with them?" He said, "I am taking them up to the post office to register them." I said, "Let me look." So I looked, and they were addressed to the Commissioner of the State of Iowa, the Commissioner of the State of Illinois, and so forth; each one of them was addressed to a securities commission. So I said, "Let us get into a cab and I will take you up."

I found out that that was the result of four weeks' work, in connection with the qualification of a securities issue, and the form is different in every State. These forms had to be prepared and sworn to and sent to the respective States and approved before any investment banker could legally offer for sale any of those securities in a particular State.

What is the result? The result is that when the investment banker takes on an issue he looks the thing, over and he says, "Well, this is so expensive to qualify in all States and takes such a long time that I can only afford to qualify in 4 or 5 States." Of course he picks out New York, Pennsylvania, Illinois, Massachusetts, and a few of the larger States where securities are more liable to be bought. That deprives the States that have these licensing laws of the opportunity to buy the finest and best securities because they are not qualified, and therefore cannot be sold.

Now we come to the next step; and this is on the point of why we welcome this national law. If you could only pass a model law that would become a uniform law, stating the right principles with respect to dealings in securities, eventually these other State laws would follow the model, just as in the case of the national food law-after you passed the model Food and Drugs Act in 1896, within 10 years it was substantially adopted through revisions of the laws of all the States. Think what it would mean to the investment banker to have come out of this Congress a model uniform securities law; and I like Senator Gore's title "registration" law. It would help them in every particular. It would be helpful to the country at large. It would be helpful in your own States, because they would begin to think, and they have not found that these license laws worked out as satisfactorily as they expected.

Now, recurring to the President's statement, it is my opinion that he states in his message exactly the fundamental principles of a model securities law.

Senator GORE. Have you an extract from the President's statement?

Mr. BREED. Yes, sir; I have it right here.

Senator GORE. Put it in your statement at this point.

Mr. BREED. I quoted from it when I first started, Senator.
Senator GORE. I did not catch that.

Mr. BREED. Mr. Thompson, whom I have known for many years and many of whose acts I admired when he was on the Federal Trade Commission, although they did not all work out in my favor, made the statement that this law was largely based upon two laws, the uniform sales act and the English securities law called the English Companies Act.

First, let us clear the atmosphere by saying that the uniform securities law adopted by the Uniform Law Commissioners is not a law. I believe it has been passed in two States in a modified form. I

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noted the other night that the Uniform Law Commissioners had recommended some 49 or 50 different uniform laws on various subjects, but not a large number of them have been adopted in the various States. Some of them have, with very valuable effect.

The English act to which he referred is well worth considering. I happened some weeks ago to have to make a speech, both in New York, before a commerce organization there, and then, again, in Philadelphia before some securities salesmen. That caused me to make a study of all this blue-sky legislation, and it also caused me to go to the English act in order to learn what that act contained, and to arrive at some conclusions with respect to sound principles regulating the issue and sale of fraudulent securities.

I happen therefore to have printed, and I would like, if it is proper, to give to each member of the committee an extract from the English Companies Act [handing papers to the members of the committee].

This English companies law, which is some several hundred pages long in itself, is what is known as the general corporation law of England. The securities act portion of it in which we are interested is contained in this printed memorandum. The rest merely has to do with the organization and operation of corporations. The English companies law is based, the same as the law of France and of Belgium, upon long experience in connection with handling commerce. The principles of that law, and of these other laws are, as stated by the President, one full and complete disclosure with respect to all securities issued. Second, the directors are obliged to sign the statements which are filed in connection with any issue, and those directors are entitled to rely, as you will see in reading this act, upon the certified statements of public accountants, and upon statements or appraisals by experts with respect to property values and upon public documents on file.

Senator GORE. Do they have to disclose the names?

Mr. BREED. Yes; they do.

The second principle of the act is of the strongest type of liability for fraud in connection with any of those statements.

Senator ADAMS. Is there liability for misstatements, even though they are not fraudulent?

