Mr. BUTLER. A loose-leaf volume that is kept up to date by that clearing house.

On four different occasions I have heard four different witnesses say that none of the States permit or authorize revocation on grounds similar to those contained in this bill.

They referred to subsections (e) and (f) formerly in this bill which authorized revocation of registration if the affairs of the issuer were in unsound business condition or not based upon sound business principles. As a matter of fact, I have here a list of 22 States

Senator ADAMS (interposing). Mr. Butler, the real question we have is as to whether this law that is here proposed contains certain features, rather than what is in the State law, is it not? That is, the State law might have one thing or might not have it. It would not necessarily determine what this legislation ought to be.

Mr. BUTLER. I did not make that statement in support of the Federal bill.

Senator ADAMS. Because you have already said to us the State laws have been ineffective, and it occurs to me an argument based on the State laws, if they are ineffective, is not very helpful to us.

Mr. BUTLER. I did not make that statement as an argument in favor of the Federal law, but as an example of some of the inaccuracies that have gone into this record.

Senator ADAMS. That is customary.

The CHAIRMAN. I think it would be very well to give us the number of States that have that sort of law.

Mr. BUTLER. In that connection I should like to submit a list of 22 States, with extracts from their legislation, in which their power of revocation is based on anything from ill repute to business principles that jeopardize the interests of stockholders, and including 10 States that use exactly the same language that is used in the Federal bill.

Senator GORE. Could you state or approximate the number of instances where the power of revocation has been exercised and what consequences followed?

Mr. BUTLER. I cannot state that; no. I am not familiar with that feature of the legislation; that is, the practical application of it. I have not followed it up.

The CHAIRMAN. Do you wish to insert that in the record, that list? Mr. BUTLER. Yes, sir. I would like to.

The CHAIRMAN. Without objection, it will be inserted in the record. (The list submitted by Mr. Butler is as follows:)

COMMENTS RELATIVE TO REVOCATION PROVISIONS OF THE PROPOSED FEDERAL SECURITIES ACT

Subsections (e) and (f) of section 11 (p. 13) which authorized the Commission to revoke registration of a security issue if it should appear that the affairs of the issuer were in an unsound condition or not, based upon sound business principles, were subjected to considerable questioning during the hearing before both committees and four stated that similar provisions do not exist in State legislation. An examination of State legislation shows that these statements are inaccurate and that there is nothing novel in extending to the appropriate administrative officer or commission the power to revoke registration or permits for the causes shown, provided always that the revocation order is subject to proper judicial review, a provision for which has been included in the proposed Federal securities bill. There is attached a memorandum containing excerpts from the securities laws of 22 States showing that the administrative units in those States have the same or broader powers of revocation than those proposed by the Federal bill. Ten of these States use provisions almost identical with the proposed Federal

act and were, no doubt, the basis for the language employed in the Uniform Sales of Securities Act. Thirteen go still further and authorize revocation on the ground of "bad business repute" or that the business is conducted in such a manner as to jeopardize the financial interests of stockholders or investors. These provisions are found in both the "prior approval" and "permissive" types of registration.

The proposed Federal bill is definitely of the "permissive” type, for it is believed undesirable to require the Federal Government to approve a security in advance. It would be incongruous, however, to permit securities to be advertised as registered with the Federal Government when it is known that they are unsound and to leave the Commission powerless to revoke the registration. While it would be extremely undesirable to require that the Government approve securities in advance, there would be no great danger in empowering it, for sufficient cause shown, to declare certain securities undesirable by revoking their registration.

EXCERPTS FROM STATE LAWS

[C.C.H. refers to the loose-leaf service of the Commerce Clearing House]

Alabama (C.C.H., vol. II, par. 7076G).—The permit (of the dealer) may be revoked by the commission at any time if it finds that the issuer is not solvent or that his organization and methods and plans of doing business are not fair, just, and equitable.

California (C.C.H., vol. II, par. 7038B).—The commissioner may revoke permit if he finds that the applicant's proposed plan of business is unfair, unjust, or inequitable.

Florida (C.C.H., vol. II, par. 7082).-The commission may revoke registration of security if issuer is (5) of bad business repute; (7) its affairs are in an unsound condition; (8) that the enterprise of business of the issuer or the security is not based upon sound business principles.

Georgia (C.C.H., vol. II, par. 7089–7093).—Dealer's permit may be revoked if he is of bad business repute.

Indiana (C.C.H., vol. II, par. 7078).--Commission may revoke registration of security if issuer is (5) of bad business repute; (7) that its affairs are in an unsound condition.

Iowa (C.C.H., vol. II, pars. 7087-7100).--Secretary of state may revoke registration of security if it is found that the issuer is (5) of bad business repute; (7) that its affairs are in an unsound condition; (8) that the enterprise or business of the issuer is not based upon sound business principles.

