Mr. BUTLER. I am not familiar with them; no, sir.

Senator COUZENS. Well, anybody that practices before that Bureau must be certified to and approved before they are allowed to practice. That gives to the officials of the Bureau of Internal Revenue an opportunity to determine the character of the practitioners before it.

Would it not be practicable to have a system set up whereby the Federal Trade Commission could approve of practitioners or public accountants or appraisers before they accepted their statements?

Mr. BUTLER. It might be practicable, and in the study of this draft it was discussed. The reason why such a provision was not included was the feeling that this would put a discretion in the hands of the Commission that might be dangerous and that certainly would be criticized.

Senator GORE. Be what?

Mr. BUTLER. Criticized.

Senator COUZENS. Of course, that is true; any attorney that is not permitted to practice before the Bureau of Internal Revenue because of his past record or unreliability, naturally criticises the Bureau, because he was not selected. That would be true in the case of anybody whose statement was not received by the Federal Trade Commission.

Mr. BUTLER. I am sure that the drafters of this bill would be glad for the committee to consider that point in executive session and to determine whether or not they feel that it is desirable to so control certified accountants, appraisers, and others throughout the United States to an extent that their statements might be taken as a safeguard to the investing public.

Senator COUZENS. Would you say that a director's statement would be more reliable and more accurate than the statement of a certified public accountant or appraiser?

Mr. BUTLER. The theory back of the directors' responsibility provision of this bill is that the majority of directors are nothing but advertising matter.

Senator COUZENS. Well, of course, I want them all eliminated. I am talking about the serious director who wants to have the right thing and he wants to be guided, and obviously has to be guided, by somebody that knows more about these things than he does.

Mr. BUTLER. We feel that the serious director would experience very little difficulty with this law, because he would be careful in the selection of his auditors, and while sometimes he might make a mistake, ordinarily he would be careful that the statements of the auditors and the appraisers were correct.

Senator COUZENS. Is there any measure set up in the bill, any yardstick, to determine what effect an error might have upon the value of the security or the failure of the security to have proven sound?

Mr. BUTLER. That would come under the revocation clause, which I had intended to discuss in some detail, because the attack on this bill is being made chiefly against the responsibility of directors and the revocation clauses of the bill.

In passing I might say that it is unquestionable that the revocation of a security issue would destroy its marketability except to a very limited extent.

Senator COUZENS. Yes, but the damage would have been done by the time of the revocation, would it not?

Mr. BUTLER. Unless the Commission acted rapidly. The revocation clause does not provide any time limit for the exercise of that power. In other words it can be revoked within 24 hours after registration, or sooner than that.

Senator COUZENS. But in all probability the revocation would not take place until some securities had been sold, and then of course it would be too late to have the revocation benefit the purchaser. What I am trying to get at, I can see honest differences of opinion. Mr. BUTLER. Yes, sir.

Senator COUZENS. For example, an appraiser goes out and appraises a plant at a million dollars. The directors and all believe that it is worth a million dollars. They would put it in their circular and then afterwards something happens and it is determined that it is only worth half a million or six hundred thousand. How far does the director's responsibility extend in a case of a difference of opinion of that sort?

Mr. BUTLER. Whether or not the statement in the registration statement was a misrepresentation would be for the determination of the courts ultimately originally for the determination of the Commission—and if the issuer felt aggrieved by that finding of course he could apply to the courts for review.

Senator COUZENS. Just at that point, assuming, for instance, that the court decided that it was worth a half million dollars instead of a million.

Mr. BUTLER. Yes, sir.

Senator COUZENS. That might be an honest difference of opinion. Would the director be liable for the difference to the purchasers of the securities, I mean civilly?

Mr. BUTLER. As the bill is now drawn, yes, sir; the director would be responsible on the theory that, of two persons who are to suffer as the result of a mistake, it is more just and fair that the person who made the mistake suffer than the innocent purchaser who had no control over the appraisers or the accountants.

