problem tha t we have noticed is the use by 

salesmen here in the District of the Pentagon telephone book. In 

other words, calling people in the Pentagon and getting in touch with 

the military who, as a group, might constitute a source of potential 

securities customers.

We will be glad to consider this particular problem. It may well 

be, Congressman Keith, that it becomes more significant in view of the 

statement made in the newspaper 1 noticed this morning—in perhaps 

which you have reference to—about the establishment of brokerage 

firms in military installations abroad.

Mr. Keitii. Along the same line, are there any other areas where 

there is a lack of jurisdiction and a need for such supervision? For 

example, the Panam a Canal Zone, or the Virgin Islands, how are 

they regulated ?

Mr. Cary. I will have to ask Mr. Loomis to speak to th at point.

Mr. Loomis. There is not any local regulation th at 1 know of either 

in the Panama Canal Zone or in the Virgin Islands.

I frankly have not encountered many problems in the securities 

field in those areas. Particularly , I would not think there would be 

much in the Virgin Islands, because of the nature of the community 

there. There has been a problem which has been of some concern—
16 SECURITIES REGULATIONS FOR TH E DISTRICT OF COLUMBIA

the Chairman alluded to it—in regard to securities sales on major 

military installations in Europe, where the local requirements, whatever they are, are deemed inapplicable.

There is no State jurisdiction. We cannot effectively reach the situation. 1 think that to some degree, however, the regulation of these 

activities probably has to be in the hands of the military themselves, 

the command, who can, of course, give such orders as they see fit 

regarding the securities sales.

Mr. Keitii. That is all, Mr. Chairman.

Mr. Mack. Mr. Hemphill ?

Air. Hemphill. Something just occurred to me. I followed you as 

you presented your statement. On page 13, you have a numeral 3:

AVe be lie ve th e pre fe ra ble so lu tio n is a st ro ng “b lue sk y” sta tu te fo r th e D istr ic t of Co lumbia, to be ad m in is te re d un de r th e D is tr ic t of Colum bia go ve rn ­

m en t by a n adm in is tr ato r, w ith an a deq uat e en fo rc em en t s taff.

Where does this committee have jurisdiction of that ?

Unless we broaden the definition of the 1934 act, where we would 

have any jurisdiction? Suppose we pass legislation tha t is suggested 

here, creating the authority in the District of Columbia? 1 do not 

know whether we have the righ t to do it in the first place.

In the second place, if we did create it, we would lose authority over 

it, which the District of Columbia Committee would attain.

Air. Cary. I believe I agree with you in this sense: As I look at it, 

this committee is analyzing a problem in the securities field for which 

it is responsible. If our suggested proposal that the District adopt a 

“blue sky" law be thought appropriate, then I think legislation along 

those lines would probably fall or might fall within the District of 

Columbia Committee of Congress.

Therefore and on this point you certainly know much better than I — 

I would suppose you would not have jurisdiction over the functions 

of tha t “blue sky" administrator, just as you do not over the “blue 

sky" administrators of the various States.

But I think the basic question that we are discussing here is what 

kind of an organization or what kind of a law should you have to 

meet a problem which clearly falls within your jurisdiction; namely, 

dereliction, fraudulent conduct, and the other securities problems in 

the country and specifically in the District.

Mr. II emphill. I hate to think of what would happen to the poor 

fellow when the morning newspaper here got through with him. Down 

home we call the Washington Post the Daily Worker, the W ashington 

Daily Worker.

We have seen them castigate people whose intentions were so honorable tha t it was almost fantastic to see the lengths to which they 

would go to castigate someone who is tryin g to do their job.

That causes me concern because I want to be of help to your Commission. I have a legislative responsibility to try to be of help.

Thank you.

Air. Mack. Air. Chairman, on page 4 of your statement you refer 

to this problem of the salesman going into business after your Commission has put the broker-dealer out of business.

I believe Air. Loomis has referred to this problem in his testimony 

before your special committee. Is this a matter which is not limited 

to the District of Columbia, but which is a problem throughout the
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 17

entire country, or is Mr. Loomis referring specifically to the District 

of Columbia?

Mr. Cary. The case tha t I was referring to is a problem which 

could happen throughout the country, and 1 think Mr. Loomis, in his 

testimony before the special study, was likewise speaking to that 

problem.

For example, we m ight enjoin a firm, but then in order to put the 

individuals who are salesmen in the firm out of business, we would 

have to go through a revocation proceeding of the broker-dealer firm 

which might take as much as 3 years or so, and at the same time, in 

that, revocation proceeding find these persons to be so-called willful 

violators or causes.

Under those circumstances, once they are causes, then they would 

not be in a position to work for any other firm or organize th eir own 

without our approval.

But until the salesmen are found to be causes, there would not be a 

basis for disqualifying them at the present time under the existing 

laws. It is th at kind of question, of course, that we have to examine 

on a broad scale in the special study.

Mr. Loomis mig ht want to make a comment further on this.

Mr. Loomis. I think tha t the instance that I referred to in my testimony before the study is the same one that the Chairman referred to 

in his statement on page 4.

On the other hand, as the Chairman has said, this is a thin g that can 

happen outside the District, and there have been instances of it. 

Perhaps not as dramatic mathematically, but definitely instances of 

it in other parts of the country.

Mr. Mack. This could happen in States which do have “blue sky” 

laws ?

Mr. Cary. Yes, it could. Although, of course, a “blue sky” administra tor, having the suspensory power, might be able to put a particular person out of business immediately if he found tha t there was 

a basis for it in the ligh t of his past conduct or financial history or 

background.

Mr. Mack. But these new firms would also be registered with you 

as brokers ?

Mr. Cary. The new firms would be registered with us; yes, sir.

Mr. Mack. And they would be members of the National Association 

of Securities Dealers ?

Mr. Cary. They might be or they might not be. I might ask Mr. 

Loomis whether he knows whether most of those would have become 

or did become members of the NASD.

Mr. Loomis. I would suppose th at most of them would have at least 

applied and may well have become members. As the Chairman 

pointed out, while we took action against the firm, we did not have 

then time to make a case against each salesman in the firm and prove 

tha t he, individually, violated the law.

Mr. M ack. Could I inte rrupt to ask if you ever do that?

Mr. Loomis. Yes, we do it on occasion.

Air. Mack. On rare occasions?

Mr. Loomis. Well, we have tried it both ways. In New York, where 

this problem arose, we would sometimes proceed against all the salesmen.
18 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

As the Chairman says, this makes a very complicated trial, with 20 

respondents, each of them having his own attorney, and all wrapped 

up in one case it can go on for years. We have sometimes tried to move 

faster against the firm and pick up the salesmen later.

Mr. M ack. Mr. Chairman, do you feel there is any necessity or justification for additional legislation to deal with this problem, or is this 

one of the matters that you presently have under study with your 

special investigation ?

Mr. Cary. 1 would say, sir, tha t this is a matter which we have 

presently under study. Therefore, I cannot speak to any immediate 

concrete legislation. It certainly is a matter which was clearly involved in the public hearings which we have been holding in the last 

2 weeks.

Mr. Mack. Then this problem nationally will be dealt with, undoubtedly, in vour report?

Mr. Cary. It will be ; yes, sir.

Mr. Mack. On page 7, you refer to the underwriting group. An 

underwriting broker had a deficit of $12,000.

Mr. Cary. Yes, sir. It is the company, not the brokerage firm. It 

is the so-called issuer.

Mr. Mack. The issuer had the deficit of $12,000 ?

Mr. Cary. Yes, sir.

Mr. Mack. Then, the underwriting group received $120,000, or 

50 percent, of the proceeds received by the issuer ?

Mr. Cary. Yes, sir.

Mr. Mack. Do not you or the NASD have rules concerning the 

amount of commissions charged?

Mr. Cary. In answer to that, first of all, we do not. Wha t we do, 

under the Securities Act of 1933, is to force disclosure of that on the 

front page of the prospectus.

In other words, we bring it to light so th at it is clearly known.

Mr. Mack. Tha t is with regard to the 30,000 shares?

Mr. Cary. That would be the 30,000 shares, and that would be the 

40 cents per share as well. All of tha t would be clearly spelled out. 

But that is all we would do at this time.

The NASD, on the other hand, has moved ahead in the last year, 

specifically, and is beginning to study these problems of underwriters’ 

compensation, and are taking some action in that area.

It is an area, by the way, in which we, ourselves, are doing further 

study in connection with the special study.

Mr. Mack. But you have no rules regarding either the minimum 

or the maximum commission ?

Mr. Cary. No, sir. Generally, not at all.

Mr. Mack. You mentioned there are two other States that have no 

“blue sky” laws. Do those two States rely on the Fed eral Government 

for enforcement and regulation of securities?

Mr. Cary. Those two States, sir, are Nevada and Delaware. I 

would say the answer in general is yes.

Now, whether or not the ir attorney general operates under just a 

general fraud provision which he might inte rpre t broadly, I cannot 

speak. But I would say, in general, that, or the regulation of securities selling is primarily left in the Federal Government’s hands.
SECU RITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA 19

Mr. Mack. Do you have any problems in those two States similar to 

the ones you have in the District of Columbia ?

Mr. Cary. I think in view of the fact th at I have only been here a 

year, I might ask Mr. Loomis to speak to th at question.

Mr. L oomis. We have not had any p articula r problem in regard to 

Delaware. I am not quite sure why, but there has not been much tha t 

has come to our attention. We have from time to time had enforcement problems in Nevada, as elsewhere.

But, of course, Nevada is not a metropolitan State. It is a small 

State, spread out over a wide area, and there is less likely to be a concentration of securities activity there. In fact, there is not. But we 

have had our problems from time to time.

Mr. Mack. Do you have a regional office in Nevada ?

Mr. Loomis. No, sir. We have an office in San Francisco and a 

branch of tha t in Los Angeles. Nevada is handled out of the Los 

A jigeles branch, primarily.

Mr. Mack. Would you need additional legislation for the Securities 

and Exchange Commission to act as the “blue sky” law administrator?

Mr. Cary. Of the District of Columbia ?

Mr. Mack. Yes. The “blue sky” administrato r for the District.

Mr. Cary. Yes. To exercise full “blue sky” powers in the District, 

we would need additional legislation. Our question is whether we 

should establish rules for the District of Columbia which we have not 

established yet for the other par ts of the country?

Mr. Mack. My point is you would need additional authority other 

than the amendment to section 15 of the Securities and Exchange Act?

Mr. Cary. If there were amendments to section 15, I think tha t 

would be enough to give us substantial authority. It would not give 

us authority over issues of securities, but perhaps tha t would not be 

necessary.

Mr. Mack. Do you feel tha t that would give you authority that 

would be necessary to substantially eliminate the practices now 

engaged in in the District of Columbia ?

Mr. Cary. If it were the choice of the Congress to place this responsibility on the Securities and Exchange Commission, we think th at we 

would receive adequate powers under certain amendments to section 

15 to the 1934 act.

Air. Mack. I thank you, Air. Chairman, for your testimony. I do 

feel th at some action needs to be taken here in the District of Columbia. At least, I have been somewhat favorable to g ranting additional 

authority to the Securities and Exchange Commission. But if some 

other action is forthcoming tha t will solve the problem, we might 

defer to the other organization or group tha t made the proposal.

Air. Cary. Thank you, Air. Chairman.

Air. AIack. Our next witness is Air. Wallace Fulton, executive 

director, National Association of Securities Dealers.
20 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

STA TEM ENT OF WAL LACE H. FULTON, EXECUTIVE DIRECTOR , NA ­

TIONAL ASSOCIATION OF SECURIT IES DEALERS, INC., ACCOMPA NIED BY MARC A. W HI TE , COUNSEL, AND RICH AR D PETERS,

SEC RET ARY OF TH E ASSOCIATION’S DISTRICT NO. 10

Mr. M ack. Mr. Fulton, we are happy to welcome you again before 

the Commerce and Finance Subcommittee.

1 know you have l)een quite familiar with the problem existing here 

in the District of Columbia.

We will be happy to have your testimony at this time.

Mr. F ulton. Thank you very much, Mr. Chairman.

Mr. Chairman and members of the subcommittee, I am Wallace II. 

Fulton, of Washington, I).C., executive director of the National 

Association of Securities Dealers, Inc.

I have with me Marc A. White, counsel, and Richard Peters, secretary of the association's district No. 10 which includes Washington, 

D.C.

We are here to discuss securities regulations for the District of 

Columbia designed to protect the public in the purchase and sale 

of securities. The need for corrective measures arises, in part, from 

the great increase of broker-dealers in the Washington area in the 

immediate past, coupled with the lack of regulations applicable 

locally to protect the public from the dishonest or the grossly inexperienced securities dealer.

1 have stated in the past that the District of Columbia would benefit from additional regulations, provided they are properly administered.

Most State securities laws have three major classifications. These 

are: (1) the area of registration and licensing of broker-dealers and 

salesmen, (2) the registration of securities, and (3) establishment of 

provisions having to do with fraud.

Any consideration of additional regulations for the District of 

Columbia should be made with a recognition tha t the Federal securities acts are administered in Washington and all broker-dealers in 

the District must be registered with the Securities and Exchange 

Commission.

All new issues of securities sold must be registered with the Commission or offered under a regulation A exemption obtained through 

the regional oflice of the Commission, also located in Washington.

Proceedings based upon violations of the Securities Act, which 

include fraud, are instituted by or at the behest of the Securities and 

Exchange Commission.

Thus, the two of the three areas covered in any State securities law 

seem to be amply covered by present laws. The one feature of certain State laws not covered relates to registration and licensing of 

broker-dealers where the requirements in a given State are greater 

than those now in effect for registration with the Securities and Ex ­

change Commission.

It should be recognized th at no salesman registers as such with the 

Commission.

Thus, there would appear to be a need for regulation to set certain 

standards for entry into the business as a dealer or as a registered 

representative which do not exist in the District of Columbia. Such
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 21

ad ditio na l req uir em ents a nd st an da rd s may r ela te to minim um c ap ital, 

pr io r exp erience, edu cation, an d c harac ter.

In connection with the ad minist ratio n of any reg ula tio n, I believe 

th at th e Securities and Ex change Commission should be the adminis ­

te ring power because of its expertness in the field and the presen t 

existence of a reg ion al office which, in my opinion, is com petent to 

hand le the pro blems of registr ation, to hold proceedings on revocations or d enials of r eg istra tio n a nd re lat ed activ ities.

I t wou ld not, however, be difficult to org ani ze a com petent local 

ad minist ratio n if a law were to be adopted fo r the Di str ict of Columbia. In some States which hav e sec uri ties laws, th ei r administ ratio n 

ma y be inadequate if leg islatu res do no t ap pr op riate the necessary 

fun ds.

In othe r words, if an adequate job is to be done here, it will req uire 

money and, above all, exp erienc ed personnel.

I t is hop ed th e SE C stu dy grou p func tio ning un de r House Jo in t 

Resolution 438 will make recom mendations to the Commission and 

Con gress fo r na tio na l stan da rd s fo r en try int o the securities business, 

and thes e stan da rd s wou ld be appli cable to the Distric t of Colu mbia.

In summ ary , I sug gest th at reg ulations fo r sec urities dea lers who 

opera te in the Distric t of Colum bia he adopted and he adminis tered 

by th e Securities and Exc ha ng e Commission.

I rea lize th at this means ad ditio na l work fo r an alr eady hardpressed agency, bu t it wou ld seem th at the Com mission is the ideally 

suite d body wi th t he e xis tin g capabilities t o pe rfo rm th is service.

Mr. Mack. Does t hat con clude yo ur statem ent ?

Mr. F ulto n. That concludes my sta tem ent, M r. Ch airma n.

Mr. Mack. Mr. H em ph ill?

Mr. H em ph ill. Th an k you, Mr. C hairm an.

W ha t effo rt, if any , have been made by our asso ciation to police this 

problem in th e W ash ing ton a rea ?

Mr. F ulton. Th e perce nta ge of mem bers examined by the associatio n in 1960—th e asso ciation as a whole was 33 p ercent.

In d istrict No. 10, and th at is th is d istrict, inclu din g N orth C aro lina, 

Virg inia, M arylan d, and the Distric t of Columbia, 56 pe rcen t; in 

W ashing ton, D.C., 64 perc ent.

In 1961, the compar able figures were assoc iation 31 percent; distr ict 

No. 10, 62 p er ce nt ; an d W ashing ton, D.C., 107 percen t. Sev eral m embers were r eexamined d ur in g the yea r.

So fa r this ye ar we hav e exa mined 13 perce nt of our members in 

W ashing ton, I).C.

Of the 29 new mem bers fr om W ashing ton, D.C ., in 1960, 20 had been 

examin ed by Ap ril 5, 1961. On the ave rage, the 20 were examined 

4!/£ mo nth s af te r beco ming mem bers. But this figure ran ges from 2 

mo nth s to 11 months.

Of the 27 new mem bers in W ashing ton, D.C., in 1961, 15 had been 

examin ed by Decembe r 31, 1961. On the average, the 15 members 

were exa mined wi thin 5 m onths fro m the date of membership. Th is 

figu re r ang es from 1 to 6 months .

Of the 10 new m embers fro m W ashing ton, D.C., in 1962, 3 h ad been 

examin ed by Apr il 30, 1961. These three mem bers were exa min ed 

wi thin 1 to 3 mo nth s of me mbership.

84366— 62 4
22 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

Ex am ina tio ns are assigned selectively, based on the secre tar y’s 

knowledge of the m embers’ typ e and business activity.

Now, as to comp laints whi ch came about as a resu lt of thes e exam ina tions, in 1960, d istri ct No. 10 rank ed fo ur th in total numb er of 

comp laints tiled.

In 1961, d ist ric t 10 ran ked fo ur th , again . Th e firs t four, distr ict 

12, New York, distr ict 7, d istrict 8, th e Middle West , an d di stric t 10, 

this d ist ric t 30.

As of A pr il 30,1962, Di str ict 10 ra nk ed fifth.

In Wa shington, I ).C., we filed in 1960, 25 comp lai nts as of the pe rcentage of members examined. In 1961, 18.3 perce nt, an d in 1962, so 

fa r, 7.7 perce nt.

From anoth er view, in 1960—thi s is the perc entag e of mem bers, the 

first one, and the next one is the perce nt of exam ina tio ns—21.6, 17.3, 

and th is year, 24.2.

In 1960, 1961, and 1962, we exp elled 29 mem bers of the asso ciation 

from the D ist ric t of Columbia. La st week, the d istrict com mittee met 

and four were expelled by action of the di strict com mittee, which action, of course, will not become final because the y have the right to 

app eal to the boa rd of governo rs an d fro m there to the SE C.

So I t hink it is ri gh t to say, it is f ai r t o say, that q uite a b it has been 

done in the w ay of examinations o f these mem bers by the asso ciation, 

and there have been resulting comp lai nts and decisions, resu lting in 

pr et ty dr astic pen altie s.

Mr. H em ph ill. I f 1 of those 29 th at yo ur associatio n suspended 

set up his own shop and b ega n do ing b usin ess in securities, as I un de rsta nd it, the most he could be fined is $300; is th at cor rec t? W ha t 

could be do ne to h im ?

Mr. Whit e. I thi nk , Congressman, th at $300 figure relates to the 

pe na lty section of th e Distri ct of Co lum bia law s. Our penalties range 

fro m censure to a fine of $1,000 pe r vio lation , to a suspension fro m 

membership, and to an expulsion.

I f y ou r question relates to th e effect on people in a firm, when we 

expel a firm, if we nam e th e principa ls, officers, and salesmen impli cated in the vio lati ons, we norm all y revo ke th ei r registr ation, if 

th at pe na lty fits the dereliction.

If we nam e the m as a cause of the expulsion, un de r ou r bylaws, 

artic le I, section 2 of the bylaws , they cannot come bac k into the 

busin ess as principa ls or as salesme n unless they go thro ug h a mem ­

ber shi p con tinuan ce procedure set up un de r the law and are fina lly 

appro ved by the Securities a nd Ex change C omm ission.

Mr. H em ph ill . T hat is wha t I wa nte d to know.

Th an k you very much .

Mr. Mack. Mr. Fu lto n, wha t wou ld be t he sit ua tio n if you and the 

Distri ct gov ern me nt recommend th at the Securities and Ex change 

Commission have this res ponsibi lity, an d the Securities and Ex change 

Commission feels th at the D istri ct gov ern me nt shou ld ha ve this responsib ility ?

Does th at mea n th at we should no t change the law in eit he r dir ectio n?
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 23

Air. F ulton. No, Air. Alack; I do not think so. I think the law 

should be changed and I think it can be changed without much difficulty, to give the Commission the power, as Air. Cary stated on page 

12 as one of his alternatives.

The expanded jurisdictio n could be affected by an amendment to 

section 15 of the Securities and Exchange Act of 1934, which would 

provide rulemaking power in the Commission with respect to brokerdealers doing business in the District of Columbia.

That is our position exactly expressed by Air. Cary in his No. 2 

alternative. We think it is the thing to do.

Air. AIack. Is there need for additional legislation besides the 

amendment to section 15 of the Securities and Exchange Commission Act ?

Air. Fulton. In my opinion, no.

Air. AIack. Do you feel th at if the amendment is adopted, the Commission will then be in a position to fully protect the investors in the 

District of Columbia ?

Air. F ulton. I think if an appropriate amendment is adopted, that 

the Commission could act as a “blue sky” administrator and would 

accomplish th at which could be accomplished by an independent administrator, operating under the District of Columbia law.

Air. AIack. On page 1, you sta ted :

I have stated in the past that the D istric t of Columbia would benefit from addition al regulations, provided they are prop erly administered.

Were you then refe rring to the amendment to the Securities and 

Exchange Act?

Air. F ulton. The inference is “Yes.” That is correct.

