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Since those three earlier bills, representing the three basic methods of attempt. | ing to correct the situation, were introduced, numerous other bills of the same types have been proposed, particularly during the last (Seventy-second) session of Congress. As they were all variations of 1 of the 3 earlier bills which have just been discussed in detail, those presented in the Seventy-second Congress may be summarized as follows:
Two comprehensive bills 4 were introduced at this session which were restricted, however, to the issuance and sale of securities in the District of Columbia.
Eight different bills 5 relating to short selling of securities and commodities and bucket-shop transactions were introduced.
Congressman A. J. Sabath, of Illinois, introduced H.R. 4638, “to prohibit communication of false information with respect to securities in certain cases", which provides a fine or imprisonment for anyone who communicates or attempts to communicate in interstate commerce any false information affecting the price of securities.
Congressman F. H. LaGuardia, of New York, introduced two bills 6 one of which prohibited the use of the mails for the sale of real estate securities, unless they contain sworn statements by the owner as to valuation and assessment and unless they were guaranteed as to both principal and interest by the person or corporation originally underwriting or offering such mortgages, and a second bill prohibiting banking institutions from purchasing stocks or bonds unless the payment of principal and interest were guaranteed by the issuer and distributor.
Congressman A. J. Sabath, of Illinois, also introduced a bill 7 “to prevent the use of the United States mails and other agencies of interstate commerce for transporting and for promoting or procuring the sale of securities contrary to the laws of the States, and for other purposes, and providing penalties for the violation thereof." This bill is similar in character to that introduced by Congressman Denison in the Sixty-seventh Congress in that it prohibits the sending of information or offers of securities to States in which it is at that time unlawful to solicit or sell such securities. There are numerous exceptions listed in this bill, however, such as foreign government obligations, securities listed upon an organized stock exchange, the stock of banks, trust companies and savings institutions and notes secured by mortgages when the face value of such notes does not exceed 75 percent of the then fair market value of such lands and 60 percent of the insured value of any improvements thereon, and several other classes of securities.
THE NEEDED LEGISLATION
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The proposed Taylor Act has been discussed at considerable length for, of the three plans suggested by the bills introduced, this appears to be the most effective and practical method for enabling the Federal Government to regulate the sale of securities in interstate commerce and to fill the gap the States are unable to
i control. As stated in the report of the Capital Issues Committee:
“This unlicensed and unrestricted traffic a crevice in our financial structure through which flows a constant torrent of funds in utter wastage. It can and should be stopped; but more than that it is a source of heavy financial loss to hundreds of thousands who have a right to look to their Government for protection.
Constitutionality.--The authority of Congress to enact legislation regulating interstate commerce in securities can no longer be seriously questioned. A review of the judicial decisions relating to this point must, because of the nature ! of the subject matter, consider two phases: (a) Securities as Subjects of Commerce; (b) Boundaries of Interstate Commerce.
* H.R. 9065, introduced by Congressman Bowman "to supervise and regulate the sale of securities within the District of Columbia", and Å.R. 8912, introduced by Congressman Sabath "to suppress fraudulent practices in the promotion or sale of stocks, bonds, and other securities sold or offered for sale within the District of Columbia; to register persons selling bonds, stocks, or other securities; and to provide punishment for the fraudulent or unauthorized sale of the same.'
5 H. Res. 57 and 59; H.R. 11509, 4639, 4642, 11510, 4604, and 348.
Securities as subjects of commerce.-In Bracey v. Darst the Federal court said:
“We do not think it can longer be questioned that stocks, bonds, debentures, and other securities are subject matters of interstate commerce.
Again in Alabama & N.O. Transportation Co. v. Doyle it was said:
“We cannot doubt that stocks and bonds are now the subjects of interstate commerce and that shipments and sales of them, between the States, are interstate commerce.” 10 Compton v. Allen contained a similar decision as follows:
That the transportation of such articles of personal property (securities) from one State to another for the purpose of barter, sale, and delivery constitutes not only commerce among the States of this country but very large and important element of such commerce
The Supreme Court of the United States, early in its history, went much further in holding far less tangible transactions to be interstate commerce and, as such, subject to regulation by the Federal Government. In the Telegraph Cases 12 it held that telegraph messages between States constituted interstate commerce and as such subject to Federal regulation. In another case 13 the Supreme Court held that the transmission of electric current across State lines was interstate commerce and in Book Co. v. Pigg 14 it said:
'We cannot doubt that intercourse or communication between persons in different States, by means of correspondence through the mails, is commerce among the States within the meaning of the Constitution."
