"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.

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'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 amounts 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.

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The CHAIRMAN. Very well. Mr. Friedman is passing through and would like about 10 minutes.

STATEMENT OF HERBERT J. FRIEDMAN, ATTORNEY AT LAW, CHICAGO, ILL.

The CHAIRMAN. State your name, address, and occupation, please, Mr. Friedman.

Mr. Friedman. Mr. Chairman and members of the committee, my name is Herbert J. Friedman; place of residence, Chicago, Ill., and I am an attorney at law.

I do not represent anybody in this connection whatsoever, and I am here merely at the suggestion of Senator Bulkley, with whom I was discussing certain phases of this bill a few minutes ago. It was Senator Bulkley's suggestion that I should state them to the committee.

I told the Senator that in my judgment the bill, the contents of which I approve of cordially, could be clarified and possibly strengthened in some respects. I cannot see, from a study of the bill, or a cursory examination of it rather, that there are any provisions in the bill relating to what may happen in connection with the reorganization of a property in the event it goes into a default or a receivership, and everybody knows that, no matter how careful bills of this character may be drawn, some issues and some companies are bound to fail in the future.

In the last few years we have seen the evils cast upon security holders in connection with the costs of reorganization and often the inability of certain classes of security holders to really get a voice in the matter of reorganization.

The recent amendment to the bankruptcy act passed in the last days of the last session of Congress has given to the Interstate Commerce Commission a wide discretion and authority in passing upon some of these matters that I am now suggesting should be continued in this bill, and it should be conferred upon the Federal Trade Commission.

The amended bankruptcy act provides for the Interstate Commerce Commission to have a right and voice to say whether a plan of reorganization is fair to all the classes of security holders, and I believe, while legislation of this character is now being passed and subject to scrutiny relating to securities other than those relating to railroads, Congress should now protect the security holders in some such similar way by giving the Federal Trade Commission a similar right and authority to pass upon the fairness of a plan of reorganization.

I further feel that it would be wise if the Federal Trade Commission would have the right and authority to pass upon the reasonableness of fees that may be charged. In the city of Chicago we see a situation now where a tremendous number of real-estate properties have been drawn into receivership where the value of the bonds have now sunk to 8 or 9 or 10 percent of their par value, where the depositaries have been trying to exact in many instances, merely for the right of depositing the bond with them, a cost or a premium or a charge of the par value of the bond of 2 percent.

Senator ADAMS. May I interrupt I was going to ask Mr. Butler a question, since he was one of the draftsmen of the bill. Am I correct that railroads are not included in the bill as we have drawn it?

Mr. BUTLER. No; they are still under the jurisdiction of the Interstate Commerce Commission, and may I suggest at this point that no attempt in drafting this bill was made to amend corporate law. The only aim of this bill was to control the sale of securities.

Mr. FRIEDMAN. In the same way very often depositors have no voice and cannot get any voice in the right of reorganization, and any time any independent group attempts to get a voice in the right of reorganization they are blocked by the house of issue. That is to say, the house of issue has within its means all the avenues of contact as to the security holders. They can place them and they know who they You probably saw evidence of this most recently in the most acute case of Kreuger & Toll. Lee, Higginson had issued the securities, and they would not allow anybody else to see the list of security holders.

are.

There are times when the independent security holders should have that right of finding out where his common fellow in the class of holders of that security may be, so he may get in contact with him; and if he has a plan that differs from that of the house of issue he should have a right of presenting it by communicating with the security holders.

Now, I felt that could be reached by giving the Federal Trade Commission the right to say when any independent group of security holders could go to the house of issue and say, you must turn over to this independent group the list of security holders, their names and addresses. I believe that would give to the security holder, in the event of reorganization, a protection that he needs today, and that is sadly lacking.

Senator ADAMS. May I ask, are you reasonably clear that that would be within the power of Congress to do?

Mr. FRIEDMAN. I was listening to the statement of Mr. Butler yesterday, and he stated that without doubt the right to use the mails would make the provision of this act legal, and I have no doubt whatsoever

Senator ADAMS (interposing). I was thinking of your suggestions in reference to a regulation of the security house in the matter of reorganization and disclosing its security holders, and so forth.

Mr. FRIEDMAN. Yes, Senator; it is my belief that if the right to use the mail were withdrawn, unless the house of issue did that, it would be compelled to do it. It could not possible proceed with its plans, unless it made a request for the use of the mails, and I think that the Federal Trade Commission should have the right to examine this list. I am not saying it should be an indiscriminate right. I believe an application should be made to the Federal Trade Commission and the Federal Trade Commission should have the power and authority and discretion to say whether a man should have a right to examine the list of security holders.

Senator BULKLEY. Is it your idea that the list should be deposited in the first instance with the Federal Trade Commission?

Mr. FRIEDMAN. Well, I had not thought of that, but the bill might even provide for that.

The CHAIRMAN. Might they not be used by speculators for improper purposes?

Mr. FRIEDMAN. I think there would be dangers if it were an indiscriminate right, Senator, and so I am merely suggesting that the right