Air. AIack. AVere you refe rring to the Securities and Exchange 

Commission when you mentioned, “provided they are properly 

administered” ?

Air. F ulton. Yes, because I think the Securities and Exchange 

Commission could properly administer the law.

Air. AIack. You think that they would?

Air. F ulton. I think they would, yes.

Air. AIack. Were you implying that if the District government 

had the same authority they might not properly administer it?

Air. F ulton. No, I am simply saying they do not have the 

experience.

Air. AIack. If the Congress decided not to amend the Securities 

and Exchange Act to give them this rulemaking authority, then 

would you favor some type of legislation to provide for a “blue 

sky” law here for the District of Columbia?

Air. F ulton. Yes, if Congress decided not to give the Commission 

that power.

Air. AIack. Are you in a position to state whether you have a 

similar problem in Delaware and Nevada?

Air. Fulton. No, we do not have a problem in Delaware, and I 

have no knowledge of a problem in Nevada.

We have very few members in Nevada, and very few in Delaware.

Air. AIack. In other words, you do no t have the volume of business 

in those two States; is that correct ?

Air. F ulton. That is correct.

Air. AIack. I have one f urther question.
24 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

I recall in previous testimony a representative of your group said 

tha t they are obligated to permit anyone or practically anyone to 

become a member of the NASI).

Is that a true statement?

Mr. F ulton. Tha t is correct. There are only certain so-called 

statutory bars which, if they exist, would act to prohibit, or we 

could then refuse to allow tha t person against whom the bars exist 

to become a member of the association.

Mr. Mack. By law?

Mr. F ulton. Yes, sir; by law.

Mr. White. We have certain prohibitions to the entry into business on the p art of a member and of an individual. They are granted 

under section 15(a) of the Securities and Exchange Act of 1934.

'fhose bars are tha t a person where action has been taken against 

him by the Commission, by us, or by a stock exchange, which has 

revoked his license, operates as a permanent bar to membership in 

the association.

There are additional standards. If an individual was found guilty 

of a misdemeanor or a felony in connection with the securities business, or he was found guilty of a misdemeanor or felony in connection with fraudulent conversion, embezzlement, and so forth.

Unless a person falls within those particular areas, he must be admitted to membership under the act under which the association is 

registered.

Mr. Mack. Then, under present law, you have no way of keeping 

out the undesirable members who have been involved in an operation 

similar to the one referred to by the chairman on page 4 of his statement ?

Mr. F ulton. If those people have had their registration revoked by 

the Commission, that acts as a statutory bar.

Mr. Mack. But all their salesmen seem to be free to come over and 

join your association.

Mr. F ulton. Tha t is absolutely correct, unless they have been 

named.

Mr. White. In our actions, Mr. Chairman, we name as many 

individuals who we think are implicated in the alleged violations. If 

we take an action which either revokes their registration or names 

them as a cause of the expulsion, if the final action is expulsion, we 

have a bar, a disqualification under our bylaw’s to prevent their 

reentry.

In the Commission’s actions, if they name a person as a cause of the 

action, tha t operates as a bar, too. As I understood the Chairman of 

the Commission's testimony and that of Mr. Loomis, to be that in some 

cases they do name these people. In others, because of the difficulty 

of proof, they do not.

Air. Mack. Then, it would be more difficult for them to name them 

than for your organization ?

Mr. White. I think tha t is a correct statement.

Mr. F ulton. I think so, yes.

Mr. Mack. Are you familiar with the case to which they referred 

this morning?

Mr. F ulton. Yes, we are familiar with that case.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 25

Mr. Mack. Did the NASD take any action prior to the time that the 

Commission revoked the registration?

Mr. P eters. Yes, sir.

Air. Mack. Did your association make any reference to the salesmen ?

Air. Peters. We revoked the principal officers.

Air. Mack. Rut not any of the representatives?

Air. Peters. Not on tha t particular action, but on subsequent ones 

we did.

Mr. Mack. You did subsequently?

Mr. P eters. Yes, sir.

Mr. Mack. This is with regard to different broker-dealers but not 

to the representatives of this broker-dealer?

Air. P eters. That is correct.

Air. AIack. Air. Keith.

Air. Keith. Thank you, Air. Chairman.

We met with you, Air. Fulton, I think, last summer.

Air. F ulton. That is correct, Air. Keith.

Air. Keiti i. You spent some time with us on the details of an instant which I will identify as the Late Tape incident. Do you recall ?

Air. F ulton. Yes, I remember it now. The incident of a registered 

representative, whose registration had been revoked by us and who 

then appeared in southern California performing the same sort of 

operations as he had performed in Florida, and which were very successful so far as he was concerned.

Mr. K eitii. Yes. In trying to recall the circumstances, this owner 

of the Late Tape, the yacht, put into Los Angeles Harbor and had a 

dinner party for acquaintances and others who were registered brokers, 

and during the course of this dinner par ty one of the friends of the 

owner left the table and completed a phone call and returned and related the substance of the phone call, which pertained to a rather large 

offering of stock that was available.

During an interchange of information there was a lot of enthusiam 

shown by the owner of the boat. The next day, these eight or nine 

dinner guests moved into the market and picked"this stuff up, causing 

the market to rise substantially.

This was the kind of thing which you illustrated could happen 

amongst your membership, and you used it as an illustration of how 

the association was on its toes and alerting its membership to this 

kind of thing so it would not happen again; is th at correct?

Air. Fulton. Air. Keith, the people who became enthusiastic were 

young, somewhat inexperienced, registered representatives of member 

firms of the association, who were induced to put orders in for the 

purchase of this stock through their respective firms, and they did so.

Apparently, the gentleman who had chartered the yacht—we have 

since learned tha t he did not own it,—then unloaded his own securities 

as the market went up as a result of these buying orders.

We have alerted our members to that effect.

Air. Keith. If I remember rightly, you then said he went to San 

Francisco and did the same thing?

Air. F ulton. lie did, tha t is correct. And then he went to France. 

I do not think he is back.

Air. Keith. About how long ago did this take place ?
26 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

Air. F ulton. It took place last year.

Air. Keith. When the committee went out to California, I was 

fascinated by this story. I was asked to luncheon by the board of 

directors of the San Francisco and Los Angeles branches of the AVest 

Coast Exchange, and I asked about this incident. Not a one of them 

could recall having heard of it.

They went out and checked during the luncheon to see if there was 

anybody else that had heard of it. There seemed to be a failure of 

communications in this particular respect.

Air. Fulton. It does not surprise me that the directors of the Pacific 

Coast Stock Exchange did not know of that situation.

Air. Keirii. Is it that they are not members of your association ?

Air. F ulton. Practically all of them, are.

Air. Keith. Was there a failure of communication ?

Air. F ulton. There was no reason to communicate with them because the securities were over-the-counter securities and were not 

securities listed on the Pacific Coast Stock Exchange.

Air. Keith. I thought you said earlier tha t you had advised the 

west coast membership of this?

Air. F ulton. Our own district committee, which is entirely separate from the Pacific Coast Stock Exchange group, and the members 

involved, of course. There was a very complete study made.

All*. Keith. Tha t is all, Air. Chairman.

Air. AIack. Air. Hemphill, have you anything else?

Air. Hemphill. No, Air. Chairman.

Air. AIack. To make it clear, you feel that the amendment to the 

Securities Act would solve the problem here?

Air. F ulton. I happen to believe tha t it w ould ; yes, sir.

Air. AIack. Air. Fulto n, 1 want to thank you for your testimony 

today.

Air. F ulton. Thank you, Air. Chairman.

Air. AIack. Air. Alii ton D. Korman, Assistant Corporation Counsel, 

District of Columbia.

STATEMENT OF MILTON D. KORMAN, PRINCIPAL ASSISTANT CORPORATION COUNSEL, DISTRICT OF COLUMBIA. PRESENT ALSO

FROM THE DISTRICT GOVERNMENT: IRV ING BRYAN, CHIE F,

AND ROBERT F. KNEIP P, ASSISTANT CHIE F, LEGISLATION AND

OPINIONS DIVISION, OFFICE OF THE CORPORATION COUNSEL;

JOSEPH J. ILGE NFRITZ, DIRECTOR OF LICENSES AND INSPECTIONS; AND C. T. NOTTINGHAM, SUPERINTENDENT, LICENSE AND

PERMIT DIVISION, DEPARTMENT OF LICENSES AND INSPECTIONS

Air. Korman. Thank you, Air. Chairman. With me is Air. Kneipp, 

the Assistant Chief of our Legislation and Opinions Division of the 

Office of the Corporation Counsel.

Also with me is the Chief of that Division, Air. Irving Bryan, and 

the Director of the Department of Licenses and Inspections of the 

District, Air. J. J. Ilgenfritz, and the Superintendent of the Division 

of Licenses and Permits of that Department, Air. Nottingham.

Air. AI ack. We are glad to have you with us, gentlemen.

Do you have a statement to present?
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 27

Mr. Korman. No, I do not have a prepared statement, Mr. Chairman. I came at the invitation of the committee to be as helpful as 

I can and to tell you what we have done.

Mr. Mack. Maybe I can sta rt out by asking you whether or not the 

District Commissioners have recommended any type of “blue sky” 

legislation to the Congress?

Mr. Korman. Categorically answering that, s ir: No, they have not.

I might tell you what has been done in the last few months.

Air. Mack. I wanted to also say that the Securities and Exchange 

Commission this morning indicated tha t they felt t hat was the proper 

course.

Air. K orman. I heard the testimony of Air. Cary, the Chairman of 

the Securities and Exchange Commission.

I gathered from his testimony, Air. Chairman, that he thought that 

was one of several ways of approaching this problem, and one which 

he probably favored. But I also gathered from his testimony that they 

would not be adverse to assuming the responsibility if it was the wisdom of the Congress th at they should do so.

Air. Mack. I think that is true. He indicated tha t he would carry 

out the laws that are enacted by the Congress. But 1 also had the 

distinct impression that he was not all enthusiastic about the enactment of such legislation, and that he preferred the enactment of legislation which would establish a “blue sky” law for the District of 

Columbia.

Air. K ORMAN. I think that is what he said, sir. I cannot deny 

that. I believe, however, that he was fearful of certain situations, 

about which I do not think he need have the fears that he anticipates.

One, it seemed to me t hat he was saying tha t the Securities and 

Exchange Commission would thereby be entering a local field, and 

tha t this was something that Federal agencies generally did not do.

I would call his attention, and the committee’s attention, to the fact 

that there are quite a few instances where Federal agencies undertake 

to police and to regulate local situations in the District of Columbia.

One is the Federal Trade Commission, which I believe has a specific section devoted to the enforcement of the laws which they enforce 

in the District of Columbia.

The Comptroller of the Currency, for instance, has control of the 

local banks, in addition to his national duties. The Bureau of Federal Credit Unions, which is pa rt of the Department of Health, Education, and Welfare, has, by law, supervision over the local credit 

unions in the D istrict of Columbia, not only those that operate under 

the Federal credit union law, but also those tha t operate under the 

District of Columbia credit union law.

Air. Mack. I imagine if Air. Cary were here, he might want time 

for rebuttal. I am sure he would mention such things as your Public 

Utilities Commission that you operate in the District.

A on have dual jurisdiction in several areas, dual agencies in several 

areas, with the Federal agencies, wherein you have the jurisdiction 

over the District of Columbia.

Air. Korman. I do not understand how the Public Utilities Commission here would conflict with any Federal regulation.
28 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

Mr. M ack. We have an In te rs ta te Comm erce Commission which 

has sim ila r responsibilitie s n ationwide, a nd you have t he Commission , 

which has the res ponsibility wi thin the Distri ct of Colum bia, such 

as the Ill inois Commerce Comm ission has.

Some St ates refer to them as railr oa d comm issions and in oth er 

States they a re utility commissions.

Mr. Korman. We, of course, do not attempt locally to reg ula te 

in terstate commerce. Tha t was a purely local th in g in the beg inning , 

fo ra local concern.

I am not sayin g th at it is impossible.

Mr. Mack. You do not have the au thor ity to reg ulate interst ate 

comm erce bu t you do have the au thority to reg ulate in tras ta te commerce ?

Mr. K orman. Yes, sir.

Mr. Mack. W he ther the y hav e done a good job or not, th at is 

what the y ha ve trie d to do.

Mr. Korman. 1 am not sayin g that it could not be done, bu t wh at 

I was po intin g out was th at there are instances of Fe de ral agencies 

regu latin g in the Distri ct of Columbia, the local con ditions.

Mr. Mack. Let me ask th is: Ha s the Commission giv en any consid erati on to the pos sibility of reco mmending a “blue sky” law for 

the Di str ict ?

Air. K orman. My u nd ersta nd ing of the wishes of th e Bo ard of Com ­

mis sioners of the Di str ict are these: Th at subsequent to the series 

of art icl es by Miss Otten berg, which are generally referre d to as the 

“I nv estors Bew are” series, and which have been pu t out in pa mp hlet 

form , the Commissioners directed the Office of the C orpo ratio n Counsel 

to inv est iga te to see wh eth er or not the re was pow er in the Com mission ers to tak e any actio n wi thou t legisla tion , and to repo rt to them 

on how to take action to correct some of the con dition s and situatio ns 

describ ed in th is series of ar ticles.

If they have not been m ade a pa rt of the reco rd, I wou ld offer them, 

Mr. Ch airma n, the a rticle s th at were the predica te fo r this.

(A repr int of “Investo rs Be wa re” may be fou nd on p. 49.)

Mr. K orman. T o do something ab out t ha t, we sum moned—well, n ot 

summ oned, b ut requ ested—t o come to our office representat ives of var ious gro ups that we th ou gh t migh t be h elp ful to us, an d as a res ult, we 

hav e had several mee ting s with, as best 1 can recall, these groups re pre se nt ed : The Better Busine ss Bu rea u of the D istric t of Colum bia ; 

the Nation al Asso ciation of Secur itie s De ale rs; t he W ash ing ton , D.C., 

Sec urit ies De aler s & Trad er s A ssoc iat ion ; the Se curities an d Ex change 

Commission—Mr. Loom is and, at an othe r tim e, M r. Lesli of t ha t Com ­

mission attend ed our meetings.

Inc ide nta lly , Mr. Peter s, who was here th is morning with Mr. 

Fu lto n, attended several of ou r meetin gs on be ha lf of the Na tional 

Ass ociatio n of Secur itie s Dealers.

Also, the Su pe rin ten dent of ou r Dep artm en t of Licenses and P erm its ; the D irecto r o f th e D ep artm en t of Licenses a nd Inspecti on s; the 

I .S. Atto rney ’s Office of the Di str ict of Colum bia, rep res ented by its 

princ ipal as sistan t; the Metr opoli tan Police De pa rtm en t, repres ent ed 

by a deputy chief and one other ma n; the Investm ent Ba nk ers Asso ­

cia tion of Am erica; and, of course, the Co rporation Counsel, myself 

as princ ipa l ass istant, and several other ass istant s.
SECURITIES REGULATIONS FOR THE DISTRICT OF

Th ere were rep res entat ives of several of the la rg er securi 

ers in the District of Columbia, among them La nd rum 1

Jo hn sto n L emon & Co., and some others.

We discussed t his p roblem at some le ng th a nd a tte mp ted to see

could be done wi thin the fra me wo rk of the au thor ity of the Di str ict 

Com missioners.

I t was th e con sensus of all those who atte nded t he m eeting th at some 

reg ulation was necessa ry to take care of the evils th at ha d been described in this series of articles.

We fo und, and it is ou r belief, that the D ist ric t Com mission ers have 

at present lim ite d au thor ity which might or might not—probably 

would not —solve all the problems.

Th e ex ten t of th eir au thor ity at the prese nt time, as we see it, is to 

req uir e licenses of dea lers or agents o r both, and to possibly pre scr ibe 

some lim ita tio ns on those who might be licensed by pr ov iding th at 

they mu st show some experience, they mu st be able to demo nstra te 

tru stw orthiness by bei ng un de r the tongue of good rep ort, by no t 

ha ving been co nvicted of crime on p rio r occasions—ce rta in lim ita tio ns 

of that sort.

Th is migh t, by ha ving them screened by ou r police de pa rtm en t 

before licensing, whi ch might be anoth er proviso , screen out some of 

the people th at have been en terin g the business here and doing some 

of th e tili ngs th at have been describ ed in thes e articles.

We can not be sure th at it will tak e care of all the situ ations.

I t was indic ate d th at p robably the most im po rta nt thi ng th at sho uld 

be done was to hav e those who wante d to en ter the business eit he r 

show t hat they ha d been engag ed in it else whe re and had not been in 

difficulty—t hat is to show experience in the business for a certa in 

perio d of time—or th at the y should pass an exam ina tion in orde r to 

be licensed.

The Di str ict of Columbia has no fac ilitie s fo r giving such an exam inati on or gr ad in g it. Indeed, we have no t the exp ertise in ou r 

organizatio n to do these sorts of thi ngs. We would have to hir e 

people fo r tha t.

Th e Na tio nal Ass ociatio n of Securiti es De alers offered to conduct 

such ex am ina tions an d grad e t hem f or us, but un de r the law we cannot 

accept th ei r services gr atis, and we do not have fund s to pay them 

with. We wou ld have to have au thor ity fro m Congress to do (ha t.

A ft er rev iew ing the sit ua tio n, and Mr. Kn eipp ha ving prep ared a 

very rou gh d ra ft fo r discussion purposes only of wha t migh t be called 

a lim ited “blue skv" law for the Dist ric t of Columbia, ha ving tak en the 

Unifo rm Securiti es Ac t t ha t was mentio ned here ea rli er t his mo rning, 

chan gin g it in some respects to apply to the District—and I have fo r 

the com mittee some of the dr af ts th at went out, together with ou r 

letter of in vit ati on t hat went to these peo ple I mentio ned to come to the 

meetin g, o r come to one of ou r m eetings—we have discussed th at at the 

meetin gs and have c onclude d th at to do th is w ould, of course, require 

leg islation, and th e settin g u p of a s epara te depa rtm en t in the D ist ric t, 

or a new div isio n in our Dep artm en t of Occup ations and Pro fessions, 

whi ch is a separate De pa rtm en t from the Licen sin g De partm ent.
30 SECU RITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA

(T he docum ent ref erred to f ollows:)

Gove rnment of th e Dist ric t of Col um bia ,

Off ic e of th e Corporation Cou ns el,

Washington, D.C., April 2',, 1962.

Dear Mr. --------- : I att ach th e fi rs t d ra ft of prop osed re gula tion s go ve rning

pe rs on s en ga ge d in th e bu sine ss of de alin g in se cu rities , pro hib itin g fr au d u le n t 

pra ct ic es in re la tion th er et o, an d re qu ir in g th e lic en sing of br ok er -d ea le rs , 

ag en ts , an d in ve stm en t ad vi se rs . Ple as e no te th a t th is d ra ft has been ad ap te d 

from th e Uniform Sec ur itie s Act, ac co mmod ated to th e del et io n of p a rt I I I of 

su ch ac t, re la ti ng to th e re gis tr ati on of sec ur iti es .

The at ta ched first d ra ft shou ld be co ns id ered as a gr os s ad ap tion of th e U nifo rm Sec ur itie s Act sin ce th e d ra ft co nt ai ns a nu m be r of pr ov isions which th e 

Com miss ione rs, un de r ex is ting law, a re no t au th ori ze d to ad op t. The se pro ­

vi sion s ha ve, howe ver, been includ ed in th e att ached d ra ft fo r pu rp os es of dis ­

cu ss ion, an d fo r det er m in at io n as to w het her an y reco m m en da tion sh ou ld be 

m ad e to th e Co mm iss ione rs th a t th ey sp on so r le gis la tion auth ori zin g th em to 

adopt som e o r a ll of su ch pr ov isions .

I am ha vi ng a mee tin g in my office, roo m 329, D is tr ic t Build ing, 14tl i and E 

S tr eets N W , a t 2 :3 0 p.m. on Mon day, A pr il 30, 1962, to di sc us s th e att ached 

pr op os ed re gu la tion s. I wo uld ver y mu ch aa ppre cia te it yo u co uld be pr es en t. 

If yo u find you will be ab le to att en d th is mee tin g, pl ea se bri ng w ith you th e 

att ach ed m at er ia l.

Si nc erely yo urs,

Che st er H. Gray, 

Co rp or ation Co unsel,

D is tr ic t o f Co lum bia .

D RA FT NO. 1, A PR IL 20, 1962

(U ni fo rm Sec ur itie s Act adapte d as D is tr ic t of Colum bia lic en sing re gu la tions 

aft e r acco mmod ati on of su ch act to th e de le tion of P a rt I I I : R egis tr at io n of 

se cu ri ties )

S u b je c t: Reg ul at io ns go ve rn in g pe rs on s en ga ge d in th e bu sine ss of de al in g in 

se cu rities , pro hi bi ting fr au d u le n t pr ac tice s in re la ti on th er et o, an d re quir in g 

th e lic en sin g of br ok er -d ea le rs , ag en ts, an d in ve st m en t ad vi se rs.

Ordered , T hat th e fo llo wing re gula tions go ve rn in g pe rs on s en ga ge d in th e 

bu sine ss of de alin g in se cu ri ties , pro hi bi ting fr au d u le n t pr ac tice s in re la tion 

th er et o, an d re qu ir in g th e lice ns in g of br ok er -d ea le rs , ag en ts, an d in ve st m en t 

ad vis er s in th e D is tr ic t of Co lumbia, are he re by ad op te d an d pr om ul ga te d.

