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Do you ask me to suggest a remedy? I cheerfully do so. If you would pass H.R. 4102, the silver "Õunce" act proposed by Representative Patman, of your own great State, you would have given us a real remedy. I attach a printed brief in favor of that bill, and ask that it be printed as a part of my argument at the foot of this letter. I have no objection to the securities bill, but it is a poor comfort when the house is burning down and we need monetary reform at once if we are to put the fire out.

Very respectfully,

A. W. LAFFERTY.

The CHAIRMAN. The statement of Mr. Lafferty on silver will be held available for the members of the committee, but will not be printed as part of the hearings.

(The clerk read the following telegram:)

Hon. SAM RAYBURN,

NEW YORK, N. Y., April 1, 1933.

Chairman Interstate Commerce Commission, House of Representatives: Desire to register emphatic disapproval of section 9 of proposed Federal securities bill which in my opinion will render trading in insurance securities impossible. Insurance companies are now strictly supervised by State insurance departments which do not permit issuance of any statements relating to their financial condition without their approval and consent.

ROBERT C. REAM, President, American Reinsurance Co.

Mr. THOMPSON. Before you recess, Mr. Chairman, I would like to submit, on behalf of members of the District of Columbia Bar Association, a paragraph to be inserted in this bill (H.R. 4314) as subsection (e) of section 5, on page 12, after line 18. I will not read it but will submit it.

(The suggested amendment is as follows:)

(e) At the time of filing such statement the applicant shall designate in writing an agent in the city of Washington, District of Columbia, upon whom service of all notices, orders, and processes may be made for and on behalf of such applicant in any proceeding before the Federal Trade Commission, which designation may from time to time be changed by notice in writing filed with the Federal Trade Commission; and thereupon service of all said notices, orders, and processes may be made upon such applicant by leaving a copy thereof with such designated agent at the address given in such designation, with like effect as if made personally upon such applicant, and in default of such designation of such agent, service of any notice, order, or other process in any proceeding before said Federal Trade Commission may be made by posting such notice, order, or process in the office of the Secretary of the Federal Trade Commission.

The CHAIRMAN. We will recess until 10 o'clock Tuesday.

(Thereupon the committee adjourned until Tuesday, April 4, 1933, at 10 a.m.)

FEDERAL SECURITIES ACT

TUESDAY, APRIL 4, 1933

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met at 10 a.m., Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order. We will hear this morning the suggestions of the investment bankers. Mr. Breed, will you proceed.

STATEMENT OF WILLIAM C. BREED, OF BREED, ABBOTT & MORGAN, COUNSEL, INVESTMENT BANKERS ASSOCIATION OF NEW YORK, NEW JERSEY AND CONNECTICUT; ALSO REPRESENTING THE INVESTMENT BANKERS ASSOCIATION OF AMERICA

Mr. BREED. Mr. Chairman, I am appearing this morning for the Investment Bankers Association of New York, New Jersey and Connecticut and also for the American Investment Bankers Association, which is represented by Mr. Paul Keyser here, who may wish to say something after I have concluded, if he sees fit and you permit it. Mr. CROSSER. In what capacity do you appear? Mr. BREED. I am a lawyer.

Mr. CROSSER. In other words, you are counsel for these gentlemen? Mr. BREED. I am the counsel. Gentlemen, in the first place, I want to make clear that these two associations are heartily in accord with the principles of the bill that is presented here. In fact, they all feel that it is a very fortunate thing that such a bill as this has been presented to the Congress, because there is every need in the United States for a model law regulating the registration and sale of securities in interstate commerce.

Perhaps you ought to realize why a uniform law on this vastly important subject is necessary. At the present time 48 States have laws in one manner or another, regulating securities, their issuance and fraud in connection therewith; 37 of these States have passed what are known as "license laws." That is, these States pass, at the outset, upon the propriety of the issue of the securities, their soundness or unsoundness. Five States have laws fashioned along the lines of what is known as "registration and fraud enforcement.

