bars any person from being associated with a member (e.g., by ordering that a member cannot employ a certain person as a salesman because of some alleged statutory bar), such action will be reviewed by the Commission if the aggrieved person makes application for review or if the Commission institutes review on its own motion.

Second change. The second change in this section would shorten the period in which an aggrieved member, person associated with a member, or person seeking to become a person associated with a member, may apply for review by the Commission of the specified types of action by a registered securities association. The change would shorten that period from "60 days within such longer period as the Commission may determine" to "30 days or within such longer period as the Commission may determine." This would expedite review and yet leave ample time for aggrieved persons to make application for review.

or

Third change. The third change relates to stays of action by a registered securities association pending final Commission determination upon review. Under present law, application to the Commission for review automatically, and in all cases, stays the action taken by the association. In a few cases, this is undesirable. For example, if a member is expelled by the NASD for fraudulent conduct, an application for review to the Commission automatically stays the expulsion and there is no procedure whereby the Commission can order otherwise, even though it appears clear the NASD's action will be upheld by the Commission on review. In effect, such a broker-dealer is patently buying time pending the expected Commission decision upholding the NASD action. Under the proposed change, the Commission would be empowered, after notice and opportunity for hearing on the question of the stay, to order that there will be no stay of the action of a registered securities association pending the Commission's ultimate decision on review. The Commission could, in its discretion, order that the hearing on the question of the stay be limited to affidavits and oral arguments. The Commission could order a hearing on the question of a stay either on its own motion or upon application of the registered securities association. Any such application for hearing on the question of a stay could be acted upon summarily, and without notice, by the Commission. The denial of an application by the registered securities association for a hearing on the question of a stay would, of course, not be appealable by the association. Also, if a hearing on the question of a stay is ordered, and if the Commission finds that there should be a stay pending final determination, neither the association nor any other person could appeal that finding. In any such proceeding concerning the question of a stay, the Commission would not order that there be no stay unless it found it to be necessary or appropriate in the public interest or for the protection of investors so to order.

Section 7(d), amending section 15A (h)—Procedure in Commission review of disciplinary action and denial of membership by a registered securities association

Section 15A (h) specifies the procedure and the Commission's authority in reviewing disciplinary action by an association against members and in reviewing association action in denying membership. The proposed amendment would make those procedures and that authority also applicable to Commission review of disciplinary action against persons associated with members and to the barring by an association of any person from being associated with a member. In view of the proposal to make membership in the association compulsory, the extent of the Commission authority to review disciplinary action by the NASD, particularly denials of membership and expulsion from membership. becomes particularly significant. Under existing section 15A (g) any person aggrieved by any such action may appeal to the Commission as of right and any decision by the Commission upon such an appeal is subject to further review in the appropriate U.S. Court of Appeals. In the case of any appeal from disciplinary action by the NASD against a member, the Commission is required by existing section 15A (h) (1) to set aside the action of the NASD unless it finds, after appropriate notice and opportunity for hearing, upon consideration of the record, that the member has engaged in the acts, practices or omissions constituting a violation of such rules of the association as were alleged by it to have been violated. Even if these findings are made, section 15A (h) (2) provides that if the Commission finds that the penalty imposed upon the member is oppressive or excessive, it shall cancel, reduce, or require the remission of such penalty. It has been the consistent construction of the Commission that

it is required to pass upon the question of whether or not any penalty is excessive or oppressive, and to make the determinations called for by this subsection, if the issue is raised by a person appealing to it.

In addition, section 15A(b) (4) provides that expulsion from an association constitutes a bar to future admission to membership only if the expulsion was for violation of a rule of the association which prohibits conduct inconsistent with just and equitable principles of trade, and the Commission is required by section 15A(h), in any appeal from a disciplinary proceeding, to determine whether or not the conduct prohibited by the rule upon which the association relies is inconsistent with just and equitable principles of trade. It has therefore been the consistent administrative construction of the Commission and the NASD that an expulsion of a member for violation of a rule of the association operates as a bar to his readmission only if the rule in question is one which prohibits conduct inconsistent with just and equitable principles of trade.

