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(The remainder of the statement referred to is as follows:)
Section 19 of the bill imposed liability upon persons controlling any other person liable under the provisions of the bill when such control exists through stock ownership, agency or otherwise or by any agreement or understanding. These provisions seem to apply more particularly to corporations and officers, directors and stockholders of corporations than to exchanges or brokers. There is, however, one extraordinary provision which might directly affect brokers. Subdivision (d) provides that the acts of a husband, wife or child or parent residing with a person subject to any provision of the bill, or a trustee for such person of property used in the transaction in question, may be imputed to such person unless he shall sustain the burden of showing that the acts were not done with his approval or for the purpose of evading the bill. In view of the numerous provisions of the bill, to which criminal penalties are attached, and the fact that à violation of many of them could occur through inadvertence, this provision, which makes a man responsible not only for his own acts, but for the acts of independent persons, may operate in a grossly unfair manner.
Section 20 of the bill authorizes the Federal Trade Commission to investigate for the purpose of determining whether any person has violated or is about to violate any provisions of the bill. It further gives to the Federal Trade Commission certain remedies whenever it is satisfied that a person is violating or intends to violate any provision of the bill or any rule or regulation adopted by the Federal Trade Commission. These remedies include, first, the right to secure an injunction; second, the right to suspend any national exchange from registration for a period not exceeding 12 months or to withdraw its registration altogether; and, third, the right to suspend for a period of 12 months or order the expulsion from a national exchange of any member or officer who the Federal Trade Commission finds has violated any provision of the bill or any rule or regulation thereunder, or who has effected any transaction for any other person who he has reason to believe is violating any of the provisions of the bill or any of the rules and regulations adopted pursuant to it. These powers to suspend an exchange or to terminate its registration and to suspend or require the expulsion of a member or officer of an exchange may apparently be exercised whenever the Federa! Trade Commission is convinced that the exchange or an officer or member of it has violated any provision of the bill or any of the rules or regulations which the Federal Trade Commission may adopt, irrespective of whether such violation is material or immaterial or willful or inadvertent. The determination of the Federal Trade Commission in such cases is apparently final because the later provision which permits an aggrieved person to review in the courts the orders of the Federal Trade Commission specifically provides that the findings of the Commission as to facts, if supported by evidence, shall be conclusive. This section, therefore, gives the Federal Trade Commission complete control of exchanges and puts every officer and member of an exchange at the mercy of the Commission.
Sections 21 and 22 of the bill provide that all hearings before the Commission shall be public and that all information received by it shall be public records. The latter provision, which would seem to require that all information which the Federal Trade Commission may receive from corporations must be made available to any person who wishes to examine it may result in putting American business at a distinct disadvantage in competing with foreign enterprises. We all know that every important business has trade secrets and processes and formulas which have value chiefly because they are not available to competitors. In like manner, many of the statistics in regard to the operations of companies are of little value to stockholders and investors, but of inestimable worth to competitors. These provisions requiring publicity may, therefore, have very serious consequences.
Section 23 of the bill provides that any person aggrieved by an order of the Federal Trade Commission may have it reviewed in the courts, but, as I have pointed out, the value of this right of legal review is to all intents and purposes destroyed by the provision that the findings of the Commission as to the facts, if supported by evidence, shall be conclusive. The acts of the Commission would in almost every instance involve a determination of matters of fact rather than of matters of law. This provision gives a semblance of protecting the rights of persons subject to the power of the Federal Trade Commission but, in fact, does not in any way restrict the absolute power of the Federal Trade Commission under the bill.
Section 24 of the bill deals with the criminal penalties which may be imposed for any violation of any provision of the bill or of any rule or regulation which the
Federal Trade Commission may adopt pursuant to it. The maximum penalties are fixed at a fine of $25,000 or imprisonment of not more than 10 years, or both, except in the case of an exchange when a fine of not exceeding $500,000 may be imposed. These extraordinarily heavy penalties are made applicable to persons who make or are responsible for making any statement in a report or document filed with the Commission, which, in the light of the circumstances under which it was made, was false or misleading in any matter sufficiently important to influence the judgment of an average investor. The vagueness of this definition, on which the criminal liability of citizens may depend, makes the harsh penalties of the bill cruel and unusual. Finally, while these penalties apply only to willful violations of a provision of the bill or of a rule or regulation adopted by the Federal Trade Commission, or to a person who willfully is responsible for a false or misleading statement in a paper filed with the Commission, apparently there is no such protection afforded to a person who makes a statement to the Federal Trade Commission and he will be liable whether his act was willful or not.
Section 25 of the bil vests in the District Courts of the United States and the United States courts of any Territory and the Supreme Court of the District of Columbia jurisdiction of offenses and violations of any provision of the bill, and also of suits brought to enforce any liability or duty created by it.
