Mr. SEWALL. In my desire to answer you successfully, may I call upon Mr. Hoblitzelle, who will perhaps give you a clearer exposition of it than I can.

Mr. SAPERSTEIN. With the chairman's permission I should be very glad to hear from him; yes.

STATEMENT OF HARRISON HOBLITZELLE, PRESIDENT OF THE GENERAL STEEL CASTINGS CORPORATION, EDDYSTONE, PA.

The CHAIRMAN. Very well Mr. Hoblitzelle. State your name and residence and occupation.

Mr. HOBLITZELLE. Harrison Hoblitzelle, president of the General Steel Castings Corporation, Eddystone, Pa.

The CHAIRMAN. Very well, Mr. Hoblitzelle; you have heard the question. You can answer it in your own way.

Mr. HOBLITZELLE. Gentlemen, in the report you will notice that we have suggested that the question be raised, but we are not endeavoring to answer that question for the reason that it is a little out of our bailiwick. Being business men and not in the financial business, we cannot speak with authority on that, or experience, on that particular section. But we think there is a possibility that investment houses which are segregated as to their purposes may have to charge larger spreads, large brokerages, if you will, where they are confined to a single line of business. As I say, that is out of our bailiwick. We simply wish to raise that question, as we said, without endeavoring to answer it. It is a question which the bankers are equipped to testify about. We are not. But we are under the impression that there is a possibility at least that, by splitting up those functions, it may be that we will be required as business men who may ultimately have to refund or seek additional loans, to pay larger brokerages, which, of course, we do not want. If we get out an issue of bonds, we do not want the underwriter to say, "Well, our costs have gone up. We haven't the same possibilities of distributing overheads that we had before. Instead of requiring three or four points spread, we may require more."

Senator KEAN. I would like to call your attention to the situation in Paris, where to float any issue of bonds you have to allow a spread of over 6 percent.

Senator ToWNSEND. For what reason?

Senator KEAN. For the reason that the market there is not so broad and that people do business in a different way; they go around from house to house and the people have a day that they wish to do their investments, and the broker has to go, instead of having a broad market on the exchange, he has to go and visit people, and you have got to call on them, and the consequence is you cannot float an issue in Paris for less than 6 percent. Whereas here we float lots of issues of the same kind that pay 6 percent in Paris, and they have been floated in the United States, for 1 percent.

Mr. SEWALL. Did I get the drift of your question, or perhaps we haven't heard it right yet?

Mr. SAPERSTEIN. What I was driving at was that I merely wanted to get your point of view.

Mr. SEWALL. Yes, sir.

Mr. SAPERSTEIN. We have a great deal of testimony by dealers and by brokers and by specialists as to the effect upon their business of this section 10. Now, I want to get the viewpoint of people like yourself as to why this section should increase the costs of the issuance of new securities. We have also, during the course of our investigation before the subcommittee. had a great deal of testimony by investment bankers, who said that their interests and the interests of the corporations which they represent, as well as the interests of the public, were identical, and that in ascertaining the price at which a security was to be brought out they had to take into consideration on the one hand what the public would pay for that security and on the other what the corporation could afford to take for that security, and the difference would be their spread. Those conditions would remain the same. They would still have to take into account what the public would pay on the one hand and what the corporation could afford to take on the other. And if there were no profit in between them, the security of course would not be brought out. If there were, the profit would be the same whether section 10 were in effect or not.

Mr. HOBLITZELLE. However, is it not true that your costs of doing business provide the fundamental basis for the price which you must ask either for your goods or your services?

Now, the question here is one of diversity factor, which is recog nized in almost any business. In other words, if you are in the business of making farm machinery and you are also in the business of making perhaps railroad equipment, you have a chance of distributing your overhead. In other words, when the farm-machinery business may be dull you may be enjoying a good demand for railroad equipment. That is hardly a direct analogy, but it brings up the factor we had in mind there; that is, the diversity factor.

In other words, the business which is diversified has low-average costs as a rule. They are put in a position where they can get lower average costs.

