closely approximates the interpretation placed by most courts on "willfully" and is an appropriate culpability level for offenses in this highly regulated field. The Committee intends that "knowingly" receive the same construction under all the securities offenses in which the term is used, thereby effecting a beneficial clarification and unification of the applicable culpability standard.

Subsection (a) (2) contains the false statements provisions for the securities laws. It harmonizes existing law by using the same description of the statements prohibited in each of the securities laws, rather than different language for each statute. The change is primarily stylistic rather than of substance since, although the language in existing statutes differs, the courts have tended to construe the statutes as containing essentially the same terms.62

Under this subsection, it is an offense to make a false statement of a material fact or to omit to state a material fact required to be stated or necessary to make a statement not misleading in a registration statement, offering circular, report, application, or other document filed or required to be filed, or kept or required to be kept, under enumerated securities laws. This provision is worded similarly to section 49 of the Investment Companies Act of 1940.63 Although the language is like that in proposed section 1343 (Making a False Statement), it has been formulated with the intention of carrying forward the existing specialized case law on false or misleading statements in the securities area, which places a high degree of responsibility on persons dealing in securities to assure the accuracy of materials used in selling those securities.64

The conduct in this offense is making a statement or omitting to state a fact. Since no culpability level is specifically prescribed, the applicable state of mind that must be proved is at least "knowing," ie., that the defendant was aware of the nature of his actions.65

The elements that the statement was false and concerned a "material" fact, or that the omission was of a "material" fact required to be related or necessary to make a statement not misleading, are existing circumstances. As no culpability standard is specifically designated, the applicable state of mind to be shown is, at a minimum, "reckless," i.e., that the defendant was conscious of but disregarded the risk that the circumstances existed.66

Under subsection (b), the provisions of section 1345 that apply to section 1343 (Making a False Statement) apply under this section. Section 1345 contains definitions, applicable, inter alia, to section 1343, of the terms "statement" and "material." Those definitions are discussed in connection with the offenses in subchapter E of chapter 13, and that discussion should be consulted here.

The element that the statement or omission was in a registration statement, offering circular, etc., is also an existing circumstance as to which the requisite mental state is at least "reckless."

The element that the registration statement or other document was filed or required to be filed, or kept or required to be kept, under

62 See S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963).

63 15 U.S.C. 80a-48.

64 See, e.g., United States v. Simon, supra note 60.

65 See sections 303 (b) (1) and 302 (b) (1).

66 See sections 303 (b) (2) and 302 (c) (1).

enumerated statutes is also an existing circumstance. However, under the provisions of section 303 (d)(1)(A), no mental state need be shown as to this element.

Subsection (a) (3) lists the offenses under the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, and the Investment Advisers Act of 1940 which are treated as felonies. These include the following offenses:

(A) Offenses related to regulation of stock exchanges, brokers, and investment companies:

(i) Violations relating to margin and credit financing, under section 7 (c), (d), and (f) of the Securities Act of 1934; 67

(ii) Violations of regulations relating to short sales and the use of stop-loss orders on national securities exchanges under section 10 (a) of the Securities Exchange Act of 1934; 68

(iii) Violation of prohibitions of certain short sales of securities by the beneficial owner of more than ten percent of a security, or by an officer or director of the issuer of a security under section 16(c) of the Securities Exchange Act of 1934;

69

(iv) Violations of prohibitions against certain stock transactions by unregistered investment companies, or a depositor, trustee, or underwriter of such a company under section 7 of the Investment Company Act of 1940; 70

(v) Conflicts of interest in the acquisition or disposition of property or securities by a registered investment company in violation of section 17 (a), (d), or (e) of the Investment Company Act of 1940; 1

71

(vi) Violations of restrictions on loans by registered investment companies to controlling shareholders or in violation of company policy under section 21 of the Investment Company Act of 1940; 72

(B) Fraud and false statements:

(i) Fraud in the solicitation of proxies in violation of Rule 14a-973 promulgated under the Securities Exchange Act of 1934;

(ii) False information statements to shareholders in violation of Rule 16c-6 7 promulgated under the Securities Exchange Act of 1934;

(iii) Fraudulent tender offers for securities in violation of section 14(e) of the Securities Exchange Act of 1934;75

(iv) Fraud by investment advisers in violation of section 206 (1), (2), or (3) of the Investment Advisers Act of 1940; 76 and (C) Political contributions by public utility holding companies and their directors in violation of section 12 (h) of the Public Utility Holding Company Act of 1935.7

The discussion and analysis under subsection (a) (1) is equally applicable to this subsection and should be referred to here.

67 15 U.S.C. 78g (c), (d), and (f).

68 15 U.S.C. 78j (a).