I ntroduction

Section 1. Scope.—T he se re gula tions to re gula te th e acti vit ie s of pe rs on s en ­

ga ging in th e bu sine ss of dea ling in se cu ri ties , to pro hib it fr au d u le n t pra ct ic es 

in re la tion th er eto, and to re quir e th e lic en sing of br ok er -d ea le rs , ag en ts, an d 

in ve st m en t ad vise rs, are ad op te d in ac co rd an ce w ith th e au th o ri ty ve sted in th e 

Com miss ione rs of th e D is tr ic t of Co lum bia by se ction 7 of th e Ac t ap pr ov ed 

Ju ly 1, 1962 ( 32 Sta t. 62 2), as am en de d (t it le 47, ch. 23, D.C. Cod e, 1961 ed.) .

P art I — F raud ulent and Oth er P ro hibit ed P ractices

Sec. 101. Sales and P ur ch as es .—I t sh al l be u nla w fu l fo r an y pe rson lic en sed 

un de r th e auth ori ty of th es e re gu la tion s, in co nn ec tio n w ith th e off er, sale, or 

pu rc ha se of any sec ur ity, d ir ec tly or i ndi re ct ly —

(1 ) to em ploy a ny d evice , sch em e, or a rt ific e to d ef ra ud ;

(2 ) to mak e an y u n tr u e st ate m ent of a m ate ri al fa ct or to om it to st ate 

a m at er ia l fa ct ne ce ss ar y in ord er to mak e th e st at em en ts made, in th e light 

of the ci rc um st an ce s under which th ey are m ad e, not m is le adin g; or

(3) to e ng ag e in an y ac t, pra ct ic e, or c ou rs e of bu sine ss which ope ra te s or 

wo uld o pe ra te a s a fr au d or d ec ei t up on a ny pe rson .

Sec. 102. Advisory Act iv it ie s.— (a ) I t sh al l be unla w fu l fo r an y pe rson licensed un de r th es e re gula tions wh o rece ives any co ns id er at io n fr om anoth er 

pe rson pri m ar ily fo r ad vis in g th e oth er pe rs on as to th e va lu e of se cu ri ties or
SECURITIES REGULATIONS FOR TH E DISTRICT OF COLUMBIA 31

th eir pu rc has e or sa le , w het her th ro ugh th e is su an ce of an al yse s or re port s or 

ot he rw ise—

(1 ) to em ploy an y dev ice , sch em e, or art if ic e to def ra ud th e oth er p e rs o n ; 

or

(2 ) to en ga ge in an y ac t, pr ac tice , or co ur se of b us in es s which oper at es o r 

wo uld o per at e as a fr aud o r de ce it up on th e oth er perso n.

(b ) I t sh al l be unla w fu l fo r an y in ves tm en t ad vis er to ente r into , ex tend , or 

rene w an y in ve st m en t ad vis or y contr act un less it pr ov id es in w riting—

(1 ) th a t th e in ves tm en t ad vis er sh al l not be co mpe ns ated on th e bas is of 

a sh are of capit al gai ns up on or capit al ap pre ci at io n of th e fu nds or an y 

lio rtio n of fu nds o f th e c li e n t;

(2 ) th a t no as si gn m en t of th e co n tr act may be m ad e by th e in ves tm en t 

ad vi se r w ithout th e co ns en t of th e oth er p art y to th e co n tr act; an d

(3 ) th a t th e in ves tm en t ad vi se r, if a p art ners hip , sh al l no tify th e oth er 

part y to th e co n tr act of an y ch an ge in th e mem be rshi p of th e part ners hip 

w ithi n a re as on ab le tim e a ft e r th e ch an ge .

Claus e (1 ) do es no t pro hib it an in ve st m en t ad vi so ry co nt ra ct which prov id es 

fo r co m pe ns atio n ba se d up on th e to ta l va lu e of a fund av er ag ed ov er a de fin ite 

pe riod , or as of de fini te date s or ta ken as of a de fin ite da te . “A ssig nm en t”, as 

us ed in cl au se (2 ), in cl ud es an y dir ect or in dir ect tr a n sfe r or hy po th ec at io n of 

an in ves tm en t ad vi so ry contr act by th e as si gnor or of a co nt ro llin g blo ck of 

th e as si gn or’s outs ta ndin g vo ting se cu ri ties by a se cu ri ty ho ld er of th e as si gnor; 

bu t, if th e in ve st m en t advis er is a part ners hip , no as si gn m en t of an in ve st m en t 

ad vi so ry contr act is co ns id er ed to re su lt from th e dea th or w ithdra w al of a 

m in or ity of th e m em be rs of th e in ves tm en t ad vis er ha vi ng only a m in or ity 

in te re st in th e bu sine ss of th e in ve st m en t ad vi se r, or from th e ad mission to th e 

in ve st m en t ad vis er of on e or more mem be rs wh o, a ft e r ad mission , will be only 

a m in or ity of th e mem be rs an d will ha ve on ly a m in or ity in te re st in th e bu sine ss.

(c ) I t sh al l be unla w fu l fo r an y in ve st m en t ad vi se r to ta ke or ha ve cu stod y 

of any s ec uri ties o r f unds o f a ny c lien t if—

(1 ) an y pr ov isio n of th es e re gu la tions pro hib its su ch cu st ody; or

(2 ) in th e ab senc e of an y such pr ov ision in th es e re gu la tion s, th e in ves tm en t ad vis er fa il s to notify th e d ir ec to r th a t he has or may ha ve cu sto dy .

P art II —Registr ation of Broker-Deal ers, Age nts, an i, I nvest ment Advisers

Sec. 201. Lic en sing Req uire men ts.— (a ) It sh al l be un la w fu l fo r an y pe rson 

to tr a n sa c t bu sine ss in th e D is tr ic t as a bro ke r- de al er or ag en t un less he is 

lic en se d in ac co rd an ce w ith th e re qu irem en ts of th es e re gu la tion s.

(b ) It sh al l be unl aw fu l fo r an y bro ke r- de al er or is su er to em plo y an ag en t 

un less su ch ag en t is lic en sed in a cc or da nc e w ith th es e re gu la tion s. The l icen sing 

o f an ag en t sh al l not be effecti ve duri ng an y pe rio d when he is no t as so ci at ed 

w ith a p art ic u la r br oker -d ea le r lic en sed in ac co rd an ce w ith th es e re gula tion s 

or w ith a p art ic u la r is su er . When an ag en t be gins or te rm in at es a co nn ec tio n 

with a br ok er -d ea le r or issu er , or be gins or te rm in ate s thos e act iv itie s which 

m ak e him an ag en t, th e agent as we ll as th e br oker -d ea le r or is su er sh al l 

pr om ptly no tify th e D irec to r.

(c) It sh al l be un la w fu l fo r an y pe rson to tr an sa ct bu sine ss in the D is tr ic t 

as an in ve st m en t advis er un le ss—

(1 ) he is lic en sed in ac co rd an ce w ith th es e re gula ti ons;

(2 ) he is lic en sed in ac co rd an ce w ith th es e re gula tion s as a bro ke r- de al er 

w ithout th e im po sition of a co nd iti on un de r section 20 4( b) ( 5) ; or

(3 ) hi s on ly cl ie nt s in th e D is tr ic t are in ve stm en t co mpa nies as defin ed 

in th e In ve st m en t Co mpa ny Act of 1040 or in su ra nc e compa nies.

(d ) Li ce ns es issued in ac co rd an ce w ith th e pr ov isions of th es e re gu la tions 

sh all be va lid fo r th e tw elve -m on th perio d be ginn in g on No vemb er 1 of ea ch 

yea r, un le ss rev ok ed , or su sp en de d an d no t re st or ed w ithin such perio d.

Sec. 202. Lic en sing P rocedure.— (a ) A br ok er -d ea ler, ag en t, or in ve stm en t 

ad vis er may ob ta in an in it ia l or re ne w al lic en se by fili ng w ith th e D irec to r 

an ap pl ic at io n to ge th er w ith a co ns en t to serv ice of proc ess purs uant to secti on 

314(g ). Th e ap pl ic at io n sh al l co nt ai n w hat ev er in fo rm at io n th e D irec to r re ­

qu ir es co nc er ni ng su ch m att ers as—

(1 ) th e applica nt's form an d plac e of org an iz at io n:

(2 ) th e appli ca nt's prop os ed m et hrd of do ing busi nes s;

(3 ) th e qu al ific at io ns an d bu sine ss his to ry of th e appli cant; in th e ca se 

of a br ok er d ea le r or in ve st m en t ad vi se r, th e qu al ific at io ns an d bu sine ss 

hi st ory of an y part ner, officer, or direc to r, an y pe rs on occu py ing a si m ilar 

sta tu s or pe rf or m in g si m il ar funr tio ns , or an y pe rson dir ec tly or in dir ec tly
32 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

co nt ro llin g the bro ke r- de al er or in ves tm ent- advis er; an d in th e ca se of an 

in ve st m en t ad vi se r, th e qu al ific at io ns an d bu sine ss hi st ory of an y em pl oy ee ;

(4 ) an y in ju nct io n or adm in is tr ati ve ord er or co nv ict ion of a misde ­

m ea no r in vo lv ing a se cu ri ty or an y as pec t of th e se cu ri ties bu sin ess, an d 

an y co nv ict ion of a fe lo ny ; an d

(5 ) th e appli cant’s fin an cial con ditio n an d hi st ory .

T he D irec to r may re quir e an ap pl ic an t fo r in it ia l lic en se to pu blish an an no un ce ­

m en t o f t he ap plica tion in one or more ne w sp ap er s o f g en er al c ir cu la tion pu bl is he d 

in t he D is tr ic t. If n o den ia l ord er is in eff ect an d no proc ee ding is pe nd ing under 

se ction 204, th e lic en se fo r wh ich a ppl ic at io n has b een m ad e sh al l bec ome effective 

a t noon Nov em ber 1 or th e th ir ti e th da y a ft e r ap pl ic at io n is filed, which ev er 

oc cu rs la te r in any lic en se ye ar . The D irec to r m ay sp ec ify an earl ie r ef fe ctiv e 

dat e, an d he may def er th e effecti ve date unti l noo n of th e th ir ti eth da y a fte r 

th e fili ng of an y am en dm en t. Li ce ns in g of a bro ke r- de al er auto m at ic al ly const it u te s th e lic en sing of an y ag en t wh o is a part n er, offic er or di re ct or, or a 

pe rs on oc cu py ing a si m il ar sta tu s or pe rf orm in g si m il ar fu nc tion s.

(b ) Eve ry ap plica nt fo r in it ia l or re ne w al lic en sing sh al l pa y a fili ng fee o f

$ in th e ca se o f a br ok er -d ea ler, $ in th e c as e of a n ag en t, an d $

in th e ca se o f an in ve stm en t ad vi se r. W he n appl ic at io n is de nied or w ithdra w n, 

th e D irec to r sh al l re ta in $ of th e fee.

(c ) A lic en sed br ok er -d ea le r or in ve st m en t ad vis er may file an ap pl ic at io n 

fo r th e lic en se of a successor, w het her or no t th e su cc esso r is th en in ex is te nc e, 

fo r th e un ex pi re d po rtio n of th e lic en se yea r. Ther e sh al l be no filing fee.

(d ) The D irec to r may re qu ire a minim um ca pit al fo r lic en sing br ok er-dea lers; 

an d in ve stm en t ad vi se rs.

(e ) The D irec to r may re quir e lic en sed br ok er -d ea le rs , ag en ts, an d in ve stm en t 

advis er s to po st su re ty bond s in am oun ts up to $10,000, an d may det er m in e 

th eir co nd iti on s. Any ap pro pri ate de po sit of ca sh or se cu ri ties sh al l be ac ce pted 

in lieu of a ny bond so re qu ired . No bond m ay be re qu ired of an y lic en se e who se 

net ca pital , as defin ed in thes e re gu la tion s, ex ce ed s $25,0(M). Eve ry bond sh all 

pr ov id e fo r su it th er eo n by an y pe rson wh o has a ca us e of ac tion unde r se ction 

310 an d, if th e D irec to r by ru le o r ord er re quir es by an y pe rson wh o has a ca us e 

of ac tion no t ari si ng und er th es e re gu la tion s. Eve ry bon d sh al l pr ov id e th at 

no su it may be m ai nt ai ne d to en fo rc e an y li ab ility on th e bond un le ss br ou gh t 

w ithi n tw o year s a ft e r th e sa le or oth er ac t up on which it is ba sed.

Sec. 203. P os tlice ns ing P ro vision s.— (a ) Eve ry lic en sed br oker -d ea le r an d 

in ves tm en t advis er sh al l mak e an d ke ep such ac co un ts, co rrespo nd en ce , me mo ­

ra nd um s, pa pe rs , boo ks, an d oth er re co rd s as th e D irec to r may re quire. All 

re co rd s so re quir ed sh al l be pr es er ve d fo r th re e yea rs un less th e D irec to r finds 

th a t p art ic u la r ty pe s of reco rd s m us t be ke pt fo r a gre ate r or le ss er tim e th a n 

th re e y ea rs .

(b ) Ever y lic en se d br ok er -d ea le r and in ve stm en t ad vis er sh al l file such 

fina nc ial re port s as may be re qu ired by th es e re gu la tion s.

(c ) If th e in fo rm at io n co nt ai ne d in an y do cu men t filed in ac co rd an ce w ith 

th es e re gula tions is or becom es in ac cura te in an y m ate ri al resp ec t, th e lic ensee 

sh al l pr om pt ly file w ith th e D irec to r a co rr ec te d am en dm en t un le ss no tif icatio n 

of th e co rr ec tion has be en giv en under se ction 201(b ).

(d ) All th e re co rd s re fe rr ed to in su bs ec tio n (a ) are su bje ct a t an y tim e 

or from tim e to tim e to su ch re as on ab le pe rio dic, spec ial, or oth er ex am in at io ns 

by th e D irec to r, w ithi n or w ithou t th e D is tr ic t, as th e D irec to r de em s ne ce ss ar y 

or appro pri ate in th e pu blic in te re st or fo r th e pro te ct io n of in ve stor s. F or th e 

pu rp os e of av oi di ng un ne ce ss ar y du pl ic at io n of ex am in at io ns , th e D irec to r, in ­

so fa r as he de em s it pr ac tica ble in ad m in is te ri ng th is su bs ec tio n, may co op er at e 

w ith th e se cu ri ties adm in is tr ato rs of oth er st at es , th e Sec uri ties an d Exc ha ng e 

Co mm ission , an d an y national se cu ri ties ex ch an ge or nati onal se cu ri ties as so ­

ci at io n re gi st er ed unde r th e Sec urities Exc ha ng e Act of 1934, as am en de d.

Sec. 204. Den ia l, Revocation, S us pe nsi on, Can cel lat ion, and W ith dr aw al 01" 

Lic en sing .— (a ) Th e D irec to r is auth ori ze d to de ny , su sp en d, or revo ke a lic en se 

issu ed un der th e au th o ri ty of th es e re gula tions if he fin ds (1 ) th a t such ac tio n is 

in th e pu blic in te re st an d (2 ) th a t th e ap plica nt or lic en see or. in th e ca se of a 

bro ke r- de al er or in ve st m en t ad vi se r, an y part ner, officer, or dir ec to r, an y perso n, 

oc cu py ing a si m il ar sta tu s or pe rf orm in g si m il ar fu nc tion s, or an y pe rson 

dir ec tly or in di re ct ly co nt ro llin g th e br ok er -d ea le r or in ve st m en t ad vis er—

(A ) ha s filed an ap pl ic at io n fo r lic en sing which as of it s e ffec tiv e da te , o r 

as of an y dat e aft e r filing in th e ca se of an ord er de ny in g eff ec tiv en ess, w as 

inco mplete in an y m ate ri al re sp ec t or co nt ai ne d an y st ate m ent which was, 

in light of th e ci rc um st an ce s und er which it w as m ad e, fa ls e o r misl eadin g, 

w ith r es pe ct to a ny m ate ri al f a c t;
SECU RITIE S REGULATIONS FOR TH E DISTRICT OF COLUMBIA 33

( B ) has w illf ully vio la te d or w illf ul ly fa il ed to c om ply w ith an y pr ov isio n 

of th es e re g u la ti o n s;

(C ) has be en co nv icted, w ithin th e past 10 ye ar s, of an y m isde m ea no r 

in vo lv in g a se curi ty or an y as pec t of th e se cu ri ties bu sin ess, or an y fe lo n y ;

(D ) is perm an en tly or te m pora ri ly en jo in ed by an y co urt of co m pe te nt 

ju ri sd ic ti o n fr om en ga gi ng in or co ntinu in g any co nd uc t or pra ct ic e inv olving 

any a sp ec t o f t he s ecuri ti es bu sine ss ;

(B ) is th e su bje ct of an ord er of th e D irec to r de ny ing, su sp en ding , or 

revo ki ng hi s lic en se as a br oke r- de al er , ag en t, or in ve stm en t a d v is e r;

(F ) is th e su bje ct of an ord er ente re d w ithin th e past five year s by th e 

se cu ri ties ad m in is tr ato r of an y Sta te , or by th e Sec ur itie s an d Exc ha ng e 

Co mmiss ion de ny in g or revo ki ng re gis tr ati on as a br ok er -d ea le r, ag en t, or 

in ve st m en t ad vi se r, or th e su b sta n ti al eq ui val en t of th os e te rm s as defin ed 

in th es e re gul at io ns , or is th e su bje ct of an or der of th e Sec ur itie s an d 

Exc ha ng e Co mmiss ion su sp en di ng or ex pe llin g him from a nati onal se cu ri ­

ti es ex ch an ge or nati onal se cu ri ties as so ci at io n re gi st er ed und er th e Se cu rities Exc ha ng e Ac t of 1934, or is th e su bje ct of a U ni ted S ta te s Post Office 

F ra u d O rd er; but (i ) th e D ir ec to r m ay no t in sti tu te a re vo ca tion or 

su sp en sion pr oc ee di ng under cl au se (F ) mor e th an one yea r fr om th e date 

of th e ord er re lied on, and (i i) he may no t ente r an ord er unde r clau se (F ) 

on th e ba si s of an ord er under a S ta te ac t un le ss th a t ord er w as ba se d 

on fa cts whi ch wou ld curr entl y const it ute a gr ou nd fo r th e ord er unde r 

th is se c ti o n ;

(G) has en ga ge d in di sh one st or uneth ic al pr ac tice s in th e se cu ri ties 

b u sin ess;

(H ) is in so lv en t, eit her in th e sens e th a t his liabil it ie s ex ceed hi s ass et s 

or in th e se ns e th a t he ca nno t m ee t hi s ob liga tion s as th ey m a tu re ; but th e 

D irec to r m ay no t en te r an ord er again st a bro ke r- de al er or in ve st m en t advi se r under th is cl au se w ithout a fin ding of inso lven cy as to th e br ok erdeal er or inv es tm en t a dvis er ; or

(I) is no t qu alifie d on th e ba si s of su ch fa cto rs as tr ai nin g, ex pe rie nc e, 

and kn ow ledg e of th e se cu ri ties bu sine ss ex ce pt as oth er w is e pr ov id ed in 

su bs ec tio n (b ).

The D ir ec to r m ay by ord er de ny , su sp en d, or re vo ke an y lic en se if he find s 

(1 ) th a t th e or der is in th e pu blic in te re st an d (2 ) th a t th e ap pl ic an t or 

lice ns ee —

( J ) has fa il ed re as onab ly to su pe rv ise his ag en ts if he is a br ok er -d ea le r 

or h is em ploy ee s if h e is a n in ves tm en t ad vis er ; or

(K ) has fa il ed to pay th e pro per filing fe e; but th e D irec to r may ente r 

on ly a de ni al ord er under th is clau se , an d sh al l vac at e an y su ch ord er whe n 

th e defic ien cy has be en co rrec ted.

Th e D irec to r may no t in sti tu te a su sp en sion or revo ca tio n pr oc ee di ng on th e 

bas is of a fa ct or tr an sa cti o n kn ow n to him whe n lic en sing be ca me effecti ve 

un le ss th e pr oc ee di ng is in sti tu te d w ithin th e next th ir ty days.

(b ) The follo wing pr ov is io ns go ve rn th e ap pl ic at io n of se ction 204(a ) (2 ) (I ) :

(1 ) The D ir ec to r m ay not ente r an ord er again st a bro ke r- de al er on th e ba sis 

of th e lack of qu al ific at io n of any pe rs on oth er th an (A ) th e bro ke r- de al er hi m ­

se lf if he is an in di vi dua l or (B ) an agent, of th e br ok er -d ea ler.

(2 ) The D irec to r may not ente r an ord er again st an in ve st m en t ad vis er on 

th e b as is of t he la ck o f qua lifica tion of a ny p er so n oth er t h an (A ) th e in ve st m en t 

ad vis er h im se lf i f he is a n in div id ual or (B ) an y oth er pe rson wh o re pre se nts th e 

in ve st m en t ad vis er in do ing an y of th e ac ts whi ch mak e him an in ves tm en t 

ad vise r.

(3 ) Th e D irec to r may not ente r an ord er so lely on th e ba sis of lack of ex ­

pe rien ce if th e ap pli cant or lic en se e is qu alified by tr ain in g or kn ow led ge , or 

bo th.

(4 ) The D irec to r sh al l co ns id er th a t an agen t wh o will work un der th e su per ­

vi sion of a lic en sed br oker -d ea le r ne ed not ha ve th e same qu al ific at io ns as a 

br ok er -d ea le r.

(5 ) Th e D irec to r sh al l co ns id er th a t an in ves tm en t ad vi se r is not nec es sa rily 

qu alifi ed solel y on th e ba si s of ex pe rien ce as a bro ke r- de al er or ag en t. W he n 

he fin ds th a t an ap plica nt fo r in it ia l or re new al lic en sing as a bro ke r- de al er is 

no t qu alifi ed as an in ves tm en t ad vis er , he m ay by ord er co nd iti on th e appli cant’s 

lic en sing as a br ok er -d ea le r up on his not tr an sa cti n g bu sine ss in th e D is tr ic t as 

an inv es tm en t a dv is er .
34 SECU RITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

(6) The Director shall provide for an examination, which may be writte n 

or oral or both, to he taken by any clas s of or all applic ants, as well as jiersons 

who represent or will represent an investme nt adviser in doing any of the acts 

which make him an investment adviser.

