Senator BARKLEY. You agree to the principle, do you?

Mr. THOMPSON. Yes.

Senator TOWNSEND. They may get twice par at the end of 9 years. Senator ADAMS. On page 20, subdivision (b) you use a phrase exempting a public utility subject to regulation or supervision by a commission, board, or officers of the Government of the United States. Now, is that to be interpreted as a commission or a board of the United States, or does it exempt a public utility that is supervised by a State board?

Mr. THOMPSON. It does not exempt a public utility that is supervised by a State. The reason we have that language in there is that the Interstate Commerce Commission does supervise telephone lines, utilities other than railroads. But it does not exempt this supervision by a State because we have found, and Judge Healy will give you example after example where a State does not supervise, and probably as great losses have been suffered in public utility securities, supposed to be supervised by States, as in any line of industry in this country. Senator ADAMS. I wanted to know if that language is clear as it is written.

Mr. THOMPSON. We defined that to mean a commission or subdivision under the United States Government.

The CHAIRMAN. There was some question also raised about the amount of the fee required.

Mr. THOMPSON. The fee is one one-hundredth of 1 percent of the value of the stock or other security which they are about to sell, the value which they place upon it, and if they do not place any value upon it we make the stock par. We figured out that on the securities sold last year that would bring an income of approximately $175,000. While it is speculative in a sense, of course, yet we figured that this amount would cover the expenses of running the division of the Federal Trade Commission that will have to supervise it.

Furthermore, we are suggesting in this bill that for the first year there be an allowance of $100,000 to set up the machinery and to start the organization going. But we feel quite confident that this charge of a minimum of $50, or one one-hundredth of 1 percent on the value of a security, will be sufficient to carry on this division.

The CHAIRMAN. That would be very high as to building and loan associations, wouldn't it?

Mr. THOMPSON. Well, I might say that fact affected us I think more than any other as to exempting them. Some of these very small building and loan associations, that put out a number of securities, if they had to pay out $50 each time it would mean a considerable tax upon them. And there are very many of them.

Senator ADAMS. Aren't the building and loan people perhaps straining a little when they say that? They are thinking in terms of the gentleman who was here the other day, that every time they issued a certificate they had to pay that amount. Sometimes they have one, two, or three classes of stock authorized by their bylaws. It occurred to me that perhaps when they paid their fee they would be authorized to issue the entire series of stock mentioned.

Mr. THOMPSON. Yes.

Senator ADAMS. Rather than every time they issue a new certificate. Mr. THOMPSON. We were discussing that before the House committee, and we came to the conclusion that they could issue three or

four classes of stock under the one payment very easily. But they would all be issued at the same time, or would be so declared. Nevertheless, they told us that there were something like 2,000 of these organizations, say, in the State of Pennsylvania, organizations that are very small, and in other States similar numbers, and that it would be a very great burden upon them if they had to come here each time they issued a security and pay a fee. If they are under the surveillance of the State supervising bodies, if they really supervise, I suppose we will have to exclude them.

Now, under the subject of foreign securities, I think we have covered that. But if there are any questions any member of the committee would like to ask

Senator BARKLEY (interposing). You said you were going to offer an amendment about that. You mentioned that this morning when you struck out the language in the earlier pages. I thought you said you had an amendment you would offer at a later place in the bill. It may be that you were referring to a later provision in the bill, and if so, all right.

Mr. THOMPSON. Yes, I think so.

Senator GLASS. On that subject, I think there ought to be a very definite exemption from the operation of this bill of the transactions of the open market committee of the Federal Reserve Banking System. Mr. THOMPSON. Do you mean under foreign securities?

Senator GLASS. Yes.

Mr. THOMPSON. Senator Glass, I do not know just how that would arise. Could you give me some kind of information on it?

Senator GLASS. I mean this-that the New York Federal Reserve Bank bought 500 million dollars of foreign bills of exchange and notes of foreign governments and underwrote acceptances for foreign banks. I do not think they had any lawful right on the face of the globe to do it when they did it, and I do not think they ought to be permitted to do it. In the so-called Glass monetary bill we take note of that fact. But under your definition of securities here, I mean in the matter of notes and various and sundry things, it might be well to consider whether that interprets transactions of the Federal Reserve open market committee with foreign governments.

