peculiarly well adapted to consider and to resolve new problems as they arise because it is composed of men who are in intimate and daily touch with the world of business and finance.

I believe that flexibility in the formulation of these rules is of the utmost importance. Rules in this domain must of necessity be capable of adaptation to conditions which change from day to day. A statute crystallizing in law the rules of today may be utterly ineffectual to deal with the conditions of tomorrow. Such rigidity might easily obstruct the normal development of American corporate procedure where the object should be not to obstruct but to influence, in the public interest, the direction of such development.

Notwithstanding the efforts made by the committee on stock list, evidence of which you will find in the document which I have placed in your hands. we recognize that there is much that we have not been able to accomplish. One of our difficulties has its roots in the lack of uniformity in the corporation laws of the various States. The competition between States in this field is a matter of common knowledge, and the tendency of many States to liberalize the provisions of corporate charters with a view to making their laws attractive for the incorporation of companies has led to practices which have often given At times we have been able to resist such practices with a fair degree of promptness, but more often we have had to wait until, either as a result of our efforts or otherwise, public opinion had developed to a point where it would support determined action on our part.

us concern.

The remedy for much of this we have long felt lies in a Federal incorporation statute. We recognize the enormous political difficulties in the way of such legislation, but the importance of it from the point of view of the protec tion of investors generally is so great and the advantages of it are so obvious that we would, with all respect, like to urge upon you the desirability to having this question fully explored.

Such an act would, for instance, furnish the means of clarifying and codifying such complicated questions as those growing out of preemptive rights, stock dividends, the par value of stock, or stocks of no par value. It would permit the development and imposition of uniform methods of accounting within industries, a matter of great importance to investors generally. Fur thermore, it would permit the general adoption of a desirable and simple provision to the effect that auditors should be responsible to the stockholders of a corporation rather than to its management, and should only be removable after a full hearing before a stockholders' meeting.

Instances of deliberate misrepresentation in connection with listing applications have, insofar as we know, been camparatively rare; that they have occurred, however, admits of no dispute. We are sympathetic to legislation providing penalties for false statements contained in listing applications or in documents submitted in support of these; and I believe that such legislation would not alone be helpful to us in the work that we are trying to do but would prove an enormous safeguard to the investing public. Legislation which will act as a deterrent and will at the same time provide adequate punishment for transgressors-taken in conjunction with such legislation as I have suggested above-will, I believe, be most effective to accomplish the purposes which are being sought in the relevant sections of the bill. Regulation which takes the form of an attempt at continuing supervision of corporate activities in order to prevent every conceivable kind of fraud will, in my opinion, not only fail to prevent fraud but will of necessity hamper the conduct of honest business.

I have come prepared, Mr. Chairman, to make a complete statement to you in regard to those provisions of the bill under consideration which relate most directly to the work of my committee. If your time permits I would like very much to read this statement to you now, in order that you may have an opportunity of questioning me fully in regard thereto in case you care to. I believe that such a discussion would prove most helpful to all concerned.

Now, Mr. Chairman, I have a statement dealing with the sections of the bill in detail, which I will hand to you for your convenience. The CHAIRMAN. Very well.

Mr. ALTSCHUL. I believe some of these points have already been covered, and it may be expedient if when we get to them I skip over them.

Mr. Pecora, I will be very glad if you interrupt at any time in this statement to discuss the particular matters that we happen to

be on.

Mr. PECORA. Mr. Altschul, would you pardon postponement of your reading of this statement just long enough to enable me to ask you one or two simple questions with regard to the statement you just read?

Mr. ALTSCHUL. Certainly.

Mr. PECORA. You say:

Instances of deliberate misrepresentation in connection with listing applications have insofar as we know been comparatively rare; that they have occurred, however, admits of no dispute. We are sympathetic to legislation providing penalties for false statements contained in listing applications or in documents submitted in support of these; and I believe that such legislation would not alone be helpful to us in the work that we are trying to do, but would prove an enormous safeguard to the investing public.

When you made that statement did you have in mind State legislation or Federal legislation?

Mr. ALTSCHUL. This statement was made in connection with a discussion of the Federal statute, and what I had in mind was that some of the benefits which you are obviously seeking in that statute, and with which we entirely agree, you would find a way to incorporate something in the statute which would cover. I am not a lawyer.