89 15 U.S.C. 78p (c).

70 15 U.S.C. 80a-7.

71 15 U.S.C. 80a-17 (a), (d), or (e).

72 15 U.S.C. 80a-21.

73 17 C.F.R. § 240.14a-9.

74 17 C.F.R. § 240.14c-6.

75 15 U.S.C. 78n (e).

76 15 U.S.C. 80b-6(1), (2), or (3).

77 15 U.S.C. 79-1(h).

Subsection (a) (4) makes it an offense to fail to file reports or documents required to be filed with the Securities and Exchange Commission by officers, directors, and major shareholders of (1) corporations registered under the Securities Exchange Act of 1934,78 (2) public utility holding companies registered under the Public Utility Holding Company Act of 1935,79 or (3) closed end investment companies registered under the Investment Company Act of 1940.80

The conduct in this offense is failing to file a report or document. As no culpability level is specifically set forth, the applicable state of mind that must be proved is at least "knowing," i.e., that the offender was aware of the nature of his actions.81

The fact that the report or document was required to be filed under one of the enumerated statutes is an element requiring no proof of any state of mind.82

It should be noted that the brief descriptions of the statutes cited in subsections (a) (1) through (a) (4), contained in parentheses, are not to be construed as limiting the scope of application of those enactments.83

Except for those specific areas where changes in existing law have been made, the offenses in this section are designed to bring forward the body of case law under current statutes which for the most part has been highly protective of the interests of the investing public. 4. Jurisdiction

84

This section contains no subsection setting forth the extent to which Federal jurisdiction attaches to an offense herein. Ordinarily, therefore, by operation of section 201 (b) (2), Federal jurisdiction would exist if the offense was committed within the general jurisdiction of the United States. However, this provision does not apply since this section incorporates by reference the definitions of offenses in title 15, which carry their own jurisdictional limitations. It is those limitations that govern the reach of this section. It should be noted that the existing confusion in the securities area on the question whether the offender has to know that interstate commerce or the mails were used in the perpetration of the offense 85 will be obviated by the provision of section 303 (d) (2) that "proof of state of mind is not required with respect to any matter that is solely a basis for federal jurisdiction."

5. Grading

The offenses described in subsection (a) (1) are graded as Class D felonies (up to seven years in prison) while those described in the remainder of the section are graded as Class E felonies (up to three years in prison). All reckless violations of the securities laws, whether

78 Section 16(a) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78p(a)). 78 Section 17(a) of the Public Utility Holding Company Act of 1935 (15 U.S.C. 79q (a)). 50 Section 30 (f) of the Investment Company Act of 1940, as amended (15 U.S.C. 80a29 (f)).

81 See sections 303 (b) (1) and 302(b) (1).

82 See section 303 (d) (1) (A).

83 See section 112 (b).

E.g., S.E.C. v. Capital Gains Research Bureau, Inc., supra note 62; United States v. Simon, supra note 60; United States v. Peltz, supra note 60; United States v. Schwartz, supra note 60: Travis v. United States, 247 F.2d 130 (10th Cir. 1957); United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968), cert, denied, 394 U.S. 946 (1969); United Sattes v. Buckner, 108 F.2d 921 (2d Cir.), cert. denied, 309 U.S. 669 (1940); Seeman v. United States, 90 F.2d 88 (5th Cir. 1937); United States v. Abrams, 357 F.2d 539 (2d Cir.), cert. denied, 384 U.S. 1001 (1966).

85 Compare Price v. United States, 200 F.2d 652, 655 (5th Cir. 1953), with United States v. Attaway, 211 F. Supp. 682, 684 (W.D. La. 1962).

of a provision covered as a felony under section 1761 if violated knowingly, or not otherwise covered as an offense, are graded as Class A misdemeanors (up to one year in prison) under the penalty provisions of the securities laws as codified in title 15 and amended by this bill.86 This grading structure replaces the existing structure which made all offenses under the Securities Act of 1933 and the Trust Indenture Act of 1939 five-year felonies and all offenses under the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, and the Investment Advisers Act of 1940 two-year felonies.

The grading scheme adopted by S. 1 has the advantages of distinguishing more carefully among the felonies according to the severity of their impact on the public, and of providing misdemeanor coverage for lesser included offenses of the offenses in section 1761 and for less serious securities offenses.

87

With two exceptions, the fines for offenses under this section will be as high or higher than they are under existing law. The statutes now provide either $5,000 or $10,000 ss maximum fines for offenders convicted under the securities laws, except that an exchange convicted under section 32 of the Securities Exchange Act of 1934, as amended,s is subject to a $500,000 maximum fine, while a holding company not an individual which is convicted under section 29 of the Public Utility Holding Company Act of 1935 90 is subject to a $200,000 maximum fine.

