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Mr. MACLEAN. Yes, sir. We found that all the banks were going into the bond business. So we went into the banking business, and have conducted both a bond and a banking business.

Senator KEAN. Before you start out on your comments on the bill let me ask a question or two.

Mr. MACLEAN. Certainly.

Senator KEAN. You have sold municipals and other bond for as long number of years, have you not?

Mr. MACLEAN. Yes, sir.

Senator KEAN. How many salesmen have you had, on an average? Mr. McLEAN. We have had offices in 36 of the principal cities of this country, and in Canada, and, of course, that has meant about 600 people. But that force has varied at times.

Senator KEAN. Do you mean 600 salesmen?
Mr. MACLEAN. They were not all salesmen.
Senator KEAN. How many salesmen?

Mr. MACLEAN. I would say about 60 salesmen.

Senator KEAN. Up to 125 salesmen, would you say?

Mr. MACLEAN. At the most about 60, now about 30.

Senator KEAN. And those salesmen were drawing salaries all the time, and a commission on sales?

Mr. MACLEAN. Yes, sir.

Senator KEAN. When you buy a bond how much do you have to load that bond before you would get even on its sale?

Mr. MACLEAN. On municipal bonds the spread, as we call it, is narrow, a point and a half and sometimes less.

Senator KEAN. So if you bought a bond at 90, in order to come out even you must sell it at, say, 912?

Mr. MACLEAN. About that.

Senator KEAN. That is, without any profit to you at all?

Mr. MACLEAN. No. That would cover our profit also.

Senator KEAN. I mean without profit to you.

Mr. MACLEAN. Then it would be about one half of that spread. Senator KEAN. That would be 90.

Mr. MACLEAN. Yes. I am speaking of municipals now.

Senator KEAN. Now, then, what about other bonds?

Mr. MACLEAN. As to rails, industrials, utilities, there is a larger spread, from 3 to 5 points usually, or about 4.

Senator KEAN. Then you would have to get from 3 to 5 points above what you paid for the bond in order to cover your expenses, without any profit to you?

Mr. MACLEAN. No. That would include our profit.

Senator KEAN. I want to get the spread without any profit to you. Mr. MACLEAN. Then it would be about half of that.

Senator KEAN. Then you would say 1% percent.

Mr. MACLEAN. Yes.

Senator KEAN. 2 percent?

Mr. MACLEAN. About 14.

Senator KEAN. In other words, if you bought a bond at 90 it would cost you 2 percent before you would break even?

Mr. MACLEAN. Yes, sir; for expenses of investigation, accounting, and of distribution, as well as advertising.

Senator KEAN. All right. I wanted to get that information in the record because I have to leave the room in a minute. Isn't it true

that your salesmen are pressing you continually to be fed with more securities. They say, "We can sell these securities." And one of the defects of your business is to find enough securities to feed your salesmen.

Mr. MACLEAN. Our experience has been that we, during the years, have been able to get a sufficient supply of the sort of securities that we wish to offer. There is always a demand for good securities, using the word "good" and underscoring it.

Senator KEAN. There is always a demand for good securities, but not always a supply.

Mr. MACLEAN. No; but we have been able to get sufficient.
Senator KEAN. Isn't it difficult to get a supply?

Mr. MACLEAN. It is now; yes, sir.

Senator KEAN. Therefore, if it is difficult to get a supply, your salesmen are demanding that you provide them all the time, and they are pushing you all the time to take securities which, perhaps, you might not be willing to take in ordinary circumstances, if they were not pushing you all the time, isn't that true?

Mr. MACLEAN. There are two safeguards against that. First, the policy of our house. And, second, the fact that we have a very fully developed buying department, with skilled men, experienced in the business, who pass upon the goodness or worth of a security. If we cannot get good securities, securities of the grade we wish to handle, then we do not handle them.

Senator KEAN. That is all, Mr. Chairman. I thank you very much, Mr. MacLean.

Mr. MACLEAN. Thank you, sir.

Senator COSTIGAN. You may proceed with your statement, Mr. MacLean.

Mr. MACLEAN. May I now give you these few comments on the bill?