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I might say right here, as was intimated at the Senate hearing yesterday by Senator Gore, I would personally like to see this act entitled "Federal Securities Registration and Fraud Enforcement Act." I think it would be a more appropriate title in order to carry over to the public what is sought to be accomplished.

In connection with the history of the passage of these various acts by the States, you who are going to give most serious consideration to the final act that is to come out here perhaps would be interested to know a little of that history.

The first act that was passed having to do with the regulation of securities was the Kansas Act of 1913, and to that act was given the name of "blue sky law" because one of the members of the legislature in a heated argument said, "So we must pass this act because these crooks are trying to sell an interest in the blue sky itself."

Mr. PARKER. May I ask the gentleman whether there was not a law passed in New York a long time before that that prohibited any public utility from issuing any stocks or bonds? I was chairman of the committee that had to do with that act. That was about

1897 or 1898.

Mr. BREED. There were many special laws, but I am referring only to laws that generally affect all securities.

Between 1911, the date of the Kansas Act, and up to about 1920, 36 States passed acts of this character, all of which are known as license laws, and at the outset purport to refuse or allow the registration and issuance of securities.

So we start with that status in the United States. The acts passed like a wave. Beginning with 1920, you will recall, of course, the Capital Issues Committee report, that Mr. Thompson referred to, and you will recall that throughout the United States during the war, appealing to the patriotism of all of our citizens, millions of people became the owners of investments, namely, Government bonds, who had never owned a security before. In other words, the market for securities was so tremendously broadened that we cannot believe but what a new situation arose out of that sale of Government bonds, based on the patriotic desire of the people to aid the Government.

Following that, as stated in the Capital Issues Committee report, appeared the usual growth of irresponsible people, fraudulent operators and crooks, who came around to people in different parts of the United States and said, "Here, we have a security that pays 81⁄2 or 10 percent; you just exchange this security for your 4 percent or 4%1⁄2 percent bonds, and you are going to make twice as much money."

Well, a large proportion of those exchanges were fraudulent transactions, and that is what caused the capital issues report and gave basis to the introduction of the Dennison bill and precipitated the whole subject for discussion as we have it now here before us.

What followed after 1920? The first thing that happened in the history of this securities legislation in the United States was that one, Calvin Coolidge, then Governor of the State of Massachusetts, thought it was time for Massachusetts to look into this subject, and so he appointed a commission. And if you gentlemen ever have any time, I would say to you that there is a finer line of reports and discussions with reference to this whole subject of the control of the sale and the fraudulent sale of securities in that report than is to be found almost anywhere, and that statement I make not only on my own belief, having read it, but on the authority of many textbooks and others, including Professor Berle, who, I understand, had something to do with this bill; and I think Mr. Thompson and others.

The result of it was that out of that commission's report, the Commonwealth of Massachusetts passed a law. That law was based on the theory that the Government should not put itself in the position of guaranteeing the securities that were issued or being the guardian of the people. That was one principle on which they all were thoroughly agreed and that principle is the principle that is before you in connection with this bill.

Mind you, they had before them all of these blue sky laws in the 36 States in which the Government did presume to pass upon the soundness or unsoundness of the securities at the time of their issue.

I might divert just a little from the main thought here to say that Massachusetts in its act also introduced a brand new thought, namely, registration by notification. Now, what did they mean by that? In this report it is shown that while 80 to 90 percent of all the securities that are issued are not tainted with fraud, and the money obtained thereby is needed for business uses promptly, the determination as to whether the security can be issued, whether it can be sold, whether the underwriter will buy it, in a condition that has to be determined upon the market at about the time that the contract is entered into.

You realize, all of you, that if you yourselves were going to buy a security or a farm or a house, you would buy it with reference to the condition of the market at about the time that you pay your money; because if you were going to enter into a contract to pay a definite price for something next week, next month, or next year, you may or may not at that time want to pay that price.