In the Lottery case,15 a Federal law enacted under the authority of the interstate commerce clause of the Constitution, prohibiting the transportation of lottery tickets between the States, was attacked as unconstitutional on the ground that lottery tickets had no value and for this reason could not be subjects of commerce. The Supreme Court disagreed with this contention, holding the statute to be constitutional and stating in part as follows:
“We are of the opinion that lottery tickets are subjects of traffic and therefore are subjects of commerce, and the regulation or the carriage of such tickets from State to State, at least by independent carriers, is a regulation of commerce among the several States."
Early decisions of the Supreme Court have been so inclusive in defining subjects of interstate commerce that it has never been seriously questioned either in arguments before that Court or in discussions in Congress concerning proposed Federal blue-sky laws, that stocks, bonds, and other securities fall within this category.
In that series of leading cases, already mentioned, decided by the Supreme Court in 1917, counsel contended that the blue-sky laws of Ohio, North Dakota, and Michigan were unconstitutional inasmuch as they tended to regulate the sale of securities originating in other States and, therefore, interfered with the exclusive power of Congress to regulate interstate commerce. The Court by implication agreed that such securities were subjects of interstate commerce bui that the State legislation under discussion was not an unauthorized regulation of that type, explaining their opinion as follows:
Úpon the transportation into the State there is no impediment—no regulation of them or interference with them after they get there. There is the exaction only that he who disposes of them there shall be licensed to do so and this only that they may not appear in false character and impose an appearance of value which they may not possess—and this certainly is only an indirect burden upon them as objects of interstate commerce
It is a police regulation strictly, not affecting them until there is an attempt to make disposition of them within the State.16
• Bracey v. Darst, 218 Fed. p. 482, citing: Gibbons v. Ogden, 9 Wheat. 1, 6 L. Ed. 23; Brown v. Maryland, 12 Wheat. 419, 6 L. Ed. 678; Chy Lung v. Freeman, 92 U.S. 275, 23 L. Ed. 550; Railroad Co. v. Husen, 95 U.S. 465, 24 L. Ed. 527; Telegraph Co. v. Telegraph Co., 96 U.S. 1, 24 L. Ed. 708; Telegraph Co. v. Pendleton, 122 U.S. 347, 7 Sup. Ct. 1126, 30 Ed. 1187; Lottery Cases, 188 U.S. 321, 23 Sup. Ct. 321, 47 L. Ed. 492; Book Co. v. Pigg, 217 U.S. 91, 30 Sup. Ct. 481, 54 L. Ed. 678, 27 L.R.A. (N.S.) 493, 18 Ann. Cas. 1103; West v. Kansas Co., 221 U.S. 229, 31 Sup. Ct. 564, 55 L. Ed. 716, 35 L.R.A. (N.S.) 1193; Cook on Corp. (7th Ed.) vol. 2, par. 486, p. 1364.
10 Alabama & N.O. Transp. Co. v. Doyle, 210 Fed. 173.
16 Hall v. Geiger-Jones Company (242 U.S. 539-557). See also Caldwell v. Sioux Falls Stockyards Co. (242 U.S. 559), and Merrick v. Halsey & Co. (242 U.S. 568).
In the Textbook Company case, supra,1? attorneys unsuccessfully contended that correspondence school courses do not constitute interstate commerce and cited in support of their contention the Supreme Court's early decision rendered in the so-called Insurance case 18 holding that insurance policies are not subjects of commerce. The Court overruled this contention, however, stating that the Insurance case decision was not applicable to this class of cases because of the peculiar character of an insurance policy.
That an insurance policy is essentially different from a security is evident from the language of the Court itself in rendering the Insurance case decision where it is said that “they (insurance policies) are not subjects of trade and barter offered in the market as something having an existence and value independent of the parties to them.” As has been shown above, decisions subsequent to the Insurance case have followed the distinction then made in holding that securities, lottery tickets, telegraph messages, correspondence school courses, electric current and correspondence concerning these articles are “subjects of trade and barter offered in the market as something having an existence and value independent of the parties to them.”
The question before the Supreme Court, in a case decided during 1918, involved a contract between the New York Stock Exchange and certain telegraph companies under the terms of which the exchange agreed to furnish those companies with continuous market quotations which were to be transmitted in Morse code to other cities and there decoded and distributed by ticker tape to the officers of the telegraph companies' various broker-customers. The contract also provided that no person should receive this service unless his application had been approved by the exchange. The State of Massachusetts objected to this arrangement in connection with quotations transmitted to and distributed in Boston on the ground that the authority given the exchange to withhold the service was discriminatory.
