transactions, and under this amendment we could get after individual fraudulent sale of the security that was fraudulent or the fraudulent sale of a good security.

Senator ADAMS. Why do you in your amendment_restrict it to securities issued before the act? Why should not the same protection be made against the passing on?

Mr. BREED. Those are really two separate ideas; in other words, that the whole act should not apply except to future securities, but as far as the enforcement of fraud goes it should apply to all securities, whether issued before or issued after.

Now, on section 9 as to directors' liability: I want to call to your attention, gentlemen, that that provision makes directors the guarantors of these securities, not for 40 days as provided in the English act, so that everybody who buys the original issue has a chance to look at it, but in this case it is forever. They become the guarantors of all of the facts and every detail fact stated in the statement that is to be filed with the Federal Trade Commission.

Senator GORE. What would you do there, follow the English act? Mr. BREED. I would follow the English act, but the general provision of this act should provide that directors are liable for the exercise of diligence and good faith and for all of the liability that is imposed upon trustees, executors, or others that are in a fiduciary position.

All directors under the laws of our land, National, State, common law, are today liable for good faith in connection with the administration of their affairs. No greater liability has ever been imposed by any law of any country or any State of our country or any country that I know of than that requirement that as trustee, which he is, he is liable in the performance of his duties for good faith and diligence in the performance of the trust which is imposed upon him.

I doubt very much whether you can constitutionally make a director a guarantor of all the various facts, statements, details of appraisal, statement of profits, and so forth, that are involved in the requirements of the statement to be filed. In fact, you heard me say, I think, what would result would be a resignation of all responsible men from the directorships of all companies in the United States, and whether or no you could hire a dummy to sit or not is another question, because some dummies have some respect for themselves, also.

Senator BULKLEY. I do not quite follow your constitutional objec

tion there.

Mr. BREED. The constitutional objection, Senator, would be this: This act is a prohibitory act, prohibiting a commodity known as a security from going into interstate commerce except upon this condition, that a statement shall be filed guaranteed by a director of the company as to every fact or many of the facts which it is absolutely physically impossible for him to have other than a general notion of, facts for which he must, in the ordinary course of business, rely upon expert accountants. In the first instance he must rely upon his president and upon the treasurer of the company, upon the expert accountants for the company, and so forth.

Now, when you prohibit a commodity from going into interstate commerce, unless certain parties are willing to impose upon themselves a liability that is not imposed by the common law of our land nor by any statute of our land or of any country that I know of, you

are restricting interstate commerce upon a condition that I doubt. whether the Supreme Court would uphold and in that connection I refer you to the two principal child labor cases, where you know they attempted to prohibit the sale of commodities manufactured in factories, where in one case they employed children to do any work under a certain age, and the act was held unconstitutional, restricting the sale in interstate commerce of the commodity of that factory.

And this is a vastly more violent condition, to my mind.

Senator BULKLEY. Was not the difference there that the distinction did not depend upon the character of the commodities themselves but only on the manner in which they were produced?

Mr. BREED. They depended, I think, on

Senator BULKLEY (interposing). In this case it would affect the quality of the commodity itself, if you call the stock a commodity.

Mr. BREED. That is quite right, it does affect the quality, but the definition of how to determine the quality is fixed by placing upon you, the director of a company who is diligent, who knows pretty well about his company and believes in his president and his treasurer, the obligation of being the guarantor against any error that may be made by any one of them.

Now, let us just stop and think

Senator WAGNER (interposing). That is another question, is it not? That is not a question of interstate commerce?

Mr. BREED. Yes; you prohibit the commodity from going into interstate commerce unless a statement is filed which imposes upon the directors signing the statement a liability that is not now imposed at common law.

The CHAIRMAN. The child-labor case was not based upon the commerce clause of the Constitution. That act was based upon the

power of taxation under the Constitution.

Senator BARKLEY. That first one was, but the last one was not. Senator BULKLEY. There were two different cases.

Mr. BREED. There are two different cases.

The CHAIRMAN. The Supreme Court said you were not only raising revenue, you were also impinging upon the police powers of the State.

Mr. BREED. Right.

