write to me through the mails and say "We would like to sell you a million of bonds, " under the law.

Mr. BUTLER. You are speaking now of an underwriting agreement? Senator KEAN. No; before any underwriting agreement. company in Washington wants to sell me a million of bonds they cannot write to me and say, "I would like to sell you a million of bonds," or I cannot write to them and say, "It seems to me the interest of your company would be to finance your company in this way, and I would like to know whether you would not be interested in my buying a million of bonds from you.

The CHAIRMAN. That is before they are registered?

Senator KEAN. Before they are registered, before anything is done at all. It is an inquiry.

Mr. BUTLER. By referring to registration I presume that you are not now discussing section 14 which refers to the interstate transportation of securities in violation of the State law?

Senator KEAN. This says that you cannot communicate before the thing is registered.

Mr. BUTLER. Section 14?

Senator KEAN. I think it is 14, yes.

Mr. BUTLER. Section 14 has no reference whatever to registration, sir.

Senator KEAN. You cannot form an underwriting syndicate. For instance, suppose that I go further and get a step further and I buy a million of bonds. I have got to get up all the details. When I agree to buy them I cannot write to Bill Jones and Tom Smith and say that "I have agreed to buy these bonds. Would you like an interest in the syndicate?"

Mr. BUTLER. Is this what you have reference to, sir? The section reads as amended:

That it shall be unlawful for any person to sell, accept an offer to buy, transport, bring, or deliver any security from any State, Territory, or the District of Columbia into any other State, Territory, or the District of Columbia, or from any foreign country into any State, Territory, or the District of Columbia, unless there shall have been full compliance with the requirements of the laws relating to the sales of securities of the place to which such security is transported, brought, or delivered.

Senator KEAN. Yes. Now, if you put in there "public issue" that would be all right.

Mr. BUTLER. That would be all right. As I understand this section

Senator KEAN (interposing). What I am trying to do is this: Supposing that somebody here, the street railroad or the gas company or some organization, Woodward & Lothrop, or somebody else, wished to issue a million of bonds, and I have looked into the question and I wrote them a letter and say, "I think that the way to finance your company is to issue so many bonds, so much preferred stock, and so much common stock. If you are interested I am willing to enter negotiations with you to buy that million of bonds." Under this law you cannot do it.

Mr. BUTLER. Under section 14, sir, the law is not changed in any respect. The law existing today is not changed in any respect.

Senator KEAN. Next, as soon as those negotiations are closed, the minute they close I immediately want to telegraph to Tom, Dick,

and Harry all over the United States--I mean to say a group of people that I do business with-and say: "I have bought such and such and such bonds. Do you want an interest in the syndicate? I am charging 1 percent for forming the syndicate and do you want an interest?" And that is before any registration. That is before anything is done. Then when they join me or some of them join me, enough to stop my liability—what I am trying to do is to stop my liability, as everybody is trying to stop their liability. As soon as they make an issue, why, they want to stop their liability under the circumstances. I get enough people to reply to that so that my liability is cut; instead of a million dollars it is cut to $50,000. I am only illustrating that. So that I have only $50,000 interest in that for the next step.

Then I register. Then I comply with all the details of this law and make a public issue.

But in the meantime I want the right to communicate with those people and stop my liability. I mean to say no banker wants to carry overnight if he can stop it, a liability of 10, 15, 20, 25 millions of bonds. What he wants to do is the moment that that is closed, that transaction is closed, communicate with Tom, Dick, and Harry and have them assume part of that liability. Nobody will do business unless they can relieve themselves of a liability of 20, 30, or 40 millions of dollars. See?

Mr. BUTLER. Yes, sir; but I do not think that section 14 has any application whatever to the section you are referring to.

Senator KEAN. It is somewhere in this bill. I read it.

Mr. BUTLER. Section 14 is merely a provision that the existing State laws shall be enforced and does not change the State laws in any respect.

Senator KEAN. Well, I want the people to register. I want all these statements to be made. I want those people protected in every way, so that the public is protected, but at the same time we should leave it open enough so that people can do business.