(c) The Dire ctor may by order summarily postpone or suspend licensing 

pending final determination of any proceeding under this section. Upon the 

entry of the order, the Direc tor sha ll promptly notify the applican t or licensee, 

as well as the employer or prospective employer if the applic ant or licensee is an 

agent, that it has been entered and of the reasons therefor, and that within 

fifteen days after the receipt of a writte n request, the matter will he set down 

for hearing. If no hearin g is requested, and none is ordered by the Dire ctor , 

the order will remain in effect, u ntil it is modified or vacated by the Director. If 

a hearing is requested or ordered, the Director, afte r notice of and opportunity 

for hearing, may modify or vaca te the order or extend it unt il final determination.

(d) If the Direc tor finds that any licensee or applic ant for licens ing is no 

longer in existence or has ceased to do business as a broker-dealer, agent, or investment adviser, or is subject to an adjud icatio n of mental incompetence or to 

the control of a committee, conservator, or guard ian, or cannot he located after 

reasonable search, the Dire ctor may by order cancel the license or applica tion 

for license.

(e) With draw al from licensing as a broker-dealer, agent, or an investment 

advis er becomes effective thirty days afte r receipt of an appli catio n to withdraw 

or with in such shorter period of time as the Direc tor may determine, unless a 

revocation or suspension proceeding is pending when t he appli catio n is filed or a 

proceeding to revoke or suspend or to impose conditions upon the with draw al is 

insti tuted within thir ty days aft er the application is filed. I f a proceeding is 

pending or institu ted, withdraw al becomes effective at such time and upon such 

conditions as the Dire ctor by order determines. I f no proceeding is pending on 

instituted and withdrawal auto maticall y becomes effective, the Direc tor may 

nevertheless institute a revocation or suspension proceeding under section 

204(a) (2) (B) within one year aft er withdraw al became effective and enter a 

revocation or suspension order as of the last date on which licensing was effect ive.

(f) No order may be entered under any part of this section except the first 

sentence of subsection (c) withou t (1) appropriate prior notice to the appli cant 

or licensee (as well as the employer or prospective employer if the applic ant 

or licensee is an age nt), (2) opportunity for hearin g, and (3) writte n findings 

of f ac t and conclusions o f law.

Part I I I —G en eral Prov isions

Sec. 301. Def in it io ns.—When used in these regula tions, unless the context 

otherwise req uire s:

“A gen t” means any indi vidual other than a broker-dealer who represents a 

broker-dealer or issuer (excep t as provided in section 302) in effecting or attempting to effect purchases or sales of securitie s. A partner, officer, or direc tor 

of a broker-dealer or issuer, or a person occupying a sim ilar statu s or perfor ming similar functions, is an agen t only if he otherwise conies within this 

definition.

“Broker -dealer” means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. “Broke rdealer” does not include (1) an agent, (2) an issuer, (3) a bank, savings institu ­

tion, or trust company, or (4) a person who has no place of business in the Di stric t if (A) he effects trans actions in the Dis tric t exclusively with or through 

(i) the issuers of securities involved in the tran sacti ons, (ii) other brokerdealers, or (iii ) banks, savings instit ution s, trust companies, i nsurance companies, 

investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutio ns or insti tutio nal buyers, whether actin g for themselves or as trustees, or (B) durin g any period of 

twelve consecutive months he does not direct more than fifteen offers to sell or 

buy into the Dis trict in any manner to persons other than those specified in 

clause (A ), whether or not the offeror or any of the offerees is then present in 

the D istric t.

“Commissioners” means the Commissioners of the Distr ict of Colum bia, or 

their designated agen t.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 35

“D ir ec to r” mea ns th e D irec to r, D ep art m ent of Li ce nses an d In sp ec tio ns of th e 

D is tr ic t of Colum bia , or h is d es ig na te d ag en t.

“D is tr ic t” mea ns t he D is tr ic t of C olum bia.

“F ra u d ”, “d ec ei t”, an d “d efr au d ” are n ot li m ited to comm on -la w de ce it.

“G uara nte ed” m ea ns g uara nte ed as to pa ym en t of pr in ci pa l, in te re st , or 

divi de nd s.

“In ve st m en t ad vis er” m ea ns an y pe rs on who, fo r co mpe ns ation, en ga ge s in th e 

bu sine ss of ad vi si ng ot he rs , eit h er dir ec tly or th ro ugh pu bl ic at io ns or w riting s, 

as to th e va lu e of se cu ri ties or as to th e ad vis ab ility of in ve stin g in, pu rc ha sing , 

or se llin g se cu rities , or wh o, fo r co m pe ns atio n an d as a p a rt of a re gula r bu siness, issu es or pr om ul ga te s an aly se s or re port s co nc er ni ng se cu rities . “I nves tm en t ad vis er” does not in cl ud e (1 ) a ba nk , sa vi ng s in st it uti on, or tr u s t com ­

p an y ; (2 ) a la w ye r, ac co unta nt, en gi ne er , or te acher who se pe rf or m an ce of 

th es e se rv ices is so lely in ci den ta l to th e pra ct ic e of hi s pr of es si on; (3 ) a brok erde al er who se pe rf or m an ce of th es e se rv ices is soleljT in ci den ta l to th e co nd uc t 

of hi s bu sine ss as a bro ker -d ea le r and who rece ives no sp ec ia l co mpe ns atio n fo r 

th em ; (4 ) a pu bl is he r of any bo na tid e ne w sp ap er , ne ws mag az ine, or bu sine ss 

or fina nc ial pu bl ic at io n of gen er al , re gula r, and pai d cir cula ti on; (5 ) a pe rson 

who se ad vice , an al ys es , or re port s re la te on ly to se cu ri ties ex em pt ed by section 3 0 2 (a )(1 ) ; (0 ) a pe rs on wh o has no pl ac e of bu sine ss in th e D is tr ic t if 

(A ) hi s on ly cl ie nts in th e D is tr ic t are oth er in ve st m en t ad vi se rs , brok erde al er s, ba nk s, sa vi ng s in st it uti ons, tr u st compa nies, in su ra nce co mpa nies, in ­

ves tm en t co mpa ni es as defin ed in th e In ves tm en t Com pa ny Ac t of 1940, pe nsion 

or pr ofit-sh ar in g tr u st s, or oth er fina nc ia l in st it uti ons or in st it uti onal bu ye rs, 

w heth er act in g f or them se lv es or as tr ust ees, or (B ) duri ng an y pe riod of tw elve 

co ns ec ut ive m on th s he do es not dir ect bu sine ss co m m un icat ions in to th e D istr ic t in an y m an ner to mor e th an five cl ie nt s oth er th an th os e spe cified in clau se 

(A ), w heth er or no t he or any of th e pe rs on s to wh om th e co mm un ications are 

di re ct ed is th en pr es en t in th e D is tr ic t; or (7 ) su ch oth er pe rs on s as th e D irec ­

to r sh al l find a re no t w ithin th e in te n t of th is para gra ph.

“Is su er” m ea ns an y pe rs on who issu es or pr op os es to issu e an y se cu rity , ex ­

ce pt th a t (1 ) w ith re sp ec t to cert if ic at es of de po sit, vo tin g tr u st ce rtificates , 

or coll ate ra l tr u st ce rtific at es , or w ith re sp ec t to ce rtif ic at es of in te re st or 

sh are s in an un in co rp ora te d in ves tm en t tr u st no t hav in g a bo ar d of dir ec to rs 

or pe rs on s pe rf or m in g si m il ar fu nc tions or of th e fixe d, re st ri cte d m an ag emen t, or u n it type , th e te rm “issu er” m ea ns th e pe rs on or pe rson s pe rf or m in g 

th e acts an d as su m in g th e duti es of dep os itor or m an ag er purs uant to th e 

pr ov isio ns of th e tr u s t or o th er ag re em en t or in st ru m ent unde r which th e 

se cu ri ty is is su ed; an d (2 ) w ith re sp ec t to ce rtific at es of in te re st or part ic ip ation in oil, ga s, or m in in g ti tl es or leas es or in pa ym en ts ou t of pr od uc tion 

und er su ch t it le s or lea ses, th ere is n ot c on side re d to b e a ny “is su er” .

“N et ca p it al” mea ns * * *.

(T o be sup pl ied if nec es sa ry .)

“P er so n” m ea ns an in div id ual , a co rp or at io n, a part ners hip , an as so ci atio n, a jo in t stoc k co mpa ny , a tr u s t w he re th e in te re st s of th e be ne ficiar ies 

are ev iden ce d by a se cu rity , an unin co rp ora te d or ga ni za tion , a go ve rnmen t, o r 

a po litica l s ub di vi sion o f a g ov er nm en t.

“Sa le ” or “s el l” in cl ud es ev er y contr act of sa le of, co ntr act to sel l, or di spo sitio n of, a se cu ri ty o r in te re st in a se cu ri ty fo r v a lu e ; an d “o ffer” or “offe r 

to se ll” in cl ud es ev ery att em p t or offer to disp os e of, or so lici ta tion of an offer 

to buy, a se cu ri ty or in te re st in a se curi ty fo r va lue. Any se cu ri ty giv en or delive re d w ith , or as a bo nu s on ac co un t of, an y pu rc ha se of se cu ri ti es or an y oth er 

th in g is co ns id er ed to const it ute p a rt of th e su bj ec t of th e pur ch as e an d to ha ve 

be en offered an d sold fo r va lue. A purp ort ed gi ft of as se ss ab le stoc k is con ­

si de re d to invo lve an off er and sa le. Eve ry sa le or off er of a w a rr a n t or ri ght 

to pu rc has e o r su bs cr ib e to an o th er se cu ri ty of t he sam e or anoth er issu er , as well 

as ev ery sa le or off er of a se curi ty whi ch gives th e hol de r a pre se nt or fu tu re 

ri ght or pr iv ileg e to co nv er t in to an o th er se cu rity of th e sa m e or anoth er is su er , 

is co ns id er ed to in clud e an offer of th e oth er se cu rity . T he te rm s her ei n defin ed 

do not in cl ud e (A ) an y bo na fide pled ge or lo an; (B ) an y stoc k divi de nd , 

w heth er th e co rp or at io n d is tr ib u ti n g th e divi de nd is th e is su er of th e stoc k or 

no t, if no th in g of va lu e is give n by st oc kh ol de rs fo r th e di vi de nd oth er th en the 

su rr en d er of a ri ght to a ca sh o r pro pert y di vi de nd whe n ea ch st oc kh ol de r may 

elec t to ta k e th e divi de nd in ca sh or pro per ty or in st ock: (C ) an y act inciden t to a clas s vo te by st oc kh ol de rs , p u rs u an t to th e ce rtific at e of in co rp or at io n 

or th e ap pl ic ab le co rp or at io n st atu te , on a m er ge r, co ns ol id at io n, reclas sific a-
36 SECU RITIES REG ULA TION S FOR THE DIS TRICT OF COLUMBIA

tion of se cu ri ties , or sa le of corp ora te ass ets in co ns id er at io n of th e is su an ce 

of se cu ri ties of anoth er co rp o ra ti o n ; or (I )) an y act in ci de nt to a ju dic ia lly 

ap pr ov ed re org an iz at io n in which a se cu ri ty is issu ed in ex ch an ge fo r one or 

mor e outs ta ndin g se cu rities , cla im s, or pro per ty in te re st s, or part ly in su ch ex ­

ch an ge a nd p art ly f or ca sh .

“Sec ur itie s A ct of 1933” , “S ec ur itie s Exc ha ng e Act of 1934” , “P ubl ic U tility 

Hol di ng Co mpa ny Ac t of 1935” , an d "I nves tm en t Co mp any Ac t o f 1940” mea n 

th e F ed er al sta tu te s o f th os e na mes as am en de d be fore or aft e r th e effective dat e 

of t he se re gu la tion s.

“Sec uri ty ” m ea ns an y note ; st ock ; tr easu ry st oc k; bo nd ; debentu re ; ev iden ce 

of in debte dness ; ce rt ific at e of in te re st or par tici pat io n in an y pro fi t- sh ar in g 

ag re em en t; coll ate ra l- tr ust cert if ic ate ; pre or ga ni za tion ce rtific at e or su bsc ripti o n ; tr an sf era b le sh are ; in ve st m en t co n tr act; vo ting- tr ust cert if ic ate ; ce rtif icat e of de po sit fo r a se c u rit y ; ce rtific at e of in te re st or part ic ip ati on in an oil, 

ga s, or m in ing ti tl e or le as e or in pa ym en ts ou t of pr od uc tio n under su ch a ti tl e 

or le a se ; or, in ge ne ra l, an y in te re st or in st ru m en t comm on ly kn ow n as a 

“s ec uri ty ”, or an y ce rtific at e of in te re st or part ic ip ati on in , te m pora ry or in ­

te ri m ce rt if ic at e fo r, re ce ip t fo r guara nte e of, or w arr an t or ri g h t to su bs cib e 

to or pu rc ha se , an y of th e forego ing. “Sec ur ity” does no t in cl ud e an y in su ra nce 

or en do w m en t polic y or annuit y co ntr act un de r wh ich an in su ra nce co mpa ny 

prom ises to pa y [ a fixe d sum o f] mo ney ei th er in a lum p sum or pe riod ic al ly 

fo r l ife or fo r som e o th er sp ecified peri od .

“ S ta te ” m ea ns an y S ta te or po ssession of th e United Sta te s, and P uert o Rico.

Sec. 302. E xe mpt ions .— (a ) Age nts or is su er s w ith re sp ec t to th e follo wing 

se curi ti es a re ex em pted from se ct ions 30 1( b) an d 303:

(1 ) An y se cu ri ty (i nc lu di ng a re ve nu e ob lig ation) issu ed or guar ante ed by 

th e U ni te d S ta te s, an y Sta te , an y politica l su bd ivisi on of a Sta te , or an y ag en cy 

or corp ora te or oth er in st ru m enta li ty of one or mo re of th e fo re g o in g ; or an y 

ce rt if ic at e of d ep os it fo r an y of th e fo re goin g;

(2 ) An y se cu ri ty issued or guar an te ed by Can ad a, an y C an ad ia n prov ince, 

any politica l su bd ivision of an y su ch pro vin ce, an y ag ency or corp ora te or 

oth er in st ru m en ta li ty of one or more of th e forego ing, or an y oth er fo re ign 

go ve rn m en t w ith wh ich th e U ni ted S ta te s cu rr en tly m ai nta in s dip lo m at ic re la ­

tio ns , if th e s ec ur ity i s recogn ize d as a va lid ob lig ation by th e iss uer or g u ara n to r ;

(3 ) An y se cu rity issu ed by an d re pr es en ting an in te re st in or a de bt of, or 

guara nte es by, an y ba nk or ga ni ze d un de r th e law s of th e U ni te d Sta te s, or 

an y ba nk , sa vi ng s in st itution, or tr u st comp any or ga ni ze d an d su pe rv ised un de r 

th e la w s of an y S ta te ;

(4 ) An y co mmercial pa per wh ich ari se s ou t of a cu rr en t tr an sa cti o n or th e 

pr oc ee ds of which ha ve bee n or are to be used fo r cu rr en t tr ansa cti ons, an d 

which ev iden ce s an ob lig atio n to pa y ca sh w ith in ni ne m on th s of th e date of 

issu an ce , ex clus ive of da ys of gr ac e, or an y re ne w al of such pap er which is 

lik ew ise lim ited , or an y guar an te e of such pa pe r or of an y su ch re n e w a l;

(5 ) An y in ve stm en t contr ac t issu ed in conn ec tio n w ith an em ploy ee s’ sto ck 

pu rc ha se , saving s, pensi on, pr of it- sh aring, or si m ilar benefit pla n if tli e D irec to r 

is no tif ied in w ri ti ng th ir ty da ys be fore th e ince ption of th e pla n or, w ith re sp ec t 

to pl an s which are in effect on th e eff ective date of th es e re gula tions, w ith in 

si xty da ys th ere aft er (o r w ith in th ir ty da ys be fore th ey a re reop en ed if th ey 

are cl os ed on th e eff ectiv e dat e of the se r egula ti ons) .

(b ) Age nts or is su er s w ith re sp ec t to the follo wing tr ansa cti ons are ex em pt ed 

from th e de fin iti on of “agent” in se ction 301, a nd fro m s ec tio n 303 :

(1 ) Any tr an sa ct io n betw ee n th e is su er or oth er pe rson on who se beh al f th e 

offer is m ad e an d an under w ri te r, o r am on g u nderw ri te rs ;

(2 ) Any tr an sa cti on in a bon d or oth er ev iden ce of in de bt ed ne ss se cu re d by 

re al or ch at te l mor tgag e o r deed of tr ust , or by an ag re em en t fo r th e sa le of re al 

est ate or ch at te ls , if th e enti re mor tgag e, de ed or tr u st, or ag re em en t, to ge th er 

w ith all th e bonds or oth er ev iden ce s of in de bt ed ne ss se cu red th er eb y, is offered 

an d sol d as a u n it;

(3) Any tr an sa ct io n by a re ce iv er or t ru st ee in ban kru ptc y ;

(4) An y off er or sa le to a ba nk , sa vi ng s in st it uti on, tr u st co mpa ny , in su ra nc e 

co mp any, in ve stm en t co mpa ny as defined in th e In ves tm en t Com pa ny Act of 

1940, pe nsion or pr of it- sh ar in g tr u st , or o th er fina nc ial in st it uti on or in sti tu ti o n al 

bu ye r, or to a br ok er -d ea ler, w het her th e purc hase r is ac ting fo r it se lf or in some 

fidu ci ar y cap acit y ;
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 37

(5 ) An y tr ansa cti on p u rs u an t to an offer direc te d by th e offeror to not mor e 

th an te n pe rs on s (o th er th an th os e de si gnat ed in para gra ph (4 )) in th e D istr ic t duri ng an y pe riod of tw elve co ns ec ut ive mon ths, w he th er or no t th e of fe ro r 

or an y of th e offerees is th en pre se nt in th e D is tr ic t, if (A ) th e se ller re as ona bly 

be lie ve s th a t al l th e buy er s in th e D is tr ic t (o th er th an th os e de si gna te d in 

para g ra p h (4 )) are purc has in g fo r in ve stm en t, an d (B ) no co mmiss ion 

or oth er re m uner at io n is pai d or give n dir ec tly or in dir ec tly fo r so lici ting an y 

pr os pe ct iv e bu ye r in th e D is tr ic t (o th er th an th os e de sign at ed in para gra ph 

(4 )) ; bu t th e D irec to r is au th ori ze d, as to an y se cu ri ty or tr ansa cti on or an y 

ty pe of se cu ri ty or tr ansa cti on, fo r goo d ca us e, to w ithdra w or fu rth e r co nd itio n th is ex em ption, or in cr ea se or dec re as e th e nu m be r of offerees per m itte d, 

ox* w ai ve t he co nd itio ns in Claus es (A ) and (B ) w ith or w ithout th e su bst itution 

of a lim itat io n o n re m u n era ti o n :

(6 ) An y offer’ or sa le of a pre org an iz at io n ce rt if ic at e ox-

 su bs cr ip tion if (A ) 

no co mmiss ion or other’ re m unera ti on is paid or give n dir ec tly or in direc tly 

fo r so lici ting an y pr os pe ct iv e su bs cr ib er , (B ) th e nu m be r of su bs cr ib er s does 

not ex ceetl ten , an d (C ) no pay m en t is m ad e by an y su bsc riber ;

(7) An y tr ansa cti on p u rs u an t to an of fe r to ex is ting se cu ri ty hold er s of th e 

is su er , in cl ud in g pe rs on s who a t th e tim e of th e tr ansa cti on a re ho ld er s of conve rt ib le se cu rities , n ontr ansf era ble w arr an ts , oi’ tr an sf era b le ex er ci sa bl e w ithin 

no t mor e th an ni net y da ys of th e ir issu an ce , if (A ) no comm iss ion o r oth er 

re m unera ti on (o th er’ th an a st an dby co mmission ) is pai d or give n dir ec tly or 

in dir ec tly fox’ so lici ting an y se cu ri ty hold er in th is st ate , or (B ) th e Is su er firs t 

files a no tice sp ec ifying th e t erm s of th e o ffer an d th e D irec to r does no t by ord er 

di sa llow t he ex em pt io n w it h in th e n ext five fu ll b us in es s d a y s ;

(8 ) An y offer (b ut no t a sa le ) of a se cu ri ty fo r which re gis tr ati on st at em en ts 

ha ve been filed under th e Sec uri ties Ac t of 1933 if no stop ord er or re fu sa l ord er 

is in effect an d no pu bl ic pr oc ee di ng or ex am in at io n look ing to w ar d su ch an 

o rd er is pe nd ing under su ch A c t;

(9 ) An y tra nsactio xx effecte d w ith exis ting em ploy ees, part ners , or dir ec to rs of 

th e is su er if no co mmiss ion or o th er re m uner at io n is pa id or giv en di re ct ly or 

in dir ec tly f or so lici ting any per so n in the D is tr ic t.

(c ) In an y pr oc ee di ng un d er th es e re gu la tion s, th e bu rd en of prov in g an 

ex em pt io n i s up on the p er so n cl ai m in g it.

Sec. 303. F il in g of Sales Lite ra ture.—T he D irec to r is au th ori ze d to re quir e 

th e fil ing of an y pr os pe ct us , pa m ph le t, ci rc ula r, fo rm le tt er, ad ve rtisem en t, or 

oth er sa le s li te ra tu re or advert is in g co mm un ication ad dr es se d or intend ed fo r 

d is tr ib uti on to pr os pe ct iv e in ves to rs , in cl ud in g cl ie nt s ox- pros pe ctive cl ie nt s 

of an in ve st m en t ad vis er unl es s th e se cu ri ty or tr ansa cti on is ex em pted by 

se ct io n 302.

