Mr. BREED. Subsection (d) of section 2

"Issuer" shall mean and include every person who issues, has issued, or proposes to issue any security. Any person who acts as a promoter for and on behalf of an individual, corporation, trust, or unincorporated association or partnership of any kind to be formed shall be deemed to be an issuer.

This fellow will certainly very easily come under the definition of "promoter." But I mention the fact that having bought this block of stock and then started out to sell part of it in interstate commerce, he becomes the issuer and later

The CHAIRMAN. It says, "issuer on behalf of the company," does it not?

Mr. BREED. It does not say "company". It says "who issues, has issued, or proposes to issue".

The CHAIRMAN. On behalf of the company?

Mr. BREED. But it does not say that, Senator.

Senator STEIWER. It says that the issuer is the man who issues, does it not?

Mr. BREED. That is the best opinion of all the people that I have talked with down here in the two days that we have been here.

Senator STEIWER. Is there any adjudication to that effect?

Mr. BREED. No; you have got to use your legal judgment; but it is our belief that this law will apply to a block of stock in the hands of a broker on the New York Stock Exchange who is selling to you, and he happens to have 10,000 shares and he sells it to a lot of different people. He is an issuer because he is selling that stock in interstate

commerce.

Let us go a step further in this illustration, which I apologize for taking so long to carry through, but I do feel that it is a practical problem, and I know you want to know how this will work practically. We feel that this law should contain two or three fundamental things, and that you have to determine them.

The first fundamental that I say you as a committee should determine is whether in this act you wish to have it relate to all present securities that are issued and require them all to file before anybody can deal in them or only to securities issued after the passage of the act.

I was glad to hear Mr. Thompson say that he would amend the act so as to have it only apply after the date of its passage

Mr. THOMPSON. From the date of its passage, with an additional statement

Mr. BREED. With the additional clause which I think you and I agreed was proper, that it does not cover securities in the treasury of a company, even though a part of the issue has been previously sold. If you have this act amended in that way, you will find that it is going to remove many difficulties.

The next thing you have to determine is whether you wish to give the Federal Trade Commission power

Senator WAGNER. Have you some suggestions to make as to how far the responsibility for the statement should go?

Mr. BREED. May I come to that in just a moment, Senator Wagner? Senator WAGNER. You intend to come to it, do you?

Mr. BREED. Oh, yes.

My next fundamental is that you must decide whether you wish to give the Federal Trade Commission the power to revoke. As was

brought out in the House committee, if a corporation is required to register its stock and the Federal Trade Commission is given the power to revoke at any subsequent time, you have this illogical situation. The President says that we must not become the guarantors of the securities. Mr. Thompson agrees to that; but if you require a corporation to register and then you reserve the power to revoke, would it not be better for the corporation to have you pass on it at the start? How long is the Federal Trade Commission going to take to investigate these facts to determine whether they are going to revoke-1 week, 3 weeks, 5 weeks?

Let us come to the public. Let us say that the Commission has not revoked for 5 weeks. The issuer is entitled upon registration and filing to sell the securities. He has sold those securities to you and to me. We have paid our good money for them. Five weeks thereafter comes the Federal Trade Commission and says, "We have looked into this and we revoke the issue of these securities."

As a member of the public, I object; I have paid my money, and the only fellow that is hurt or injured is myself. I have bought the securities. The sale by me is revoked. I cannot sell. I would much rather have the Government pass at the start on whether those securities were good or bad, the same as in these license States. It is much better to have a license law than to have a law that 5 weeks after I have paid my money for the securities the Government is going to say that no further sale can be made. What is the effect on the market value of the securities of a corporation after the Federal Trade Commission has issued a revocation? I would say that it would not be worth very much. The public is the loser. It affects the public. The intention of the framers of this bill was to get after the issuer. That is the corporation. It does not affect the corporation very much after an issue is revoked, because the corporation has received its money from sale of the securities from the underwriter or otherwise. It is a finished transaction.

The CHAIRMAN. Suppose we put a proviso in, for instance:
Provided, That none of the issue has been distributed.