Section 26 of the bill purports to deal with the effect of the bill on existing law. Subdivision (a) provides that the rights and remedies created by the bill shall be in addition to existing rights and remedies and attempts to declare that any State laws providing for the supervision or regulation of the administration or the conduct of the business of any exchange shall be superseded by the provisions of the bill. I am advised that the constitutionality of any such provision can be questioned.
Section 27 of the bill deals with the validity of contracts and subsection (a) declares void any contract or condition binding a person to waive compliance with any provision of the bill. Subsection (b) declares void every contract made in violation of any provision of the bill or of any rule or regulation adopted by the Federal Trade Commission and also attempts to provide that even contracts, which were lawful when entered into, shall likewise be void in respect of any cause of action arising after the effective date of the bill or of any rule or regulation adopted pursuant to it.
Section 28 of the bill attempts to control transactions on foreign exchanges by making it unlawful for any broker or dealer to make use of the mails or of any means of interstate transportation or communication for the purpose of executing a transaction on an exchange outside of the United States, except in accordance with such rules and regulations as the Federal Trade Commission may prescribe. As in the case of section 14, which attempts to control over-the-counter markets, the validity and effectiveness of this provision are open to grave doubt.
Section 29 of the bill requires every registered exchange to pay as a license fee one five hundredth of 1 percent of the aggregate dollar amount of transactions taking place on such exchange during the preceding calendar year. This sum is described as a registration fee and is to be paid not to the Treasury of the United States but to the Federal Trade Commission itself. In effect, this is not a registration fee but a tax upon the security business, which is already subject to special taxes by Federal and State Governments. There is no means of accurately computing what this tax would amount to in the case of the New York Stock Exchange because there are no statistics showing the aggregate dollar amount of the sales of securities which took place upon it. A rough estimate, however, would indicate that it might approximate somewhere between $500,000 and $1,000,000.
Section 30 of the bill authorizes the Federal Trade Commission to employ and fix the compensation of an apparently unlimited number of employees and further exempts all such employees from the provisions of the Civil Service Act.
Sections 31 and 32 of the bill merely provide for the separability of its provi. sions in the event that any of them are invalid and make October 1, 1934, the effective date of the bill.
The CHAIRMAN. In view of our legislation in the past, that is not much more stringent than the Federal Trade Commission is empowered to do now, and the Interstate Commerce Commission is empowered to do?
Mr. Whitney. It is infinitely more stringent, sir, where the hearings shall be secret.
The CHAIRMAN. We have been conducting investigations by this committee, through a special counsel, for 4 years. We have not had to resort to any public hearing whatsoever in order that the entire, financial set-up of the railroads, power, light and gas companies, telegraph and telephone companies, the radio companies, and of the airways. We have not had, in a single instance, to go to court with any company, and they have all, after some argument, given to this counsel all information in answer to every questionnaire that he has asked them, and he has gone into their books, into their financial set-up, into their physical set-up, in every particular that a questionnaire could reach. I do know that it has been done without the blare of trumpets, and the case has not been tried in the newspapers, and I think that probably that is one reason why we have been able to get all of the information, and I do not think that they or their business have been hurt by any questions that they have been asked, and answered.
Mr. WHITNEY. And I did not mean to so imply with regard to this section. What I do mean to imply in the last paragraph part is that the person or officer appearing cannot divulge to any of his partners, or others in the corporation, what transpired at the investigation.
I call your attention, sir, to sections 21 and 22 of the bill, which, however, provide that all hearings before the Commission shall be public and all information received by it shall be public records. I do not understand where it is an investigation, in one category, and a hearing—whatever the distinction may be—which shall be public, and it would seem that in the latter that it might work to the great detriment of corporations, from a competitive point of view. I thought that you were referring to the secret end of it. The CHAIRMAN. Probably that is why it is written that way,
that it was thought that it might do harm in giving the competitor information that he would not want the public to know.
Mr. WHITNEY. The two sections seem to be at variance, and particularly that part of it with regard to secrecy, and it seems, as I said, that an individual may not disclose to anybody connected with him in the business what has transpired insofar as the investigation is concerned.
The CHAIRMAN. That would not apply to anything he would say in the investigation?
Mr. WHITNEY. It would seem so, sir.
Mr. COOPER. Mr. Whitney, I want to submit one or two questions that I would like to have your comments on.
Does this bill give the Federal Trade Commission supervision over rebuilding of industry?
Take the steel industry, for instance. There are millions of dollars today invested in the steel industry. However, it may be necessary to make some changes, enlargements, which would require a large amount of capital through the sale of their stocks and bonds. Under the bill, the Federal Trade Commission has the power to prohibit the sale of those securities on the stock market exchanges. am going to say what I said the other day: There seems to be the pretty general feeling that our Government is entering upon a policy
preventing any further expansion of industry along certain lines.