Sec. 304. Misl ea ding F il in gs.—I t sh al l be unla w fu l fo r an y pe rson to mak e 

or ca us e to be mad e, in an y do cu m en t filed w ith th e D irec to r or in any proc ee din gs under th es e re gul at io ns , an y st ate m ent which is a t th e tim e an d in th e 

li ght of ci rc um st an ce s under w hi ch it is ma de, fa ls e or m isle ad in g in an y 

m ate ri al re sp ec t.

Sec. 305. Unl aw fu l R ep re sent at ions Conc ern ing Lic en sing or E xe mp tion .— 

(a ) N either (1 ) th e fa ct th a t an ap pl ic at io n fo r lic en sing has been filed no r (2 ) 

th e f act th a t a pe rson is effectively lic en sed co nst itut es a fin din g by th e D ir ec to r 

th a t an y do cu men t file d under th es e re gula tions is tr ue, comp let e, an d no t 

m isle ad in g. N ei th er an y su ch fa ct nor th e fa ct th a t an ex ce pt ion is av ai la ble 

m ea ns th a t th e D ir ecto r has pa ss ed in an y wa y uixxn th e m er its or qua lifica tion s 

of, or re co mmen de d or give n ap pro va l to, an y pe rso n, se cu rity , or tr an sa ct io n.

(b ) It sh al l be unl aw fu l to mak e, or ca us e to be mad e, to an y pr os pe ctive 

purc has er , cu stom er , or cl ie nt an y re pre se nta tion in co nsi st en t w ith subs ec ­

tion (a ).

Sec. 306. Adm inistr at ion of Regulat ions.— (a) The se re gula tions sh al l be 

ad m in is te re d by th e D irec to r, D epar tm en t of Li ce ns es and In sp ec tio ns .

(b ) It sh all be unla w fu l fo r th e D irec to r or an y of hi s officers ox* em plo yees 

to us e fo r pe rs on al be ne fit any in fo rm at io n which is filed w ith or ob tain ed by 

th e D ir ecto r an d which is no t m ad e pu bli c. No prov ision of th es e re gu la tions 

auth ori zes th e D ir ec to r or an y of his officers or em ploy ees to disclose an y such 

in fo rm ati on ex ce pt am on g th em se lv es or whe n ne ce ss ar y or appro pri ate in a 

pr oc ee di ng ox- in ves tigat io n under th es e re gu la tion s. No pr ov ision of th es e re gu ­

la ti ons eit her cre at es or der oga te s fr om any pr iv ile ge which ex is ts a t comm on
38 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

law or oth er w is e whe n do cu m en ta ry or oth er ev iden ce is so ug ht un de r a 

su bp oe na dir ec te d to th e D irec to r or an y of his officers or em plo yees.

[c . In se rt a prov ision, if de sired, co ve rin g fees fo r ex am in at io ns , til ings unde r 

se ct io n 303, an d oth er m isce lla ne ou s tilings fo r which no fe es are specified 

■elsewhere i n th es e re gula ti ons. ]

Sec. 307. I nve stigations and Sub pena s.— (a ) Th e D irec to r is au th ori ze d (1) 

to m ak e su ch pu blic or pri vate in ve st ig at io ns w ithin or outs id e th e D is tr ic t as 

he de em s ne ce ss ar y to de te rm in e w het her an y pe rson has vio la te d or is ab ou t 

to vi ola te an y pr ov ision of th es e re gu la tion s, or to ai d in th e en fo rc em en t of 

th es e re gu la tions , (2 ) to re quir e or pe rm it an y pe rson to file a st ate m ent in 

w riting, unde r oat h or oth er w is e as th e D irec to r de term in es , as to al l th e fa cts 

an d ci rc um st an ce s co nc erning th e m att er to be in ve st ig at ed , an d (3 ) to pu blish 

in fo rm at io n co nc erning an y vi ol at io n of th es e re gu la tion s.

(b ) F or th e pu rp os e of any i nv es tiga tion or p ro ce ed ing under th es e re gu la tion s, 

th e D irec to r or an y officer or em ploy ee de sign ated by him m ay adm in is te r oa th s 

and affirm atio ns , subp oe na witn es se s, com pel th eir at te ndan ce , ta k e e vid ence, an d 

re quir e th e pr od uc tion of an y boo ks, pa pe rs, co rrespo nd en ce , m em or an da , ag reem en ts or ot her do cu men ts or re co rd s which th e D ir ec to r de em s re le vant or 

m ate ri al to th e in qu iry.

(c ) In th e ca se of co ntum ac y by, or re fu sa l to obey a su bp oe na is su ed to, an y 

pe rs on , th e U ni te d S ta te s D is tr ic t Cou rt fo r th e D is tr ic t of Co lum bia , up on 

applica tion by th e D irec to r, m ay issu e to th e pe rs on an ord er re quir in g him to 

appear be fo re th e D irec to r or th e officer de sign at ed by him , th ere to pr od uc e 

do cu m en ta ry ev iden ce if so o rd er ed or to giv e ev iden ce to uc hi ng th e m att er under 

in ve st ig at io n or in qu estio n. F ail u re to obe y th e ord er of th e co urt may be 

puni sh ed by th e co urt as a co ntem pt of cou rt.

(d ) No pe rson is ex cu sed fro m at te ndin g a nd te st if yin g or fr om p ro du ci ng an y 

doc um en t or reco rd be fo re th e D irec to r, or in ob edien ce to th e su bp oe na of th e 

D ir ecto r or an y officer de sign ated by him, or in an y pr oc ee di ng in st it ute d by th e 

D irec to r, on th e gr ou nd th a t th e te stim on y o r ev iden ce (d ocu m en ta ry or oth erw ise) re qu ired of him may tend to in cr im in ate him or su bje ct him to a pen al ty 

o r fo rfe it u re ; bu t no in di vi du al m ay be pr os ec ut ed or su bj ec te d to an y pen al ty 

or fo rf eit ure fo r or on ac co un t of an y tr ansa cti on, m att er, or th in g co nc erning 

w hi ch he is comp elled, aft e r clai m in g his pr iv ileg e ag ain st in cr im in at io n to 

te sti fy or prod uc e evide nc e (d ocu m en ta ry or oth erw is e), ex ce pt th a t th e in divid ual te st if yin g is no t ex em pt from pr os ec ut io n an d pun is hm en t fo r p erj u ry 

or co ntem pt com mitt ed in t es tify in g.

Sec. 308. I nju nc ti ons .—W he ne ve r it appears to th e D ir ec to r th a t an y pe rs on 

has en ga ge d or is ab ou t to en ga ge in an y ac t or pra ct ic e co nst it uti ng a viol atio n 

of an y prov ision of th es e re gu la tion s, he may in it ia te appro pri ate ac tion to 

en jo in th e a ct s or p ra ct ic es an d to en fo rc e th e co mpl ianc e w ith th es e re gu la tion s. 

Up on a pr op er sho wing, a perm an en t or te m pora ry in ju nc tion, re str ain in g or de r, 

or w ri t of m an da m us sh al l be gra nte d an d a re ce iv er or co nse rv at or may be 

ap po in te d fo r th e def en da nt or th e defe ndan t’s as se ts. The court m ay no t 

re quir e th e D irec to r to po st a bond.

Sec. 309. Cri m in al P en al ti es .— (a ) An y pe rs on wh o w ill fu lly vio la te s an y 

pr ov isio n of th es e re gu la tions ex ce pt section 304, or wh o w ill fu lly vio la te s an y 

ord er issu ed un de r th e au th o ri ty of th es e re gu la tion s, or wh o w ill fu lly vio la te s 

se ct ion 304 kn ow ing th e st ate m ent mad e to be fa ls e or m isle ad in g in an y 

m ate ri al resp ec t, sh al l up on co nv ictio n be fine d no t mor e th an $300 or im pri soned fo r no t more th an nin et y d a y s ; but no pe rson may be im pr ison ed fo r th e 

vi ol at io n of an y ru le or or de r if he pr ov es th a t he had no kn ow ledg e of th e ru le 

or ord er .

(b ) The D irec to r m ay re fe r su ch ev iden ce as is avai la ble co nc er ni ng vio ­

la tions of th es e re gul at io ns or of an y ord er issu ed her eunder to th e C or po ra ­

tion Co unsel, wh o may , w ith o r w ithout su ch a re fe re nc e, in sti tu te th e ap pro ­

p ri ate crim in al p roce ed ings u nder th es e re gu la tion s.

(c ) Nothing in th es e re gula tions sh al l lim it th e po wer of th e U ni ted S ta te s 

or th e D is tr ic t to pun is h an y pe rs on fo r an y co nd uc t which const itute s a cr im e 

by st atu te o r t he commo n law .

Sec. 310. Civil Lia bil it ie s.— (a ) An y p erso n who—

(1) offers or sells a se curi ty in vi ol at io n of se ct io n 201(a ) or 30 5( b) ; 

or

(2) offer s or sells a se curi ty by m ea ns of any u n tr u e st ate m ent of a 

m ate ri al fa ct or an y om ission to sta te a m ate ri al fa ct ne ce ss ar y in ord er 

to mak e th e st ate m ents ma de, in th e li ght of th e ci rc um st an ce s under
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 39

whi ch th ey are mad e, not m isle ad in g (t h e buy er not kn ow ing of th e un ­

tr u th or om is si on ), an d who do es no t su st ain th e bur de n of pr oo f th a t he 

di d no t know , an d in th e ex er ci se of re as on ab le car e could not ha ve know n, 

of t he u n tr u th o r o miss ion.

is liab le to th e pe rs on bu yi ng th e se cu ri ty from him, wh o may su e eit her a t 

la w or in eq ui ty to re co ve r th e co ns id er at io n pai d fo r th e se cu rity , to get her 

w ith in te re st a t six i>ereent per y ear from th e d ate of pa ym en t, co sts , an d 

re as on ab le att orn eys’ fee s, less th e am ount of an y inco me rece ived on th e securi ty , up on th e te nder of th e se cu ri ty , or fo r da m ag es if he no long er ow ns th e 

se cu rity .

(b ) Eve ry pe rson who dir ectl y or in dir ec tly co ntr ols a se ller liab le under 

su bs ec tio n (a ), ev ery part n er, officer, o r dir ec to r or su ch a selle r, ev ery pe rson 

occu py ing a si m il ar sta tu s or per fo rm in g si m il ar fu nc tion s, ev er y em plo yee 

of su ch a se ller wh o m ate ri all y ai ds in th e sa le, an d ev ery br ok er -d ea le r or 

ag en t wh o m ate ri all y ai ds in th e sa le a re also liab le jo in tl y an d se ve ra lly w ith 

an d to th e sa m e ex te n t as th e se ller , un le ss th e no n- se lle r wh o is so lia ble 

su st ain s th e bu rd en of pr oo f th a t he did no t know an d in ex er ci se of re as on ab le 

ca re co uld no t ha ve kn ow n of th e ex is te nc e of th e fa ct by re as on of which 

th e liabil it y is allege d to ex is t. T her e is contr ib ut io n as in ca se s of contr act 

am on g th e se ve ra l p er so ns so lia ble.

(c ) An y te nder specified in th is se ct ion m ay be m ad e a t an y tim e be fore 

entr y o f j ud gm en t.

(d ) Eve ry ca us e of ac tion under th es e re gula tions su rv iv es th e dea th of 

an y p er so n wh o m ig ht h av e b een a pla in ti ff or d ef en da nt .

(e ) No pe rson may su e under th is se ct ion mor e th an tw o years aft e r th e 

contr act of s ale. No pe rs on m ay su e under th is section (1 ) if th e bu ye r rec eive d 

a w ri tt en offer , be fo re su it and fo r a tim e whe n he ow ned th e se cu rity , to 

re fu nd th e co ns id er at io n pai d to get her w ith in te re st a t six per ce nt per yea r 

fr om th e d ate o f p ay m en t, less t h e a m oun t of an y inc om e rece ived on th e s ec ur ity , 

an d he fa iled to ac ce pt th e offer w ithin th ir ty da ys of it s re ce ip t, or (2 ) if th e 

bu ye r rece ived su ch an offer be fo re su it an d a t a tim e whe n he did no t own th e 

se cu rity , un less he re je ct ed th e offer in w ri ti ng w ithin th ir ty da ys o f it s rece ipt.

(f ) No pe rs on wh o had m ad e or en ga ge d in th e per fo rm an ce of an y co ntr ac t 

in vi ol at io n of th es e re gu la tion s, or wh o h as ac qu ired an y purp ort ed ri ght un de r 

an y su ch contr act w ith kn ow ledg e of th e fa cts by re as on of whic h its mak in g 

or pe rf or m an ce w as in viol atio n, m ay ba se an y su it on th e co nt ra ct .

(g ) An y co nd iti on , st ip ula tion, or pr ov ision bi nd ing an y pe rs on ac qu irin g an y 

se cu ri ty to w ai ve co mplianc e of an y pr ov ision of th es e re gula tions is void.

(h ) Th e ri ghts an d re m ed ie s pr ov id ed by th es e re gula tions a re in ad di tion 

to an y oth er ri g h ts or re m ed ie s th a t may ex is t at law’ or in eq uity, but th es e 

re gula ti ons do no t cre ate an y ca use of ac tion no t specified in th is se ction or 

se ct ion 202(e ).

Sec. 311. Review’ of Orders.— (a ) Any pe rson ag grieve d by a fin al ord er of 

th e D irec to r may obt ai n a review of th e ord er by th e B oa rd of App ea ls an d 

Review’ of th e D is tr ic t of Co lumbia by tili ng, w ithin fif tee n da ys aft e r th e entr y 

of th e or de r, a w ri tt en pe tition pra yin g th a t th e or de r be modified or se t as id e 

in who le or in p art . A copy of th e pe tition sh al l be fo rt hw ith serv ed up on th e 

D irec to r, an d thereui>on th e D irec to r sh al l ce rt if y an d file w ith th e B oa rd a 

copy of th e filing an d ev iden ce up on which th e ord er was en te re d. W hen th es e 

ha ve been filed, th e B oa rd sh al l ha ve ju ri sd ic tion to affirm, mod ify , en force, 

or se t as id e th e or de r, in w’hol e or in p art , an d an y such ac tion by th e Boa rd 

sh al l be fin al. The fin ding s of th e D irec to r as to th e fa ct s, if su pp or te d by compe te nt, m ate ri al an d su bst anti al eviden ce , sh al l be conclus ive . If eit her part y 

ap pl ie s to th e Boa rd fo r leav e to ad du ce ad di tion al m at er ia l ev ide nc e, an d 

sh ow s to th e sa ti sf acti on of th e Boa rd th a t th ere were re as on ab le gr ou nd s fo r 

fa il u re to ad du ce th e ev iden ce in th e hea ri ng be fore th e D irec to r, th e B oa rd 

m ay ord er th e addit io nal ev iden ce to be ta ke n be fore th e D irec to r an d to be 

ad du ce d up on th e heari ng in su ch m an ne r an d upon such co nd itio ns as th e 

B oar d m ay co ns id er pr op er . The D irec to r may mod ify hi s fin ding s an d or de r 

by reas on of th e ad dit io nal ev iden ce an d sh all file w ith th e B oar d th e add itio nal 

ev id en ce to ge th er w ith an y mo dif ied or ne w fin ding s or or de r.

(b ) The comm en ce men t of pr oc ee di ng s un de r su bs ec tio n (a ) do es no t. un less 

sp ec ifi ca lly or de re d by th e B oa rd , opera te as a st ay of th e D ir ec to r’s or de r.

Sec. 312. F orm s, Orders and H ea ring s.— (a ) Th e D irec to r m ay from tim e to 

tim e pre sc ribe su ch fo rm s an d m ak e su ch or de rs as ar e ne ce ss ar y to carr y out 

th e pr ov isio ns of th es e re gu la tion s, in cl ud in g fo rm s go ve rning app lica tions fo r
40 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

lic en se an d re po rt s. For th e pu rp os e of form s, th e D irec to r m ay cl as sify secu ­

ri ties , pe rson s, an d m att ers w ithi n hi s ju ri sd ic tion, an d pre sc ribe di ff er en t 

re quir em en ts fo r diffe re nt classes.

(b ) No fo rm sh al l be pres cr ibed , an d no or de r sh al l be issu ed , am en de d or 

re sc in de d, un le ss th e D irec to r finds th a t th e ac tion is ne ce ss ar y or appro pri ate 

in th e pu blic in te re st or fo r th e pro te ct io n of in ve stor s an d co nsi st en t w ith th e 

pu rp os es fa ir ly in te nd ed by th e po lic y an d pr ov isions of th es e re gu la tions. In 

pr es cr ib in g fo rm s, th e D irec to r may co op er ate w ith th e se cu ri ties adm in is tr ato rs o f th e S ta te s an d w ith th e Sec ur itie s an d Ex ch an ge Co mm iss ion w ith a vie w 

to ef fe ct ua ting th e policy of th es e re gu la tion s to ac hiev e m ax im um unif orm ity 

in th e fo rm an d co nt en t of re port s an d ap pl ic at io ns fo r lice ns es w he re ve r 

pr ac tica bl e.

(c ) The D irec to r is au th or iz ed to pr es cr ib e (1 ) th e fo rm and co nte nt of 

fina nc ial st ate m ents re quir ed by th es e regu la tio ns . (2 ) th e ci rc um st an ce s un der 

whi ch co ns ol idated fin an cial st ate m ents sh al l be filed, an d (3 ) w heth er an y re ­

qu ir ed fina nc ial st at em en ts sh al l be ce rti fie d by inde pe nd en t or ce rtified pu blic 

ac co unt an ts . All fina nc ial st ate m ents sh al l be pr ep ar ed in ac co rd an ce w ith 

gen er al ly a cc ep ted ac co un ting p ra ct ices .

(d ) All fo rm s pr es cr ib ed by th e D irec to r sh al l he pu blishe d.

(e ) No pr ov ision of th es e re gu la tions im po sin g an y li abil it y ap pl ie s to an y 

ac t do ne o r om itte d in goo d fa it h in co nf or m ity w ith an y fo rm or ord er of th e D ire ct or , no tw ithst an din g t h a t th e for m o r ord er m ay l ate r he am en de d or r es ci nd ed 

or be d et er m in ed by j udic ia l or oth er auth ori ty to be in va lid fo r an y reas on .

(f ) Ever y he ar in g co nd uc te d unde r th e au th ori ty of th es e re gul at io ns sh al l 

he pu blic un less th e D irec to r in his di sc re tio n gra nts a re ques t jo in ed in by al l 

th e re sp on de nt s th a t th e hea ri ng he c on du cte d pr iv atel y.

Sec. 313. Adm inistr at ive Files and Opi nio n s.— (a ) A do cu m en t is file d whe n 

it i s rece ived by th e D irec to r.

(b ) Th e D irec to r sh al l ke ep a re gis te r of all ap pl ic at io ns fo r lic en se which 

a re o r ha ve e ve r bee n effecti ve under th es e re gu la tion s an d all de ni al , su sp en sion , 

or re vo ca tion or de rs which ha ve been en te re d und er th es e re gu la tion s. The 

re gis te r sh al l be open f or pu blic insp ec tio n.

(c ) The in fo rm at io n co nt ai ne d in or filed w ith an y ap plica tion or re port may 

be m ad e av ai la bl e to th e pu blic in ac co rd an ce w ith th e pr ov isio ns of th es e 

re gu la tion s.

(d ) Upon re qu es t an d upon such pa ym en t as th e D irec to r sh al l find will com ­

pe nsa te th e D is tr ic t fo r th e co st of fu rn is hin g su ch serv ice , th e D ir ec to r sh al l 

fu rn is h to an y pe rson photo st at ic or ot he r copie s (c er tified under th e se al of 

th e D is tr ic t if re qu es te d) of an y entr y in th e re gis te r or an y do cu m en t which is 

a m att er of pu blic reco rd . In a ny proc ee ding u nd er th es e re gula tions , or p ro se cu ­

tion fo r vi ol atio n of th es e re gu la tion s, an y cop y so ce rti fieil is pri m a fa cie 

ev iden ce of th e co nt en ts of th e entr y or do cu men t ce rti fie d.

(e ) The D irec to r sh al l re fe r to th e Cor po ra tio n Co un sel fo r ap p ro p ri ate 

act io n re qu es ts from in te re st ed pe rs on s fo r in te rp re ta ti v e op inions .

Sec. 314. Scope of T he se Regulat ions and Service of P rocess.— (a ) Se ctions 

101, 2 0 1 (a ), 305, an d 310 ap ply to pe rson s wh o sell or offer to se ll whe n (1) 

an offer to sell is mad e in th e D is tr ic t, or (2) an off er to bu y is m ad e an d 

ac ce pt ed in th e D is tric t.

(h ) Se ctions 101, 201(a ), an d 305 ap ply to pe rson s wh o bu y or off er to bu y 

w he n (1 ) an off er to bu y is m ad e in th e D is tric t, or (2) an offer to sell is m ad e 

and a cc ep ted in th e D istric t.

(c ) For th e pu rp os e of th is section, an off er to sell or to bu y is mad e in th e 

D is tr ic t, w he th er or no t eit her part y is th en pre se nt in th e D is tr ic t, whe n th e 

offer (1 ) or ig in at es from th e D is tr ic t or (2) is direc te d by th e off er or to th e 

D is tr ic t an d received at th e plac e to wh ich it is dir ec te d (o r at an y po st office in 

th e D is tr ic t in th e c ase of a m ai le d o ff er) .