Mr. PECORA. You had in mind the Federal legislation?

Mr. ALTSCHUL. I was discussing the bill.

Mr. PECORA. Do you recognize that State legislation would be comparatively ineffectual?

Mr. ALTSCHUL. I recognize the difficulties, but I am not a lawyer. I am a layman. I cannot deal with the legal questions very thoroughly.

Mr. PECORA. And just one other question: In your reference in this statement to the efforts in the past made by the Committee on Stock List to keep off the board of your exchange stocks that contain no voting power, does that include voting trust certificates?

Mr. ALTSCHUL. It does not include voting-trust certificates.

Mr. PECORA. Do you recognize that that is a species of security which for a limited period of time at least deprives the purchasers, the stockholders, the public in other words

Mr. ALTSCHUL. Quite right.

Mr. PECORA. Of an effective voice in management?

Mr. ALTSCHUL. Quite right.

Mr. PECORA. And it is an evil comparable to the one of nonvoting stock, except that the evil is limited as to time?

Mr. ALTSCHUL. No, sir. I think there is another important difference there. In the case of a nonvoting stock the purchaser buys an instrument that has been deprived of a vote in perpetuity right at the start of the operation.

Mr. PECORA. Yes.

Mr. ALTSCHUL. In the case of the voting-trust certificate it generally comes into being as a voluntary exchange of the voting-trust certificate for a stock certificate that had the voting power, and presumably the holder of the stock certificate who makes that exchange is making it for considerations that seem to him persuasive. Mr. PECORA, How about the case of the Pennroad Corporation?

Mr. ALTSCHUL. Well, I am not familiar with the case of the Pennroad Corporation.

Mr. PECORA. Their certificates are listed, are they not?

Mr. REDMOND. Not listed on the New York Stock Exchange.
Mr. ALTSCHUL. I am not familiar with that.

Mr. PECORA. Then they are on the Curb, and I think they are listed on one of the New York exchanges.

Mr. REDMOND. I think they have been dealt in on the Curb. Mr. PECORA. Those were voting-trust certificates at the outset. Mr. ALTSCHUL. There are two fundamental distinctions. In the case of the voting trusts the laws of the various States on voting trusts are set up providing limits of time at the end of which the stockholder again returns to his former status.

The second point is that in a great many cases and in most of those that we have seen in the stock exchange, voting-trust certificates are issued in exchange for the stock and the exchange was made voluntarily by the stockholder, who exchanged his voting right for what he considered to be a good reason, and there are at times good reasons of that sort.

We do not feel that that has any of the same general implications that the nonvoting stock has.

I shall attempt to place before you my views concerning those provisions of the proposed legislation which relate most directly to the work of my committee. I find myself in accord with certain of these provisions. As I shall point out in detail later, others appear to me to go much too far and to be of such a nature as to suggest the possibility that they may defeat the purposes of the measure. I am heartily in favor of such measures as will afford the maximum degree of protection to the investing public. The efforts of the committee on stock list have constantly been directed to this end. While I feel that in the main these efforts have been constructive and helpful, I would be the last one to suggest that further progress cannot be made. To the extent to which the provisions of this bill represent such further progress, these provisions of course meet with my approval.

Briefly, the committee on stock list has developed certain standards and requirements which must be satisfied by applicant companies if their securities are to be eligible for listing at all. These standards and requirements are matters of gradual evolution, responsive to the changing aspects of American business life and to the constant development of corporate procedure.

In connection with an initial listing application, the committee requires a formal printed listing application containing such information and supported by the documents which you will find described in detail in the memorandum which I have submitted to you. In general, the listing requirements are designed to furnish information concerning the character and background of the business, the nature of its assets and operations, the record of its earnings and such other pertinent material as seems likely to assist the investor.

If the securities of a company have been admitted to the list and the company applies for the listing of additional securities, a similar listing application is required; and in this application there must be up-to-date financial statements of the applicant company together with a statement of the purposes of the issue applied for, a copy of

the resolution of the board of directors authorizing such issue, and an opinion of counsel, not an officer or director of the company, as to the validity of the issue contemplated. A strong and usually successful effort is made, in connection with the application for listing of additional securities, to have the company comply with the then current requirements. Such compliance is often made a condition of the listing requested.