Kansas (C.C.H., vol. II, par. 7073).—Charter board may revoke registration of securities if it is found that (6) the enterprise or business is against public policy; (8) that the business is not conducted upon sound business principles.

Kentucky (C.C.H., vol. II, par. 7074).-Commissioner may revoke registration of security if it is found that the issuer is of (5) bad business repute; (8) that the enterprise or business of the issuer is not based upon sound business principles. Louisiana (C.C.H., vol. II, par. 7007).-Commissioner may revoke dealer's permit "for cause.'

Maine (C.C.H., vol. II, pars. 7017-7024).—Commissioner may revoke dealer's permit "for proper cause.

Minnesota (C.C.H., vol. II, par. 7049).—Commission may revoke the registration of a security "for good cause appearing to the Commission."

Montana (C.C.H., vol. II, par. 7036).-Commission may revoke permits to investment company whenever it shall appear that it is conducting its business in an unsafe, inequitable, or unauthorized manner or is jeopardizing the interests of its stockholders or the investors in stocks, bonds, or other securities.

New Hampshire (C.C.H. vol. II, par. 7027).-The commission may prohibit the sale of securities if they are of "such a character that there is serious financial danger to the purchaser in buying them."

North Dakota (C.C.H., vol. II, pars. 7005-7006).-Commission may revoke permit to sell securities for (5) "lack of adequate proof sufficient to satisfy the commission of the soundness of the venture or enterprise or prospective success thereof"; (6) "that in the judgment of the commission the prospect of future earnings is too uncertain

* *

Oklahoma (C.C.H., vol. II, par. 7111).—Commission may revoke dealer's permit if it shall find that he (4) has demonstrated his unworthiness.

Oregon (C.C.H., vol. II, par. 7051).—Commission may revoke permit if it finds that "issuer is of such security or securities is insolvent or is conducting his or its business in such manner as to jeopardize the interests of creditors or investors."

South Dakota (C.C.H., vol. II, par. 7062).—The commission may revoke the registration of an issuer when it appears to the commission that such issuer is "of bad business repute" or is "not conducting its business in accordance with law or upon sound business principles.

Tennessee (C.C.H., vol. II, par. 7015).-Commission may revoke permit of investment company "whenever it shall appear to the commissioner of insurance and banking * * * that it is conducting its business in an unsafe, inequitable, or unauthorized manner or is jeopardizing the interests of its stockholders or investors in stocks, bonds, or other securities.'

Utah (C.C.H., vol. II, par. 7073).-Commission may revoke registration of any security if it shall appear that the issuer (5) "is of bad business repute'; (7) that its affairs are in an unsound condition; or (8) that the enterprise or business is not based upon sound business principles.

Vermont (C.C.H., vol. II, par. 7078).-The commissioner may revoke the registration of any security if it shall appear that the issuer (5) "is of bad business repute"; (7) that its affairs are in an unsound condition; (8) that the enterprise or business of the issuer is not based upon sound business principles.

West Virginia (C.C.H., vol. II, par. 7076).—Commissioner may revoke registration of securities if it shall appear that the issuer (e) "is of bad business repute"; (g) that its affairs are in an unsound condition; (h) that the enterprise or business of the issuer is not based upon sound business principles.

Wisconsin (C.C.H., vol. II, par. 7064).—The commission "may impose such conditions as may be deemed necessary" concerning the sale of securities and may revoke permits to sell "for cause.

Senator CoSTIGAN. You do not know how effectively such State laws have been enforced?

Mr. BUTLER. No, sir; I have not followed up the decisions, and I do not know what the States have done under those revocation clauses.

The statement has also been made that very few States have the power to revoke registration. Over three fourths of the States have power to revoke.

Senator CoSTIGAN. In as sweeping a form as provided in the bill? Mr. BUTLER. No, sir; that varies. In some cases it is under the authority of the secretary of state for cause shown, and stops there. In other cases the law states what the causes shall be. I think that the list of States that I have submitted here, which extends from the East to the West and to the South, is a fair cross section of the State laws on the subject.

Senator GORE. I think the statement was made that 37 States had the power of revocation. In each instance I understood the license accompanies the permission to sell the stock, and that the State in a way undertakes to certify that the stocks are sound, at least by implication.

Mr. BUTLER. I am just about to classify the State laws.
Senator GORE. Yes.

Mr. BUTLER. Which after all are not very difficult to classify along general lines. There are two major groups, the fraud law and the regulatory law. The fraud laws exist in four States only. I will correct that by saying that four States only depend on fraud laws. Two other States had fraud laws in their legislation but do not depend entirely on that provision.

Senator GORE. Could you name the four?

Mr. BUTLER. The four are New York and New Jersey, Delaware, and Maryland. Connecticut, as one of four securities laws, has a fraud law. Colorado, as one of several provisions also has a fraud law. As you all know, the Federal bill has a fraud clause that is similar to the Martin Fraud Act of New York. The other 44 States all have

regulatory laws of one class or another, with the exception of Nevada, which has no security law at all.

