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man will be aided rather than hampered by the lessened competition of legitimate securities which will not be offered if prospective offerors feel that they may later be charged with violation of the law when they are trying to be careful to be complete, frank, and intelligent in their statement of facts about the business whose securities are to be offered. The major portion of the present trouble with securities is the decline in prices. This has been primarily caused by a change in the price level and the general shrinkage of all business due to the depression, and not because of any thievery, malicious mismanagement, incompetence, or lack of investigation or frankness on the part of those who sold the securities or any lack of caution and conservatism on the part of the buyers. The stock of one of the most liquid and conservatively run banks in New York has decreased in price from nearly $300 a share in 1929 to less than $20 a share now. No amount of knowledge of the facts regarding this bank would have prevented the loss suffered by those who in 1929 bought its stock; neither would any of the other provisions of the proposed securities bill if it had been in effect in 1929. In fact, the larger purchasers at high prices were the active officers and directors who, knowing all about the bank, bought its stock for their own account for permanent investment. }* If the bank had been an enterprise capitalized with one half debt or more, as is true of public utilities, railroads, etc., the lowering of values would first have been absorbed in the price of the stock, reducing it to practically nothing, and would then have depreciated far below par the price of the outstanding bonds. Yet here there was no dishonesty or mismanagement, and precautions required by the proposed securities act would not have eliminated any abuses and would only have been an added expense and interference with the business of raising capital for such an enterprise. Some of the dangers in the act as it now stands are set forth in the following comment by Charles M. Travis, Esq., of Travis, Brownback & Paxson, one of the most experienced law firms of the country in connection with the issuance of corporate securities: “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 interests of public welfare. “It is also provided in subdivision (c) 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 fo revocation on the grounds that the corporation ‘is not conducting its business in accordance with the 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 decree shall be final.” With the added expense entailed by the fee called for under the bill, corporations should not be denied the right to advertise or put letters in the mail if they have complied with the provisions of the act because of their having failed to conform to the separate and distinct requirements of blue-sky statutes in 48 States. At the present time it frequently develops that the expense and trouble of satisfying the requirements of certain States is prohibitive in view of the fact that little or no securities can probably be sold there anyway, yet the right to advertise in a newspaper which may have a few subscribers in such a State should not be denied a security issuer. In our effort to see that wholesome legislation is made as complete as possible, let us not have an enghteenth amendment in the securities business to be later