(d ) Fo r th e pu rp os e of th is section, an off er to bu y or to sell is ac ce pt ed in th e 

D is tr ic t wh en ac ce ptan ce (1 ) is co mmun icated to th e of fe ro r in th e D is tr ic t an d 

(2 ) has not prev ious ly bee n co mm un icated to th e officer, ora lly or in w riting , 

ou ts id e th e D is tr ic t; an d ac ce pt an ce is co mm un icated to th e of fe ro r in th e Distr ic t, w he th er or no t eit her p art y is th en pre se nt in th e D is tr ic t, whe n th e offeree 

dir ects it to the offeror in th e D is tr ic t re as on ab ly be lie ving th a t th e offeror is in 

th e D is tr ic t an d it is rece ived a t th e plac e to which it is dir ec te d (o r a t an y po st 

office i n th e D is tr ic t in th e ca se o f a mailed ac ce pt an ce .)
SECU RITIES REG ULA TIONS FOR THE DIS TRICT OF COLUMBIA 41

(e ) An offer to se ll or to bu y is no t m ad e in th e D is tr ic t whe n (1 ) th e pu bli sh er cir cu la te s or th ere is cir cula te d on his beh al f in th e D is tr ic t an y bona tide 

ne w sp ap er or oth er pu bl ic at io n of ge ne ra l, re gul ar , an d pa id ci rc ul at io n which 

is no t pu bl ishe d in th e D is tr ic t, or which is pu bl ishe d in th e D is tr ic t but ha s 

had mor e th an tw o- th irds of it s ci rc ula ti on ou ts id e of th e D is tr ic t du ring th e 

p ast tw elve mon ths, or (2 ) a ra dio or te le vi sion pr og ra m origi na ting ou tsid e 

th e D is tr ic t is rece iv ed in th e D is tr ic t.

(f ) Se ctions 102 and 201(c ), as well as se ct ion 305 so fa r as in ve st m en t advi se rs are co nc erne d, ap ply whe n an y a ct in st ru m en ta l in eff ectin g pro hi bi te d 

co nd uc t is do ne in th e D is tr ic t, w heth er or not eit h er part y is th en pre se nt in 

th e D is tr ic t.

(g ) Eve ry ap pli cant fo r lice ns in g under th es e re gul at io ns an d ev er y is su er 

who prop os es to off er a se cu ri ty in th e D is tr ic t th ro ugh an y pe rson ac ting on 

an ag en cy ba sis in th e co mm on -la w se ns e sh all til e w ith th e Dire ct or , in su ch 

fo rm as he may pr es cr ibe, an irre vo ca bl e co ns en t ap po in ting th e Com miss ione rs 

to be hi s att orn ey to re ce iv e se rv ice of an y la w fu l proc es s in an y nonc rim in al 

su it, ac tio n, or pro ce ed in g ag ain st him or his su cc es so r ex ec ut or or ad m in is tr ato r 

which ari se s under th es e re gula ti ons or an y ord er here under aft e r th e co ns en t 

has been filed , w ith th e sa m e fo rc e and vali dit y as if se rv ed pe rs on al ly on th e 

pe rs on tiling th e co ns en t. A pe rs on wh o has tiled su ch a co ns en t in co nn ec tio n 

w ith a pr ev io us lic en sing ne ed no t tile anoth er . Se rv ice may be mad e by le av in g 

a cop y of th e pr oc es s in th e office of th e Sec re ta ry of th e Co mm iss ione rs, but 

it is no t effecti ve un le ss (1 ) th e pla in tiff, wh o may be th e D irec to r in a su it, 

ac tion , or pr oc ee di ng in sti tu te d by him, fo rt h w it h se nd s no tic e of th e se rv ice 

an d a cop y of th e pr oc es s by ce rtifie d m ai l to th e def en dan t or re sp on de nt a t 

his la st addre ss on tile w ith th e D irec to r, an d (2 ) th e pl ai nt if f's affid av it of 

co mpl ianc e w ith th is su bs ec tio n is file d in th e ca se on or be fo re th e re tu rn 

day o f th e proc ess, if a ny , or w ithin su ch fu rth e r tim e as t he co urt all ow s.

(h ) W he n an y pe rson , in cl ud in g an y non re si de nt of th e D is tr ic t, en ga ge s in 

con duct, pr oh ib ited or m ad e ac tionab le by th es e re gula tions or an y ord er issu ed 

her eu nde r, a nd he h as not filed a co ns en t to serv ice of pr oc es s u nd er s ub secti on (g ) 

an d pe rs on al ju ri sd ic ti on ov er him ca nn ot oth er w is e be ob tain ed in th e D is tric t, 

th a t co nd uc t sh al l be co ns id er ed equi val en t to his ap poin tm en t of th e Co mm issi one rs to be hi s att o rn ey to rece iv e se rv ic e of an y la w fu l proc es s in an y no ncr im in al su it, ac tio n, or pr oc ee di ng again st hi m or his su cc es so r ex ec ut or or 

ad m in is tr ato r which gr ow s out of t h a t co nd uc t an d which is br ou ght unde r th es e 

re gula ti ons or an y ord er issu ed her eu nder , w ith th e sa m e fo rc e an d va lidi ty as if 

se rv ed on him pe rs on al ly . Se rv ice may be m ad e by le av in g a cop y of th e proc es s 

in th e office of th e S ecr et ar y of th e Com miss ione rs, and it is no t eff ectiv e un less 

(1 ) th e pl ai nt iff, who may be th e D ir ec to r in a su it, ac tio n, or proc ee ding in ­

st it u te d by him , fo rt hw ith se nd s no tice of th e se rv ice an d a copy of th e proc es s 

by re gis te re d m ai l to th e def endant or re sp on den t a t his la st kn ow n ad dr es s or 

ta kes oth er st ep s which are re as onab ly cal cula te d to giv e actu al no tic e, an d (2) 

th e pla in ti ff ’s affida vi t of co m pl ianc e w ith th is su bs ec tio n is filed in th e ca se on 

or be fo re th e re tu rn da y o f th e proc ess, if an y, or w ithi n su ch fu rt h e r tim e as th e 

co u rt allow s.

(i ) W he n proc es s is se rv ed under th is section, th e co urt, or th e D irec to r in a 

pr oc ee di ng be fo re him, sh al l ord er su ch co ntinuan ce as m ay lie ne ce ss ar y to 

affo rd th e defe ndan t or re sp on den t re as ona ble o pport unity to de fend .

Sec. 315. Cons tru ction of Reg ul at ions.—The se re gula tions sh al l be so const ru ed as to ef fe ct ua te th e ge ner al pu rp os e of m ak in g un if orm th e law go ve rning 

pe rs on s de al in g in se cu ri ties an d to co or di na te th e in te rp re ta ti o n an d ad m in istr a ti o n of the se reg ula tions w ith th e r ela te d F ed er al r eg ula tion.

Sec. 316. Short Tit le .—The se re gula ti ons may be ci te d as th e D is tr ic t of 

Colum bia Unifo rm Sec ur itie s R eg ul at io ns .

Sec. 317. Severability of P rovis ion s.—If an y pr ov ision of th es e re gu la tion s 

or th e ap pl ic at io n th er eo f to an y pe rson or ci rc um st an ce is he ld in va lid , th e in ­

val id it y sh all no t affect oth er pr ov is io ns of ap plica tions of th es e re gu la tion s, an d 

to t h is en d th e p ro vision s of th es e re gula ti ons are sev erab le.

Sec. 318. Repe al and Saving Provis ion s.

(S ee m ate ri al on p. 148; U.L .A. 9 C.)

Sec. 319. Tim e of T ak ing Effec t.—The se re gula tions sh al l ta ke eff ect on 

, 1962.
42 SECU RITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA

Mr. Korman. The Licensing Department does not feel that they are 

in a position to handle this type of licensing and supervision.

It requires much more expertise than they have in their organization. 

They think it requires a separate division of the other department o r 

a separate department headed by an individual that might be akin 

to our Superintendent of Insurance.

It has been stated here this morning in connection with the recommendation that the District could take this over, Mr. Cary said, that 

the D istrict authorities could act much more rapidly than they could.

I assumed from what he said th at he believed we could step in and 

take away a license without the requirements of due process tha t the* 

Securities and Exchange Commission now affords to holders of their 

registrations.

I hope that was not his recommendation because we have no more 

authority to step in and take away a license than the Securities and 

Exchange Commission has to take away a registration, and we would 

have to afford to the holder the same due process that they do.

It would take some time. It may be that under a “blue sky” law 

in some of the States the director has the right to summarily suspend operations durin g the investigation. But I would think the 

requirements of due process, certainly as practiced under the Federal 

jurisdiction of the District of Columbia, would require full hearing 

with charges and opportunity to be heard, counsel and so on, and the 

righ t of appeal, and in providing this we could not act with much 

more speed than the Securities and Exchange Commission could if' 

they were empowered to do so.

Mr. Mack. Is this draft for the District government to adapt?

Mr. Korman. No, sir. This was a draft of the Uniform SecuritiesAct, which was adapted to the District of Columbia for discussion 

purposes.

It is not in any final form at all, and was simply something to put 

before this group to discuss, to see whether we needed all of the items', 

tha t were in there, or whether some should be changed, and so on.

This was the sole purpose of it. This is not a proposal for legislation at this point.

You will note, Mr. Chairman, that it does not encompass thoseparts of the uniform law which have to do with the registration of' 

securities. It only has to do with those portions of it that have to dowith the licensing or registration of dealers, agents, and advisers.

Mr. Mack. Does the District of Columbia have authority today to> 

adopt these regulations ?

Mr. Korman. No, sir.

Mr. Mack. In other words, you would require additional legislation, enabling legislation, before you could proceed ?

Mr. Korman. That is right, sir.

Mr. Mack. This is not a rough dra ft of the legislation ?

Mr. Korman. It is not, sir. It was merely compiled for discussion 

purposes. I wanted to tell you what we have done thus far. We 

have not as yet reported to the Commissioners.

I may say, sir, what I am saying here, is not necessarily the ir points 

of view. It is solely that of the Office of the Corporation Counsel, 

which is in the midst of its study.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 4 3

Mr. Mack. I)o you think we can solve our problem by amending 

section 15 of the Securities and Exchange Act, and by adopting legislation similar to this proposal, or this draft ?

I refer to the discussion draft. In that way, we would be closing 

the gate at both ends of the field.

Air. Korman. I gather, Air. Chairman, from w hat Mr. Cary said— 

indeed, on page 17 of his statement, I find this :

Under present law we could undoubtedly issue particular rules with respect 

to the District under the Secu rities Act of 1933.

I th ink they have, at present, f air authority.

I think if you amended section 15 of the 1934 act, as you have indicated, th at that would give them sufficient authority to act completely 

in the District of Columbia.

Mr. Mack. Mr. Cary, under questioning, indicated he would need 

additional authority.

Air. Korman. I am not quarreling with them. I have not studied 

their act sufficiently to say that he does or does not. I am merely going 

by what he says in his statement.

I gathered from what he said and from what was said in the discussions tha t we had at the office, tha t they almost have sufficient 

authority now and possibly with a little bit of authority from the 

Congress would be able to take care of the situation locally.

With all the expertise that they have there in the Department, witn 

the fact that we do not presently think that it is necessary that the 

District should have a complete “blue sky” law in tha t we do not 

think we need to actually register new issues, the only thing they would 

be doing would be with the help of the National Association of Securities Dealers, policing the industry to the extent of policing the people 

who deal with it, and who advise others.

It is my personal point of view, and I limit it to my personal point 

of view, tha t it would be better for them, with all the facilities they 

now have, to take this over rath er than the District of Columbia to 

take it over.

But I have not discussed that with the Commissioners of the District. We do believe that what has been disclosed indicates that some 

regulation is necessary.

Air. Mack. I think it is quite obvious th at we need some additional 

regulation or legislation to deal with this problem. It is far from 

being satisfactory.

I think Miss Ottenberg has done a valuable service here in acquainting you gentlemen with the problem, and calling it to the attention of 

other people.

Obviously, it was a deplorable condition.

I would also be interested in knowing whether or not you gentlemen 

were aware of the problem as it has existed since 1959? I wonder 

whether or not the Commissioners were aware of this problem prior 

to the time the articles were written ?

Air. K orman. I cannot speak for all the Commissioners, sir; but I 

am inclined to believe that they were not, or they would have taken 

some action to direct us to do something about it.

Air. AIack. Then, what action has been taken since that time ?
44 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

Mr. Korman. The action th at has been taken since that time was for 

us to call all these people together tha t I enumerated e arlier and have 

discussions of it to see what our present authority is and what might 

be necessary, and where is the best place for that authority to be 

lodged.

As I said earlier, it is my view that the best place, because of the 

facilities they now have and the knowledge and expertise that they 

have in the area, that this should be lodged with the Securities and 

Exchange Commission.

Mr. Mack. 1 presume you will make or you have made such a recommendation to the Commissioners ?

Mr. Korman. We will, sir. We have not as yet. We had our last 

discussion only last week, and others are anticipated with some of this 

group to see whether the limited authority the Commissioners have 

now could be at all effective to take care of some of these ills.

As I said, our discussion indicates that the most that the Commissioners could do now would be to require licenses of some of these 

people.

Mr. Mack. Are you making such a recommendation ?

Mr. Korman. Will we make that to the Commissioners?

Mr. Mack. Yes.

Mr. Korman. I have not discussed tha t fully with the Corporation 

Counsel.

Mr. Mack. In other words, no recommendation has been made?

Mr. Korman. No recommendation has been made. I am inclined to 

think that what we could do at the moment would not be completely 

adequate to take care of the situation, and that legislation of some sort 

should be suggested.

Mr. M ack. Of course, if the Commissioners do not have sufficient 

authority today, they can get authority from the Congress, if Congress 

feels it appropriate.

Mr. Korman. Yes, sir.

Mr. M ack. They have not made such a request, and you are not recommending that they do make such a request?

Mr. Korman. I am inclined to say this, sir: If this committee does 

not feel that it should give to the Securities and Exchange Commission 

the authority to enter the District of Columbia field more actively, 

then our recommendation would be to the Commissioners th at they 

seek authority to do these same things by the District of Columbia 

government, which they do not have now.

They do not have, for instance, the authority to require of these 

people the posting of bonds, to require financial responsibility before 

entering the business, and so on.

These things would have to come from legislation. As I say, we 

would have to set up a completely new department and hire experts 

in this field, who would probably come from the Securities and Exchange Commission.

Mr. Mack. Changing the subject slightly, could I ask you about 

your program for the police to screen out these people who want to 

go into the securities business ?
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 45

Mr. K orman. The most we could do would be to require an application from each one th at wanted to be licensed and have th at application processed by our police department, which would screen their 

own files to see what, if anything, they could find on it.

Mr. Mack. In other words, if they had a police record, you would 

not gra nt them a license ?

Mr. Korman. That would probably be one of the provisions.

Mr. Mack. If they did not have the police record, they would probably get the license ?

Mr. Korman. Probably so; yes, sir. I will not say in all instances ; they might have some other shortcomings.

Fo r instance, if we required them to get recommendations from 

others or required them to show tha t they had experience and they 

were unable to get recommendations, or the recommendations did not 

show them to be people who were trustworth y, I think we might be 

able to put such a limitation on within our present authority.

Or if they were unable to show tha t they had experience in the 

field, we might be able to deny them a license. But if you had someone 

who had no experience and wanted to enter the business for the first 

time, we have no facility, for instance, without legislation, to give 

them an examination.

Mr. Mack. As I understand, you are now studying the problem and 

you are going to make some recommendations of some k ind; is th at 

correct ?

Mr. Korman. That is right, Mr. Chairman.

Mr. Mack. You have been studying the problem since February?

Mr. Korman. I will not say we have been studying the problem 

since February. At some time, the date of which I do not have before 

me, subsequent to the appearance of these articles, the Commissioners 

sent the problem to us.

In that interim, our office has been doing a great many other things 

and we have had, I think, either three or four meetings with this group 

over a period of about a month and a half, I would say.

There have been, between meetings, anywhere from a week to 10 

days to 2 weeks. We also sent this out to the interested parties to 

study before we held any of these meetings, or after having had one 

meeting.

Mr. Mack. I want to tha nk you for your testimony.

Personally, I favor an amendment to the Securities and Exchange 

Act, but I do get the impression th at the District government has not 

been sufficiently interested in this problem.

Mr. Korman. I think they have been, since the matter was called 

to th eir attention. Yes, they have been, indeed.

Mr. Mack. I also have the impression tha t they are extremely reluctan t in assuming the responsibility for solving this problem on the 

local level?

Mr. Korman. On the contrary, Mr. Chairman, where situations 

of this sort have been pointed out to the Commissioners in other 

areas, and the matter has been studied, the Commissioners have come 

forward and sought legislation from the Congress, or have taken 

action on their own to remedy conditions.
46 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

One of those areas was that involving the sale and financing of 

automobiles, which, incidentally, was also brought forcibly to the 

attention of the Commissioners by a series of articles by Miss 

Ottenberg.

We went to the Congress and got authority to act in tha t case, 

and came up with a complete set of regulations, which took considerable time to frame, with the help of people in the industry.

We think we have corrected a great many, if not all, of the difficulties and problems in tha t industry.

A similar situation arose in connection with the home improvement 

contract business. We took similar action in tha t and have issued 

regulations to cover the situation.

In those instances, however, we were able, we thought, to take care 

of it entirely by comparatively simple regulations which could be 

administered by our Superintendent of Licenses, and simply by the 

issuance of licenses with certain limited restrictions.

But the securities business is one which is not quite so easy to regulate as is the sale of automobiles, or the repair of houses. It requires 

a setting up, we think now, of a department with experts who are 

thoroughly familiar with the industry, rath er than simply setting i t 

into our Licensing Department where complaints of factual situations can be resolved without a great deal of expertise.

This presents a problem which is not quite as simple as those others 

are. But in any event, the District is not treading water on this. 

The Commissioners have issued the instructions to us to investigate, 

and tha t is what we are doing.

We try not to act precipitously, but to act only after careful study.

Mr. Kneipp has an observation. I would be happ y to have him 

make it to you directly, Mr. Chairman.

Mr. Mack. We will be glad to hear from you.

Mr. Kneipp. Thank you, Mr. Chairman. I am sorry the clerk 

is not here. I would like to offer for the record, if I may, copies of 

what Mr. Korman has just referred to, the two sets of regulations and 

the two laws that were enacted by the Congress.

Mr. Mack. We will accept those for our files.

Mr. Kneipp. The purpose in offering those, Mr. Chairman, is to 

demonstrate to the committee how the District has proceeded in 

matters of this kind heretofore.

First, an effort is made to mark out the limits of the Commissioner 

authority. Tha t is what is in process now in that dra ft of A pril 20 

tha t was furnished the chairman.

Then, having determined what existing law offers the Commissioners in the way of the authority, it is the practice of the Commissioners to go to the Congress and seek supplementary legislation.

In the case of the Home Improvement Contractors, Public Law 

86-715 was a relatively simple bill to draft and to process through 

the Congress.

But in the case of the sales finance legislation, Public Law 86-431, 

it was a very complicated law. The Commissioners had to be given 

considerable additional authority over and above what they possessed 

under existing law.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 47

I think, as Mr. Korman has indicated, it is anticipated now tha t 

additional authority to flesh out what the Commissioners now have 

in the way of dealing with securities dealers would be a rather complicated act to draft.

But the District is in process—the Corporation's Counsel’s Office is 

in process of reviewing what is necessary to the end th at a determination can be made as to the kind of law t ha t may be necessary to give 

the Commissioners adequate authority in the field.

Mr. M ack. When do you expect to make your recommendations?

Mr. Korman. Mr. Kneipp has been carrying the laboring oar in 

this field. I would like him to answer the question.

Mr. Kneipp. Mr. Chairman, as you can see, th at draft is, I believe, 

about 40 pages in length. The group tha t Mr. Korman mentioned 

earlier has been working on that. We have not gotten very far because the problems that do come up create some difficulty in their 

determination.

It is a little hard to point out just how long, or to say just how 

long, it is going to be before we come up with some recommendation.

It might be that rather than try to deal with the matter by an 

adaptation of the Uniform Securities Act, to work just under the 

Commissioners’ existing authority, which would allow them to require a showing of experience and character, require fingerprinting, 

reports, and fees, and then seek legislation, simple legislation, authorizing the Commissioners to require a bond and minimum capital of 

persons entering this field.

And also authorizing the Commissioners to set up an administrative agency with authorization for funds.

Mr. Mack. I cannot see any objection to doing that.

Mr. Kneipp. That would be relatively simple to do.

Mr. Mack. At the same time, if the Congress would come in on it, 

I cannot see any objection to some type of local activity on the part 

of the District of Columbia government; tha t is, a recommendation 

for legislation.

Mr. Kneipp. We could, Mr. Chairman, come up with relatively 

simple recommendations, merely “fleshing” out the authority of the 

Commissioners in certain limited respects, bu t not anything so complicated and detailed as the Unifo rm Securities Act.

This is the policy decision that has to be made at this time. Should 

we do it simply as we have done, fo r example, in the case of the home 

improvement contractors and the sales finance organizations ?

Mr. Mack. I got the impression from Mr. Korman tha t if the Congress acted in regard to section 15 of the SEC, the District government 

would make no recommendations at all.

Mr. Korman. I thin k that would take care of the situation, Mr. 

Chairman, and I see, frankly, no reason why there should be two sets 

of regulations.

I would like to have the expression of the Congress as to what their 

will is. If they think tha t the Securities and Exchange Commission 

can better handle it, it would be certainly not our policy to try to take 

an opposite position.

Mr. Mack. I would not want tha t to be implied, even if the amendment were approved. I would not want it implied that the Congress 

felt tha t the District government should not interest itself in this
48 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

m atter because we h ave m erely amended the Secur itie s and Ex cha nge 

Act.