Mr. BREED. When you read that act you will see that a director of a British company is held to the same liability that the common law holds anybody to. He is responsible for any fraudulent statement in connection with the statement that is filed with respect to the issue, but is only held to good faith and diligence, and he may, in presenting these statements, rely upon the certified public accountants' statements. Where is there a director of any corporation just about to issue securities that would dare to sit on a board in this country if this act, as now drawn, goes through? He cannot rely upon anything; he must know it all, in a small company or a large company. He must sign the statement with a detailed list of assets and liabilities and properties, accounts receivable and accounts payable. Could you or I sit on a board of directors and take personal and individual liability if there is a mistake in any one of those figures -with personal and individual liability, for all time under the terms of this bill, to the fellow who buys the security for the price that he paid for such security if any misstatement or error is later discovered? I do not pose as too strong a constitutional lawyer, but I know that

there are many able lawyers on this committee, and I respectfully submit that there should be some consideration, before you pass this bill in this form, to this proposition. This bill is a prohibition of the issuance and sale in interstate commerce of all securities except under certain circumstances. What is it that the bill requires? The consideration for allowing them to be sold is that the director of the corporation becomes the guarantor of every figure contained in every statement filed with the Federal Trade Commission and every fact also contained in that same statement which the Federal Trade Commission may by regulation or rule see fit to require the corporation to file.

The CHAIRMAN. Does your statement here give the Directors' Liability Act of 1890?

Mr. BREED. This is the latest.

The CHAIRMAN. This is a later one?

Mr. BREED. Yes.

The CHAIRMAN. I was looking last night at Palmer's Company Law, page 369 and following, as found in the Congressional Library. It is a big volume. They insisted that I must return it today, so I had to read it yesterday all I could. One of the chapters is the Directors' Liability Act of 1890.

Mr. BREED. You know that the British Companies Act goes back to 1860, I think, and it has come along with various amendments, and, as Mr. Thompson says, they have been making them stronger, and the law of England today is this one of 1929.

The CHAIRMAN. That has to do with disclosure, under the act of 1929?

Mr. BREED. Yes, sir. I am going to ask the chairman, if he will permit it subsequently, to let me or the association file some detailed suggestions of amendment with respect to this bill But I am trying now to get at the principles. We want a model law to come out of this committee. In order to be practical, and without discussing each one of these sections, I would like to put this law into operation and assume that it was passed yesterday. I will have to go into a personal statement. Last week before I left New York this situation came up. There is a company there with 10 directors, and the company is in very great need of borrowing a million and a half of dollars. The business is a business that I am sure you would all agree has a real future. It is at present subject to the depressed conditions of the times.

The plan that was discussed with respect to raising this million and a half dollars was this. They talked to some bankers, some of our friends that I represent, and they said, "No; we cannot provide you with a million and a half dollars."

They then talked to some men who happened to live over in Jersey and who knew something about the plans of the company. One of those men said, "I am willing to put $1,000,000 into this company, up to a million, if you can raise the other $500,000."

The company, before it can issue additional stock, naturally has to offer the stock to each of its stockholders. So the understanding with this group over in Jersey was that they would take all that was not taken up by the existing stockholders, up to $1,000,000. Of course, if the stockholders take it, it is theirs. However, we knew that the stockholders could not afford to take it. But the company

must have the money. The corporation has an excellent president, an excellent controller or treasurer, and, as I said, a board of 10 directors, and every one of them directs; they are interested; they realize the needs of the company.

So much for the facts. Now, let us assume that the bill has passed. We will assume that the president, to whom you have to look in the first instance, starts ahead. He decides to call up the Jersey fellow and say, "I have talked this over with my directors, and we will make a contract to sell you up to one million of the stock that the stockholders themselves do not subscribe to." Right there he is blocked. He cannot even telephone to that man in Jersey about this subject, because under the terms of this new law prior to his conversation with respect to the whole situation he must come to Washington and file a statement of the proposed plan. But how does the president know what the proposed plan is going to be until he finds out whether this man will put his signature on the dotted line and obligate himself to take the stock? He is prohibited, prior to registration, from communicating by telephone or by telegraph to anybody in interstate commerce about the plan involving the sale of a security until that plan is disclosed and filed.