repealed, but only after business has become permeated with lawless, bootlegging practices forced by necessities brought about by irresistible economic forces. The following is a summary of the bill by Eustace Seligman, Esq., member of the law firm of Sullivan & Cromwell, who have perhaps had more experience with the legal aspects of security issues than any other law firm in this country: “The bill submitted to Congress on Wednesday by President Roosevelt for Federal supervision of the sale of securities has been generally misunderstood if one may judge by the comments in the press. The bill is of such a technical nature that apparently most of the commentators have not had an opportunity to carefully analyze it. The bill is in fact so revolutionary that an explanation of its major features may at this time be of value. “The purpose of the bill is primarily the same as the so-called blue-sky laws of the various States, namely, to prevent fraud in the sale of securities by requiring full publicity with regard to all of the facts with respect to the issuance of every security. Its purpose is obviously a sound one and those portions of the bill which are designed to accomplish this purpose deserve wholehearted support. Even that portion of the bill which requires the underwriting bankers to disclose their profit deserves support. It is true, of course, that no other business man is subject to this requirement. If you buy a car or a radio, you do not know what the profit is of the dealer who is selling it to you. However, notwithstanding this fact, there are sound reasons why dealers in securities should be held up to more severe standards and therefore, while this proposed requirement is arl oirely novel one in American law and practice, it is nevertheless essentially sounci. “However, the proposed bill goes far beyond the principle of enforcing the fullest publicity and contains other proposals which are fraught with most serious consequences. “Perhaps the most important of these other proposals is the remarkable extension of power given to the Federal Trade Commission. The Commission is iven the power to forbid the issuance of the securities of any corporation if in its opinion the business of that corporation is in an “unsound condition” or is “not based upon sound principles.” The definition of these terms is obviously so much a matter of judgment that the effect of this proposal if enacted into law would be to give to the Federal Trade Commission the power of a dictator over American business. It is hardly conceivable that such a proposal will commend itself to American public opinion. “The second in importance of the unsound proposals of the bill is that imposing a new liability upon directors of all corporations. The bill provides in substance that every time that a corporation issues securities to the public, a statement must be filed with the Federal Trade Commission signed by all of the directors containing full facts, including a balance sheet and earnings statement. The bill then further provides that if such a statement is false in any material respect the directors are jointly and severally liable to any persons who thereafter purchase any securities of the corporation and whether or not they relied upon the representations in the statement. “In other words, by this proposal every director is made a guarantor of the correctness of all of the figures in the financial statement of his company. It is no defense to a director that his corporation employed independent accountants of the highest standing and that he had no knowledge whatsoever of the matter, if those accountants make a mistake in their audited figures. “It is difficult to understand the reasons in support of such a proposal, the unfairness of which seems obvious. If such a proposal were to become law, the inevitable effect would be that every director of any responsibility would resign his directorship and that boards of directors would be entirely made up of dummies for it is not conceivable that any director would expose himself to a risk of un. financial responsibility which might result from acts entirely beyond his control. “This proposal is indeed a revolutionary one and without precedent in AngloSaxon law or practice. “Perhaps the next most important provision of the bill is that it is applicable not merely to securities to be issued in the future but to all existing securities. In other words, every corporation in this country must immediately proceed to compile all of the so required and file it with the Federal Trade Commission and until this has been done, it will be unlawful for any stock broker to sell for any customer the securities of any corporation. The effect of this would be that all securities transactions on all the markets in the United States would be temporarily suspended.

“One’s first reaction to this provision is that it is, of course, a mistake and that no such result was ever intended. However, it is understood that the contrary is the case and that careful consideration was given by the draftsman of the bill to the question of whether it should apply to only securities issued hereafter or to all existing securities and that the latter decision was consciously reached. “The lack of wisdom of this provision seems so clear that it is unnecessary to further elaborate the point. “The next provision of major importance is perhaps that which requires that every advertisement or letter written by any dealer in securities with respect to the sale of any security must contain substantially all the information required in an offering circular which includes a balance sheet and earnings statement. “While at first blush this proposal may to the layman seem unobjectionable the fact is that it is entirely impractical. For example, the financial pages of the New York Times contain numerous advertisements with respect to the sale of securities; none of these advertisements with respect to securities will be permitted in the future unless they are elaborated and extended so as to include among other things the balance sheet and earnings statement of the company in question. The impracticability of this must be obvious. In the same way every letter from a stock broker to his customer would under the above proposal when recommending the purchase of any stock, have to set forth the same full facts. “One particular portion of the proposal deals with the sale of securities of foreign governments and it contains a provision that in the case of such securities underwriting bankers shall, if the Federal Trade Commission requires, sign the statement to be filed with the Federal Trade Commission and thereby become guarantors of all the information furnished by the foreign government and individually liable to any purchaser of such securities if such statement is false in any material respect. “The effect of this provision is thus to single out from all other securities the bonds of foreign governments and in that case alone make the underwriting bankers guarantors. It is difficult to see any justification for this proposal unless it be to prevent the sale of bonds of foreign governments in the United States hereafter. For certainly such will be the effect of the proposal since no responsible banking house will be willing to guarantee the correctness of statements furnished by the foreign government to the Federal Trade Commission when it is absolutely beyond its own power to verify the correctness of many of such statements. If bankers in good faith and with the exercise of due care rely upon statements furnished to them, it is unreasonable to ask them to guarantee the same. With the exception of a few countries such as England and France, it is probable that no foreign country will be able if this proposal becomes law, to thereafter sell securities in this country. “If this policy is to be adopted by the United States, it should be adopted frankly and openly and not in the indirect fashion proposed in this bill. There is no reason why, as far as the question of bankers' liability is concerned, bonds of foreign governments should be in a different category from the bonds of foreign corporations or the bonds of domestic corporations. “Whether it really is desirable by legislative action to prevent the sale of foreign government bonds in the United States in the future is a separate and distinct question. It is obvious that if foreign government bonds are not to be sold in this country, an additional barrier will be created to the financing of our export trade. It would seem that there is no more reason for a prohibition upon loans to foreign governments than there is upon loans to foreign corporations. “The above summarizes some of the more important provisions of the bill and the objections to them. There are many detailed provisions of the bill as drawn which, unless changed, will seriously hinder legitimate business without accomplishing any social purpose. For example, the bill includes in securities commercial paper, which provision, if not eliminated from the bill, would make it impossible for corporations to obtain loans from banks without complying with the provisions of the bill. Again the provisions affecting underwriters of securities are such that they would render it far more difficult, if not impossible, for bankers to underwrite a public issue and in any event would greatly increase the cost to corporations because of the greater risks to which underwriting bankers would be subjected because of delays in the public marketing which would result from compliance with the bill as now drawn. “The investment banker is today exceedingly unpopular. Whether this unpopularity is entirely deserved or is in part due to our national tendency to