As a practical matter, the Commission knows of no case, other than those involving nonpayment of dues or fines, in which the NASD has expelled or suspended a member without finding that his conduct was inconsistent with just and equitable principles of trade.

Section 7(e), amending section 15A(k) (2)—Expansion of Commission's power to alter or supplement rules of registered securities association relating to organization, discipline, and eligibility for membership

Section 15A(k) (2) now authorizes the Commission to require the alteration or supplementation of the rules of an association with respect to four enumerated matters, including organization, discipline, and eligibility for membership.

It is proposed that subdivision (A) of section 15A (k) (2) be amended to add the following to the areas in which the Commission can alter or supplement the rules of a registered securities association: Basis for and procedure in connection with the barring from being associated with a member, the disciplining of persons associated with a member, and the qualifications (which would include training, experience, and integrity) required for members, or persons associated with members or any class of either. The Commission is proposing amendments to section 15A relating to disclipline and qualifications for membership, and the proposed amendment to subdivision (1) of section 15A(k) (2) would be needed to insure that the Commission retains ultimate control in these areas, consistent with the philosophy of the Maloney Act.

Under the proposed amendment, the Commission would, of course, have full power to alter or supplement the rules of a registered securities association in the areas covered by the proposed new paragraph (5) of section 15A(b), including the area of members' capital and the financial responsibility of members.

In addition, the introductory portion of section 15A(k) (2) would be amended to clear up a technical procedural ambiguity. Under the procedures of present law, the Commission makes written request of an association to adopt a specified alteration or supplement to its rules. If the association fails within a reasonable time to adopt such alteration or supplement, the Commission may, by order, alter or supplement the rules of the association in the manner theretofore requested, if after notice and opportunity for hearing, it appears to the Commission that such alteration or supplement is necessary or appropriate in the public interest or for the protection of investors or to effectuate the purposes of section 15A. Under existing law, it is unclear whether the alteration or supplement ordered to be adopted must be the exact one submitted to the association before the opportunity for hearing. This is an unfortunate ambiguity, for the hearing (or written comments submitted outside of a hearing) may show that the alteration or supplement first submitted should be modified. The proposed amendment would make it clear that the Commission can modify the alteration or supplement first requested (after notice and opportunity for hearing on such alteration or supplement) and that the modified alteration or supplement can be ordered adopted without further notice and opportunity for hearing. Section 7(f), amending section 15A (1) (2)-Giving the Commission power to suspend or bar a person from being associated with a member of a registered securities association

The Commission presently has authority to suspend or expel a member of a registered securities association for a violation of the Securities Act of 1933 or the Securities Exchange Act of 1934 (or rules or regulations thereunder). This amendment would give the Commission express authority to suspend (for a

period not to exceed 12 months) or bar an individual from being associated with a member, on the same grounds that a member may be suspended or expelled by the Commission. This is a part of the overall proposal that the Commission be given authority to proceed against individuals as well as firms and is a correlative of proposed section 15(b) (3) giving the Commission power to bar or suspend a person from being associated with a broker or a dealer. Of course, an individual who is a respondent in a proceeding under this provision would be entitled to the same due process protections as members presently have, including a right of appeal to the appropriate Federal court of appeals, as specified in the Securities Exchange Act, if the Commission makes an adverse determination.

As would be true under proposed section 15(b) (3), the Commission would have discretion concerning joinder or nonjoinder of individuals with brokers or dealers or other persons, and could proceed against persons who are not, and have not been, associated with a broker or dealer or member.

COMPARATIVE PRINT OF PROPOSED AMENDMENTS TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

[Deletions in black brackets-additions in italics]

Section 2 would add the following paragraphs to subsection (a) of section 3 of the Securities Exchange Act of 1934, as amended:

"(18) The term 'person associated with a broker or dealer' means any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), or any person directly or indirectly controlling or controlled by such broker or dealer, including any employee of such broker or dealer. The Commission may by rules and regulations classify, for the purpose of any portion or portions of this title, persons, including employees, controlled by a broker or a dealer. In such rules and regulations the Commission shall appropriately exclude from the scope of subsection (b) (other than paragraph (3) thereof) of section 15 hereof persons associated with a broker or dealer whose functions are clerical or ministerial.