Under section 2201 of the subject bill, an individual convicted of a felony ordinarily would be subject to a maximum fine of $100,000 and an organization convicted of a felony, to a maximum fine of $500,000. In addition, under subsection (c), a fine of up to twice the pecuniary gain of the offender or twice the loss to the victim could be assessed.

If an individual is convicted of a misdemeanor under the Act (there are no misdemeanor provisions now), he is subject to a maximum fine of $10,000, and an organization is subject to a maximum fine of $100,000, unless application of section 2201 (c) would result in a higher fine. Again, these fines are equal to or higher than the existing fines for felonies, except in the case of misdemeanors by exchanges under the Securities Exchange Act of 1934 and by holding companies not individuals under the Public Utility Holding Company Act of 1935. The Committee believes that these increased fine levels will be especially important in the securities area, where the criminal laws play such a substantial role. This is especially true of the deterrent effect of section 2201 (c), with its fines based on financial gain or loss.

86 See, as amended by Title II of this bill, section 24 of the Securities Act of 1933 (15 U.S.C. 77x): section 325 of the Trust Indenture Act of 1939, as added by the Act of August 3, 1939 (15 U.S.C. 77yyy); section 32 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78ff); section 29 of the Public Utility Holding Company Act of 1935 (15 U.S.C. 79z-3); section 49 of the Investment Company Act of 1940 (15 U.S.C. 80a-48): section 217 of the Investment Advisers Act of 1940. as amended (15 U.S.C. 806-17).

87 Section 24 of the Securities Act of 1933 (15 U.S.C. 77x); section 325 of the Trust Indenture Act of 1939, as added by the Act of August 3, 1939 (15 U.S.C. 77yyy).

88 Section 32 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78ff); seetion 29 of the Public Utility Holding Company Act of 1935 (15 U.S.C. 79z-3): section 49 of the Investment Company Act of 1940 (15 U.S.C. 80a-48); section 217 of the Investment Advisers Act of 1940, as amended (15 U.S.C. SOb-17).

89 15 U.S.C. 78ff.

90 15 U.S.C. 79z-3.

SECTION 1762. MONETARY OFFENSES

1. In General and Present Federal Law

This section carries forward the basic reporting and recordkeeping offenses contained in 12 U.S.C. 1730d, 18296, 1951-1959, and 31 U.S.C. 1051-1143, enacted together in 1970. The above provisions are designed to obtain financial information and to insure the keeping of records having a "high degree of usefulness in criminal, tax, or regulatory investigations or proceedings." 91

The statutes were enacted following extensive hearings concerning the unavailability of foreign and domestic bank records of customers thought to be engaged in activities entailing criminal or civil liability. Under the Act, the Secretary of the Treasury is authorized to prescribe by regulation certain record-keeping and reporting requirements for banks and other financial institutions in this country. Criminal penalties attach only upon violation of regulations promulgated by the Secretary.92

The title 12 statutes contain the general recordkeeping requirements for banks and other financial institutions. 12 U.S.C. 1829b applies only to Federally insured banks and requires that such banks record the identities of persons having accounts with them and of persons having signature authority over such accounts. It also mandates, to the extent that the Secretary determines by regulation that such records would have a "high degree of usefulness," the creation and maintenance of microfilm or other reproduction of each check, draft, or other instrument received by it for deposit or collection, along with an identification of the party for whose account it is to be deposited or collected. The above section also authorizes the Secretatry to require insured banks to maintain a record of the identity of all individuals who engage in transactions that are reportable by the bank under Title II of the Act.

12 U.S.C. 1730d amends the National Housing Act to authorize the Secretary to apply similar recordkeeping requirements to institutions insured thereunder. 12 U.S.C. 1953 empowers the Secretary to issue regulations applying similar recordkeeping requirements to uninsured banks and institutions or any person engaging in the business of (1) issuing or redeeming checks, money orders, travelers' checks, or like instruments, except as an incident to the conduct of its own nonfinancial business, (2) transferring funds or credits domestically or internationally, (3) operating a currency exchange or otherwise dealing in foreign currencies or credits, (4) operating a credit card system, or (5) performing such similar, related, or substitute functions for any of the foregoing or for banking as may be specified by the Secretary in regulations.

12 U.S.C. 1952 authorizes the Secretary to require reports with respect to the ownership, control, and management of uninsured banks and institutions if he determines by regulation that such reports have a "high degree of usefulness" in criminal, tax, or regulatory investigations or proceedings.

91 31 U.S.C. 1051 12 U.S.C. 1829 (a) (2); 1951 (b).

92 See California Bankers Ass'n v. Shultz, 416 U.S. 21, 25–27 (1974).