Mr. THOMPSON. We will try to draw an amendment, and if you will help us we should like to have your assistance. We will try to draw some phraseology to cover that. Of course, we presumed that we had language here that would be all-inclusive, and we made it as broad as possible so that transactions that came in under the Federal Reserve would automatically go out under this act.

Senator GLASS. I think it would be desirable to take the matter up with counsel for the Federal Reserve Board, or at least see what they think about it. I know that they feel this bill would interfere with the operations mentioned.

Mr. THOMPSON. We will be glad to do that. I did go to Governor Hamlin of the Board and he referred me to one of its officials and I consulted with him.

Senator GLASS. I think it would be desirable for you to do that. I have been ill myself and cannot afford you a great deal of assist

ance.

Mr. THOMPSON. All right.

Senator GLASS. Let me ask you this, more in a semihumorous way, perhaps, than in a very serious way: Do you know of any securities that are being sold now?

Mr. THOMPSON. No, I do not. I am informed there are not.

Senator GLASS. Well, then, why should there be any precipitancy about this particular measure? Why should it supersede measures that seem to me are vastly more important? You do know that national bank affiliates are operating now, and I assume you know, as everybody else has come to the conclusion pretty nearly, that they ought not to be permitted to operate. And we have a bank bill pending to stop the operation of national bank affiliates, which have created this whole difficulty we are in now. They are absolutely responsible, or in greater degree than all other things put together, for the paralysis of the whole banking system of this country. We have a bill to put a stop to that right away. I was just wondering why you gentlemen are so apprehensive that there might be a great amount of securities dumped on the market in the near future as that you ought to proceed with a bill of this sort.

Mr. THOMPSON. Senator Glass, I was amazed to find, and I cannot give you the figures, that even in such a bad year as last year a great number of securities came out. They are not necessarily securities that came out over the New York Stock Exchange, but millions of dollars of securities are coming out throughout the country that we do not hear about publicly. There is a constant sale of securities of one kind and another throughout the country.

Senator GLASS. I am as anxious as you or anybody else can be to put a stop to flotation of securities of that sort. As you very kindly indicated this morning, 13 years ago I wrote a letter to the chairman of the Finance Committee of the Senate and to the chairman of the Ways and Means Committee of the House, and presented a form of bill that had been prepared by Mr. Drum, a very capable banker of California, and by Mr. Palmer who was then counsel of the committee of the Treasury Department, urging that that should be done. If we had had that bill then we would not have had this riot of stock issues recently. But I was just wondering whether there was any need of precipitant haste about this bill when there are other bills, or I would not say other bills, but I know there is another bank bill of very much greater importance, at least in my view.

Mr. THOMPSON. Cannot they run on simultaneously? I do not know about the other bill.

Senator GLASS. We are going to try to do so. In fact, we are going to try to run so fast that we will get ahead of you.

Mr. THOMPSON. On page 12 of the bill you will find the subject of the fee. We have discussed that I believe, and we now come down to what is known as revocation. The revocation idea is not in the terms of the British Companies Act; in fact, I do not think the British Companies Act has revocation in it.

Senator WAGNER. What is the page of the bill?

Mr. THOMPSON. Page 12, line 22, section 6. And there we set forth the various grounds upon which revocation could be exercised by the Federal Trade Commission. Might I say that we get this language from the Uniform Sales of Securities Act, although we cut out a number of the grounds which were provided in that act.

Now, I want to call attention particularly to page 13, sections (e) and (f), lines 17 to 22. There has been considerable criticism of those two sections. In the House committee there was criticism on the ground that we deviated by putting those two sections in from the Taylor bill. It would give the Commission, in the event it found upon investigation that the affairs of the company were unsound, or it was insolvent, or that the enterprise or business or security was not based upon sound principles, and not in the public welfare, the right of revocation. It is said that here we really go beyond the speculative feature of a security.

I have already stated that we are not trying to stop speculation. By those two sections we permit the Commission to sit in judgment. upon the soundness or unsoundness of the principles of a corporation, There is objection to that.

let us say.

I might say that those two sections are incorporated in blue sky laws of 20 States.

Senator GOLDSBOROUGH. That is section (f) on page 17, isn't it? Mr. THOMPSON. It is sections (e) and (f).