Mr. K orman. I do no t th in k the y would divorce them selves of it. 

Unquestionabl y, they would not. But merely lice nsing is one th in g; 

regu latin g is an oth er.

The regu latio n of an in du stry as complex as th is may req uire a 

comp lete “blue sky” law an d the setting up of an oth er deparm ent of 

the Dist ric t gove rnm ent.

This, I would say, req uir es ra th er careful study. That is wh at we 

are giving to it now.

Air. Mack. 

r<’han k you, gen tlem en, fo r your testimony.

I feel th at t he Distri ct should be a s hin ing e xam ple of h igh , ethical 

sta nd ards. T hat is wi th rega rd to the securities business as well as 

oth er businesses.

I know the Congress has a responsibility. I fu rth ermore feel th at 

the District governm ent has a res ponsibility of looking into matters 

of thi s na ture, to see how we can im pro ve a situa t ion here in the D istri ct 

of Columbia.

Th is is ou r N ation’s C ap ita l, a nd th e cap ita l o f the wor ld, you migh t 

say. I t distu rb s me when we perm it such an opera tio n as th is in the 

Nation’s Capital .

Mr. K orman. I may say th is m uc h: I do not like to use the words 

“in defen se,” because it sounds like we ha ve been amiss in our a pproa ch 

to this. I th in k th is s hou ld be said , however, th at wi th the presence 

of th e Securities an d Ex ch an ge Comm ission here in the N ation’s C ap ­

ita l, wi th ou r kno wle dge o f th ei r general sup ervisio n of th is business, 

I th in k pos sibly there may have been an assum ption, not necessa rily 

on th e part of the Di str ict Com missioners, but on the pa rt of the 

peo ple generally, t hat th is subject was tak en care of here.

Not un til the sit ua tio n was called to our att en tio n comp ara tively 

rec ently was there a rea liz ati on th at som eth ing more need ed to be 

done.

Mr. Mack. I d id not mean to be critic al of the ina ction on the par t 

of the District gov ernme nt. Bu t at the same tim e we have the Sec ret 

Service here, the Fe de ral Bu rea u of Investi ga tio n, the Par k Police, 

the Capitol Police, an d in ad ditio n to th at , you decided or we decided 

to have the Me tro po litan Police.

You hav e a sim ila r pro ble m here wi th re ga rd to reg ula tions.

As I hav e indica ted , I s lig htly f av or th e e xpansion o f Fe de ral ju ri sdiction.

I wa nt to be certa in, first, th at th e Securiti es and Ex ch an ge Com ­

mission has been dilig ent, h as disc harge d its r esp onsib ility.

Pe rso nally , I fa vo r th e a me ndme nt whi ch w ould exp and juris diction 

with rega rd to the Se curities and Ex ch an ge Commission.

Bu t I also feel th at the D istric t governm ent ou gh t to interest i tse lf 

in this are a, and th at the y ou gh t to mak e some kind of recommenda ­

tio ns to the Congres s, if we are in need of ad ditio na l leg islation.

Air. Korman. AVe shall no t discon tinue wha t we are doing now. 

AVe shall ca rry it on to co nclu sion as quickly as possible, Air. Ch airma n.

Air. Mack. Th an k you very much.

That concludes o ur he aring on this subject.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 49

f f

The committee stands adjourned. JUL 2 IS 62

(“Investors Beware,” by Miriam Ottenberg, follows:) \

IN V ESTO RS BEW ARE

(B y P uli tz er Pri ze W in ner M iria m Otte nb erg, S ta r staf f w ri te r;

A se ri es ex pl or in g th e pra cti ces of que st io na bl e in ve st m en t firms , pu bl ishe d by 

th e W as hi ng to n S ta r

Nati onal A ss ocia ti on of Secu rit ie s D ea le rs, I nc.

The se ries of ar ti cle s en ti tl ed “I nvest ors B ew ar e” w ri tt en by M iriam O tten ­

be rg fo r th e W as hi ng to n S ta r de sc ribe a si tu ati on of whi ch ev ery in ve stor in 

W as hi ng to n, D.C., sh ou ld be in fo rm ed . G ro wth in t he n um be r of se cu rities firms 

opera ti ng he re on th e fr in ge of est ab lish ed et hic s and th e la w has be en of gre at 

co nc er n to th e v ast m ajo ri ty of firm s in th e se cu ri ties bu sine ss, th e NA SD, an d 

th e SEC. In cr ea se d en fo rc em en t acti vit y by NA SD an d th e SEC has been effe ct iv e ; ho we ver, th is al on e ca nnot pr ov id e th e fu ll m ea su re of pr ot ec tion which 

is n eede d.

An i nf or m ed in ves to r is ca pa bl e of ex er ci si ng common sens e w he n ap pr oa ch ed by 

a str an g er re pre se nting th e se curi ti es bu sine ss wh o pr om ises gre at pr of its in 

a sh ort pe rio d. Miss O tten ber g’s art ic le s co nta in ba sic fa cts which co uld prov e 

in va lu ab le to i nv es to rs .

Also, an in fo rm ed in ves ting pu bl ic is es se ntial if W as hi ng to n is to ha ve th e 

ri g h t kin d of se cu ri ties law, pro per ly ad m in is te re d.

If we are to de al pr om pt ly and w ell w ith th e prob lems cre at ed by m ar gi na l 

firm s mov ing in to th is a re a an d re al iz e th e st an d ard s fo r which bo th th e NA SD 

and th e SEC are st rivi ng , it w ill be in th e li ght of an al ys es su ch as th e “Inves ­

to rs B ew ar e” se ries .

The se a rt ic le s de se rv e care fu l re ad in g.

W al la ce F ult on, E x e c u ti v e D ir ec to r.

[F ro m th e W as hi ng to n (D .C.) S ta r, Fe b. 4, 1962]

I nv es to rs B ew ar e— On e of T hree D is tr ic t of Colu m bia B ro ke rs F ound T o Be

U n sa fe

(B y' M ir ia m O tte nb er g, S ta r st af f w ri te r)

Mo re th an 100 firms are de al in g in stoc ks an d bo nd s in W as hi ng ton, but oneth ir d o f them c ou ld n’t o pe ra te in m os t o f th e Sta te s.

T h at m ea ns th e ch an ce s are one in th re e th a t th e unw ar y W as hi ng to n in ­

ves to r m ay ru n in to a bro ke r- de al er wh o kn ow s no th in g ab out th e bu sine ss 

or wh o pa ys th e re n t w ith his cu st om er ’s in ves tm en t mon ey or wh o ap plies hig hpre ss ure ta cti cs to se ll qu es tion ab le stock s.

The pre se nt danger to W as hi ng to n in ves to rs is em er gi ng in in ve st ig at io ns conduct ed by th e Sec ur itie s an d Exch an ge Co mm iss ion , th e N at io nal Assoc iatio n 

of Sec uri ties D ea le rs an d th e b ett er bu si nes s bu re au s.

The st ea di ly -w or se ni ng si tu ati o n her e in th e pr om ot io n an d sa le of low -pric ed, 

ov er -the -c ou nt er se cu ri ties la y be hi nd th e SE C’s re ce nt de cision to send a ta sk 

fo rc e of i nves ti gat ors into W as hi ng to n on a clea n- up miss ion.

T he N at io na l Assoc iatio n of Sec ur itie s D ea le rs , se lf-p ol icin g or gan iz at io n in 

th e se cu ri ties field, re port s th at, in it s re g u la r ex am in ati ons of more th an 100 

in ve st m en t firms he re, it h as re ce ntly be en ta kin g a ct io n again st one out of t hre e 

firms .

T he b ett er bu sine ss bure au hir ed an ex -F B I agent to in vest ig ate W as hi ng ­

to n se cu ri ties firms . On th e ba si s of his find ings of sh od dy and une th ic al pra ctic es , th e bure au ca lle d on th e SE C and th e deale rs ’ as so ci at io n to in cr ea se 

th eir i nv es tiga tive staf fs a nd st ep up en fo rc em en t a cti vit ie s he re .

The bure au ci te d “t he pro m ot io na l acti vit ie s an d bu sine ss metho ds of som e 

of th es e se cu ri ties fir ms (t h a t) hav e re su lted in se ve re los ses to th e in ve stin g 

pu blic in th is a re a.”
50 SECU RITIE S REGULATIONS FOR TH E DISTRICT OF COLUMBIA

RELIABLE FIRM S CONCERNED

Established investment firms here are seriously concerned by the sudden 

increase in inexperienced, financially unstable firms as well as the out-of-town 

promoters flocking into Washington.

The many reliable firms welcomed the better business bureau investigation 

and have labored with the dealers’ organization in its self-i>olicing activities as 

they see the city’s reputation for safe dealings in securities threatened.

They are aware of the increasing number of victims—the stock-buying customers—many of whom are investing for the first time. Nearly 800 customers were 

caught in the collapse of one firm last year and their experience has been duplicated on a smaller scale by the customers of other firms.

These newcomer firms have opened their doors with promotional fanfare, accepted money from their customers to buy stock and closed their doors. In some 

cases, they have protected their investors. But, in other cases, the customers 

have been seriously hurt.

A Star survey of more than 60 firms which have opened for business here 

since Janua ry I960 showed that approximately one-third of them have already 

gone out of business or been put out of business by the SEC or the National 

Association of Securities Dealers.

In one recent week alone, two Washington firms were expelled by the dealers’' 

group and three Washington firms were named in actions launched by the SEC,

Since the sta rt of 1960, the SEC has obtained injunctions against 11 Washington firms and revoked the dealer registrations of 9 firms. The SEC regional 

office covers Pennsylvania, Maryland, Virginia, West Virginia, Delaware and 

the D istrict but, in the past 2 years, half the SEC actions against broker-dealers 

throughout the region have been against Washington firms.

During the same period, the National Association of Securities Dealers 

district committee has filed formal complaints against 44 Washington firms, 

expelled 18, suspended 1 and fined 20. It has revoked the registrations of 19 

salesmen and fined 2—a total of $4,000.

The closed doors, the injunctions, revocations and complaints do not happen 

overnight. Before a firm’s inexperience, lack of operating capital or questionable activities leads to formal action, plenty of customers have had a chance 

to lose their savings.

Both the SEC and the dealers’ association report tha t evidence of violation 

of rules designed to protect the investing public is worse here than anywhere else 

in their regions.

Both bodies are aware of the prime cause: Washington has no local law ta 

safeguard investors against questionable or financially unfit dealers.

NO LOCAL CONTROL

Unlike most States, Washington has no local control over the dealers or 

the stocks they sell. It has no requirement tha t broker-dealers be experienced 

or trained before going into the business of handling other people’s money. It 

has no local control over salesmen. It also has no requirement that brokerdealers have any money of their own before they go into business.

With more stringent regulations going on the books in many Eastern States, 

promoters have gotten out one step ahead of legal action and moved into Washington where they feel comparatively safe until the SEC or the dealers’ association catches up with them.

Out-of-town firms with no stock exchange connections have opened branch 

offices here to escape the local controls exerted over their headquarters in 

other States.

Characteristic of some of the newcomer firms are their fancy names, many 

of which are so close to those of established firms as to be indistinguishable 

when said fast. The names also are designed to give the impression to customers that a two-room firm has nationwide connections.

The lack of operating capital, however, is rated particula rly dangerous 

to the customers. Until the SEC pins down a violation of its rule tha t a 

firm cannot owe 20 times more than its net capital, some of these firms use 

their customers’ money to pay the rent, promote their business and furnish 

their offices. When their doors close, the customers’ money—if there ’s anything left—can be attached by other creditors.
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 51

The St ar’s survey of newcomer firms showed seven have gone into busines here in the past 2 ye ars with $500 or less in cash. One of them sta rte d with 

$100. More than half sta rte d with less tha n $5,000. Many were in the hole 

financially with the costs of laun chin g the ir business before they even began 

accepting customers’ money to buy stocks.

Their lack of experience in the business is equally appar ent—and as potentially 

har mful to the custom ers.

EX PER IE N C E LA CK SH O W N

Of the 45 firms who have registered with the SEC since the st ar t of 1960 

and are still in business, the St ar ’s survey showed th at 7 had no previous 

experience in the secu ritie s field. Four repo rted less tha n a year’s experience. 

Nine got their own traini ng as salesmen for a now defunct firm or in one of 

the firms stemming from it. In 10 firms, only 1 member of the company 

had any previous experience. In only 11 of the 45 firms, all the partn ers had 

some previous experience but frequen tly not much of it.

[F ro m th e W as hi ngt on (D .C.) S ta r, Fe b. 5, 1962 ]

I nv esto rs Bew ar e— Vario us T e c h n iq u e s U sed T o Lure U nw ary

(By Miriam Ottenberg, Star staff writer)

The techniques for selling low-grade stocks to unw ary Wash ington investors 

range from e laborate stage setting s to fa st telephone patter.

While the stock prom oters pre tend the gre ate st solicitude for the safety of 

their customers’ money and act as though the ir only concern is to let a client in 

on a good thing, their actua l goal is to make a killing before the stock they tout 

becomes worthless.

They can get away with their gimmicks here longer tha n in most other places 

because Washington has no law to ass ure local controls over the investment 

firms or their salesmen.

Wash ington has many reliable, firmly establish ed investme nt firms but onethird of those in business here today would not be allowed to operate in most 

oth er cities.

ex a m ples of te c h n iq u e s

Selling techniques of some stock prom oters a re shown in reports of an ex-FBI 

age nt who “shopped” Washington investme nt firms for the Better Business 

Bureau, in customer complain ts and in reports of unethical practices furnished 

by Washington’s reputab le firms. Here’s the pat te rn :

1. To create the impression th at stocks of little value are being heavily traded, 

the promoter installs a blackboard in his office and changes the stock quotations 

on it hourly.

While a customer listens, the prom oter calls a well-known investment firm 

and asks for the lat est price on a stock. When the promoter gets the answer, 

he tells the custo me r: “See, the big boys are tradin g in this, too.”

J U S T W IN D OW DR ES SING

The impressed customer doesn’t realize th at the blackboard quotations are 

ju st window dressing. He doesn’t know that the answ er given by the big firm 

was simply read from the daily sheet of over-the-counter listings and th at a 

reputab le firm wouldn’t touch the pa rticu lar stock. He also is unaware that 

the buying price of the stock given to him is substan tially higher tha n the price 

the promoter got over the telephone.

Reputable firms are try ing to curb this prac tice by offering to call back with 

the answer when they suspect a fly-by-night outfit is on th e o ther end of the telephone. If the ir suspicions are proved correct, they don’t call back—but they 

can ’t d etect them all.

2. To cre ate the illusion of respectability, a shoestring outfit claims it is trading 

regularly with one of the well-known firms.
52 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

To p ro ve it, th e p ro m ote r fla shes a bil l on th e le tt erh ead of th e big in ve st m en t 

hou se. The bill w as ea sy to com e by. T he pr om ot er simply ord er ed some we llkn ow n stoc ks or bo nd s as an y cu st om er co uld do. Eve n if he lo st a li tt le mo ney 

on t he d eal, he ha s ev iden ce to show th e d ou bt in g cu stom er s th a t he doe s bu sine ss 

w ith re co gn ized firm s.

3. To a tt ra c t se rv icem en w ith a few dollar s to inve st, th e pr om ot er s re cru it 

officers re ti ri n g from th e Arm ed Fo rces as sa le sm en or ju nio r part ners . Th e 

pr om ot er s a re a tt ra c te d by th e serv ice c ont ac ts of th es e fo rm er officer s as well as 

by th eir sa ving s.

The ex -F B I agen t w or ki ng w ith th e bett er bu sine ss bure au re port ed hea ri ng a 

pr om ot er addre ss in g se ver al teleph on e ca ller s by th eir offic er ra nk, an d a d d e d : 

“It has becom e ra th e r ob vio us du ri ng th is in ves tigat io n th a t th e Arm ed For ce s 

offer a trem en do us m ark et f or o ve r-the-co un ter d ea le rs .”

A nu m be r of th e le tt ers from cu stom er s wh o lo st th eir sa vi ng s in th e co lla ps e 

of one W as hi ng to n firm ca me from b oth officers a nd en list ed m en.

ATTRACTING SALESM EN

4. To a tt ra c t sa le sm en w ith some mo ne y of th eir own, th e pro m ote rs put 

he lp -w an te d ad s fo r sa le sm en in th e ne w sp ap er s on th e sa m e da y th ey ad vert is e 

sp ec ta cu la r new issu es.

W he n th e wo uld-be sa le sm en ap pl y fo r jobs , th ey ha ve to ag re e to in ve st in 

th es e qu es tion ab le ne w stoc ks them se lv es be fo re th ey ca n go to work. Th ey 

are ex pe cted to get th eir re la tives an d fr ie nds in to th e de al, too. To milk them 

a li tt le mo re, th e pr om ote rs mak e th em pa y var io us fees as well as a lum p su m 

fo r so-call ed tr ain in g.

The w ife of on e sa le sm an wh o w en t in to a now def unc t firm co mpl aine d th a t 

her husb an d had give n up a good jo b in an o th er field , in ve sted all th eir sa vi ng s 

in th e stoc ks he w as su pp os ed to sell, an d en de d up w ith neit her sa vi ng s nor job .

VARIOUS GI MMIC KS

5. To d ra in th e fina nc ial re so ur ce s of th eir cu stom er s th e pr om ot er s ha ve 

se ve ra l g im mi cks.

On e co nv ince d a cu stom er to ca sh in his life in su ra nce and put th e mo ney 

in l ow -pric ed sto ck s which w ou ld grow and g ro w in va lue .

The he ad of anoth er firm her e to ld th e bett er bu sine ss bure au in ves tigat or 

th a t cu stom er s le ft th eir mo ney w ith him an d au th ori ze d him to us e hi s ow n 

di sc re tion in bu ying an d se lli ng sto ck s. T he re puta ble firms , w ith pl en ty of 

capit al be hind them , are ex trem el y ca ut io us ab ou t ac ce pt in g an y su ch di sc re ­

ti onary ac co un ts an d do it on ly in in di vid ual ca se s fo r lo ng st an di ng cu stom ers.

A si m il ar pr om ot er co nc en trat es on ol de r peop le wh o ha ve clun g th ro ug h 

th e yea rs to a few “b lue ch ip ” sto ck s. Th ey are ad vise d to sell th e “b lu e ch ip s” 

be ca us e th ey can ge t more inc om e out of a lo w er pr iced sto ck . The y a re not 

w arn ed th a t a pr om ised 8 pe rc en t divi de nd m ig ht be ac co mpa nied by a g re ate r 

risk . So th ey giv e up sa fe in ve st m en ts in fa vor of sto ck in st ru ggling yo un g 

co mpa ni es th a t can ’t m ak e en ds me et.

TE LE PH ON E US E

6. To pr om ot e sales, pr om ot er s h ir e a b att ery of par t- tim e tele ph on e salesm en . 

Pro sp ec tiv e cu st om er s ca lle d a t ra ndom a re to ld a stoc k se llin g fo r $2 has ju s t 

gone up an ei gh th an d th e “ins id e” w or d from New Yo rk is th a t it actu ally has 

go ne up a quart er. No re put ab le firm w ou ld both er to use fr acti o n al ch an ge s 

to in te re st in ve st or s bu t th e sa lesm en are tr ain ed to give th e im pr es sion th a t 

th e sto ck is mo ving f a st an d th e tim e to get in on qu ick pr of its is now.

O r pr os pe ct iv e in ve st or s are to ld th e sa le sm an has “ins id e in fo rm ati on” 

ab ou t a co nt em pl at ed merge r, a sp ecta cula r ea rn in gs re po rt, a new inve nt ion, 

an ex tr a divi de nd , a big ord er th e co mpa ny has ju s t rece ived , or a su cc es sful 

te st of a co m pl icat ed ga dg et.

Som e of th e pr om ot er s ha ve im po rted hig h- pr es su re salesm en from New York. 

On e of th e ir fa vori te ga m bi ts is th e earn est as su ra nce th a t th e sa le sm an ha s 

bo ug ht stoc k in th is ven tu re fo r his m ot he r. Ob vio usl y, th e cu stom er is led to 

believe, if a m an p u t his ow n m oth er ’s mo ne y in th is sto ck , it m us t be sa fe .
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 5 3

ANOTHER ARGUMENT

Or the argument is advanced tha t low-priced stocks are safer to buy because 

they can’t drop as far as the high-priced stocks.

Complaints from the public indicate tha t many of those fleeced were buying 

stocks for the first time. Typical of their innocence is one victim’s remark that 

she did not investigate the salesman before she let him take her money because 

she thought all stock salesmen had to be licensed.

In many places, both the investment firms and their salesmen are subject to 

local regulation, but not in Washington.

[F ro m th e W as hin gto n (D .C .) Sta r, Fe b. 6, 1962 ]

Investors Bew’are—Case of 1 Firm and 800 Victims

(By Miriam Ottenberg, Star staff writer)

When a Washington investment firm called American Diversified Securities, 

Inc., closed its doors last year close to 800 customers were caught in the collapse. 

Their claims amount to over half a million dollars.

Nobody is sure yet what can be salvaged for the customers and other creditors, 

but the company’s ultimate deficit is expected to run over a million dollars.

The story of the rise and fall of American Diversified is the story of what can 

happen in a community without a local law to protect investors from inexperienced and undercapitalized investment firms.

OFFSHOOTS SPROUT UP

It is a continuing story, because many of American Diversified’s former salesmen and associates have opened investment firms of their own—and some of 

them have already run afoul of Federal regulations.

Six have been named in proceedings by the Securities and Exchange Commission or the National Association of Securities Dealers. Four others have closed. 

At least seven are still in business. Among other newcomers to the burgeoning 

securities business here are broker-dealers who gained their only experience in 

firms launched by former American Diversified salesmen.

