issued under Federal supervising authority; but commercial paper is not issued under Federal supervising authority. The Federal Reserve Act directs that the Federal Reserve Board may prescribe regulations as to the terms on which the banks may discount, but there is no regulation of the issuance of commercial paper itself.

Section 14 of this bill prevents the insertion of any advertisement of a security in any newspaper if that newspaper goes into another State, unless that security is qualified for sale in every State into which the newspaper goes.

The CHAIRMAN. You heard Mr. Thompson's suggestion about. striking out part of that section?

Mr. DEAN. My understanding was that he was going to have that particular portion of it stay in. I may be wrong. It is impossible as it stands. It will prohibit all newspaper advertising.

If I may proceed, the bill in its present form requires that in the case. of the issuance of foreign government bonds, all of the data shall be signed by the issuing banker and that they practically are to be guarantors of those issues. It seems to me unwarranted to permit the underwriting banks to make statements as to the financial condition of a foreign government, without requiring that those statements be signed by a responsible financial officer of that government. This bill in its present form would practically amount to a prohibition of the issuance of foreign government loans. If that is the purpose of the bill, I think it should be more clearly stated.

Senator GORE. That would have been some protection in the past, would it not? But do you not think that the underwriting house could require some responsible officer of the issuing government to sign the statement? The foreign officer would be beyond our jurisdiction.

Mr. DEAN. But is it wise to permit an issuing banker, even though he does practically guarantee them, to make statements as to the general financial condition of a foreign government, without the law requiring that any statements be signed by a responsible officer of such government?

Senator GORE. I should think the issuing bank would take that responsibility.

Senator BYRNES. I would not think the issuing bank would sign it without having a sworn statement from the responsible officer of the foreign government.

Senator GORE. The foreign officer might be over in Czechoslovakia, for instance.

Mr. DEAN. I assume the purpose of the bill-because you cannot reach the foreign government-was to make the bankers liable for those statements because of various matters that have developed in connection with foreign government loans.

Senator GORE. This makes them responsible, anyway.

Mr. DEAN. This makes them guarantors of all statements in the prospectuses.

Senator GORE. If they want to protect themselves by requiring the signature of a foreign officer, they may do that.

Mr. DEAN. I think this will amount to a prohibition on such loans, and I think if that is the case the bill ought to be amended so to state. Furthermore, if that is the purpose I think these loans ought to be placed under the supervision of the Federal Reserve Board rather

than under the supervision of the Federal Trade Commission, because every foreign government loan directly affects exchange in such a vital way.

The CHAIRMAN. This country would have been very much better off if we had prohibited some of those transactions.

Mr. DEAN. I would like to say also that the definitions in the bill are not used with the same uniformity throughout the bill; and in my memorandum I will comment on various other portions of the bill which we think need clarification and simplification. In general I think that you could draft a very simple bill along the lines of the English Companies Act, that would not constitute a burden on business and industry or be as confusing as this bill is.

Senator GORE. Have you sketched out such a bill?

Mr. DEAN. I would require, first, the filing of adequate information on the original offering of securities. Second, the responsibility of directors except for statements made in good faith. No right of

revocation

Senator BARKLEY. How could you ever prove that any director did not make a statement in good faith?

Mr. DEAN. The bill could contain proper provisions to show that he had to have supporting documents. For example, the English Companies Act does not permit him to rely on an expert unless he had good ground to believe that that man was an expert.

Senator GORE. Will you complete your statement of points?

Mr. DEAN. Strong provisions with respect to fraudulent transactions, with the right to proceed by injunction against those engaging in such fraudulent transactions. Under the Martin Act you cannot only prevent a man from dealing in one particular security, but from ever engaging in it again.

The CHAIRMAN. Subject to prosecution, too?

Mr. DEAN. Subject to prosecution under the criminal laws as well. Senator GORE. You have not put these in the form of a bill, have you?

Mr. DEAN. No, sir. There has not been time. There has not been time. I would be glad to draft such a bill, if you desire.

