Section 12 compels municipalities to have an outside audit in order to have their bonds listed.

The only comment I have on that is that it is pretty costly. Many States have systems of audit which they think are fairly satisfactory. Even an audit would not help particularly. It would not cure their credit. What they really need is a balanced budget and somebody to make a survey to be sure they are not spending more money than they are getting from taxes. That is what makes a municipal bond good, and not the accuracy of their accounts. As a matter of fact, the safety and the security of a municipal bond do not depend upon the integrity or the good business ability of the officials; that may be helpful, but they depend upon the taxpaying ability of the taxpayers in the town. If they depended upon the good business ability and the integrity of the officials, even though the latter were the best in the world when the bond was sold, the next administration might have less capable and honest officials; and if the value of the bond depended upon that it would be very unstable.

An audit of a municipality would simply certify as to the honesty of the officials and the correctness of their accounts. A municipality, for instance, might require a million dollars for its operating expenses and only levy half a million dollars to meet these expenditures, and thereby ruin their credit, but still be perfectly honest. Another municipality might levy a million dollars; some official might steal $100,000, but, if they only needed the remaining $900,000 to meet all their operating expenses, they would balance their budget in spite of the theft, and the bonds would be much more salable and at better prices than those of the municipality previously cited. Section 14 seems to make it unlawful to sell, and practically prohibits the sale of, any State or municipal bonds which did not comply with the Commission's ruling, which probably includes_a provision for registration with the Federal Trade Commission. In view of the vast number of political subdivisions in the country, this is hardly feasible. This paragraph would prevent the sale of new bonds and would seem to prevent the sale, or the use as collateral for loans in times of stress, of any bonds now outstanding which might be held by insurance companies, savings banks, Postal Savings funds, pension funds, individuals, and corporations. Many of the institutions just specified and many corporations own municipal bonds which they hold as a reserve against the time when they may need to sell them or borrow money on them. Unless the issuers of these bonds register them, the bonds would not be available for this purpose and would be nonsalable.

Section 17

Senator GOLDSBOROUGH. What about section 16?

Mr. GIBBONS. I omitted that because that simply requires the bond dealer to keep certain books subject to examination by the Commission. We have all had income-tax people in from the State and from the Federal Government. The only objection I make to that is paying for it. I cannot pay my own employees sometimes. The representatives of the Government are welcome to anything they want to come down and see. Our books are perfectly open. My firm, and I guess many others, have kept their books in permanent form and not loose leaves. They run right back to the

time when we started in business. I know mine do, and I think most people's do. Any properly constituted officials are not only entitled to see them, but are perfectly welcome to see them at any time; and they have been seen several times. But it would be costly to place a charge of $100 a day for a couple of auditors to go over the books and possibly spend a couple of weeks at it, when a man is having a hard time paying his own employees. Most of us have had a hard time in the last few years.

Section 17 (a). This paragraph and the subsequent paragraphs in this section would, apparently, render a municipality, which I believe is responsible for the acts of its officials, liable for any false statement. That sounds perfectly reasonable. I do not care whether they are liable or not, but it would be pretty tough on them, and I will tell you how it might happen.

A village in my State sold some bonds to me on an absolutely false statement made by the treasurer of the village. He absolutely lied and made false affidavits right through. He deceived the village officials; he deceived the attorneys for the village who were outside attorneys; he deceived the purchaser of the bonds. I sold those bonds under those false statements. I cannot guarantee the bonds I sell. All I can do is to be honest, myself, and make statements which I have investigated and believe to be true. If a municipal officer makes a false statement I cannot help it. That man did make such a false statement, and he was just released from jail the other day. By the way: Those bonds were sold in the fall of 1931 or the fall of 1932, I have forgotten which; but the market immediately after took a very severe drop until bonds of a similar character were selling at 90 cents on the dollar.

Under this bill, if I sold those bonds to you and they went down to 90 because of the general decline, you nevertheless having bought the bonds on a false statement can sue that municipality and make them pay you the difference. In this case it would cost them $86,000. under this bill. The mere fact that the village treasurer lied and stole a few thousand dollars did not affect the legality or security of those bonds one atom.