Senator GOLDSBOROUGH. I thank you.

Senator ADAMS. Mr. Thompson, let us suppose that Senator Byrnes and I have a patent, and we would like to float bonds in order to build a manufacturing plant and factory. We specify it in our statement, but the Commission thinks it a very unsound patent. Ought we to be put up against the judgment of somebody else if other people are willing to take a truthful statement? If so, Mr. Ford would have gone up against that same thing. I know that banks he went to replied: No, your scheme is not sound. We will not lend you any money. I wondered if you are going to put it into the hands of the Commission to pass in judgment upon any enterprise, rather than to say: You cannot deceive the people.

Mr. THOMPSON. Of course, we had more in mind situations like the Insull and the Kreuger program, and many others I can think of. I can think of a utility company, against which the Government has just gotten a decision, where they took the values of all the companies that came into the company that was first of all to absorb them. The undisputed testimony is that that value was 54 million dollars. Then they created another company and transferred all the securities from the first company, which we will call A, to the other company, which we will call B. And they then wrote up those securities to 72 million dollars. And then over night they increased the writeup to 139 million dollars. And they sold the securities, a great many of them, to the public.

Well, when you look at a situation of that kind

Senator ADAMS (interposing). Wouldn't they come under your supervision along another line?

Mr. THOMPSON. As fraudulent transactions?

Senator ADAMS. Yes.

Mr. THOMPSON. Well, here was the act in a particular state which apparently approved, or did not give disapproval to such a thing. The prices to which they wrote those securities up they made as a basis for charge for electricity throughout the community. The community seems willing to stand it, so I am not personally objecting, but I am giving that as an illustration of the kind of thing we had in mind when we included these two sections.

Senator ADAMS. Well, you know that you and I come from a country that has been developed by things many of which were unsound as a matter of policy, that is, the mining ventures of our State. Mr. THOMPSON. Yes.

Senator ADAMS. And the oil ventures of the West.

Mr. THOMPSON. Yes.

Senator ADAMS. And as to many of them a business man would say: That is an unsound venture. And they would not have been developed if some one had had to pass on the most of those things.

Mr. THOMPSON. I think there is a great deal in what you say. I gave an illustration when before the House committee: That when we were running the blue sky organization in the Federal Trade Commission we thought in a certain case they were advertising a security rather wildly. And I guess they were, but subsequently that same security, the basis of which was a certain acreage in Texas, produced an oil well of 10,000 barrels a day. So that put us in a rather embarrassing position, when we were objecting to it.

Senator BYRNES. Mr. Thompson, what the Senator from Colorado is suggesting is that under this language some official in a department will determine whether or not a given enterprise is based upon sound principles. That is quite a lot of power to give to an official, to determine that in his opinion a given enterprise is not based upon sound principles. If he reaches that opinion revocation takes place and the market for the stock is destroyed, and with it the business itself is destroyed.

Mr. THOMPSON. Yes.

Senator BYRNES. Now, I agree with the Senator from Colorado as to the prohibition against false representation. But an individual must still have left some discretion as to what he wants to invest in. If the issuer is made to tell the truth about the issue, and he thinks it a splendid business proposal, and that the enterprise is based upon sound principles, he ought to have the opportunity to do business in this country without having some man we employ to say: I do not think it is sound in principle and therefore you cannot offer the security.

Mr. THOMPSON. Well, Senator Byrnes

Senator BYRNES (continuing). Isn't that going beyond the purpose of the bill to supervise the traffic in investment securities. That is passing upon the soundness of the business and of the principles upon which all business of America is founded. That is going pretty far, isn't it?

Mr. THOMPSON. The thought was brought out in the House hearing that the information put the Commission in the position of being really a guarantor if it did not object to the registration. We are not going to press those two sections.

Senator BULKLEY. Which two are those?

Mr. THOMPSON. Sections E and F on page 13. They were, as I say, in the Uniform Sales of Securities Act and in 22 State acts. But we are not going to press those.

Senator WAGNER. That means you are going to eliminate them? Mr. THOMPSON. I think that is right, yes.

Senator WAGNER. I was going to ask a question about that same thing. I thought, Mr. Thompson, that really if the Federal Trade Commission disagreed with the business policies of the particular