SECURITIES ACT SATURDAY, APRIL 8, 1933 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee met, pursuant to adjournment on yesterday, at 10:30 o'clock a.m., in room 301, Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Bulkley, Costigan, Byrnes, McAdoo, Adams, and Kean. The CHAIRMAN. The committee will come to order. Mr. Butler had not completed his statement yesterday when the committee adjourned, so we will let him finish his statement at this time. STATEMENT OF OLLIE M. BUTLER, ATTORNEY, DEPARTMENT OF COMMERCE, WASHINGTON, D.C.-Resumed The CHAIRMAN. Very well; you may resume your statement, Mr. Butler. Mr. BUTLER. Mr. Chairman and gentlemen; when the hearing adjourned yesterday I had just about completed a brief analysis of the proposed bill and shall not refer to that further this morning because I have no doubt that we all wish to close these hearings as soon as possible. For that reason I shall attempt to confine my remarks entirely to one or two points that have been made by the opponents, but before proceeding along those lines perhaps it would be well to explain that the bill before this committee makes no attempt whatever to amend the existing corporate laws of the States, as matters that relate to charters are, at the present time, essentially subject to the legislation of the various States. My personal opinion is that eventually we will have a Federal corporation law requiring all corporations engaging in interstate commerce or selling their securities in interstate commerce to incorporate under a Federal law, which will greatly simplify the objects that have been attempted in this bill. But that has not been before you yet, and we have endeavored to do what we feel we can to regulate the sale of securities in interstate commerce. The CHAIRMAN. As I understand it, you do not in this bill propose to have it apply to railroad securities at all? Mr. BUTLER. No, sir. The CHAIRMAN. Bonds or stocks? Mr. BUTLER. Those are left as they now stand under the jurisdiction of the Interstate Commerce Commission. The principal points of attack by the opponents of this bill have been two, namely, the revocation clause and the responsibility of directors. Before discussing further the revocation clause, Mr. Thompson, who cannot be here this morning, has asked me to read a statement in that connection that he has been authorized to make by the President. It is as follows: I am authorized to say that the President is in favor of the idea of revocation as expressed in section 6, page 12, House bill no. 4314; that he did not attempt to or intend his message to Congress to cover any more than the general statement regarding the bill. Senator KEAN. That is, he would be in favor of leaving out to a certain extent the responsibility of directors, except as far as their own knowledge went? Mr. BUTLER. No, sir; this has no reference whatever to the responsibility of directors. Senator KEAN. Oh, that is the revocation; yes. Mr. BUTLER. There has been considerable criticism concerning the revocation clause in the bill, and the President's message made no mention of that specific point, from which it has been argued that he did not intend revocation to be in the bill. Therefore, Mr. Thompson obtained from him this statement to the effect that he is in principle in favor of revocation for sufficient causes but has not gone into the details of those causes. Senator CoSTIGAN. The statement has no reference to the responsibility of directors? Mr. BUTLER. None whatever. The revocation clause has been made the grounds for numerous attacks on this bill, and the British act has been cited as a precedent, inasmuch as it does not provide for revocation. The British Company Act, which was originally inaugurated in the middle of the nineteenth century has been gradually amended, was practically reconstructed in 1908 and again in 1929, and several amendments strengthening that act are now being considered and are in galley proof, a copy of which I have. The British Companies Act is a corporation act, not merely a sale of securities act. It controls the corporation from preorganization activities until the final winding up of the company. Everything that that company does during its life is controlled by this companies act, and every violation of the act is subject to severe penalties. The CHAIRMAN. Have you noted the contention of Mr. Breed with reference to the proposed amendment that he was going to suggest as to that provision in the law? Mr. BUTLER. Yes, sir. I am discussing the revocation clause now, and the objections that they raise. The CHAIRMAN. Yes. Mr. BUTLER. One of the objections being that the―― The CHAIRMAN (interposing). As I remember, he was suggesting an amendment. Whether you had considered that or not I did not know. Mr. BUTLER. I have not seen the amendment; no, sir. One objection that he raised was that the British Companies law, on which this bill is largely based, contained no revocation provision and I am endeavoring to point out that the Companies Act does not need a revocation clause because it controls every corporate act of a company, provides penalties for violations, and in that way makes revocation unnecessary in the event that a company does not conduct its affairs in the way that it should. A great deal of stress has been laid, and it seems to me unnecessary stress, on the possible dishonesty or unwise decisions of the Federal Trade Commission. The Federal Trade Commission is subject to two reviews. First, the President may, as was decided in the Meyer case, remove any one of the Commissioners immediately, and without consulting the Senate. Moreover, every