The State, in attempting to enforce regulatory State legislation, conceded that the original transmission of the quotations from New York to Boston constituted interstate commerce but contended that interstate commerce ended when the quotations were received and decoded in Boston for distribution by other means to local customers and for this reason were subject, from that point on, to State control. The Supreme Court overruled this contention, however, and held that interstate commerce did not terminate until the market quotations had actually reached the brokers for whom they were originally intended.19.
Boundaries of Interstate Commerce.-From the foregoing review of authorities it appears clear that investment securities are subjects of commerce and that interstate transactions in them are subject to regulation by the Federal Government. The second question, then, involving interpretation of the commerce clause—i.e., when interstate commerce begins and terminates—is important, not as concerning the constitutionality of Federal securities legislation, but as affecting the practical operation of such legislation, under varying circumstances, after it has been enacted. The Supreme Court of the United States has rendered numerous decisions on this subject, covering a great variety of situations, but a few examples, particularly recent ones, should serve to indicate the general principles followed.
In Real Silk Mills v. Portland,20 the State of Oregon had attempted to impose a license fee on salesmen who solicited orders from individuals, collecting a deposit of $1 on each box of hosiery ordered, the hosiery to be delivered later by c.o.d. parcel post packages from the factory in Indiana. The Court, holding that such à State tax was invalid as an unwarranted burden on interstate commerce, stated that “Considering former opinions of this Court, we cannot doubt that the ordinance materially burdens interstate commerce and conflicts with the commerce
“The negotiation of sales of goods which are in another State, for the purpose of introducing them into the State in which the negotiation was made is interstate commerce."'22 In Shafer v. Farmers' Grain Company 23 the State of North Dakota had attempted to enforce grading regulations covering purchases of wheat by buyers within the State intended for shipment to other States. The Court held such a regulation to be unconstitutional on the ground that “Buying 17 Book Co. v. Pigg (271 U.S. 91). 18 Paui v. Virginia (8 Wall., 168, decided in 1868). 10 Western Union Telegraph Co. v. Foster (247 U.S., 105). 20 Real Silk Mills v. Portland (268 U.S. 325). 21 Citing Robbins v. Shelby Taxing District (120 U.S. 489); Brennan v. Titusville (153 U.S., 289); Rearick v. Pennsylvania (203 U.S. 507); Crenshaw v. Arkansas (227 U.S. 150); Alpha Portland Cement Co. v. Common. wealth (268 U.S. 203).
22 Weeks v. U.S. (245 U.S. 618).
for shipment, and shipping, to markets in other States when conducted as before shown constitutes interstate commerce the buying being as much a part of it as the shipping. We so held in Lemke v. Farmers' Grain Company, supra,24 following and applying the principle of prior cases. Later cases have given effect to the same principles. "25
The first of these decisions (the Hosiery case) makes it clear that, if a principle in one State sends an agent into another State for the purpose of selling an article in the latter, to be delivered to the customer from without the State, the transaction constitutes interstate commerce and, as such, is subject to Federal regulation. The second decision (the Grain case) establishes the principle that, if a purchaser buys an article in one State for the purpose of transmitting that article to and selling it in another, the buying as well as the shipping is interstate com
The complication in the second example would, perhaps, be one of fact, of showing the intent when the purchase was made. This should not be impossible to do, however, if it could be shown that the purchaser dealt habitually in the article involved and isolated transactions where this could not be shown would not, ordinarily, be particularly important.26
The point at which a transaction ceases to be interstate was defined in general but unequivocal terms by an early decision of the Supreme Court which has since been followed, under more specific circumstances, in numerous instances. In Robbins v. Shelby Taxing District 27 it was stated that “as soon as the goods are in the State and become part of its general mass of property, they will become liable to be taxed in the same manner as other property of similar character
It has been repeatedly held, for example, that merchandise entering a State unsold, for the purpose of sale therein, ceases to be in interstate commerce when it reaches its destination, but that merchandise already sold to a definite customer before entering the State is in interstate commerce until delivery to the buyer. In American Steel & Wire Company v. Speed 28 the court held that nails in kegs, shipped to Memphis from outside the State and held in a warehouse there until sold, ceased to be in interstate commerce on arrival at the warehouse even though they remained in the original package until delivery to the eventual customer. In Rearick v. Pennsylvania,29 decided 3 years later, the question raised involved the sale of brooms to individuals in Pennsylvania by a solicitor on behalf of a firm in Ohio. After a sufficient number of orders had been accumulated, the brooms were shipped in one package to the solicitor or agent, who broke the package and made deliveries to his customers. Mr. Justice Holmes, delivering the opinion of the court, held that the merchandise remained in interstate commerce until delivery to the customers, distinguishing this case from the Wire Company case on the ground that, in the present instance, the merchandise had been sold before arrival within the State and was en route to designated purchasers, while in the former case the merchandise was still unsold when received by the shipper's agent (bailee) and stored in the warehouse.