The CHAIRMAN. Then there was no loss or no damage?

Mr. GIBBONS. Suppose a man had bought them at par and they had sold afterward at 90. He could claim that he paid par within 90 days for bonds that now sold at 90 and could show he bought them on a false statement and he could sue the village for damages. There are so many things in there that it seems to me that possibly this bill is not drawn particularly with regard to municipal bonds or State bonds

Mr. PECORA. If the bill were to confer power on the Federal Trade Commission to exempt municipal bonds from the operations of its provisions, which you have criticized, such action would meet your criticisms, would it not?

Mr. GIBBONS. No; for instance, we would not be interested in whether they had exempted a certain bond of a certain village in Pennsylvania or Connecticut or New York, but before we could buy that bond we would have to be sure it was exempted. So long as it is required to exempt all municipal bonds there would be a delay. A man who needed money quickly could not use his bonds

before he found out they were exempt. People would wait until the emergency arose and then try to sell their bonds and could not. Mr. PECORA. When you submit a bid for a new issue of municipal bonds do you make an independent investigation?

Mr. GIBBONS. To what exent do you mean-send an auditor up there?

Mr. PECORA. In order to form your judgment as to the soundness of the securities?

Mr. GIBBONS. Yes. We consider that we have investigated sufficiently to arrive at an opinion so that we are satisfied about the bonds. We take the sworn statements of the officials as to their financial status, their tax collections, their debt, their population, and we act on that.

Mr. PECORA. Then you do not make an independent investigation, if that is all you do.

Mr. GIBBONS. We do not send an auditor.

Mr. PECORA. Do you make any kind of an independent investigation?

Mr. GIBBONS. I have just explained what we do.

Mr. PECORA. You take the sworn statements of somebody else? Mr. GIBBONS. Correct.

Mr. PECORA. Of the officers of the issuing municipality?

Mr. GIBBONS. Yes. That is precisely what we do. In the first place, it would be impossible for us to make an independent investigation of New York City, for instance. The task would be too great. Nobody would undertake it; or in Albany or Yonkers or any other place.

Mr. PECORA. I did not mean an independent investigation of that kind; but do you merely rely upon the data and information furnished by the officers of the issuing municipality?

Mr. GIBBONS. We rely on the officers of the municipality to furnish us an accurate statement of their financial status-their debt, their bonds, their tax collections. We rely on the attorneys, who are usually New York attorneys retained by different municipalities. There are several firms that specialize in that. We rely on their opinion as to the legality of the issuance of the bonds, that the proceedings authorizing them are legal and that the sale is legal.

Senator KEAN. But further than that, you require that the municipality shall furnish you with certain statements and affidavits? Mr. GIBBONS. Correct.

The CHAIRMAN. You do not check up the assessment to see whether there is an overassessment or an underassessment on the property, and how it compares?

Mr. GIBBONS. We do, Senator, but not by going to the place. For instance, we take the tables of equalization in New York State and find out whether or not the State board of equalization assess property in a certain way. Albany, for instance, may assess its property on 80 percent or 70 percent. Some counties assess at 40 percent, so they would apparently have $10,000 of market value of property for every $4,000 assessed. In paying their taxes they pay on $10,000 for State tax, and in their local taxes they pay on $4,000. Some counties are assessed at a higher percentage than others. They also have county boards of equalization. We have all those tables and can check them all up.

The CHAIRMAN. You can tell whether property is coming down year after year or going up?

Mr. GIBBONS. You can do that by seeing whether there is a change in the assessed valuation and also the amount of new building which is added. The only change in any place would be the removal of old buildings and the addition of new buildings plus or minus the change in values. The real estate would be the same. A house and lot are usually assessed as one. We have all those records.

The CHAIRMAN. Are there any further questions of Mr. Gibbons or Mr. Roosevelt? If not, that is all. We are very much obliged to you gentlemen.

Mr. PECORA. Are municipal bonds speculated in?

Mr. GIBBONS. They do not speculate much in municipal bonds, because once they are sold they are gone. If you had them on an exchange you would be able to pick up some pretty cheap bonds.