Mr. BREED. That would not cover the point, Mr. Chairman, because you do not know how long the Commission will take, and you have to sit around and wait. There is nothing in the law whereby you can get any information from the Federal Trade Commission as to whether they are going to revoke or not. So you are never going to know "where you are at." The English law contains no such thing as that. If it did, it would absolutely ruin the commerce of England.

Senator GOLDSBOROUGH. It would stop business?

Mr. BREED. It would absolutely stop business. They say there is a revocation clause in 37 States that have license laws. But a revocation clause in a blue sky law, where the Commission originally says that this security is good, is a very different thing. A State certainly ought to have the right, if it discovers fraud, to say, "We made a mistake; it is bad," because the State originally gave them the right to sell those securities, and of course they ought to have the right to watch over them. It is an entirely different theory of economics where the State originally passes on the soundness of securities.

Senator ADAMS. You get the same result in every case if you happen to buy the securities?

Mr. BREED. To answer your question, Do I get the same result?what do the license States revoke for? Not because there is a mistake as to all the items mentioned in this revocation clause of this bill. They only revoke where their bureau has discovered actual fraud; and if there is actual fraud in connection with the issue of securities, the future sale by the issuer ought to be stopped at once, no matter if I have a loss, because the State has said they are good, and the State has discovered that there is a crook involved in the situation and they ought to get him. New York has no revocation law. The English law has no revocation clause. The French law has none and the Belgian law has no revocation clause.

I suggest that this law should be amended by striking out entirely the revocation clause. Otherwise you contradict what the President said, that we do not want to take any action which may be construed as approving or claiming that newly issued securities are sound in the sense that their values will be maintained or that the properties which they represent will earn a profit.

You cannot hold back the right to revoke and not say that you are holding back for the purpose of investigating the soundness of securities. It is the same thing as though you did it at the start. So I think that the entire revocation clause should be stricken from the bill. What do I suggest as a substitute for that? I suggest what is in the English law; I suggest what is in the Martin Act; I suggest what is, in many respects, in the base law of our State. I suggest that the Federal Trade Commission be given power to investigate any securities that are issued today, previously issued, or to be issued in the future, and that wherever the Federal Trade Commission finds any fraud in connection with those securities or with the sale of those securities, they have the right to subpena, to get the facts, to get the records, and the Government imposes upon them the duty to get those facts and to hand them over to the Attorney General, with the Attorney General having the right under this law and the other mail fraud laws and the other criminal laws of this land to proceed against those who are dealing in fraudulent securities. There is where the Federal Trade Commission should come in-not passing on the soundness of securities, but in investigating fraud in connection with past, present, and future issuing of and sale of securities, to see that our market is kept as clean as it can be from the crooked dealer in securities.

Senator STEIWER. Do you contend that under this revocation clause existing in this bill, if a corporation should lose half its capital assets, we will say, by reason of depression, and wholly without fraud, the Federal Trade Commission could revoke its registration?

Mr. BREED. Well, all I can say to that is that after listening to Mr. Thompson's statement that he was willing to take out, I think it is (e) and (f), it leaves in other provisions for revocation the effect of which I could not pass on at the moment.

Senator STEIWER. I think you are on fairly safe ground. Sections (e) and (f) probably justify an affirmative answer to my question. Mr. BREED. With those out, your question would be an open question, would it not?

Senator STEIWER. I would think so, myself. I wanted your judgment on that. The thought in my mind is that if the company

should lose half its assets its stock might go down from 100 cents to 50 cents, and if the market price of the stock correctly reflected the values still inherent in the investment, I see no moral objection to the sale of that stock at the depreciated price. Nobody is being injured by the sale of that stock at this depreciated price.

Mr. BREED. The results of revocation, just as you say, hits the people more than it hits the issuer or the investment banker or anybody else, because he bought.

In other words, any revoca

Senator STEIWER. It would appear so. Mr. BREED. Yes; it seems to me so. tion is revocation in the interest of putting me in a position, whether rightfully or wrongfully, I cannot get out of, because after revocation that stock cannot be sold in interstate commerce. Suppose I sold it to five or six different people in interstate commerce. That would not

be within the exception of these isolated transactions as to which it

says

Made in the course of repeated and successive transactions of a like character: I am pretty close to becoming an issuer myself, and I become liable. Senator STEIWER. If subsections (e) and (f) are removed from section 6, you still object to the right of revocation?