These regulatory laws are generally divided into two groups, one group attempting to regulate the security itself, the specific issue, and the other group attempting to regulate the sale of securities through the control of the dealer, salesman, or broker.

Senator GORE. Not getting back to the source?

Mr. BUTLER. Not getting back to the source, controlling only the vendor, the professional vendor of the security.

Senator GORE. I do not want to divert you, but are conditions worse in Nevada than in these other States?

Mr. BUTLER. I am not familiar with conditions in Nevada. The laws attempting to regulate the securities themselves generally classify securities, and attempt to determine whether or not certain securities, by their qualities, are subject to preferential treatment. Some are exempted entirely, as we have done in this bill, but further exemptions are provided in the State laws for securities, for example, which are listed on certain recognized stock exchanges. That exemption has not been followed in this bill.

Senator GORE. How many States have that provision?

Mr. BUTLER. I think the majority of them have, sir. I could not tell you the number, but I know that it is carried in the Uniform Sale of Securities Law, which was more or less based on the laws of the various States, and attempts to conform as nearly as practicable to the State laws.

A second group of securities, which is not considered as good enough to have complete exemption, is in many States allowed to register by notification rather than by qualification. The terms "qualification" and "notification" are more or less self-explanatory. In the case of securities registered by qualification, full information must be given concerning them, and ordinarily an investigation is made before the security is qualified and its sale permitted. In that other class of securities that are permitted registration by notification, the issuer may register his security by notification, which in most instances gives an immediate right to sell the security.

In the proposed Federal bill, we have requested the full information that is ordinarily required for registration by qualification, but the registration is merely permissive and is not a qualification, and the issuer is permitted to sell his issue immediately on registration, as in the case of registration by notification in the States, rather than to await an investigation.

Senator COUZENS. In other words, under that plan he can say anything he likes in his notification, is that it? Mr. BUTLER. In his registration?

Senator COUZENS. Yes, sir.

Mr. BUTLER. Yes, sir; he can.

Senator COUZENS. In other words, the public knows nothing at all about the contents of his circular advertising it?

Mr. BUTLER. Except that if he makes a false statement he is subject to the perjury law, and except that if he has made any misstatement he is subject to civil liability to the purchasers of any of those securities.

Senator COUZENS. It is usually too late when that occurs.

Mr. BUTLER. Isn't that true of most laws?

Senator COUZENS. Yes, but

Senator ADAMS (interposing). That is not a justification of the law necessarily.

Senator COUZENS. Under a civil case, though, the purchaser has lost.

Mr. BUTLER. Yes, sir.

Senator CoUZENS. He cannot recover. He ought to be warned before he loses if he can be.

Mr. BUTLER. He is warned to the extent that all advertising must carry the basic information that is included in the registration statement. Of course, as you say, that might be untrue, but the proponents of this bill felt that the Government should not be put in the position of approving the soundness of an issue of securities. They felt that it might well disapprove a security for cause shown, but to attempt to approve in advance two or three hundred thousand issues of securities would be imposing a rather dangerous duty upon any commission of the United States Government.

Senator COUZENS. I do not understand that anybody contemplates that, but they ought to be able to know something of the character of the men who put it out, and their reliability, and not only of the man, but of the facts submitted. You do not find reliable men, ordinarily reliable men, men with good reputations, sending out misinformation, and if the public can be guarded against the other kind, why, they ought to be guarded against the other kind.

Mr. BUTLER. Of course, the exemptions in this bill apply only to the registration. Back of that there is always the fraud clause, which is substantially the same as the fraud provision of the State of New York.

In regard to foreign legislation, the British act has been studied in connection with the drafting of the proposed bill. In some ways the British act is more drastic than the bill now proposed. In other ways it is more liberal, due very largely to the differences in the governmental situtation between the two countries. Under the British act, the directors are made responsible to purchasers for any misstatement in the prospectus, which is later on in the act defined as any advertising matter.

But they are excused from such responsibility when they accept in good faith the reports of certified accountants, appraisers, or certain other experts. That is possible under the British system of government, where the central government has absolute control over such experts, and can demand certain requirements of them.

In the United States we have 49 governments, and the qualifications of appraisers and of certified public accountants are left to the legislation of some 48 States. In some of these States the legislation is adequate. In other States it is not so adequate, and to excuse the directors for a misstatement based on the report of some auditors or certified accountants would practically nullify the strength of the responsibility provision.

As examples I might cite the appraisals that were made in the case of the Wardman securities that have recently been floated and of those floated by F. H. Smith & Co.

Senator COUZENS. Before you leave that point, you understand the rules and regulations of the Bureau of Internal Revenue here?