Mr. CARY. We had-Senator, I am not sure I can provide that at this very moment. When I spoke before the commitee-the subcommittee of the Committee on Interstate and Foreign Commerce of the House of Representatives, we did provide certain statistics-I am not sure that they would give you quite what you are driving at. But if you would give me one moment here.

I think I might start, if I may, Senator Dominick, at page 4 of my written testimony before the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce of the House of Representatives, on May 21, 1962, when I urged the need for this legislation.

And, at that time-if I may, I would like to read excerpts from my discussion at both pages 4 and 5, which gives some statistics. And I might say that Mr. Brown, who is here and handling our regional area, might be able to give you some practical situations which would further amplify the point.

We say here the genesis and subsequent history of many new firms reflects what has caused our anxiety and resulted in our actions.

A staff study the past 5 years shows that many local brokerage firms have been formed by persons formerly associated with houses that the Commission has 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. Half of this group had two such persons.

Then, if I may skip over to other statistics or points made at page 5 of my manuscript, I say here:

A barometer of what the District's security problem was may be seen in the great number of enforcement actions brought by the Commission, and complaints filed with 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 total of 20 such proceedings were brought, nearly twice that of the previous period. Similarly, from June 1, 1955–

Senator DOMINICK. Could I interrupt you, Mr. Cary?

Those proceedings that you refer to, from July 1 of 1959 to 1962, were they proceedings against an alleged broker-dealer?

Mr. CARY. That is correct, yes.

Senator DOMINICK. Thank you.

Mr. CARY. Administrative proceedings.

Similarly, from June 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 had 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 it is responsibleMaryland, Virginia, West Virginia, Delaware, and Pennsylvania.

I think that is as close to statistical information as I can furnish. Mr. Brown, who has been working very actively in this field, could supplement it with cases, if you wish to pursue them.

Senator DOMINICK. I think for my purpose that is satisfactory. I just wanted something in this hearing record which would give the background of this.

Now, let me go on, if I may, to the variable annuity problem.
Mr. CARY. Yes, sir.

32-278-64-3

Senator DOMINICK. I might say that I don't know skidledee about this thing at all. I don't even know what a variable annuity is, other than from your statement.

But along with everybody else on the committee, I presume we have been getting letters from people saying either this is good or this is bad.

This is an area, as I understand it, in which the Commission has not been involved prior to this time. Is that correct?

Mr. CARY. With respect to variable annuities, we have been involved, in this sense, Senator. We brought action some years ago against the Variable Annuity Life Insurance Co. of the District of Columbia, which had been formed really primarily for the purposes of selling them.

Now, at that time, the question arose whether or not these were securities. And we took this case up to the Supreme Court and established the principle that they were securities within the meaning of the Securities Act of 1933.

Senator DOMINICK. Mr. Cary, may I ask you a question there? Do you know of anything which involves any paper that is not a security under that definition?

Mr. CARY. Well, you are quite right that the definition is broad, but there are certain exemptions, as you may know, including insurance. And-for instance, an insurance policy, we have no jurisdiction with respect to those. And in a sense that is the crucial distinction that is to be drawn in this area. Our jurisdiction only goes to the variable annuity policies, and not to insurance policies as such. Senator DOMINICK. Now, was this taken up at the same time you started asserting jurisdiction over investment trusts held by the banks? Mr. CARY. No, sir; it preceded it. Our position with respect to this firmly established our jurisdiction over variable annuities.

And then the question of the so-called managing agency accounts to be formed by banks has, as I understand it-I think I am correcthas since come up, and it is at this point we have taken what we deem to be a very consistent position of saying that the managing agency account is another form of a mutual fund being organized in this case by a bank whereas a variable annuity is a-involves a mutual fund which is being organized by an insurance company.

Senator DOMINICK. Now, in the process of your statement here, you state that variable annuities involve risks and advantages inherent in investment in equity securities. You don't say it in exactly those words, but putting the top two sentences together I gather that is what you mean.

Mr. CARY. That is correct.