Senator COUZENS. I am not talking_about a mistake. It is a question of a difference in judgment. There might be quite a good deal of difference in judgment as to the value of a property. In one instance the value of a property might be based upon its earning power and an appraiser and a director honestly value it based on its earning power, and there may be an evolution in the industry which makes it less valuable later on, and so two different persons, one would say it was worth it and another would say it was not worth it, and not having taken into consideration the evolution or change in the industry, and in that case I understand a mistake was made because they could not forsee the evolution, and so the director in that case is going to be responsible-is that right?

Mr. BUTLER. I doubt if any piece of property that was worth, let us say, a million dollars in Washington in 1929 and is worth perhaps three fourths of that amount today according to current values-I doubt if such a mistake as that had been made the court would say that it was a misstatement of fact in the original registration. And after all, are not the courts called up on daily to discuss and to decide just such questions as this-as to what constitutes reasonable care,

for example? Those are things that cannot be reduced to mathematics. It takes judgment, and the courts are the ultimate arbiters of questions of that kind.

Senator COUZENS. Yes, I understand, but I was trying to bring out whether there should not be some attempt to defraud or cheat demonstrated, rather than just punish a director for an error in judgment.

Mr. BUTLER. I do not think so. I think for a criminal action, of course, you could not convict a man under the penal clause unless intent was shown. But in a civil action where one of two people

The CHAIRMAN (interposing). Does not that emphasize the importance of requiring follow up reports semiannually or, may be, oftener?

Mr. BUTLER. I think it does, sir, and I think that section 15 of this bill empowers the Commission to do so, if in its experience in administering this act, it finds it necessary to require such reports. Senator GORE. Does this power of revocation virtually nullify the limited liability clause in these charters of these corporations?

Mr. BUTLER. You mean the responsibility of directors clause? Senator GORE. Yes. Of course, that would go to stockholders as well.

Mr. BUTLER. It does so far as the directors are concerned.

Senator GORE. Yes.

Mr. BUTLER. After all, the stockholders in most instances are the investing public and not the originators of the issue.

Senator GORE. Yes. This is trying to protect against the directors. Mr. BUTLER. Yes, sir; that is right.

The proposed bill, as I see it, consists of certain fundamental provisions and a number of auxiliary provisions. The fundamental provisions are contained in sections 3 to 12, both inclusive. They are based primarily on the theory of publicity, on the theory that the buying public should be enabled to know sufficient facts to determine intelligently whether or not there is any merit in the security that they are offered. This is accomplished by the provision for registration requiring information concerning the basic property and the organization of the issuing company.

Our requirements in that regard are very much more liberal than the requirements of the British Act. The British Act requires that the prospectus to be filed with the registrar show much more intimate and detailed information than is required in the bill now proposed.

In drafting this bill it has been endeavored, wherever possible, to avoid enumeration and to give the Commission broad powers of regulation, the theory being that they would be in a better position to determine, after practical experience, what information is needed than we could in advance. For this reason section 15 of the act has been added as an auxiliary to other provisions giving the Commission power to call for such further information as it may require and to establish such rules and regulations as it may find necessary in the administration of this act.

We thought, however, that it would be incongruous to have a security registered with the Commission after it should become common knowledge that the security was worthless. For this reason the revocation clause has been added, and the revocation clause is one of the two that have been the most severely attacked. This

attack overlooks the fact that after a security has been revoked by the Commission it is in exactly the same situation as a security that has been enjoined under a fraud law. The attack on revocation has been based chiefly on the ground that once the security had been revoked it would be unmarketable and those who had bought it would be the ones punished rather than the issuers who were responsible.

The same situation exists under the fraud law, and we have found no way to correct it. If a security is enjoined under a fraud law its marketability is certainly destroyed, and the innocent purchasers who had no part in that fraud are punished, along with the fraudulent issuer or dealer who is usually subject to a penalty, but the fraud law no more than this bill can prevent beforehand the issuance of those securities. As a matter of fact, the fraud law does not operate as rapidly as this proposal.