Senator CoSTIGAN. We will be glad to have you do so. Mr. MACLEAN. Every human document has defects. We think the present bill has some, and hope they can be modified. My comments are as follows:

(a) Its provisions, except as to foreign loans, apply to the borrowing corporation and not to the banker or underwriting group which negotiates the sale of the securities to the public. It is clear from section 5 that the "issuer" is the corporation or other entity whose securities are being sold. The right of "rescission" for false statements in circulars established by section 9 obtains against the signers of the circular. By section 8 (d) it is required that the circular be signed by the officers, directors, and trustees of the "issuer" or of the owner of the property constituting the basis of the issue. The only provision with respect to underwriters requires a statement to the Federal Trade Commission and in offering circulars of the members of the underwriting syndicate, and any commissions or bonuses paid or to be paid in connection with the sale or distribution of the securities. The provision that transactions may be rescinded would make it impossible for any one to know when he had made a valid transaction. (b) A second serious defect is that the present form of the bill applies to securities now outstanding. It should not be applied to old securities. Free trading in these should be allowed. The information called for has in many cases been published for years in stand

ard manuals. The bill as proposed would bring interstate trading to a standstill until individual traders found out whether the data had been filed with the Federal Trade Commission or not. The bill as drawn would require dealers to go back to 1492 in this country or to the fourteenth century when the English Government defaulted to the Florentine bankers.

Although there may be some question as to the intention the framers of the bill, there is no doubt that it covers all presently outstanding securities. For example, a house engaged in the business of selling and buying securities could not, after the passage of the bill, continue that business until the securities it proposed to buy and sell had been registered with the Federal Trade Commission. This would mean the immediate swamping of the Commission with applications for registration, and would shut down all the security business, except where brokers are acting as agents for bona fide investors. In the case of many issues, including most foreign government issues, the practical difficulties in the way of complying with registration requirements would be almost insuperable.

(c) Definitions are vague or lacking in the bill. There is no definition of "promoter." There is no definition of what constitutes an "underwriting syndicate." There is no definition of what is meant by an "original issuer."

(d) That section of the act, section 9, granting any person a right or rescission against any fraudulent vendor or against any signer of a statement, in case of any false statement, and further giving such person a right to damages for the losses he has sustained by reason of the falsity, imposes new and stricter penalties. The parties defending such suit are deprived of the defenses of good faith and due care. Further, the burden is upon them to show that the plaintiff did not rely upon the statement. Under existing law the burden is upon the plaintiff to show that he did rely upon the false statement in question. In the second place, the plaintiff may rescind against the officers and directors of the issuing company even though he acquired his security after any number of intermediate sales. The right of rescission bears no relation whatever to the chain of ownership of the security from original seller to final purchaser, and preserves no rights in favor of any inermediate party in the chain against him or any prior seller. Finally, the section establishes what is in effect a double liability, the two sources of liability, rescission and damages, being legally unrelated to each other and not mutually exclusive or even coextensive.

(e) The most serious provisions of the law, aside from those requiring signature of statements by all directors and making directors personally liable, are those of section 6 authorizing the Commission to revoke the registration of any security. The grounds upon which registration may be revoked give the Commission practically dictatorial power over all businesses of the country.

It is provided in subdivision (f) of section 6 that the registration may be revoked if it appears that the enterprise or business of the issuer, or the security, is not based upon sound principles and that the revocation is in the interest of public welfare.

It is also provided in subdivision (e) of section 6 that the registration may be revoked if the Commission finds that the affairs of the issuer are in unsound condition, and in subdivision (d), if the Commission

finds that it is not conducting its business in accordance with law. Any fraudulent representation in any circular or literature at any time in the past history of the corporation is apparently a ground for revocation under subdivision (c) of the same section, notwithstanding that the management may have entirely changed and that there can be no criticism of its present method of doing business. Any infraction of civil laws, no matter how innocent, might be made the basis of revocation on the ground that the corporation "is not conducting its business in accordance with law."

True, an appeal is allowed to the Court of Appeals for the District of Columbia, but before such an appeal is heard and decided, the damage is done. No appeal is permitted to the United States Supreme Court, it being provided that the jurisdiction of the Court of Appeals for the District of Columbia shall be exclusive and its judgment and decrees shall be final.

