3. Under section 16 of the Exchange Act, corporate insiders are restrained from using inside information for personal profit. These insiders must report their securities transactions; the corporation may recover their trading profits made with a 6-month period; and they are not allowed to sell short.

S. 1642 will make the three above-mentioned requirements applicable to the over-the-counter market. Initially, companies having $1 million in assets and a class of equity securities held of record by 750 or more persons would be required to register with the Commission and assume the obligation of listed companies. This standard will result in an estimated coverage of 2,400 added companies (excluding banks and insurance companies).

The examination of additional registration statements and preliminary proxy statements, the review of additional annual reports, and conducting investigations and other administrative actions will require 56 additional positions for the Division of Corporation Finance. However, 13 positions under the Division's present personnel allocation will be utilized for the additional workload. Thus, an additional 43 positions are requested for the Division effective January 1, 1965. An additional six positions are required for the field offices effective January 1, 1965 to assist the Division in investigations and other administrative actions.

After 2 years, or a longer period if the Commission so determines, the stockholder requirement would drop to 500 shareholder level. This standard would result in an estimated total coverage of 2,900 companies (excluding banks and insurance companies)—an increase of approximately 500 companies in the 500 to 749 shareholder category.

The bill provides that the administration and enforcement of the disclosure, proxy, and insider trading provisions of the Securities Exchange Act, shall, with respect to bank securities, be vested in the appropriate Federal bank supervisory agencies. Also, the bill exempts stock insurance companies under certain conditions.

REGULATION OF BROKERS AND DEALERS

The second major aspect of S. 1642 relates to qualification standards and controls over those in the securities business. The vast growth in the securities markets has been accompanied by a rapid increase of brokers and dealers and their employees. For example, the membership of the National Association of Securities Dealers (NASD), the self-regulatory agency for the over-the-counter market, has more than doubled since 1945; over the same period its registered representatives have increased from about 25,000 to 95,000 and branch offices of members from 790 to 4,713. This expansion-accompanied by a comparable growth in securities traded and in the number of investors-has strained the regulatory pattern of the securities acts and emphasized the dramatic need for stronger and more refined controls.

S. 1642 is designed also to raise the standards for entry into the securities business; to enlarge the scope of self-regulation; to refine Commission disciplinary controls over brokers, dealers, and their employees; to clarify and improve existing provisions dealing with related matters; and to permit the assessment of fees by the Commission for expenses incurred for the regulation of registered brokers and dealers who are not members of the NASD. The controls provided would have their primary impact upon those who deal in over-thecounter securities and would complement the protections recommended with respect to companies whose securities are traded in that market.

Under existing law, control over over-the-counter brokers and dealers begins with the requirement that they register with the Commission. Section 15 of the Exchange Act provides for revocation or denial of registration if a firm, or any person associated with it, (1) has been convicted of a crime involving securities transactions or the securities business; (2) is enjoined from engaging in any act or practice in connection with securities transactions; or (3) has willfully violated the Securities Act or the Exchange Act.

Section 15A of the Exchange Act authorizes registration with the Commission of national securities associations. These organizations of over-the-counter brokers and dealers were intended to provide a medium for self-regulation for the over-the-counter market comparable to the securities exchanges in the listed market. Section 15A contains rather detailed provisions concerning the rules, organization and disciplinary proceedings of such associations and gives the Commission a certain amount of regulatory power over them. Only one association, the NASD, has registered and the great majority of brokers and dealers are members.

The principal changes to the existing law are listed below:

1. Brokers and dealers who are registered with the Commission but who are not members of the NASD would pay such reasonable fees as may be necessary to defray the costs of the Commission in performing those additional regulatory duties which are required to be performed because such broker or dealer is not a member of such an association.

2. Any broker and dealer who is registered under section 15 but who is not a member of the NASD would be prohibited from using the mails or means of instrumentalities of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any securities except on a national exchange unless the broker or dealer and all natural persons associated (includes sales personnel) with it meet certain qualifications prescribed by the Commission. These qualifications would relate to training, experience, and such other qualifications as the Commission finds necessary or desirable.

3. In a disciplinary action, the Commission could proceed directly against an employee of a broker or dealer in lieu of proceeding against the entire firm, and the authority of a national securities association to do the same would be clarified. The Commission could also impose sanctions short of revoking registration, such as a temporary suspension, censure or bar a person directly.

4. In addition to other technical changes, certain provisions would broaden the Commission's powers to alter or supplement association rules relating to organization, discipline, and eligibility for membership; eliminate in the case of registered brokers and dealers the necessity for proving that the mails and instrumentalities of interstate or foreign commerce were used in a particular prohibited transaction; authorize a registered association to adopt rules under which it might exclude from membership persons who had been suspended or expelled from a national securities exchange; shorten the period for appeals to the Commission from action taken by a registered securities association from 60 to 30 days.

It is anticipated that the major expenses involved in this part of the bill will relate to the Commission's new responsibilities over brokers and dealers who are not members of the NASD. The aim of the bill will be, through Commission regulation, to have non-NASD brokers and dealers in the same position, and subject to equivalent fees, as NASD brokers and dealers. Here the Commission will in effect be taking the place of the NASD in establishing qualification standards, supervising selling practices, and developing and enforcing rules embodying just and equitable principles of trade. However, since certain data regarding brokers and dealers is not available, the Commission cannot estimate at this time the full impact of the bill for the remainder of fiscal 1965. In order to determine the workload involved, manpower required and accompanying costs (which will be recoverable) for fiscal 1966 to implement the various provisions of the bill relating to brokers and dealers, a group composed of six positions (three attorneys, two stenographers, and one clerk) will be required on or about October 1, 1964. It will be the responsibility of this group to develop rules and regulations, forms and internal procedures and fee schedules. It will be necessary to obtain a more detailed picture of the non-NASD brokers and dealers.

On January 1, 1965, it is anticipated that this group will be augmented by an additional six positions (one attorney, two investigators, two examiners, and one stenographer) for the following purposes: (1) establish the nucleus of a registration unit for nonmembers of a registered securities association; (2) develop inspection procedures regarding such nonmembers; and (3) perform a number of pilot inspections.

The initial cost of establishing this group in 1965 as well as the cost of administering the fully integrated regulatory program in 1966 and thereafter will be recovered annually from those regulated, by the imposition of appropriate fees in accordance with a schedule to be established. For 1965, the estimated cost is $90,000. The bill provides that fees are to be prescribed to defray such costs. Any fees so collected will be deposited to the general fund of the Treasury.

I have indicated generally the programs for which we are requesting 43 additional positions for the Division of Corporation Finance, 6 positions for our regional offices and 12 positions for the Division of Trading and Marketsa total of 61 positions. The remaining four positions are for administrative services.

The amount requested in this supplemental estimate for 1965 is required to enable it to conduct its operations in an efficient and adequate manner and in accordance with the expressed intent of the new legislation.

Since I will be leaving at the end of next week and as this budget relates to important operating matters of the Commission for the coming year, I thought it appropriate and advisable to request Commissioner Cohen, who has been designated as my successor by the President, to make the Commission's presentation before your committee. I shall, of course, accompany Commissioner Cohen to the hearing.

Sincerely yours,

ADDITIONAL POSITIONS

WILLIAM L. CARY,

Chairman.

Mr. THOMAS. You indicate you want $390,000 but that $90,000 will be recovered through fees.

You want 65 new jobs. As well as I remember only 10 percent will be in the field.

Mr. COHEN. That is right.

Mr. THOMAS. You break down your allocation on page 5. Let us insert table on page 5 in the record.

(The table referred to follows:)