Senator BARKLEY. Subsequent to that, though, Senator, Congress passed another act based upon the commerce clause.

The CHAIRMAN. Yes; I understand that.

Senator BARKLEY. That was also declared unconstitutional on the ground that Congress could not, through the Interstate Commerce Act, attempt to regulate hours of labor in the States. That was partly it.

Senator BULKLEY. As I understand it, your contention here is that Congress does not have the power to impose an unreasonable restriction on interstate commerce. Isn't that what it amounts to?

Mr. BREED. I think that is a fair statement of it. But, to tell the truth, Why get into a discussion of a constitutional question when we have a practical question? We have a practical question here that under the verbiage of this act directors become the guarantors of every fact stated in the statement that is required to be filed or which under the rules and regulations of the Commission they may ask additionally to be filed.

Senator GORE. That is more stringent than any State law?
Mr. BREED. What?

Senator GORE. I say that is more stringent than any State law now existing?

Mr. BREED. Oh, yes.

Senator BULKLEY. In other words, you think the constitutional objection here is less important than an objection on the grounds of policy?

Mr. BREED. Well, I would be ashamed to be here arguing to strike this out on the theory of unconstitutionality when such a practical question is involved, that I feel myself that whatever few boards I am on-and that is not many, but they are all good business corporations-I would feel that I would have to resign immediately, as I would refuse to accept the responsibility in connection with the issue of any bond or note or stock that those corporations issued. That is a practical question.

Senator WAGNER. That is what I think you mean to tell us, that the prescription is impossible to carry out.

Mr. BREED. That is what I mean.

Senator WAGNER. Which I agree is not a constitutional question. Mr. BREED. It is a prescription with a lot of poison in it and a great injury to the public.

Senator GORE. Let me ask you one question: You say there are 37 States that have the license system, and all of the 48 States have restrictions of some sort.

Nevada hasn't any.

The CHAIRMAN. All except one. Senator GORE. That is right; as to the issuance of securities. Now, it seems to me that during recent years prior to the panic this country was deluged with stock if not fraudulent at least worthless. That was spread all over the land. I have heard universal complaint about that. Why was it these laws we have in the States did not stop the evil? Why was that? Was that due to some defect in the law or to some defect in the administration of the law or both?

Mr. BREED. Senator, if you can pick out any body of men and set them up as a commission who are to license securities that can tell you whether those securities are sound securities, you will do something that I do not think I could do. Those commissions acted in the best of faith in connection with the issuance of those securities, but it is impossible for a body of men to determine how a business is going to come out or what its future is going to be or whether it is a sound proposition or an unsound proposition.

Senator GORE. I have one apprehension about this. The committee will pardon me for just a moment. That is, That is, it may enthrone bureaucracy in this country, an evil that we are all supposed to resist. And I would like to tell the committee this incident: The Judge just said that all these commissions acted in perfect good faith in administering these blue-sky laws.

. I went with a friend of mine to the capital of a neighboring Statehe is in this room now-in an effort to secure a permit to sell stock in that State. We got about as much reaction from the commissioners and officers we talked to as we would have gotten from a graven image. We sensed that we were not making any headway. This friend of mine went to a prominent lawyer in this city, which is the capital of that State, to engage him to assist us in securing a permit.

The lawyer refused to take the case because he said he could not do any good. But he told this friend of mine that if he would engage a certain State senator living in a neighboring town and pay him $5,000 he would probably get his permit.

Now, I was connected with that transaction. There is the evil of bureaucracy when you carry it too far.

Mr. BREED. Now, Senator, in connection with these 37 States that have the license laws, right along the line of the story of Senator Gore, I want you to realize that where a security is a good security and should be offered throughout the Nation-because we all are looking for something that is sound and good-the good with the bad have to obtain this license in these 37 States before they can be sold or offered for sale.

It is a very difficult thing, as I explained to you the other day, to do it, and requires a great deal of effort. In many of the States it is found to be necessary to employ certain special attorneys or you cannot get those securities licensed except after great delay.