Now, if you segregate the functions of the dealer and the underwriter, it may be that the underwriting business in a certain year might be very lean, and consequently when the time did come for them to underwrite some issues they would have an accumulation of past costs which they would have to distribute in some way or other, and their costs would form-under ordinary circumstances; it had not prevailed during the past few profitless years, but in most instances your costs form-the fundamental, the irreducible basis for determining your selling price.

That was the main point we had in mind there. It was just a question that we wanted to raise and call the attention of this committee to, without endeavoring to testify as to whether it would or whether it would not, because we are not, as I say, equipped to answer it.

The CHAIRMAN. You can recognize a possible conflict of interest between a broker who is representing someone else on a commission and one who is a dealer, being the same man in the same stock. As a broker it might be to his interest to consummate the transaction as a broker, but as a dealer it might be to his interest to buy or sell that same stock. There is a temptation there sometimes that might be of consequence.

Mr. HOBLITZELLE. Yes, sir; we appreciate the motives which are undoubtedly behind the provision.

Senator KEAN. But I think that was pretty well covered, Mr. Chairman, under the rules of the stock exchange.

The CHAIRMAN. Well, they have not been able to do very much about it yet. But that might help some.

Senator KEAN. You can see, of course, that if a broker and an underwriter and a dealer in various bonds, at one time where there was a bond market to deal in bonds, another time there is a stock market to deal in stocks, another time there is a municipal market to deal in municipalities, another time it may be that there is underwriting and you can go into that; so that you can keep your office going. While in the last few years I think everybody has lost money, they might have lost a good deal more if that had not been trueisn't that right?

Mr. HOBLITZELLE. Yes, sir.

Mr. SEWALL. Yes, sir; that certainly is true.

The CHAIRMAN. Anything else? That is all, Mr. Hoblitzelle. Thank you very much.

Mr. SEWALL. May I thank you, Mr. Chairman, and the committee, for the privilege of appearing before you? I appreciate it very much.

Mr. HOBLITZELLE. Thank you very much, gentlemen.

The CHAIRMAN. We are very glad to have you. Now Mr. May.

STATEMENT OF GEORGE 0. MAY, SOUTHPORT, CONN., A MEMBER OF PRICE, WATERHOUSE & CO., CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK CITY

The CHAIRMAN. Mr. May, state your name and place of residence. and business.

Mr. MAY. My name is George O. May; residence, Southport, Conn.; business, Price, Waterhouse & Co., certified public accountants, 56 Pine Street, New York.

The CHAIRMAN. Mr. May, you have seen this bill and examined it. If you wish to be heard on it, we will be very glad to have your views in your own way.

Mr. MAY. Thank you, sir. I do not wish to deal with the strictly stock-exchange regulation features of the bill. That is outside my province. I wish to limit myself to a subsidiary but still important part of the bill, the provisions regarding accounts and reports. That is principally sections 12, 17, and 18 (b).

Practically my whole point of view is based on this fact, that accounts are necessarily the result of the application of accounting conventions and judgments to facts and are not pure statements of fact, and I think any sound legislation on these points must give more weight to those considerations.

The CHAIRMAN. Do you favor the idea of providing for a uniform system of accounting?

Mr. MAY. I do not, Senator; as I will come to later. Not at the present time, certainly.

For some years I have been chairman of the committee of the American Institute of Accountants that was appointed to cooperate with stock exchanges in improving matters of that kind.

In 1932 the New York Stock Exchange asked that committee study and report to it on the general form of development of the stock exchange activities which the accountants thought would most beneficial to the public interest. My committee made a report, which was put in evidence before the subcommittee by Mr. Frank Altschul, the chairman of the listing committee of the stock er change, in December 1932. If I might, I would like to read jus two sentences from that report as indicating what I have in mind and what impels me to come here. The committee, after a leg study, began its report in this way [reading]:

It believes that there are two major tasks to be accomplished. One is t educate the public in regard to the significance of accounts, their value their unavoidable limitations; and the other is to make the accounts published by corporations more informative and more authoritative.