Senator WAGNER. Under the Martin Act you can prevent the corporation itself from selling securities.

Mr. DEAN. Yes. The bill should contain numerous exemptions, such as commercial paper, loans already authorized by national or State boards, State bank stock, and other forms of paper customarily and usually exempted in State blue sky laws.

Senator KEAN. Ought you not to exempt building and loan associations?

Mr. DEAN. Yes; and the bill should also exempt annuity certificates.

Senator BYRNES. What other provisions would you suggest?

Mr. DEAN. I think, along the lines of that bill, you would have a very strong and effective bill.

Senator BYRNES. You would not place any restrictions upon the issuance of securities by foreign governments?

Mr. DEAN. That is a matter of policy not for me but for the committee to determine. If that were going to be regulated by the Government, I would say that it should be directly or indirectly

included in some of the other bills that are now pending and be placed under the jurisdiction of the Federal Reserve Board.

Senator BYRNES. You admit that this bill supervises transportation in interstate commerce of securities, and you would not seek to place any restrictions on that at all?

Mr. DEAN. No, sir. This does indirectly what it apparently is the intention to do.

Senator BYRNES. But you would not place any restrictions upon the issuance of securities by foreign governments either directly or indirectly?

Mr. DEAN. It seems to me a gratuitous insult to a large number of foreign governments whose securities have very high standing, such as the English Government or the Japanese Government, for example, on which there have been no defaults, to imply in this bill

Senator BYRNES. To ask that they be required to do what the corporations of America are required to do?

Mr. DEAN. It does not do that, sir.

Senator BYRNES. I am asking why you refrain from placing some restrictions and the same protection around foreign securities which have caused tremendous losses to the American people.

Mr. DEAN. I would require complete disclosure; and as Senator Gore pointed out, if there is anything wrong the only remedy is through diplomatic channels.

Senator BYRNES. But if, under the provisions of this bill, there were some other remedy?

Mr. DEAN. I think that in all legislation you need to be careful that you do not be so drastic that you defeat your own ends. I think this bill is so drastic and tries to include so many things that it will defeat its own purpose.

Senator BYRNES. Let us stick to this, though. If you object to the language restricting foreign securities, what substitute would you suggest?

Senator GORE. Would it avoid any breach of comity to limit it to the securities of governments which have defaulted either on the interest or principal?

Mr. DEAN. Do you mean, on an external loan or an internal loan? Senator GORE. A Brazilian loan, for instance, to be floated in this country.

Senator BARKLEY. That might exclude all the rest of them that may default in the future.

Mr. DEAN. I would say that ought to be under the Federal Reserve Board.

Senator GORE. I am rather inclined to agree with you there. Mr. DEAN. I do not feel that the issuing bankers should be made guarantors of those loans.

Senator BARKLEY. Why not? As between them and innocent purchasers in the United States, why should they not be held to some liability?

Mr. DEAN. If you mean that no foreign loan shall be floated in this country

Senator BARKLEY. I do not mean that, and I do not think the bill means that.

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Mr. DEAN. That is what it will mean, because no private banking house could afford to be made liable for an error that occurred in the budgetary statement of a foreign government; and that is what that would mean.

Senator BARKLEY. Then you prefer that if there shall be any loss in America, the loss shall be sustained by the innocent purchaser rather than the investment banker?

Mr. DEAN. I do not. I am simply saying that if you pass a law that makes the investment bankers the guarantors of foreign loans, you will put them into bankruptcy. There is a very serious situation in New York City now, where all the guaranty mortgage companies have been selling mortgages for years saying that these are good investments for an estate, for the widow or for the orphan. You have $25,000,000 worth of mortgages with guarantees of about a billion dollars of mortgage certificates, so that each holder would get about 1 cent on the dollar. People would be buying foreign government bonds on the theory that they could go against the investment banking house. The loans may total several hundred million dollars, and the total capital might be 10 million, and they could not collect. They could put a banking house out of business, and they would get nothing.