An investment-banking house that is issuing a security has to issue the security in order to be fair to the public practically on the same day throughout the country. Because if it is issued it in one section of the country at one time and later in another section and the price goes up it is unfair to the latter State to sell it to them at a higher price than offered to the people in the original State where it was early qualified.

The result of the trouble and time required to qualify is that the good securities are not qualified in but few States. Frequently the States of Idaho, Arkansas, Oklahoma, and so on, do not get an opportunity to subscribe and buy the good securities because the investment bankers cannot go to the trouble and nuisance and annoyance and delays and hold-ups involved in having those securities qualified. Again, in these States, that is an injury to the people that are in the investment banking business and to all their employees that are making a livelihood, because they cannot sell these securities in the State because they are not authorized.

The CHAIRMAN. For that reason we need a Federal statute. Mr. BREED. That is why we want a Federal statute. We want a Federal statute. It will not enable us to qualify them in those States, but if you act, sooner or later the model which you set is going to become the model throughout the United States, and as I said, like the pure food and drug law of 1906, at the end of 10 years that national law was practically adopted in all the different States. The CHAIRMAN. Mr. Breed, we will have to stop here. Mr. BREED. May I say just this?

The CHAIRMAN. Yes.

Mr. BREED. After talking with the chairman, I realize that what you wanted was some practical suggestions. The result has been that for the last two nights I, with some other associates of mine, have been trying to prepare some amendments to this bill that would illustrate the introduction into the bill of the principles which we think the President laid down and which we approve. These suggested amendments just came from the press this morning at 9 o'clock, and we were up all last night. I myself cannot tell whether lines are left out or what not, but if you would like to have me do so I will be glad to submit to you, say, tomorrow, some definite proposed

amendments to the present act based upon the principle of registration, with full disclosure and strict fraud provisions constituting the Federal Trade Commission the agency to go right after fraud wherever it may be found.

The CHAIRMAN. You can do that. Just send them down to us tomorrow and we will put in the record or place in hands of members of the committee.

Mr. BREED. Thank you.

I want to make this additional statement: Even these amendments that I will suggest, unless they are seen in completed bill and studied, and their effect upon the business interests of this country thought carefully over-no one could declare they were right. This bill does not affect just investment banking; it hits every corporation in the country. As Senator Glass said, it affects even the Federal Reserve System, because there should certainly be an amendment exempting negotiable promissory notes and acceptances, because those are the things that are now permitted to be rediscounted in the Federal reserve bank, and they might be prohibited. There are many of those things.

The CHAIRMAN. I think we understand pretty well about that, and you will offer suggestions.

Mr. BREED. I would want to review my own amendments. I cannot tell whether they are correct or not.

The CHAIRMAN. Suppose you take a copy of the bill and write one as you would want it take the bill as it has been introduced, and write your amendments in it and such other matters as you would want in the bill, and submit a revised bill for us to consider.

Mr. BREED. I will do that, with this understanding, that I will not guarantee to stand by the amendments more than 24 hours, because it would certainly require any person that is familiar with this subject several weeks to see what the effect of any verbiage is on the security business of the United States.

I want to express my great appreciation for your hearing me so long in the two days.

The CHAIRMAN. We were very glad to hear you.

STATEMENT OF JAMES F. CALLBREATH, SECRETARY AMERICAN MINING CONGRESS, WASHINGTON, D.C.

Mr. CALLBREATH. Mr. Chairman, may I file a brief statement of my own and a telegram received from the secretary of the Northwest Mining Association as a part of the hearing? I am very sorry that I cannot be with you, but I would like to submit that short statement. The CHAIRMAN. Very well; we will file the telegram and statement and it will be made a part of the record.

(The telegram submitted by Mr. Callbreath is as follows:)

JAMES F. CALLBREATH,

SPOKANE, WASH., April 5, 1933.

American Mining Congress, Washington, D.C.: Trust you will make it clear western mining industry favors securities bill as whole and has advocated such law but opposes section 14 for many reasons. This section practically prohibits advertising or mail solicitation until stock has qualified under blue sky law in 40 States. Cost of such qualification estimated at $1,000 per State on average and company might still be held up by autocratic refusal of one or few State commissioners. Section 14 would practically limit