So you see, gentlemen, as this law is drawn-I do not think it was so intended at all-it really prohibits the original negotiations and transactions that have to take place in interstate commerce, many of them, in order to arrive at what kind of a plan and offer to sell or buy the securities you can make.

Senator GORE. That is not in the English statute, is it?

Mr. BREED. Nothing of that sort at all. The English statute has nothing to do with the preliminary transactions in arriving at what are the terms of the proposed plan with respect to the issue of stock. Senator GORE. I want to make this observation at this time, that first reaction to this bill, as far as I have gone with it, is that it bristled a little too much with punishments and penalties.

my

Mr. BREED. The bill basically has the right objective, Senator Gore, but we want a model bill and we want you lawyers on this committee to bring it out.

Senator GORE. I am for the main objective. The country is just repealing the eighteenth amendment, which was a prohibition act. I do not have much faith in prohibiting acts that are committed by two people where both of them want it to happen. It is hard to stop that sort of a procedure.

Mr. BREED. To go on with our problem, let us suppose that the people over in New Jersey who are interested in this case say, "Oh, the law is foolishness. I am ready to sign up the contract even if I do violate the law, and I will sign it up.' So this man signs up the contract saying that he will buy the stock.

The president then calls quickly his board of directors together, because this money has to be gotten very quickly, and he says, "Gentlemen, here is this proposition, and we are assured at least of getting up to a million dollars from this group" [or syndicate call it anything you want to] "and I have prepared this statement under this new law that has been passed, and the rules and regulations, and I am obliged to ask you to sign this."

So he presents the statement, and the statement is accompanied by a balance sheet and detailed schedules-you have all seen them;

they are about that thick [indicating]-made up by one of the best accounting firms in the country, and they also look over the balance sheet and they see that they have down in Maryland a factory that is valued at $500,000; they have got another one in Illinois that is valued at $250,000; and the balance sheet says "as per appraisal of on December 31, 1929." Those are expert appraisals.

The first director, who is a clever fellow, says, "I am willing to sign this statement, but what is my liability under this new law?" The president will probably say, "You will have to consult your lawyer."

Suppose he gets his lawyer in. His lawyer will have to advise him. that according to the verbiage of this act as it stands, which is absolutely different from the British law, the director is the guarantor of every one of those statements prepared by those experts, if there is any mistake.

So he says, "Well, I will think this thing over, overnight." So the next day the president gets a letter from him saying, "I feel that I have to resign from your board of directors." Finally the entire 10 have gone because they also say, "I do not think that I can assume this personal liability which runs on forever."

The liability is not to the original buyer of the security, based upon the statement filed with the Federal Trade Commission, but that liability goes on forever, to any subsequent purchaser, somebody 5 years off. Some crooked lawyer who wants to work up a strong suit may go back and find that this property in Illinois or in Maryland, instead of being worth $500,000 was vacant property at the time and not worth a cent in the market although it cost the company that figure. All he has to do is to go around and get a statement from a few other people, and he can bring a suit. He did not buy this original stock on the faith of the statement and he never saw this original circular, but there would be liability according to the act because it applies to secondary sales, not merely primary sales.

So all of the directors say, "I think you better find somebody else to sign that statement."

Here is the president of the company he has the million and a half dollars and no directors. Who is he going to get to comply with the rules and provisions of this law? The only persons he can get would be office boys or dummies who have no responsibility. Gentlemen, I tell you that if this law goes into effect without amendment-and I know it will not-you will have resignations of all of the responsible directors in all of the corporations in the United States who expect to issue any securities. One of the members of the Interstate Commerce Committee of the House said the other day, "I think, if such violent directors' liability is imposed, I would resign from a few directorates that I am on."

But what is the president of the corporation going to do? He gets his dummes and they sign the statement and it is filed with the Federal Trade Commission.

I forgot to say that the man who signed this contract and bought stock up to $1,000,000 was one of a group who intended to resell some of the stock to the public. Now he goes out to sell, and about that time he wakes up and finds he is an issuer under this law.

Senator STEIWER. Under what language of the bill do you think he is an issuer?