Some of these offshoots presumably have learned something from the experience of American Diversified and are trying to conduct a different kind of business. But a survey shows that others belong in the one-third of Washington 

investment firms which wouldn’t be allowed to operate in most States.

Most of American Diversified’s successors are selling the same kind of stock, 

using the same sales methods and operating with the same lack of experience and 

shaky financing that contributed to American Diversified’s boom-and-bust 

history.

BEGAN AS ONE-MAN FIRM

American Diversified had its origin in a one-man company launched in February 1958, with $2,200 and no previous experience in the securities business. It 

incorporated in August 1958.

Its cash amounted to less than $3,000 when it launched its plan to raise the 

capital to keep going. It started issuing stock in its own newly formed corporation and announced its program to organize mutual funds among members of 

national organizations.

During 1959, according to a report of a court-appointed accountant, 49,000 

shares of American Diversified stock were sold. Ultimately, this accountant reported, $335,000 was raised through stock sales. People paid as much as $28 

a share for American Diversified stock.

The mutual fund concept which had attracted stockholders never got off the 

ground. While waiting for it to materialize, the company engaged in selling 

over-the-counter securities and started underwriting stock issues.
54 SECURIT IES REGULATIONS FOR THE DISTRICT OF COLUMBIA

EXPANDED RAPIDLY

The company rapidly expanded. From 20 employees in 1958, it had grown to 

120 hy September 1960. Like sim ilar companies, it took on retired officers from 

the Armed Forces who could and did inte rest officers and enlisted men in the 

low-priced stocks being offered by the company.

Among its other salesmen were former used-car salesmen, discount house salesmen, electricians, men’s wea r salesmen, floor managers, and hotel clerks. Much 

of th eir business was done by telephone.

American Diversified spread out. It opened a Philadelphia office, merged with 

ano ther company and, in the fall of 1960, opened offices in Miami and New York.

At th at point, the Securities and Exchange Commission moved in. The SEC 

trie s to protect the investing public by requ iring the firms entrusted with the 

public’s money to keep a proper record showing who owes wh at to whom.

COURT IS SU ES IN JU NC TI ON

In September 1960, d istric t court, at the request of the SEC, enjoined American 

Diversified from doing business until its books a nd records complied with SEC 

rules. A SEC investigato r repo rted at the time th at the books were 3 months 

behind and th at the firm had about 3,000 custom ers’ accounts “many of which 

contain inaccu rate secu ritie s positions and errors which reflect purchases for 

which the firm has not received paym ent and many unrecorded receipts and 

deliveries of se curities.”

Summ arizin g American Diversified’s rapid expansion and its first setback, 

the court-appointed acc ountant repo rte d:

“Despite this feve rish growth, the company a t no tim e earn ed any income. * * * 

For the most p art, the company was living on its expectations. The company h ad 

geared itse lf to a high-volume operation. When such was not forthcoming, 

losses became severe. The SEG shutdown for the fall of 1960 was a heavy 

burden to overcome. Opening two new offices during this same period was an 

excessive one.”

PRESSES STOCK DRIVE

After the SEC shutdown, American Diversified brought in a nation al accou nting firm to stra igh ten out its books. The firm, according to a later report, had 

to make more t han 1,000 corrections in the records.

When the records were adjusted, the company was allowed to reopen for business in Jan ua ry 1961.

In less tha n 2 months, it was in financial trouble because of its heavy operatin g 

exi>enses and vast corps of salesmen. The court-appointed acc oun tant tells how 

the company, faced with a second shutdown, zeroed in on one stock and feverishly 

began promoting it. The chosen stock went from $7 a sha re on March 11 to 

21% by April 3.

American Diversified salesmen were busy. Letters from customers who were 

solicited to buy the chosen stock during the March drive are now in the files 

of the trustee in bankruptcy in the American Diversified case.

One midwestern custom er said he was called long distance on March 20 and 

advised to buy 50 shares of the chosen stock at $13 a share. He said he was 

called again a week lat er by the same salesman, who told him the stock had 

been recommended by a New York investment house w hich sounded to him like 

Rothschild. Urging him to buy more, the salesman said the stock was now selling 

at $20 and was expected to go much higher.

BOUGHT $6,0 00 OF STOCK

A Washington doctor, also solicited by telephone, reported he bought $6,000 

worth of the stock on March 17. A Washington woman wrote th at she bough t 

$237.50 worth of the stock on March 13 and added th at “this may not appear to 

be an impressive transaction, but these shares were paid for out of savings 

accum ulated through 11 years of hard work as a waitre ss.”

A Shreveport, La., man isn ’t sure exactly wh at he bought. He knows he 

bought 50 shares of this stock on Janu ary 17 and sold 25 shares on March 13. 

Then, he said, he was notified the next day that he had sold ano ther 25 sha res 

bu t his salesman told him to ignore th at notice because it was a mistake and he 

still ha d 25 shares. On March 27, he was notified th at he h ad sold his remainin g
SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA 55

25 shares but in April he was advised that he had bought 50 shares, “which 

was news to me.”

couldn’t pay for sh ar es

The flurry of activity reflected in these letters and dozens like them climaxed 

when American Diversified couldn’t pay for the shares it had ordered from other 

brokers to fill its customers orders. It tried to cancel the orders but most of the 

brokers refused to allow cancellation and American Diversified was stuck. 

Customers clamored for payment on the stock they had sold or stock certificates 

for the shares they had bought. American Diversified had neither enough money 

nor stock to satisfy its customers.

At t hat point, the company was so fa r in the hole th at it had clearly violated 

the SEC rules forbidding a securities dealer from owing 20 times more than his 

net capital. On April 6, a dis trict court judge, at the request of the SEC, granted 

a temporary restraining order to halt American Diversified from transacting 

business until it could comply with the net capital rule.

An SEC affidavit filed in court at that time reported that the company’s deficiency in capital amounted to $217,804.47 and aggregate indebtedness to all 

others amounted to $1,064,410.91. Among these others were the customers who 

had been pressed to buy the “hot” stock—which is now selling at around 50 

cents.

VICT IM S ARE MA NY

They weren’t the only victims. The letters sent to the trustee in bankruptcy 

reflect the disappointment, despair and heartache of many others who never 

received the stock they bought nor were paid for the stock they sold.

One man wrote tha t he had put money into American Telephone & Telegraph 

stock over many years while he was saving to buy a home. When he thought 

he had enough, he turned over his 60 shares of A.T. & T. to American Diversified 

to sell for him. He should have gotten a check within 5 days. When it didn’t 

come in 2 weeks, he asked questions and was told the check had been sent to the 

wrong address. He couldn’t understand tha t because the confirmation of the 

sale had reached him all right. By the time the check finally arrived, the 

the company was in receivership and payment had been stopped.

A Florida mother said she went into the stock market early last year to make 

a quick profit to help finance her daughter’s operation. When the time came to 

sell the stock and take her profit, she still hadn’t received the stock certificates. 

So she couldn’t sell. She is still waiting for $2,795 in stock certificates or cash.

CERTIFICATE STATU S UN CERTAIN

The stock certificates of some of the customers have been located, but it hasn’t 

been decided yet whether they’re entitled to the stock they bought or whether 

they must join the other customers in participating in whatever can be salvaged 

from the collapse.

Some of the stock certificates won’t help the customers much now, in any case. 

If they had received the certificates when they were supposed to they could 

have sold at a profit or at least broken even. Now, several of the issues touted 

by American Diversified salesmen have fallen more sharply than they rose and 

today are only worth a fraction of what they cost.

Last June, afte r the court-appointed accountant went over the books of American Diversified and attempted to trace the transactions, he reported to the 

receiver:

“There are many peculiar, strange and mystifying transactions which have 

created a substantial feeling of uncertainty on our part. * * * We recommend 

further investigation.”

HOW TO PI CK A BROKER

There are many reliable, established investment firms in Washington with 

whom you can invest with confidence. To would-be investors, they give this 

adv ice:

1. Know the investment firm. Check with your banker or other financial 

adviser on the firm’s background and reputation.

2. Insist on reading the prospectus or circular before you invest in a new 

stock to understand ju st how much risk is involved.

3. Never buy stocks on the basis of unsolicited telephone calls. This is the 

high-pressure approach that can lure you into losing money.
56 SECURITIES REGULATIONS FOR THE DISTRICT OF COLUMBIA

4. If a sa le sm an mak es ex tr av ag an t pr om ises ab ou t a ne w or re ce nt ly issu ed 

stoc k but de clin es to put his st ate m ents in w riting , w at ch out—and re port to 

th e Sec uri ties and Exc ha ng e Co mm iss ion or th e N at io na l Assoc iatio n of Sec ur iti es D ea le rs .

[F ro m th e W as hi ng to n (D .C.) S ta r, Fe b. 7, 1962 ]

I nvestors B ewar e—Law I s N eeded H ere T o P rotect B uyers

(By Miriam Ottenberg, Star staff writer)

In ves to rs in 48 S ta te s a re bett er pr ot ec te d again st un sc ru pu lo us or fina nc ia lly 

un fit in ves tm en t fir ms th an a re th e in ves to rs in th e N at io n’s C ap ital .

Eve ry w he re in th e co un try but D el aw ar e, Ne va da , an d th e D is tr ic t of Co lum ­

bi a, some f or m of “b lue sk y” la w re gula te s se cu ri ties de al er s an d th e stoc ks th ey 

tr ade.

Mo st of th es e S ta te law s wo uld pre ven t on e- th ird of W as hin gto n’s in ve st m en t 

fir ms fr om op er at in g. T h a t’s th e co ns er va tive es tim at e of th e pr op ortio n of 

m ar gin al fir ms he re.

S ta te e nf or ce m en t of “blue sk y” la w s is p a rt of a thre e-pr on ge d de fe ns e ag ai nst 

un qu alified in ve st m en t fir ms and qu es tion ab le sto cks. The oth er tw o pr on gs 

are th e Sec ur itie s an d Exc ha ng e Co mm iss ion an d th e N at io nal Assoc iatio n of 

Sec ur itie s D ea lers.

W as hi ng to n lack s th e fi rs t pron g—a loc al la w to ke ep out un de rc ap ital iz ed , 

un de re xp er ie nc ed , an d unet hic al fir ms pe dd lin g qu es tion ab le sto cks.

As a re su lt, th e oth er tw o pron gs—th e S EC and the deal ers ’ as so ci at io n re gi on al 

offices—re port more co m pl aint s an d mor e vi ol atio ns of se cu ri ties ru le s her e th an 

an yw he re e lse in th eir reg ions.

To c ope w ith th e loc al pro blem , th e SE C ha s se nt a ta sk fo rc e of in ves tigat ors 

in to W as hi ng to n on a cl ea nu p dr iv e. The N at io na l Assoc iatio n of Sec ur itie s 

D ea le rs has sti ffen ed it s ex am in at io n re qu irem en ts fo r th ose se llin g sto ck, but 

th e d eale rs ’ as so ci at io n’s self- po lic ing effo rts co ve r on ly it s ow n mem be rs. At 

le ast seven of th e re ce nt ly es ta bl ishe d fir ms he re a re not mem be rs.

M an y of th e Sta te s hav e re ce nt ly tigh te ne d th eir se cu ri ties law s. A nu m be r 

of t he m h av e am en de d th eir la w s to c on form to th e tou gh Uni fo rm Sec uri ties Act, 

a mo del S ta te law dra ft ed by a bo ar d of ex pe rts. Th es e ac tion s ha ve pr om pt ed 

mor e ou t-o f-t ow ne rs to come to W as hi ng to n w her e th ey ca n oper at e fr ee fr om 

lo ca l co ntro ls.

M ar yl an d has a “b lue sk y” la w but prop os es to ti ghte n it. A co m m itt ee appo in te d by Gov erno r Taw es has com e up w ith a d ra ft of le gi sl at io n clo sely 

para ll eli ng th e Uniform Sec ur itie s Act. Gov erno r Taw es h as alr eady tagg ed it 

as a pri ori ty m ea su re f or th e ne w session of t he M ar yl an d G en er al As semb ly. I f 

M ar yl an d suc ceeds in tighte nin g it s law , som e of it s ou st ed pr om ote rs ca n be 

ex pe ct ed to cros s th e lin e in to W as hi ng ton.

V irgi ni a has a str ic t law patt ern ed a ft e r th e un iform ac t. T he V irgin ia law , 

re gu la tion s dra ft ed under it an d it s fo rt h ri g h t en fo rc em en t are widely re gard ed 

as su cc es sful in ke ep ing que st io na bl e oper at ors o ut of th e S ta te .

th re e controls

Gen erally, th e S ta te la w s pr ov id e th es e th re e type s of re g u la ti o n s:

1. A ntifr aud p ro vi sion s w hi ch en ab le “b lue sk y” ad m in is tr ato rs to issu e pu blic 

w ar ni ng s, in ve st ig at e su sp ec ted fr aud, mo ve in fa s t to st op fr au d u le n t ac ti vit ie s 

an d p un ish m al ef ac to rs .

2. R eg is tr at io n or lic en sing of bro ke r- de al er s an d th e ir sa lesm en , whi ch is 

aim ed a t ke ep ing ou t th e un qu alified or un et hic al , ass uri ng su pe rv isio n of th eir 

ac ti vit ie s an d putt in g th em out of bu sine ss if th ey fa ll below re quir ed st an d ard s.

3. R eg is tr at io n o f t h e s ec uri ties to be sold in a Sta te , which as su re s th a t th e in ­

ves to rs ca n le ar n abou t w h at th ey a re bu ying an d th a t stoc ks vi ol at in g eit h er 

S ta te o r Fed er al l aw s are n ot cir cu la ting .

prot ection sl ig ht

In W as hi ng ton, a su rv ey by th e S ta r disclosed, cu st om er s ha ve be en h u rt 

m os t by th e la ck of an y re qui re m en t th a t in ves tm en t fir ms m us t hav e an y ca sh 

of their ow n to do bu sine ss. The o nly pr ot ec tion off ere d to W as hi ng to n in ves to rs 

is th e SEC ru le th a t fo rb id s a se cu ri ties firm fr om ow ing mor e th an 20 tim es
SECURITIES REGULATIONS FOR TH E DISTRICT OF COLUMBIA 57

its net capital. However, by the time investigators discover this rule has been 

violated, the firm often has used up the customer’s money on rent and promotion. 

The firm’s doors are shut, but that doesn’t help the customer who got hurt.

The Star’s survey showed tha t more than half the investment firms going 

into business here since Janu ary 1960, started with less than $5,000 and one only 

had $100.

Virginia authorizes its State corporation commission to require a $25,000- 

surety bond to protect investors. The proposed Maryland act requires the 

broker-dealer to maintain a net capital of at least $15,000 and makes him 

subject to posting a surety bond up to $10,000.

Among other States, Michigan can require the broker-dealer to show up to 

$100,000 in capital. New Hampshire sets the figure at $25,000, and Pennsylvania recently raised its required capital from $10,000 to $25,000.

TRAINING IS LACKING

In Washington, lack of experience has proved the downfall of some investment firms which traded themselves into bankruptcy and took their customers’ 

money with them. No training or experience is required here of either the 

broker-dealers or their salesmen. If the firms stay out of the National Association of Securities Dealers, even the protection of an examination is lost.

The lack of experience was clearly revealed in the Sta r’s survey of newcomer 

firms where some of them had no experience, some had less than a year and 

less than a third of them could report tha t all members of the firm were 

experienced.

In contrast, half the State laws refer to lack of train ing or inexperience as 

sufficient grounds to keep a broker-dealer out of business.

Virginia requires a broker-dealer to have 3 consecutive years of experience 

in the securities business before he can register. If the firm is a partnership, 

the majority of the firm’s members must have 3 years’ experience and if it’s a 

corporation, at least two officers must meet the experience qualification.

Maryland’s proposed law allows the commissioner administering the “blue 

sky’’ law to deny registration to a broker-dealer lacking training, experience or 

knowledge of the securities business. It also allows him to require an examination of both broker-dealers and salesmen.

\ SITUATION ON FRAUD

In Washington, no local law deals specifically with fraud ulent practices in 

securities. The city is protected by Federal law more fully than the States 

since all but a few securities here are considered inte rstate and subject to SEC 

rules.

Virginia’s law and Maryland’s proposed law, however, offer the kind of broad 

cover that would give the U.S. attorney here some clear-cut law to use against 

fraud arti sts in the securities field if Washington had a local law.

Virginia’s law, paralleled by the Maryland proposal, makes it unlawful to 

employ any device, scheme, or artifice to defraud in the offer or sale of any 

security, directly or indirectly. It also makes it a crime to obtain money or 

property by un truth or omission of a material fact or to engage in any practice 

which defrauds or could defraud or deceive the stock purchaser.

RULES ON CRIM INAL S

In Washington, a man with a criminal record can go into the business of 

dealing with other people’s money as long as his record doesn’t involve securities. The SEO rules bar the registration of anyone convicted in the past 10 

years of a crime involving securities or the conduct of the broker-dealer’s business. The SEC also bars those previously enjoined in connection with securities 

transactions or cited by the SEC for violating its laws or regulations.

Virginia’s law requires tha t the broker-dealer be of good character and reputation. Virginia’s commission can revoke or refuse to renew a registration 

in the public interest or if the broker-dealer has engaged in a fraud ulent 

transaction, become insolvent, faces insolvency, or has been convicted of a 

misdemeanor involving securities or any felony.

Maryland’s proposed law allows the commissioner to deny or revoke a license 

for any felony conviction, any false or misleading statements on the registration, any dishonest or unethical practice in the securities business or insolvency.
58 SECU RITIES REGULATIONS FOR TH E DISTRICT OF COLUMBIA

FA ST FRAUD ACTION

Virginia’s law and Maryland’s proposed law allow the administrator to move 

fast against the unethical or fraudulent stock dealer—faster than the authorities can move in Washington.

Both the SEC and the National Association of Securities Dealers acknowledge 

tha t they can rarely go a fter the unqualified, financially unfit, and unscrupulous 

firms in Washington until some customers have already been hurt.

“The reason they’re selling junk stocks here,” one securities official summed 

it up, “is because the people coming in are promoters. They don’t have the 

capital or the experience to deal in good stocks even if they wanted to.”

Experts in the field, from official investigators to reputable investment executives, ar e convinced the promoters will continue to prey on Washington investors 

as long as there’s no local law on the books to discourage them.

Afte rm a th

Reaction to the foregoing series came swiftly. There were these developments :

The day afte r the last of the series appeared, a special committee of Washington investment dealers voted to recommend a local law to insure more protection 

for the city’s investors. The committee was appointed by the Bond Club of 

Washington, whose 300 members represent a substantial segment of the city’s; 

investment community.

The following day, the executive director of the National Association of Securities Dealers and the regional director of the Securities & Exchange Commission covering the Washington area both publicly urged a local law to protect the 

public form unscrupulous or financially shaky investment firms.

The House Commerce Subcommittee chairman in charge of SEC legislation 

requested the SEC to comment on the accuracy of the series, and the adequacy 

of SEC regulation of the securities business in Washington.

The SEC promptly replied :

“We, of course, are familiar with Miss Ottenberg’s articles. Indeed, she substan tiate d many of the facts by consultation with members of our staff. While 

we have not checked every detail, we are satisfied with the essential accuracy of 

her articles and we believe Miss Ottenberg has rendered a valuable public 

service.

“We have been aware for some time of a substantial increase in the questionable activities of a class of securities dealers in the Washington area, many of 

whom have been newcomers here.”

The SEC went on to report tha t it had assigned a task force to Washington 

to step up its enforcement activities against the new crop of questionable dealers but warned tha t “this shifting of personnel does not meet the problem fully, 

is made at the expense of other responsibilities, and can only be temporary because the District of Columbia is by no means our only trouble spot.”

Further confirmation of the problems pinpointed in the series came when the 

Star learned that a broker barred in New York had opened for business here. 

In the following days, in the SEC started proceedings to revoke his license and 

ordered proceedings to determine whether four other Washington investment 

firms and two New York Stock Exchange firms with Washington branch offices 

should be stopped from doing business.

As the demand for regulation became stronger, the president of the Board of 

District Commissioners, ordered the Corporation Counsel to dra ft rules to license 

dealers and their salesmen. The city’s attorney promptly called a meeting of 

local and national experts in the field and found general agreement tha t new 

controls were needed to protect Washington investors.

The U.S. Attorney for the District of Columbia called on the authorities to 

provide him with existing complaints with an eye toward criminal prosecution. 

The SEC promptly turned over four cases.

As for the investors themselves, brokers reported tha t their customers, for the 

first time, were asking detailed questions about the securities being sold and the 

background and reputation of the investment firms with which they were doing 

business.
SECURITIE S REGULATIONS FOR THE DISTRICT OF COLUMBIA 59

Mir ia m Otten berg

Author of “Investors Beware” she won the Pulitzer Prize for 1960 for her 

series exposing a used-car racket in the Nation’s Capital.

She has delved into many phases of crime, communism, and corruption. She 

covered the Senate investigations of the dope traffic and campaigned for strengthened narcotics laws. She covered and interpreted the findings of the Kefauver 

committee in its expos6 of crime syndicates and dug into the activities of the 

“Five Percenters.”

Her investigations in the Nation’s Capital have led to more law enforcement 

tools against violators as well as pioneering laws in the fields of mental illness, 

sexual psychopaths, narcotics addiction, and mandatory commitment of the 

criminally insane. Her exposes of unethical practices in the used-car and homeimprovement fields have led to public awareness of consumer pitfalls as well as 

corrective legislation.

In an unprecedented tribute to a newspaper reporter, the law-enforcement 

community and civic leaders gave a reception in her honor, in 1958, where she 

was presented with a plaque signed by the Attorney General of the United States, 

congressional leaders, judges, prosecutors, and the chief of police.

(Whereupon, at 12:52 p.m., the hearing in the above-entitled ma tter 

was concluded.)

o