Mr. BREED. I do not believe in the principle of revocation at all. I believe in the principle of giving the Federal Trade Commission the power and authority to go ahead and investigate securitiespast, present, and future-in the search for fraud, and to punish the people who are guilty of fraud; but I do not believe that after securities are issued this is proper. I think it is injuring the public more than it is injuring the issuer.

Senator GORE. It might turn out that the revocation would punish the innocent and let the guilty go unpunished?

Mr. BREED. That is what I think.

The CHAIRMAN. Would you have any time limit on the revocation? Suppose we modify it so as to put a time limit on it?

Mr. BREED. I will tell you the effect from a banker's point of view, Senator Fletcher. Suppose you put a time limit on it even as low as 15 days. Of course that would hardly give the Federal Trade Commission time to really investigate it. The result of that would be that any syndicate or underwriter or banking house or anybody connected with the sale would have to wait for 15 days after the date agreed upon, in order to find out whether the Federal Trade Commission was going to revoke.

The CHAIRMAN. I understand.

Mr. BREED. It is exactly contrary to the policy that was brought out in the Massachusetts law, where for the first time they allowed registration by notification, and it is contrary to the British act which allows immediate sale.

Senator WAGNER. Do you distinguish much between revocation and the issuance of an injunction?

Mr. BREED. I am glad you asked that question, because that shows that I have not made clear my thought. I think the power to revoke should go out, but I have a new section to suggest giving the Federal Trade Commission full power of investigation over all securities, and I believe the fraud clauses of this act should be very much stiffened up.

Senator WAGNER. I understood that; but just looking at the section, I thought revocation being left out is practically based on fraud, is it not? Or am I mistaken about that?

Mr. BREED. That is an open question; but suppose you are a corporation about to issue a new security-you are up against a commission of fine men today, different tomorrow and stranger next year, probably, you really do not know what this power to revoke does mean. In one clause it says

Has been or is engaged or is about to engage in fraudulent transactions.

Suppose, in reference to some query that is in their minds, they say, "I think it is absolutely fraudulent for you to issue stock for an interest in this gold mine out here" or "in this oil well. We do not think it is any good. We think it is fraudulent." The same thing would apply to any other kind of a piece of property, a patent or otherwise. There is still an open question there, is there not?

Senator WAGNER. Yes. I was just wondering how you distinguished between that sort of investigation and inquiry and the one which you suggest, which might result in the issuance of an injunction, as I understood you.

Mr. BREED. The difference is that with no power to revoke the issue, but with power to proceed against everybody connected with a fraudulent issue, that is a distinct, definite thing. They can get after that, and they ought quickly to get after that.

Again calling your attention to the Martin Act in New York, that is enforced, as you know. What do they do on an issue of new securities? The name of the security is filed and the name of the issuing house. The bureau of securities organized in the attorney general's department can look those right over. They can pick out the queer ones, and then under their broad powers can obtain injunctions and get right after it; and that is what they do.

Senator WAGNER. I signed some of the orders myself before I came here.

Senator ADAMS. You say that if the power of revocation exists and is exercised, you, as an innocent holder of the stock, may suffer a loss. Suppose in that case the power of revocation being eliminated from the bill, you being an innocent holder, but fraud having been uncovered, gross fraud, you could still go out to some other innocent purchaser and say, "This stuff is still registered on the Trade Commission's books," and pass it on. That is, some innocent holder is going to be caught in all these transactions whenever fraudulent stock goes out. Somebody loses. Is it better to put you, who happen to be the first holder, in the position of loss, or leave it open so it may be passed on again into interstate commerce after the fraud has been discovered?

Mr. BREED. That is a very pertinent question. Let us follow that through. Let us suppose that there is a fraudulent security that is issued and filed. The Commission finds that it is fraudulent and goes after them. In the intervening time of 3 days, let us say, those crooks have sold a little of the stock to you and to me, innocent people, and then the Commission comes along and revokes it next week. You and I are landed with the stock, aren't we?

Senator ADAMS. Yes.