Senator BARKLEY. We all know about the decline in the value of real estate, which is abnormal, growing out of the depression. That is quite different from normal transactions in foreign bonds.

Mr. DEAN. But my point is that people would buy these bonds thinking that J. P. Morgan was back of them, and the capital would not be sufficient if they had sold hundreds of millions of dollars' worth of those bonds and the loans were in default. This will amount to a prohibition on foreign government loans.

Senator ADAMS. Look on page 11 of the bill. It is not as drastic as you have indicated. In other words, we ask the name of the borrowing government, the purpose of the loan, the date of the loan, the date and terms of the underwriting agreement. Certainly they are things that the domestic banks would want to know. The security pledged or to be pledged; general financial condition of the borrowing government-not in detail, but the general financial condition; whether or not the borrower has ever defaulted; and the proposed method of distributing the securities. It does not seem to me that that is a very exacting statement.

Mr. DEAN. May I ask you about two things that bother me on that? I would like to know myself how to state in a circular the general financial condition of the United States Government. You have had a deficit, a cumulative deficit. All of the Treasury estimates and revenues are off. If you put additional Treasury estimates in, and they were off, you would be wrong

Senator ADAMs. But this does not ask for details, but for the general financial condition.

Mr. DEAN. What is the general financial condition of the United States Government today?

Senator ADAMS. If I were an investment banker putting out securities I would certainly be in position to make that statement.

Mr. DEAN. The United States Government has had a deficit for the last several years.

Senator BARKLEY. That would be the general financial conditionthe deficit.

Senator GORE. We go on the theory of the old negro who was asked what the words "E pluribus unum" on the silver dollar meant, and he said it meant "Plenty more where that came from."

Mr. DEAN (reading):

Whether or not the borrower has ever defaulted on the principal or interest of any other security sold in the United States.

Supposing they had gotten out an internal loan. You could not know whether an internal loan has ever been sold in the United States. It may have been offered in Brazil and somebody may have brought it from Brazil and sold it to somebody in the United States.

Senator GORE. With reference to these restrictions and limitations on foreign loans, and even with reference to domestic loans as well, would this bill have a tendency to discourage and deter honest dealers from getting into the market at all and carrying on their business?

Mr. DEAN. That is exactly what I am afraid of. I am afraid that this bill would prevent responsible houses from floating foreign loans and would encourage irresponsible houses to do that type of business. Senator GORE. Would it not have the same effect with reference to domestic securities issued in this country?

Mr. DEAN. Not with respect to domestic securities, because in that case the investment banking house does not sign a statement. It is the directors of the corporation that sign statements.

Senator GORE. Would it not deter them to some extent? The directors certainly would be restrained in a sense.

Mr. DEAN. I think it would very materially deter them, because I think that no responsible man is going to sign the statement, and I do not think investment bankers would wish to issue securities on statements signed by dummy directors.

The CHAIRMAN. The British act covers issues outside, does it not? Mr. DEAN. Provided they are floated in England; yes, sir.

The CHAIRMAN. If other countries adopt that sort of rule, why should not we?

Mr. DEAN. The English act does not require the issuing bank to be the guarantor of the statement. There are quite a number of rules and regulations of the Bank of England and various other financial formalities over there before you can float a foreign loan in England. They have a large number of rules and regulations.

The CHAIRMAN. If that is all, you may submit your memorandum. Mr. DEAN. I would like the privilege of filing this memorandum, and filing it on behalf of myself and Mr. Alexander Henderson, of New York.

Senator GORE. You think this bill proceeds on the theory that everybody is dishonest until they prove themselves honest, and it should proceed on the theory that most people are honest and should apply to those who are dishonest?

Mr. DEAN. Yes, sir.

Senator KEAN. Do you not think it would be much better to require the financial agent of the foreign government to make the statement, rather than to have the banker guarantee the truth of the statement of foreign loans?

Mr. DEAN. Yes; I feel very strongly that the statement should be signed by a responsible financial officer of that government.