make someone else a scapegoat need not here be considered. The fact is, however, that the investment banker fills a definite function in our community, namely, that of assisting industry to obtain long time capital for investment and thereby stimulate production and employment. The popular dislike of investment bankers should not lead to the hasty adoption of legislation which may superficially appear to be punishing the investment bankers but which upon analysis is in fact injuring the country as a whole.

“It is to be hoped that this bill will not be acted upon hastily but that in view of its great importance and its possible serious effect on the future business life of this country, ample time will be given to students of the subject and to the business interests affected, to examine the proposal critically and present their views to the Congress. It is to be earnestly desired that President Roosevelt will not permit this bill in its present form to be railroaded through Congress.'

That the dangers of the legislation as it now stands are not evident only to the legal mind is shown by the following reprint of an article by David Lawrence, editor and publisher of the United States Daily, one of the leading writers of the day: (Reprinted by courtesy of the Consolidated Press Association.)

WASHINGTON, March 30.—Complete supervision of the financial affairs of every corporation that deals in any way with the public may not be intended by President Roosevelt, but the bill he submitted to Congress makes it possible for a bureau or commission in the Federal Government to pass judgment on everything from ethics to business efficiency.

“The purpose of the new bill is to put a stop to abuses growing out of the sale of securities, but in the effort to accomplish a reform, the measure ignores the existence of State securities commission and State powers over corporate affairs and vests in the Federal Government by virtue of the interstate commerce clause in the Constitution the power to prohibit even a telephone conversation or salesman's comments on his wares unless he follows literally the formula specified by the Government in Washington.

“No such far-reaching piece of legislation of a prohibitory character affecting the movement of individuals in the life of the Nation ever has been seriously proposed since the eighteenth amendment undertook to say what alcoholic beverages could or could not be manufactured or sold.

“It is not too early to predict that if Mr. Roosevelt's bill ever becomes law a great constitutional battle will be fought over the right of the Federal Government to consider as interstate commerce transactions between individuals relating to everyday business. Many decisions of the courts have held that personal services were not commodities in interstate commerce, and yet the activities of a broker selling securities and advising his customers now are to be governed by the interstate commerce clause if the proposals is enacted and its constitutionality upheld.

“All securities issued, even mortgages in excess of $25,000 will have to be registered if offered for general sale, and the license to sell them can be revoked at any time if the Federal Trade Commission finds that any issuer of securities ‘has been or is engaged or is about to engage in fraudulent transactions or is in any other way dishonest.'

“Just who is to be the judge of what is meant by 'in any other way dishonest is not evident unless it is the officials of the Federal Government. Also the registration may be revoked if the 'enterprise or business of the issuer, or person, or the security is not based upon sound principles, and that the revocation is in the interest of the public welfare.'

“Opinions may differ as to what are ‘sound principles', but the rulings of the Federal Trade Commission, according to the first draft of the measure, are to be final on questions of fact and appeals to courts are permissible only to adduce additional evidence.

