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

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

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

The certificate of incorporation also requires the association to provide

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Securities and Exchange Commission in 1942 because, among other reasons, there was no express statutory basis for the rule.

The legal foundation for such a rule is now presented in this bill for the first time and would give the association the authority to write rules relating to minimum capital requirements for its members.

The special study has made suggestions concerning minimum capital for broke-dealers engaged in various categories of the securities business. The board strongly supports this section of the bill and believes that proper minimum capital requirements can be developed and defined by the association whose rules, of course, must be reviewed by the Commission and not disapproved.

As to qualifications of persons entering the business, the association has since 1956 imposed upon the new salesmen of its members a requirement that they pass an examination dealing with various technical, economic, and regulatory aspects of the securities business. This examination has been made progressively more difficult. Moreover, the association has lately developed new examinations and has coordinated its activities in the examination of persons entering the securities business with other groups and is now in the process of extending even more difficult testing requirements to members new to the business and their principals.

Thus, the board welcomes the provision of the bill in the qualifications area as it provides the basis upon which the association may adopt additional safeguards for the public. The association will confer with the Securities and Exchange Commission and will correlate the information provided in chapter 3 of the report of the special study in developing and establishing those rules considered desirable.

That portion of the bill which would require all broker-dealers to become members of a national securities association, as recommended by the special study, is supported by the board of this association. We agree with the aims upon which this section of the bill is premised, and we believe the extension of self-regulation to those who are not presently covered to be worth while.

Those portions of the bill which would allow direct action by the Commission against individual violators and which would allow proceedings by the association against individuals without the necessity for joining their employers in the action are considered to be helpful in the efficient handling of disciplinary matters. We feel confident that the Commission will exercise this power in a manner that will serve to expedite proceedings against individuals while retaining full authority over their employers.

In this regard we expect the association to adopt new procedures under which it also may proceed against individuals without the necessity of joining the employing member in the proceeding purely for technical jurisdictional reasons.

Furthermore, we welcome that section of the bill which would shorten the time period in which persons disciplined by the association can appeal to the Securities and Exchange Commission. Since the appeal procedure is simple, the present period of 60 days has proved to be more time than needed and in many instances has served as a means of delaying the ultimate disposition of a case to the possible detriment of the public.

The board supports those other sections of the bill dealing with the broadening of the statutory disqualifications of brokers and dealers from registration with the Commission, the addition of intermediate sanctions against broker-dealers in Commission disciplinary proceedings, the elimination of the exemption for broker-dealers engaged in intrastate activities, and the elimination of the requirement of proof of use of the facilities of interstate commerce in proceedings involving violations of the Securities Exchange Act of 1934 by broker-dealers. The bill would add to existing law a provision stating that the association shall adopt rules pertaining to quotations of securities. The association presently disseminates retail quotations through its nationwide district and local quotations committees under the overall supervision of its national quotations committee. Retail quotations of the over-the-counter securities are supplied by the association to the major financial dailies as well as to almost all of the newspapers throughout the country that publish quotations of over-thecounter securities.

The association has, since its inception, been concerned with the problems inherent in quotations of over-the-counter securities which involve a range of prices within which securities could have been traded on a given date.

We believe that section of the proposed bill pertaining to quotations to be a useful basis upon which the association, after reviewing the quotations section of the special study report to be released soon, may develop additional rules and procedures.

The board has no objection to the amendments to section 4(1) of the Securities Act of 1933 which would extend the requirements as to delivery of prospectuses for certain first issues from 40 to 90 days and would add a provision which would allow the Commission to shorten this period by rule or order.

We might comment here that we do not believe that this amendment will have much effect in preventing so-called hot issues, issues which command immediate premiums over the offering price. We support fully the permitted shortening of both periods by Commission action. Over the past year and a half, the association has been reviewing all provisions of its bylaws and rules in an effort to update and supplement them in areas where experience has proved the necessity therefor. We have received the first segment of the report of the special study and are now attempting to correlate our study of our bylaws and rules with those recommendations contained in the five published chapters. When the remaining chapters of this study are published, we shall proceed to complete these revisions. We believe that the study shall be of material aid to us in the forthcoming years in establishing those standards in the securities business which the public interest requires. Finally, we take this opportunity to express our appreciation to the Securities and Exchange Commission for discussing these legislative proposals with the industry. We strongly support the Commission's aims in this legislation and urge the enactment of the bill by Congress. We trust consideration will also be given to our suggestions.

We appreciate this opportunity to present our views, and we will endeavor to answer any questions you may have at this time.

Senator WILLIAMS. Thank you very much, Mr. Lemkau. Your statement and the position taken by your association represent the

highest degree of statesmanship. I understand that this bill and your position have been worked out in community discussion, perhaps some negotiation, with the Securities and Exchange Commission. You have had the opportunity to confer at length?

Mr. LEMKAU. That is correct.

Senator WILLIAMS. And, I would judge again, very productively. Mr. LEMKAU. That is also correct, Mr. Chairman.

Senator WILLIAMS. Just a few questions and observations. Your membership is 4,680? Is that right?

Mr. LEMKAU. That is correct.

Senator WILLIAMS. And there are some 87,950 registered representatives of members?

Mr. LEMKAU. That is also correct.

Senator WILLIAMS. Registered representatives of members. These are individuals who analyze and sell securities for members? Is that right?

Mr. LEMKAU. They are the principals of firms which are registered with us, and they are salesmen. There are additional people hired by these firms. I believe last year we estimated the total number of personnel in the firms who were then members at 142,000.

Senator WILLIAMS. But the figure 87,950 amounts to those whom you could describe as salesmen of securities?

Mr. LEMKAU. Correct. They are the people dealing with the public, the principals and their salesmen.

Senator WILLIAMS. When you formulate tests concerning standards and qualifications, are these given to the salesmen or just to your members?

Mr. LEMKAU. The tests run to the salesmen and to the principals. And we have just recently adopted a more difficult examination which we expect to apply to new people entering the business as principals. Senator WILLIAMS. But the salesmen do go through the testing process?

Mr. LEMKAU. All new salesmen go through the testing process. Senator WILLIAMS. Do you anticipate a substantial increase in your membership if this bill becomes law?

Mr. LEMKAU. I believe in yesterday's testimony it was mentioned there might be some 300 additional firms who would wish to become members of our association. We, of course, have no knowledge whether they will wish to join us or to set up an affiliated association. Senator WILLIAMS. Affiliated?

Mr. LEMKAU. Yes, sir.

Senator WILLIAMS. Is there a requirement of affiliation?

Mr. ROCKEFELLER. It could be affiliated or could be a separate association under 15 (a).

Mr. WHITE. There is a provision in section 15 (a) now for affiliated associations. There are at present no affiliated asociations. The test in the section of the act is that their rules be at least as stringent as an existing asociation. However, I am sure the Commission could accept the registration of an association under section 15 (a), although I think they probably-although I am not speaking for them-would follow the requirements that are set forth now in the section on affiliation.