Now, I Now, under this bill, the Federal Trade Commission would prevent an industry from expanding if it had to do it through the sales of stock and bonds on the stock exchange, could it not?
Mr. WHITNEY. I believe so.
Mr. WHITNEY. Yes, sir; I believe the bill gives the power to the Federal Trade Commission to have complete control over management if it so desires.
There are certain specific provisions in the bill, and added to those is the power of the Federal Trade Commission to put any other one in as they may please.
Mr. Chairman, with regard to the making of reports, it is specifically stated as to annual and quarterly, audited reports and monthly reports, as well, it gives them the power to make these reports, and the way of accounting, and so on, and if they then have that power, in my opinion they would have the power to dictate the management of the corporations throughout this country, if they choose to do so.
The CHAIRMAN. You would not say, Mr. Whitney, that you could control a company by controlling its method of accounting?
Mr. WHITNEY. Yes.
The CHAIRMAN. We are doing that with the railroads and have been for a long time. The railroads must have a uniform system of accounting and that system of accounting is prescribed by the Interstate Commerce Commission.
Mr. WHITNEY. Yes, sir; but this bill
The CHAIRMAN (continuing). And any regulatory body in the world, if it is going to understand the figures of the people regulated, has got to have some system of accounting that they can understand themselves.
Mr. WHITNEY. And I agree with that.
Mr. WHITNEY. I fully appreciate that. We are working along that same line.
The CHAIRMAN. I had thought that we had all agreed a long time that if the Government were going to have anything to do with the regulation of business, that it had one thing that it must come to, and that is a uniform system of accounting.
Mr. WHITNEY. Well, I do not understand that there is a necessity for the regulation of private business. I can quite understand the regulation of the railroads that are interstate carriers; but I do not understand the necessity of the regulation of private business.
The CHAIRMAN. It is an incident to the sale of stocks through the stock exchanges. If we have got any power to regulate the stock exchanges, then we must have these incidents, must we not? Of course, the argument you are now making is that we have not the power to regulate the sales of stocks and bonds of a corporation for the simple reason we are not allowed to regulate the corporation, because it is not charged with a public interest.
Mr. WHITNEY. No, sir; I do not mean to say that. The Federal Trade Commission, through the Federal Securities Act, has a very definite power to regulate the sale of stocks and bonds, already, of new issues.
The CHAIRMAN. To regulate them?
Mr. WHITNEY. To regulate them.
Well, by the provisions and the type of statements demanded, and the penalties that accrue from various points of view, there is, in my mind, the power to regulate and on the same basis, as I say, the same power to regulate as exists in this act.
The CHAIRMAN. The Securities Act has been as much misrepresented as any act that was ever passed by Congress. It was written around the theory that the public had a right to know, that the investing public had a right to know something about the company whose securities it was to buy.
Mr. WHITNEY. With that we are in entire agreement.
The CHAIRMAN. And that is the reason why the questionnaire is submitted to them, and that is the reason why we make it a penalty for a willful misstatement of material facts. We do not think that is drastic; do you?
Mr. WHITNEY. Not a willful misstatement; no, sir.
The CHAIRMAN. Well, the failure to state in reply to a questionnaire a material fact.
Mr. WHITNEY. I do not know how a man can be sure.
The CHAIRMAN. And then, furthermore than that, may I say to you with reference to the Securities Act, that after a man makes that statement he is not held liable if he exercises reasonable care, which is understood by lawyers, and reasonable care would go so far that if he depended upon a reputable auditor or a reputable engineer, even though he did not know the facts stated within the questionnaire, it would be reasonable care and due care; yet that act has been advertised all over the country as one with so many penalties on directors that men have been frightened off of directorships. Do you agree with me that they should? We have had a report in herewe had one filed with this committee day before yesterday, with reference to power and gas interests, in which one man was an officer or a director in 254 companies. Do you think that a man could know every much personally about the business of that many companies?
Mr. WHITNEY. If they were all subsidiaries of the company of which he was the head, he might very well know a great deal.
The CHAIRMAN. Well, they are not all subsidiaries.
Mr. Cooper. Mr. Whitney, referring to subsection (c) of section 18:
(c) The authority above given the Commission shall include, among other things, authority to prescribe such rules and regulations for national securities exchanges, their members and persons transacting a business in securities through such members, in addition to those specifically provided in this act.
In other words, the Federal Trade Commission can go far and beyond any power they have, under this act, according to those words, can they not?
Mr. WHITNEY. That is what I have tried to maintain, and what I have tried to maintain to the chairman with regard to the corporations, will be, as I see it, the power to manage, dictate to the management of exchanges, as well as corporations, and I cannot see anything else in this act but that.
Mr. COOPER. Now, I am going to try to bring out a point I brought out the other day. As I said, there seems to be a general feeling that the Government is entering upon a policy of curtailing production.