“It may be that Mr. Roosevelt has sought by the legislation to obtain for the Federal Government certain regulatory powers which shall govern publicity on security issues, but the proposal goes beyond that and would make every corporation subject to constant review by politically appointed commissioners.

“Financial advertising would be made difficult, if not impossible, since every word contained in an advertisement would have to conform to Federal regulations, and it is not clear what liability would be incurred by books, magazines, newspapers in publishing offers to buy or sell securities, but the bill provides for fines and jail sentences for those who 'announce' or 'advertise' issues or sales of securities not in conformity with the regulations to be prescribed.

* “If at any time representations made when the sale occurred should later turn out to be wrong, the burden of proof must be on the seller, according to the proposed law, and the purchaser has a chance to get his money back. “The whole bill is written from the viewpoint of the buyer and aims to protect against recent abuses, but it also manages successfully to pile up restrictions which make it doubtful whether brokers and security sellers would not be better off to let the Federal Government go into the business of investment banking and hire the salesmen to work for the Government itself. “Certainly few concerns would be willing to issue securities which might at any day make it possible for a Government bureau to hold them liable for the fact that statements made in one year turned out to be unsound business and poor financial judgment a year later.” The question may also well be asked as to why municipal securities should not be subjected to the publicity provisions and requirements of the law as there is probably no other class of securities in connection with which there have occurred more sins of omission and commission than municipal bonds. In many cases it has been found that census figures have been deliberately misrepresented, the ount of outstanding debt and valuations of taxable property misstated, etc., etc. Due to the political character of the issues and the ignorant innocence of the issuers, it has been found that in most cases the holders of defaulted municipal bonds are practically without redress. While receivership and bankruptcy may be availed of for corporation failures, in many cases holders of municipal securities have found, due to the fact that the issues are customarily sold at auction and no responsible bankers will stand behind them to organize the holders to pursue what legal rights they may have, nothing can be done except to accept offers in compromise of a few cents on the dollar. In the case of many smaller political subdivisions the more recently elected officials are under little pressure to offer any sort of compromise because of the lack of publicity and proper information when the securities were brought out. If the issues of any class of securities needs regulation, it is municipal bonds. It is obvious from the foregoing that the bill in its present form is entirely unworkable. No security can be advertised or offered until the “blue sky requirements” of every State have been met. In a few of the States the requirements are impossible and the opportunities for sale are negligible. Compliance with the requirements of this act should be sufficient without the United States Government attempting to act as law enforcer for the possible arbitrary, prejudiced and perhaps unlawful attitude of blue sky commissioners in 48 States in some of which the buyers may be few and the “stated” requirements highly onerous. Several of the States in the far West make it a practice to require a personal examination of the books of eastern corporations, entailing in addition to the usual fee the “expense” of trips to New York before licenses to sell even trifling amounts can be procured notwithstanding that the securities may have been fully licensed in other States where the requirements are strict. Officers and directors of companies expecting to sell securities, bondholders and stockholders holding securities therein (especially if the companies whose securities they hold are growing and will require further financing), employees of corporations who are interested in the future welfare of their employer, security dealers, banks, and financial institutions having to do with securities and other persons concerned should all be encouraged to: Write letters immediately to their Senators and Congressmen urging that the bill not be passed until it has been made fully workable. It should be revised by experts duly qualified in the business of issuing, offering, advertising, and selling securities so that there will not be a nearly complete cessation of the financial life of the country. Do not permit the destruction of the possibility of better markets and improved prices for the securities you now hold, knocked down to present levels by an economic earthquake (changed price level and business depression combined), through well intentioned, but hastily constructed legislation based mostly upon a few instances of lack of honesty, bad judgment, and unwarranted optimism, which in comparison with the total amount of securities issued, have been relatively less important.

The CHAIRMAN. Have we another gentleman who desires to make a statement at this time? Senator BULKLEY. Mr. Chairman, we might let Mr. Friedman go ahead at this time. 16969.2—33—19

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