"(19) The terms 'investment company,' 'affiliated person,' and 'insurance company' have the same meanings as in the Investment Company Act of 1940. "(20) The terms investment adviser' and 'underwriter' have the same meanings as in the Investment Advisers Act of 1940.

"(21) The term 'person associated with a member' means a person who is registered with a registered securities association pursuant to its rules or who is associated with a broker or dealer which is a member of such association." Section 3(a) would amend subsection (b) of section 12 of the Securities Exchange Act of 1934, as amended, as follows:

"(b) A security may be registered on a national securities exchange by the issuer filing an application with the exchange (and filing with the Commission such duplicate originals thereof as the Commission may require), which application shall contain

"(1) Such information, in such detail, as to the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer, and any guarantor of the security as to principal or interest or both, as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors, in respect of the following:

"(A) the organization, financial structure and nature of the business; "(B) the terms, position, rights, and privileges of the different classes of securities outstanding;

"(C) the terms on which their securities are to be, and during the preceding three years have been, offered to the public or otherwise;

"(D) the directors, officers, and underwriters, and each security holder of record holding more than 10 per centum of any class of any equity security of the issuer (other than an exempted security), their remuneration and their interests in the securities of, and their material contracts with, the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer ; "(E) remuneration to others than directors and officers exceeding $20,000 per annum ;

"(F) bonus and profit-sharing arrangements;

"(G) management and service contracts;

66

"(H) options existing or to be created in respect of their securities: "(I) material contracts, not made in the ordinary course of business, which are to be executed in whole or in part at or after the filing of the application or which were made not more than two years before such filing, and every material patent or contract for a material patent right shall be deemed a material contract;

"[(I)] (J) balance sheets for not more than the three preceding fiscal years, certified if required by the rules and regulations of the Commission by independent public accountants;

“[(J)] (K) profit and loss statements for not more than the three preceding fiscal years, certified if required by the rules and regulations of the Commission by independent public accountants; and

"[(K)] (L) any further financial statements which the Commission may deem necessary or appropriate for the protection of investors. "(2) Such copies of articles of incorporation, by-laws, trust indentures, or corresponding documents by whatever name known, underwriting arrangements, and other similar documents of, and voting trust agreements with respect to, the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common cnotrol with, the issuer as the Commission may require as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security.

“(3) Such copies of material contracts, referred to in paragraph (1)(I) above, as the Commission may require as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security."

Section 3 (b) would amend subsection (f) of section 12 of the Securities Exchange Act of 1934, as amended, as follows:

"(f) Notwithstanding the foregoing provisions of this section, any national securities exchange, [upon application to and approval of such application by the Commission, and] subject to the terms and conditions hereinafter set forth, (1) may continue unlisted trading privileges to which a security had been admitted on such exchange prior to [March 1, 1934] the effective date of subsection (g) of section 12 of this title, or (2) upon application to and approval of such application by the Commission, may extend unlisted trading privileges to any security duly listed and registered on any other national securities exchange. [, but] If an extension of unlisted trading privileges to a security was originally based upon its listing and registration on another national securities exchange, such [unlisted trading] privileges shall continue in effect only so long as such securities shall remain listed and registered on any other national securities exchange. [; or (3) may extend unlisted trading privileges to any security in respect of which there is available from a registration statement and periodic reports or other data filed pursuant to rules or regulations prescribed by the Commission under this title or the Securities Act of 1933, as amended, information substantially equivalent to that available pursuant to rules or regulations of the Commission in respect of a security duly listed and registered on a national securities exchange, but such unlisted trading privileges shall continue in effect only so long as such a registration statement remains effective and such periodic reports or other data continue to be so filed.]