Senator DOMINICK. My understanding of a variable annuity, just from listening to you-as I say, I don't know anything about it at all-is some insurance man goes out and says, "Why have a fixed annuity when you don't know what the value of the dollar is going to Why don't you buy an annuity which is payable out of a furd, and if the fund goes up you get more, if it goes down you get less."

Is that about right?

Mr. CARY. That is correct. That is a very good summary of it, yes. Serator DOMINICK. Is there any particular reason why there is something wrong with this type of program?

Mr. CARY. Not a thing wrong with it.

And our position is not that there is anything wrong with it. It is simply the very point you just made, namely, that if it goes up you get the benefit, if it goes down you take the loss. In other words, you take the risk.

You are, therefore, investing in a sort of proportionate part of a pool of securities. And you are taking the risk-as distinguished from the insurance company itself taking the investment risk. You see the difference in that case.

Senator DOMINICK. It is my understanding, however, that there are regulations over the management of these funds, under the insurance commissioners.

Mr. CARY. Well, there may be to some extent. But we would say that and we are not in every way taking jurisdiction over these in all respects. I would say basically that there are distinct elements of an interest in a mutual fund, and as a consequence, like mutual funds they should be subject to our jurisdiction.

Senator DOMINICK. The thing that constantly concerns me is the conflict between agencies and groups as to who is going to control the person who is trying to make a living. It bothers me all the time. It is happening in control of the banks. My understanding is that the SEC is in disagreement with the Comptroller of the Currency, both on common trust funds and also on these managing agency accounts. And now we have it again in this variable annuity.

I suspect that this is far from the last time that we will have it. We will have it as new people think up new ideas for investments.

But I don't like your idea as to whether or not we should follow through on the basic definition and say anything which involves an investment and involves a piece of paper evidencing it should be controlled by the SEC.

Mr. CARY. I don't want to push a position further than we do in this area involving insurance companies on the one hand-I shouldn't say insurance companies-I should say the separate fund of insurance companies which is presenting the variable annuity and the managing agency account.

Our general thesis is this, that if a bank decided to go into other forms of business, let's say it began to sell drugs or any other area, then under those circumstances, for instance, the drugs they sold might be subject to the Food and Drug Administration.

Now, the banks are moving out of the commercial banking industry, which is a dollar for dollar, that is, a fixed liability kind of industryand moving entirely into the mutual fund industry, at this particular

moment.

Now, it is at that point, only at that point that we say that fund which they organized-will represent a fund in which securities-in which people participate, and, therefore, have a security interest.

In other words, as they shift from an industry to another industry, they then become subject to our jurisdiction.

Senator DOMINICK. Well, I am not going to argue that, because this is part of the problem of whether diversification is or is not good, and whether you have a right to diversify a little bit.

Mr. CARY. We are not objecting. We don't take a position on whether they should diversify.

We simply say when they diversify, they become subject to our act.

Senator DOMINICK. As I say, I think this is going to become an increasing problem, which is why I posed this theoretical question to you. And, in general, what you are saying, if it involves anything which can be within the terms of a security, it should be governed by the SEC. In general, this is what you are saying.

Mr. CARY. We say that when the insurance industry goes into the field of variable annuities, or when the banks go into the area of managing agency accounts, both of these involve securities subject to the Securities Act, and in some cases subject to the Investment Company Act-not entirely, but in some areas.

Senator DOMINICK. As I think I have said to you before, Mr. Caryif I haven't I have said it to some of the others as a lawyer, I always advised my clients to file a prospectus, and not try to avoid SEC registration, because it was my opinion that this was the best insurance policy that anybody could have, and that you put all the adverse information you could dream up about a company in a prospectus, and nobody read it anyhow, and, therefore, once you got it in you could not possibly get hurt or get sued.

And it seems to me that we can go overboard on this, just to the extent that that has gone overboard—as a man who buys securities myself from time to time, I would not dream of reading a prospectus. It just takes too long, and you don't get the other side of the picture, in my opinion.