The only novel feature in this bill so far as the United States is concerned and it is not novel in Europe, for several of the European laws contain similar provisions-is that relating to advertising. As an auxiliary to the publicity required by registration, the bill provides in section 8 that all advertising must contain certain basic information concerning the security offered.

There has not been a serious attack on that provision, although it has been contended by some, newspapers chiefly, that such a provision regarding advertisements would be a great inconvenience to those advertising the security, inasmuch as the information required would take up about as much space as is ordinarily used for the entire advertisement.

Senator COUZENS. Has there been any question raised that the advertising of these facts would give competitors inside information? Mr. BUTLER. The thought has occurred to us, but I have not heard that ground discussed by the opponents of the measure.

Senator COUZENS. You know every time we have attempted to make public records out of income tax returns the bone of contention has been that that gives the competitors inside information which they should not have.

Mr. BUTLER. Yes, sir.

Senator COUZENS. Well, everything that is in an income tax return, in my judgment, should be in these advertisements offering the public securities for sale.

Mr. BUTLER. The theory underlying the whole publicity provision of the bill is that when a person or a group of persons, for the purpose of making a profit, offer so-called "securities" to the public, they should be compelled to give full publicity to what is underlying that security in order that the investor or potential investor may determine for himself what the chances of success are in connection with that security. No attempt is made to prohibit the sale of speculative securities. Every one realizes that many of the biggest industries in the United States began in speculation, and no endeavor whatever is made in this bill to prohibit or to deter investment in speculative enterprises.

It is felt, however, that the investor has the right to know that it is speculative and has a right to know what the chances are for success or failure.

Senator COUZENS. Would an optimistic statement as to the future of a speculative enterprise which turned out to be unduly optimistic be an offense against the directors?

Mr. BUTLER. Would that be an offense of the directors?

Senator COUZENS. Yes; I mean would that be an offense that the directors would be punishable for?

Mr. BUTLER. That would depend entirely upon the character of the statement. If it were a statement of fact and the facts were not supported, that would be, yes, sir. If it were a statement of opinion, I do not believe that would be considered a misstatement of a material fact.

Senator COUZENS. Well now, you will pardon me for being a little personal, but when we started the Ford Motor Co. there were just a few of us got around the table and sold the stock to each other. Mr. BUTLER. Yes, sir.

Senator COUZENS. And no circulars were issued. During that time there might have been some representations made, I do not know. But under the bill would they be punishable?

Mr. BUTLER. If there were any misrepresentation of a material fact, yes, sir.

Senator COUZENS. Even though it was made orally?

Mr. BUTLER. No; if it were made to the investing public. This bill does not cover

Senator COUZENS (interposing). I just want to know how far you extend the "public.' Would you consider around this table the public? If we sold some securities around this table without advertisement? Would that be selling it to the public?

Mr. BUTLER. If we were a group that entered into a contract among ourselves for the formation of a company, that would not be the public because, in using the word "promoter" in this act, the Supreme Court's definition of that word was in mind which very definitely defines the word "promoters" as persons who are promoting the formation of a company not yet in existence. Incidentally, when I said that many of our greatest industries began as speculative enterprises, I had in mind the Ford Motor Co.

Senator COUZENS. I was a promoter in that case. Would I have gone to jail if I had made a misstatement under this law?

Mr. BUTLER. If you had knowingly made

Senator COUZENS (interposing). Oh, now you are coming to another thing, knowingly and not knowingly. That is the question I am trying to raise all the time, is whether the promoter does or does

not know.

Mr. BUTLER. You asked if you would go to jail?

Senator CoUZENS. Yes.

Mr. BUTLER. You would have to make the misstatement knowingly to go to jail.

Senator COUZENS. And to be punished civilly; I could not get out under the statement that I did not know.

Mr. BUTLER. That is correct; yes, sir.

Senator GORE. Now, in regard to optimistic statements and as to the future, I believe the Supreme Court has held in mail fraud cases that an expression of opinion as to what is going to happen in the future does not constitute a breach of the law.

Mr. BUTLER. Does not constitute it?