So that in connection with securities, it is necessary at the time the contract is entered into, to take into consideration the financial conditions in the United States and in the world, in order to arrive at price which anybody is able to pay.

So, Massachusetts, recognizing that principle, said that securities may be qualified by notification; namely, if the contract is entered into, you may file with the Massachusetts commission just a brief statement; the name of the security, the name of the issuer, the amount of the security, and other general details; and you may go right ahead and sell that security. But within 7 days after that, you must file the fullest details about the business of the corporation; its existing liens, its properties, assets, liabilities, and so forth. So that State has what is known as a qualification by notification. Mr. PARKER. What is the penalty in that provision?

Mr. BREED. If you do not do what?

Mr. PARKER. If you do not file within 7 days.

Mr. BREED. The commission can call for it. I do not know what the penalty is, because anybody that has filed a notification is usually ready to file all the details with respect to it. I think there is in the act some penal provision. I do not have it right before me; I believe failure to file is deemed prima facie evidence of fraud and makes the delinquent liable for a heavy fine or imprisonment or both.

Mr. PETTENGILL. In case of registration by notification, the sale is a contingent sale, is it not?

Mr. BREED. What do you mean by contingent?

Mr. PETTENGILL. Contingent upon the subsequent approval.
Mr. BREED. Oh, yes; of course.

Mr. PETTENGILL. And nobody takes any risk in that case?

Mr. BREED. No. Following the Massachusetts act-mind you, we are in 1920 now-this subject of the sale of securities and the prevention of fraud in connection therewith was taken up by other States.

The next State to take it up, almost coincidentally, and also in the year 1920, was the State of New York. That resulted in the passage of the Martin Act in New York, which is a fraud act.

Under the terms of the Martín Act of New York today, as it now exists, you file the name of the issuer and of the underwriter, the name of the security. Then the act provides that the attorney general, knowing what is proposed to be issued, shall proceed against all cases where fraud exists, and as Mr. Thompson has stated before the Senate committee, not more than 10 or 15 percent of all securities that are issued in the United States are fraudulent; the majority of the securities that are offered in the United States are issued honestly by corporations who require money for the development of their business and for the development of the commerce of the United States. The objective of these laws, however, is to catch the fraud issuer or seller. It is, therefore, of the most vital importance that the fraud provisions of these acts should be so strict that no one can escape and so that they may be applied promptly, at

once.

As I say, under the Martin Fraud Act of New York, there is created within the attorney general's office a bureau of securities, employing more than 100 men, and that bureau operates every day. They have the power to look over these lists, to go into any office, examine the books, seize the books, take them out, take a policeman in, if they wish, cart the books up to their office and apply to the court to get an injunction to immediately restrain the sale of the securities. The record of accomplishment of fraud enforcement in the State of New York under the Martin Act is quite remarkable. It is not equalled or exceeded anywhere in the United States, and I would like just to read to you the results of that enforcement last year.

The best evidence of the effectiveness of this act is disclosed in the various reports of the attorney general which are issued annually. The latest reports, issued on January 29, 1933, show that the bureau of securities had investigated and closed during 1932, 1,113 cases, secured injunctions against 1,522 persons and firms, obtained the appointment of 144 receivers, and instituted 146 criminal prosecutions. Following the passage of the act in New York, and since 1920, came the Fraud Act of New Jersey, the Fraud Act of Maryland, and the Fraud Act of Delaware and Connecticut. So that five States since 1920, considering this subject of preventing the fraudulent sale of securities, have turned to the registration and fraud type of law.

Mr. HUDDLESTON. Mr. Breed, would you prefer to make your statement uninterrupted?

Mr. BREED. I do not think so.

Mr. HUDDLESTON. Do you favor a bill with limited provisions merely requiring registration with disclosure of all useful information, or a bill which also provides for a licensing system, where the Commission finds that the securities may be sold or might be a profitable investment?

Mr. BREED. I think that will be developed in our discussion, but I can say very briefly that I do not favor a licensing type of law or a law which puts the Government into the business of passing upon

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