So I don't want to get into a position where we are doing the same type of thing, providing a form of insurance for people who in some instances may not even be reporting the facts accurately.

But I think your testimony has been helpful on this. It does seem to me to provide the background for at least the need for this particular type of legislation. And whether it should cover variable annuities is, of course, still up in the air. We haven't heard the other side of it.

Let me ask you this one question. This bill, with the exception of what type of securities it covers-is this the standard form of brokerdealer regulation that has been enacted by the various States?

Mr. CARY. This is modeled on the Uniform Securities Act. The variations from that I cannot speak to, but I would like to ask Mr. Loomis to speak to any variations he is aware of. He worked with the committee, of which Mr. Acheson was the chairman, to work out the details of this bill.

Senator DOMINICK. Mr. Loomis, could you keep this, as far as I am concerned, down to those which are really of some substance?

Mr. LOOMIS. I will keep it down very much, particularly as I am not familiar with all of the details.

This is basically the Uniform Securities Act as promulgated by the Commissioners on uniform State laws-95 percent, anyhow-except that this does not provide for the regulation of security issuers, new issues of securities. That part of it was taken out, and this is primarily, in fact solely a regulation of brokers, dealers, and salesmen, rather than of issuers of securities.

Senator DOMINICK. This doesn't cover issuers of securities at all? Mr. LOOMIS. No, it does not.

Senator DOMINICK. Why?

Mr. LOOMIS. I think the decision was made that the problem was not too serious as far as issuers in the District of Columbia were con

cerned, and also they, of course, are subject to the Securities Act of 1933. And the problem that we had was with brokers and dealers, rather than with the issuers. That was all.

Senator DOMINICK. And they are subject to the Securities Act of 1934?

Mr. LOOMIS. Yes.

As I mentioned, it is somewhat different. And I think the main reason I didn't have anything to do with making this decision, and maybe others will tell you later is simply that we didn't have a problem with the issuers-the problem was with the broker-dealers.

There are not too many securities issued in the District of Columbia, which is a rather small area.

Mr. CARY. Primarily our problem has been with these migratory people coming in, for example, and organizing broker-dealer firms. It is not so much the new issuance of securities.

Mr. LOOMIS. There are a few changes from the Uniform Act but I don't think that fit District conditions and laws, but I don't think they are significant.

Senator DOMINICK. Have you had any complaints about those changes, the effect it might have, as being unfair?

Mr. LOOMIS. I have heard no complaints as to the changes made from the Uniform Act in this bill.

Senator DOMINICK. Thank you, Mr. Chairman.

Senator HARTKE. In regard to the issuance of the license, in regard to the standards, there are certain prescribed areas in which a license can be denied originally or suspended.

May I ask you, Mr. Cary, are there any standards as to what is in the public interest? What would require the Commission, other than arbitrary decisions-what relief would a person have, if you made an application for a license, and it was denied?

Mr. CARY. This is under the Securities and Exchange Act, administered by us, or are you referring now to the new bill?

Senator HARTKE. I am talking about the new bill.

Mr. CARY. On that point, sir, I would like to ask Mr. Loomis to speak.

Mr. LOOMIS. Well, the bases for denying and suspending licenses are set out in section 10 of the bill. They include a list of types of misconduct, having been enjoyed or convicted or willfully violating the law, or been dealt with by the Commission.

And then there are certain other tests not in our act-insolvent, or has engaged in a dishonest or unethical practices in the securities business, or while acting in any fiduciary capacity. That is subparagraph 7. Or has failed to reasonably supervise the agents, in the case

of a broker.

And there is also the power to require the posting of bonds, and to require, also, that the applicant qualify by passing an examination, and by having a certain amount of experience.

It doesn't seem to me that the Uniform Act allows arbitrary action. I know that the Uniform Act was generally supported by the securities industry, and was carefully considered by committees of the securities industry when it was being formulated. And I doubt if they would have been for it if it had allowed too arbitrary treatment of them.

Senator HARTKE. Maybe I read section 10 wrong then.