decision or every order of the Federal Trade Commission is subject to judicial review by the courts. So that the danger of a grossly unwise order on the part of the Federal Trade Commission in the question of revocation seems to be rather remote. The CHAIRMAN. Do you still insist upon review only by the United States District Court in the District of Columbia? Mr. BUTLER. I have never insisted upon that, sir. As a matter of fact, quite the contrary. The CHAIRMAN. Then have you in this modification of your bill covered that point in any way? Mr. BUTLER. No, sir. The drafters of this bill deferred to the opinion of the Attorney General in that respect, and as the bill now stands it provides only for review by the Court of Appeals of the District of Columbia. It seems to me incongruous that registration should be permittedand after all, registration is only permissive and is not qualificationthat this registration should be eternal, that no matter what might happen after the registration the Commission should have no power to revoke such registration and by doing so prohibit the right to continue the sale of those securities. The mere fact that the Government may issue to a steamship a Certificate of Seaworthiness is no reason why that should be eternal. When the vessel becomes unseaworthy they should revoke that certificate, and it seems to me that that situation is right on all fours with the present situation. The registration is permissive; when it becomes evident and well known that the security is worthless, that certificate should be revoked, just the same as a Certificate of Seaworthiness of a vessel is revoked when it is no longer seaworthy. Senator ADAMS. There is no certificate issued by the Federal Trade Commission? Mr. BUTLER. No, sir, there is no certificate issued, but permit to sell is assumed by the registration until it is revoked. Senator ADAMS. If you were to wipe out revocation would not the natural thing be to go back and change your terminology so that it would simply require the filing of information, rather than, as you call it, registration, which carries that implication that you have in mind? In other words, if it was merely an act requiring the furnishing of public information that would not involve any implication of approval by the Commission or a certificate of registration? Mr. BUTLER. The word "registration" was introduced into the draft at a rather late date. Originally it was called a "factual statement", but there was objection to the use of the word "factual", and in searching around for some other adjective of the word "statement" the word "registration" was used. Senator ADAMS. Are you satisfied with the word "registration"? Mr. BUTLER. As the dictionary defines the word "registration" it simply means "filing with the proper official”. Senator ADAMS. But doesn't it convey a little different implication to your mind? Mr. BUTLER. In common usage it does, yes, sir, but the dictionary definition of "registration" is "filing with an official", and it does not necessarily mean that that registration has been subjected to investigation or examination of any kind. Senator BULKLEY. Mr. Butler, if you will submit to a moment's delay, I would like to get more clearly exactly what the effect of what you are proposing is. Now, I take it that the original issuers get a permit to sell the securities. Let us suppose that securities of a given corporation have been sold and absorbed by the public so that the original issuer does not own any at all. Now, are you proposing that after that situation exists there still may be a revocation of a right to sell? And if so, what effect would it have on the securities in the hands of the public? Mr. BUTLER. That is substantially correct, sir. The registration is permissive, but no tangible permit is given. The mere fact of the filing with the Commission of this information entitles the securities to be sold in interstate commerce, the wording of the act being that "until the information shall have been filed it shall be unlawful to sell in interstate commerce." Senator BULKLEY. What is the revocation? What would be done to revoke it? Mr. BUTLER. If, after the registration, the Commission, probably or usually on complaint, finds that for certain causes enumerated in the act the securities are questionable or worthless, the revocation Senator KEAN (interposing). That "questionable" part-- Senator ADAMS. If I may interrupt just for one thing, getting back to the dictionary, "revocation" involves the undoing of something that has been done, does it not, from your dictionary standpoint? Mr. BUTLER. Yes, sir. Senator ADAMS. The Commission has not done a thing, has it? Mr. BUTLER. No, it has not. Senator ADAMS. And the only thing that has been done is filing of these things. They are going to take those back, are they? That is the only thing that is going to be done, that is to remain. That is the actual filing. If you are going to use the term "registration" as the term for the filing; that is, I am merely getting back to the dictionary terms. Mr. BUTLER. Perhaps the word "cancelation" would be better there. Senator MCADOO. What would you cancel except the filing? That is not feasible. Senator BULKLEY. What do you conceive it to be, Mr. Butler? Whether you call it revocation or cancelation I do not care, but what form would it take? Mr. BUTLER. It would prohibit Senator BULKLEY (interposing). It would be an order of the Commission would it? Mr. BUTLER. Prohibiting further sale in interstate commerce; yes, sir. Senator BULKLEY. Would that automatically take a listed stock off of the exchange? |