Mr. BUTLER. In the hearings on the Taylor bill, the appropriate officials of 38 States, wrote on two different occasions and said that the reason their State laws were ineffective was because they were so easily evaded by issuers, brokers and others, transacting their business across State lines and therefore not coming within their jurisdiction.

The first decisions of the Supreme Court in the blue-sky cases upholding the validity of the blue-sky laws in the States, in which, incidentally, the Honorable W. W. Wickersham appeared as amicus curiae for the Investment Bankers' Association were rendered in 1917; these decisions were rendered on January 22, 1917. On February 6, 1917, or 15 days later, the attorneys of the Investment Bankers' Association wrote their clients and explained that it would be possible to evade these decisions by transporting across State lines. Later the Denison bill was proposed, of which section 14 is an extract, and at that time the States all complained, or 38 of them complained, that it was impossible for them to enforce their State laws when business was done across State lines. This provision is merely an attempt to assist the States in enforcing whatever provisions they may feel are desirable within their boundaries, and to prevent the fraudulent manipulator from hiding behind the interstate commerce clause of the Constitution.

Senator KEAN. Well, of course; I want to have the law, as I say, as strict as it can be made, but I want it practical so that people can do business.

Mr. BUTLER. Yes, sir.

The CHAIRMAN. Is there anything in this bill now that prohibits negotiations prior to the actual issuance?

Mr. BUTLER. It is not my understanding. It only refers to public selling and does not refer to underwriting contracts made between people.

Senator KEAN. Under the definition of "sale", under that section. That is on page 3.

The Chairman. [Reading:]

"Sale" or "sell" shall also include a contract to sell, an exchange, an attempt to sell, an option of sale or purchase, a solicitation of a sale, a subscription or an offer to sell, directly or by an agent, or a circular, letter, advertisement, or otherwise: Provided, That a privilege pertaining to a security giving the holder the privilege to convert such security

If you get in that "public sale" there it would cover it.

Mr. BUTLER. I am sure the proponents of this bill would have no objection to such an amendment; and it might even go further than that and say that negotiations between underwriters are not included in the definition.

Senator KEAN. I think you ought to put that in.

Mr. BUTLER. Yes, if there is any confusion whatever about that. Of course, the contrary was not intended in drafting the bill.

Senator KEAN. I am only seeking to make the bill workable.

Mr. BUTLER. We appreciate the help of everyone on these points, because we also want the bill to be workable.

Now, Mr. Chairman, if there are no further questions I believe I have nothing further to add.

The Chairman. We are much obliged to you.

Mr. BUTLER. And I thank you for hearing me.
(Thereupon Mr. Butler left the committee table.)

THE PROPOSED UNITED STATES SECURITIES ACT

There are certain details of the proposed security bill now before Congress which will work great hardships on honest corporations faced with the absolute necessity of refinancing if they are to keep solvent and thereby preserve the interests of their thousands of investors. For the common welfare of everyone, Congress should have such restrictions called to their attention.

The purpose for which the bill is intended, namely, to protect investors from fraud, is laudable, but the act should be revised so that it will not constitute an impediment to the orderly recovery and progress of our industry and commerce. One of these provisions is the personal liability of all directors who are required to guarantee the correctness of statements which are filed. The fact that such statements may have been prepared by competent, independent accountants would constitute no defense if eventually some error was discovered. As a matter of fact, no certified public accountant, regardless of the thoroughness of his examination, would absolutely guarantee a statement, and obviously directors cannot be expected to make anything like the usual accounting investigation and the majority of them do not have the technical experience which that work requires.

There should be no criminal penalty in the act except for willful, deliberate and intentional fraud. The inclusion of such penalties will prevent honest wellintentioned men from operating under the statute at all because of the fear of unintentional violation, whereas the clever crook or weakly dishonest person can rarely be convicted except in times of public hysteria like the present when the sympathy of judges and prosecuting officers for the victims is aroused. The probable result will be that operations of the professional security confidence

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 an entirely novel one in American law and practice, it is nevertheless essentially sound.

"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 given 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 unlimited 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 information 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.