"No application pursuant to this subsection shall be approved unless the Commission finds, after appropriate notice and opportunity for hearing, that the [continuation or] extension of unlisted trading privileges pursuant to such application is necessary or appropriate in the public interest or for the protection of investors. [No application to extend unlisted trading privileges to any security pursuant to clause (2) or (3) of this subsection shall be approved except after appropriate notice and opportunity for hearing. No application to extend unlisted trading privileges to any security pursuant to clause (2) or (3) of this subsection shall be approved unless the applicant exchange shall establish to the satisfaction of the Commission that there exists in the vicinity of such exchange sufficiently widespread public distribution of such security and sufficient public trading activity therein to render the extension of unlisted trading privileges on such exchange thereto necessary or appropriate in the public interest or for the protection of investors. No application to extend unlisted trading privileges to any security pursuant to clause (3) of this subsection shall be approved, except upon such terms and conditions as will subject the issuer thereof, the officers and directors of such issuer, and every beneficial owner of more than

10 per centum of such security to duties substantially equivalent to the duties which would arise pursuant to this title if such security were duly listed and registered on a national securities exchange; except that such terms and conditions need not be imposed in any case or class of cases in which it shall appear to the Commission that the public interest and the protection of investors would nevertheless best be served by such extension of unlisted trading privileges. In the publication or making available for publication by any securities exchange, or by any person directly or indirectly controlled by such exchange, of quotations or transactions in securities made or effected upon such exchange, such exchange or controlled person shall clearly differentiate between quotations or transactions in listed securities, and quotations or transactions in securities for which unlisted trading privileges on such exchange have been continued or extended pursuant to this subsection. In the publication or making available for publication of such quotations or transactions otherwise than by ticker, such exchange or controlled person shall group under separate headings

“(A) quotations or transactions in listed securities, and

"(B) quotations or transactions in securities for which unlisted trading privileges on such exchange has been continued or extended pursuant to this subsection.]

"The Commission shall by rules and regulations suspend unlisted trading privileges in whole or in part for any or all classes of securities for a period not exceeding twelve months, if it deems such suspension necessary or appropriate in the public interest or for the protection of investors or to prevent evasion of the purposes of this title. [Unlisted trading privileges continued for any security pursuant to clause (1) of this subsection shall be terminated by order, after appropriate notice and opportunity for hearing, if it appears at any time that such security has been withdrawn from listing on any exchange by the issuer thereof, unless it shall be established to the satisfaction of the Commission that such delisting was not designed to evade the purposes of this title or unless it shall appear to the Commission that, notwithstanding any such purpose of evasion, the continuation of such unlisted trading privileges is nevertheless necessary or appropriate in the public interest or for the protection of investors.]

"On the application of the issuer of any security for which unlisted trading privileges on any exchange have been continued or extended pursuant to this subsection, or of any broker or dealer who makes or creates a market for such security, or of any other person having a bona fide interest in the question of termination or suspension of such unlisted trading privileges, or on its own motion, the Commission shall by order terminate, or suspend for a period not exceeding twelve months, such unlisted trading privileges for such security if the Commission finds, after appropriate notice and opportunity for hearing, that [by reason of inadequate public distribution of such security in the vicinity of said exchange, or by reason of inadequate public trading activity or of the character of trading therein on said exchange] such termination or suspension is necessary or appropriate in the public interest or for the protection of investors.

"In any proceeding under this subsection in which appropriate notice and opportunity for hearing are required, notice of not less than ten days to the applicant in such proceeding, to the issuer of the security involved, to the exchange which is seeking to continue or extend or has continued or extended unlisted trading privileges for such security, and to the exchange, if any, on which such security is listed and registered, shall be deemed adequate notice, and any broker or dealer who makes or creates a market for such security, and any other person having a bona fide interest in such proceeding, shall upon application be entitled to be heard.

"Any security for which unlisted trading privileges are continued or extended pursuant to this subsection shall be deemed to be registered on a national securities exchange within the meaning of this title. The powers and duties of the Commission, under subsection (b) of section 19 of this title shall be applicable to the rules of an exchange in respect of any such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors, either unconditionally or upon specified terms and conditions, or for stated periods, exempt such securities from the operation of any provision of section 13, 14, or 16 of this title."