While we have occasion to consult our own attorneys on many points, we do not have an independent staff of lawyers to determine whether all the legal requirements for the issued securities have been complied with, and while we take up many accounting questions with our consulting accountants, we do not have an independent staff of accountants to audit the accounts of applicant corporations. In the absence of contrary evidence, we accept the legal opinion furnished to us by responsible lawyers in connection with listing applications, and we accept the audits prepared in behalf of applicant companies by independent auditors.

In connection with applications for additional listings, we do not, in the absence of evidence of bad faith, seek to examine into the actions of boards of directors with a view to arriving at an independent determination as to whether they have acted in pursuance of sound business judgment or in accordance with proper standards of conduct; nor do we attempt to control such action.

It is the board of directors, not we, who are elected by and responsible to the stockholders for the outcome of their policies; the record of the company which persuaded stockholders to invest is the record of the management of the company, not our record. In my opinion, no central body, whether the stock-list committee or the Federal Trade Commission, can possibly succeed in performing the functions of the managements of all listed companies.

If there is anything in the application which appears to the committee to be open to question, then the committee makes every effort to have the question resolved in accordance with its views; but we have conceived our chief responsibility to be to see that the facts have been fully and adequately disclosed, and if this disclosure indicates nothing which appears to the committee to be unsound or improper, we do not undertake an independent investigation of the facts themselves. In other words, we accommodate ourselves to the general spirit of American institutions in dealing with persons appearing before us on the theory that they are honest until evidence to the contrary is adduced.

I approach the consideration of the pending legislation with the general view that stock exchanges perform a useful and an essential function in our national life. This I conceive to be primarily the furnishing of a market place for securities with a view to facilitating enterprises in filling their legitimate capital requirements and with a view to enabling investors to purchase and sell securities readily in response to their needs or desires.

I recognize that abuses have grown up about the market place which require correction in order that the public may be afforded proper protection, and I believe that the object of farsighted legislation should be to afford such protection while placing as few obstacles as possible in the way of the normal functioning of this important part of our economic mechanism. I suppose that there

would be general agreement with the principle that, to the extent that the provisions of the proposed legislation are so onerous in their application as to render it impossible for corporations to comply with their terms, these provisions must be looked upon as inconsistent with the conception of the useful and essential qualities of security exchanges and that accordingly such provisions should be either modified or eliminated.

With this general background, I proceed to an examination of the provisions of the bill before you insofar as they relate to the listing of securities on security exchanges. My comments should be read in the light of the foregoing general discussion. And before going into the particular discussion, Mr. Pecora, it may be that you have some questions that you would like to take up now on what we have covered.

Mr. PECORA. I have made some notations, but I think perhaps we could more advantageously enter upon a discussion after you have completed the reading of this document.

Mr. ALTSCHUL. Section 11-Registration requirements for securities:

I draw your attention to section 11 of the bill entitled "Registration Requirements for Securities." Before entering into a detailed comment upon these requirements, I would like to consider this section in its broader aspects. One effect of this provision is to require that all existing securities now listed on any exchange shall be registered in accordance with the provisions of the act at least 30 days prior to its effective date if they are to continue to be traded in thereafter on the exchanges on which they are now listed.

Securities now listed are held today in various ways largely in reliance upon the fact that there is a market for them on recognized exchanges. To deprive these securities, or any considerable part of them, of the market which investors and lenders alike have relied on would be disastrous. On this account, it is important to point out, in the first instance, that the registration requirements for securities, taken in their entirety, could very easily in a large number of instances have this effect.

In my opinion, it is a dangerous thing to impose onerous requirements in connection with the registration of new issues, as this so easily has the effect of damming up the capital market of the country, with resultant hardships to industries seeking capital for expansion or for meeting maturities. However, it is far more dangerous to impose such requirements upon existing securities because this can obviously have the effect of freezing a large part of the liquid capital of the country, with the most deflationary consequences to individual holders, banks, financial institutions, no less than to the industry of the country as a whole.

Difficult as the administrative features of the act are insofar as they apply to new issues, they are infinitely more difficult when they apply to that great bulk of securities already outstanding. If section 11 is read in conjunction with section 32, it becomes apparent that if any securities now issued are to be traded in on any security exchange after the effective date of the act, October 1, 1934, applications for registration thereof must have been made before September 1, 1934. The act presumably contemplates that applications so filed and the documents supporting them are to be reviewed by