Merely as a suggestion for the consideration of the committee, we wish to say that, perhaps, the purpose could be better accomplished by having the Federal Trade Commission license various dealers, who had filed full data as specified by the Commission, and who had satisfied the Commission as to their integrity, ability, and financial responsibility.

The books of a dealer would be open at all times to a representative of the Commission. If a dealer made false reports, or conducted his business improperly, his license would be revoked.

We do not think that the financial responsibility imposed upon directors of the issuer, is wise. It would be better to have the issuer fully responsible for all statements and subject to prosecution by the Department of Justice for fraud, with heavy penalties, of fine or imprisonment, or both.

In the case of foreign financing we would suggest that the Federal Reserve Board and the Secretary of the Treasury might first determine whether such financing is in the interest of trade and industry in this country, and that no dealer should make any negotiation for the purchase of such securities until after clearance was had.

The purpose of the bill as we read it is for the protection of the investor, and also for the dealer. Both should be protected from unscrupulous so-called dealers. And it would be better if such dealers should not be in a position to obtain the semblance of goodness or decency because of a license and then go to the public and represent that they had that authority behind them. If they were subject to pains and penalties, such as a heavy fine and imprisonment, that would deter them. A man of financial worth would not take the responsibility as set forth in this proposed bill. The crook would be willing to do so. He is the man who would be willing to take that responsibility. He would put his property in another name, and there could be no recovery.

Finally, we are very happy that this committee is considering this bill, and hope that it can be modified so that it will accomplish its purpose.

I thank you.

Senator CoSTIGAN (presiding). Any further questions by members of the committee? [A pause, without response.] Anything further, Mr. MacLean?

Mr. MACLEAN. No.

Senator CoSTIGAN. We thank you.

Senator KEAN. Might I ask a few more questions, Mr. Chairman? Senator CoSTIGAN (presiding). Certainly, Senator Kean.

Senator KEAN. Mr. MacLean, did you notice in this bill that, practically speaking, municipalities are not taken care of at all?

Mr. MACLEAN. Yes, sir.

Senator KEAN. Have you any suggestions on that line?
Mr. MACLEAN. What kind of suggestions?

Senator KEAN. That they should be included in the bill?
Mr. MACLEAN. Yes; if this can be legally done.
Senator KEAN. Why not?

Doesn't the public need to be protected

from municipals as well as all other securities? Mr. MACLEAN. That is true.

Senator KEAN. Therefore you would favor their being included in the bill, wouldn't you?

Mr. MACLEAN. As I think upon it, yes.

Senator KEAN. What do you think ought to be required of a municipality to be included in this bill?

Mr. MACLEAN. The same fundamental principles that should be included before a corporation issue is sent out.

Senator KEAN. Why?

Mr. MACLEAN. First, is the expenditure wise? Is it necessary? Is it a good thing, as we call it? Second, has the borrowing municipality the ability to pay? And, third, have all the legalities been complied with?

Senator COSTIGAN (presiding). Have there been any notable instances of misrepresentation with respect to municipal securities? Mr. MCLEAN. There have been some, our experience has shown. Senator ADAMS. Was the misrepresentation made by the municipality?

Mr. MCLEAN. Yes. I have one or two cases in mind where the misrepresentation was as to assessed value, and the ability of the town to levy sufficient taxes to pay the services of the issue. Those cases are rare, however.

Senator KEAN. There are a good many bonds that you have floated, aren't there, at the present time, that are in default? Mr. McLEAN. There are some; yes, sir.

Senator KEAN. And that is true of the most of the issuing houses, isn't it?

Mr. McLEAN. I rather think so.

Senator KEAN. Therefore, you have floated bonds that you might have been a little more careful about.

Mr. McLEAN. I think the issues to which you refer might fall into two classes: First, where there was an error of judgment as to the trend of the industry, as to the existing usefulness. Second, where the industry itself, due to economic conditions, has completely changed. In that regard I would give you as an illustration the electric short lines, the interurbans, as we call them.

Sentor KEAN. Now, you have testified that if you buy a municipal. bond at 90 and you sell it at 90% you would make no profit whatever Mr. McLEAN. That is true in general; yes, sir.

Senator KEAN. That that would just get you out even.

Mr. MACLEAN. Yes, sir.

Senator KEAN. That is the general custom, isn't it?

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