The CHAIRMAN. The committee will take a recess at this time until 2:30 this afternoon.

(Whereupon, at 1:12 p.m., a recess was taken until 2:30 p.m. of the same day.)

AFTERNOON SESSION

The committee resumed at 2:30 p.m., on the expiration of the

recess.

The CHAIRMAN. The committee will come to order, please. Mr. Fletcher, we will now hear you.

STATEMENT OF R. V. FLETCHER, WASHINGTON, D.C., GENERAL COUNSEL FOR THE ASSOCIATION OF RAILWAY EXECUTIVES

Now, Mr. Fletcher, you have examined the bill we are now considering, S. 2693, have you?

Mr. FLETCHER. Yes, Mr. Chairman. And I want to submit just a few observations about two or three sections of the bill without discussing the general features of the proposed legislation at all. The CHAIRMAN. You may proceed in your own way.

Mr. FLETCHER. I might say that I have no views to express at all with reference to the regulation of stock exchanges. I am concerned in behalf of the railroads, which I represent, with regard to a few features of the bill which seem to us to call for unnecessary expense, labor, and trouble. For instance, section 11, which is the registra tion clause of the bill; section 12, which deals with information that may be called for by the Federal Trade Commission; and one observation as to section 18 of the bill; as well as a very brief reference to section 13 in connection with proxies.

The CHAIRMAN. Very well. The committee will be glad to hear whatever you have to present in regard to this bill.

Mr. FLETCHER. So far as section 11 is concerned, that being the registration section, the point I wish to make is, that in that section, in connection with the obligation placed upon companies issuing securities dealt with on the exchanges, to have to register them, they are required particularly in the second portion of that section, which is (II) to furnish information to the Federal Trade Commission with respect to 11 different itemized matters.

As you no doubt know, in the railroad industry it is a highly regulated industry now. It is required to make reports to the Interstate Commerce Commission; to keep all records and accounts in conformity with the rules of the Interstate Commerce Commission; and, generally, to conform to the supervising authority of that body in great detail.

I have no purpose to delay the committee unduly, but would like to call attention to some items in section 11, more particulary paragraph (II) where it is provided that companies that issue securities listed on stock exchanges shall furnish the Federal Trade Commission, first, with information in regard to the organization, financial structure, and nature of the business. All that is reported regularly by the railroads in their annual reports to the Interstate Commerce Commission.

Second. They must furnish particulars regarding the terms, position, rights, and privileges of the different classes of securities outstanding. That information is not contained in the annual reports made by carriers to the Interstate Commerce Commission, but you will recall that before a railroad company can issue any security or reissue any of its securities, it must make application to the Interstate Commerce Commission under the provisions of section 20 (a) of the act, and secure the permission of the Interstate Commerce Commission to do anything about such securities; and the rules of the Interstate Commerce Commission which govern procedure in matters of that sort, require railroads to give all the particulars which are mentioned here in the second item of this subsection which I am now discussing.

It is true, of course, that there are securities listed on exchanges so old that they have not been issued under the authority of the Interstate Commerce Commission, since that portion of the Interstate Commerce Act requiring railroads to secure such authority from the Commission, was enacted in 1920. But I dare say there is scarcely a railroad of consequence in the United States that at some time or other since 1920 has not made application to the Interstate Commerce Commission for permission to issue or reissue a security of some kind. And the rules of the Commission require that there shall be reported to that body upon such application not only the particulars about the issue sought to be made then, but all particulars about all outstanding issues of stocks and bonds. So that without having checked the matter up carefully, I am quite convinced there is not a railroad in the country which has not filed with the Interstate Commerce Commission in connection with its application for authority to issue securities, all the material covered by the second section of that part I am now discussing.

The CHAIRMAN. This bill would not interfere with that in any way, would it?

Mr. FLETCHER. It would require railroads to give all this information again to the Federal Trade Commission, as I read the bill.

Mr. PECORA. Well, inasmuch as such information is given to the Interstate Commerce Commission, couldn't duplicate copies thereof be made and filed with the Federal Trade Commission?

Mr. FLETCHER. Do you mean from time to time as they are currently submitted to the Interstate Commerce Commission?