And after discussing that at some length they concluded in this way [reading]:

But even when all has been done that can be done, the limitations on the significance of even the best of accounts must be recognized, and the shorter the period covered by them the more pronounced usually are these limitations Accounts are essentially continuous historical records, and as is true of history in general, correct interpretations and sound forecasts for the future cast be reached upon a hurried survey of temporary conditions, but only by longer retrospective and a careful distinction between permanent tendencies a transitory influences. The investor who is unable to or unwilling to msk or secure an adequate survey will be wise not to rely on the results of a supe? ficial one.

The point that I wanted to bring home to the committee, or emphasize to the committee, is that accounts for a short period, whil they are useful to people who deal in securities, may easily be given an exaggerated importance by people and thereby result in more harm than good to the small man, with whom I imagine you are particularly concerned.

My feeling on this question, I think, must be very much that which the committee feels in regard to the larger subject. You want to do everything that you can to make buying and selling securities, partic ularly by the small man, safer and surrounded with more informa tion. But you must realize that all you can do will not reduce the risks that he is bound to run very greatly, and there is always the danger that by legislating you create a feeling of confidence in the securities that are offered which legislation cannot possibly impart to them.

Now, that is the thought that is in my mind. I attach great importance to accounts, but I think there is always a danger that people will attach too much importance to them, and I think undoubtedly a large part of the stock markets of 1929, the outrageous prices that were reached then, was attributable to people basing values on large earnings for short periods of time, which were no representative of the permanent earning capacity of the business. Whilst I think, therefore, that you should do what you can to ge investors ample information, you should not do it in a way that can possibly encourage them to attach more importance to them than they properly deserve.

The specific suggestions that grow out of that, first of all, are in the section 12, which provides for audited quarterly statements, and personally I have never favored the suggestion that has been made

that the stock exchange should uniformly require quarterly statements. In a great many cases they are helpful. In some cases they are more apt to be misleading than helpful. That is particularly true in the case of companies where inventories play a very large part in a determination of their results. The difference in the inventory valuation at the beginning or the end of a quarter may make all the difference between a profit and a loss. That is true, for instance, of packing houses and leather companies and the like.

So that I would suggest that a provision should be left in the bill so that the regulating body could dispense with the quarterly statements in any case where they thought that the publication would not be in the public interest.

Senator TOWNSEND. Would you suggest semiannual statements or yearly statements?

Mr. MAY. Personally, I was going to suggest the second point, Senator, if I may go on, is that I would strongly oppose audited quarterly statements, although it may seem to be against my interest as an accountant to take that position. But my opposition is not because of the expense, although that would be considerable. It is not because it would delay the publication of the quarterly statements and if they are to be published at all they ought to be published promptly. It is because of the thing that I have just been emphasizing, that if you certify them people will think that they are something absolute and accurate, that they can rely on implicity; whereas, being for a short period, they must necessarily be arbitrary and estimates.

Therefore, my suggestions on that would be to eliminate the provisions for quarterly audits and to provide a power in the regulating body to dispense with quarterly statements, particularly in any case which they might think it was expedient.

Now, I think myself, as far as audits are concerned, an audited statement once a year ought to be sufficient. But there is one very practical consideration which I would like to bring to your attention. I think the committee has an opportunity to do a very useful thing by a very simple measure, quite apart from the general purposes of the bill.

If the amount of auditing required were expanded as this bill would necessitate, it would tax the resources of the accounting profession. The great difficulty of the present position is that nearly all companies end their year at December 31, and if the amount of work to be done at December 31 were so enormously increased as this bill would increase it, then I do not think it would be within the capacity of the accounting profession, by any reasonable expansion, to take care of that work within a reasonable period after the end of the year.

And to meet that situation I would like to suggest that there should be a discretionary power so that not all auditing statements would have to be at the end of the calendar year. I suppose convenience for tax purposes and so on has led a lot of companies that used to close their year at other periods to turn to the calendar year. A few still stick to some other period. The large packing houses close their accounts at the end of October. Well, September and October would be a much more natural time for the automobile companies and the tire companies to close than December 31. The