An attempt to arrive at a precise rule, on the basis of the numerous decisions on these points, indicates that interstate commerce ceases when the merchandise arrives at its destination. If unsold before arrival in the State, its destination is the point of delivery to the shipper or his agent. If sold before arrival, its destination is the point of delivery to the purchaser even though it may have, in transit, been received by and redelivered by the shipper's agent.30 There are some decisions that appear to conflict with this general principle but in most instances it will be found that some distinguishing element is involved. In Browning v. Waycro88,31 for example, it was held that the delivery of lightning rods, shipped from without the State and delivered by the agent to a purchaser, was subject to State taxation on the ground that considerable work within the State was necessary in the installation of the apparatus and that it was, therefore, as finally delivered, an article partly processed within the State. Uncomplicated by such distinguishing features, however, the general rule appears to be as stated. If this is correct, an order for securities obtained from a client by a broker, both in Maryland, and completed by delivery from a firm in New York would continue to be an interstate transaction until final delivery to the purchaser even though 24 Lemke v. Furmers' Grain Co. (258 U.S. 50). 25 Citing Staford v. Wallace (258 U.S. 495); Binderup v. Pathé Exchange (263 U.S. 291).
28 Numerous other decisions reiterating these same principles are cited in the Federal Digest, Commerce, secs. 40 and 66 to 68, inclusive. 27 Robbins v. Shelby Taring District (120 U.S. 489 (1886)). 28 American Steel & Wire Co. v. Speed (192 U.S. 500). See also Woodruff v. Parkham (8 Wall. 123). 29 Rearick v. Pennsylrania (203 U.S. 507). 30 Brennan v. Titusville (153 U.S. 289) and others cited in the Federal Digest, Commerce, secs. 40 and 66 to 68, inclusive. 31 Browning v. Waycro88 (233 U.S. 16).
delivery was effected through the Maryland broker. If, however, the New York firm should send securities to the Maryland broker for sale, the interstate character of the transaction would terminate on the receipt of the securities by the broker. The point does not appear to be of practical importance, however, so far as concerns the enforcement of the proposed Federal securities legislation, inasmuch as both the New York firm and the Maryland broker would be subject to the law in either event.
The proposed remedy.—Six basic features have been considered in drafting the proposed Federal securities bill which is submitted with this study:
(a) The promoters, issuers, principal officers, and directors are required to sign registration statements to be filed with the Federal Trade Commission and are to be held jointly and severally liable to purchasers for any damages sustained in the event of misrepresentations of material facts contained in the statements
(b) The bill does not attempt to prevent investment in speculative projects, inasmuch as many of the industrial developments in this country began as speculations. An effort is made, however, to draft the law in such manner that prospective investors are enabled to know the extent of the speculative features and have reasonable knowledge concerning the chances of success or failure.
(c) Full publicity is required relating to factors essential to a reasonably accurate evaluation of the quality of the security offered by requiring that certain basic information appear in all advertising matter, whether printed or spoken.
(d) Certain classes of securities known to be sound, such as those of the Federal Government, as well as certain classes of transactions, such as judicial sales, are exempted from the foregoing provisions in order not to hamper the normal course of legitimate business more than may be necessary to accomplish the desired regulation of other classes.
(e) A fraud clause has been added to penalize fraud in the sale of securities exempted from the registration and publicity provisions of the fraudulent manipulation of sound securities.
(f) A further provision has been included for the purpose of preventing the use of the United States mails or other instruments of interstate commerce in evading State security laws.
Registration of information required.—The basic features of the proposed draft follow the general plan adopted in the proposed Taylor bill, the securities law of Colorado, and the legislation of several foreign countries, notably the British Companies Act, with certain changes necessary in order to conform to our dual form of government and others that are intended to strengthen various provisions in some particulars and to facilitate normal transactions in those securities that are generally recognized as sound. In substance, the act requires that every corporation or other entity offering its securities to the public in interstate commerce, shall file with the Commission a registration statement, accompanied by designated documents, and showing prescribed details concerning the financial organization of the company that will enable purchasers to know such material facts as may affect the value as an investment. This statement is to be signed by the corporation or association, its promoters, principal officers, and by its directors. All purchasers are assumed to rely upon the representations contained in this statement and, in the event of the misrepresentation of a material fact, purchasers are entitled to rescind the contract of sale and to recover the purchase price and damages, jointly or severally, from those signing the statement. A fine, imprisonment, or both, are the penalties for offering nonexempt securities in interstate commerce until the required statement has been filed.
Exemptions.-One of the important problems in this type of legislation concerns exemptions from its provisions. These should be chosen with a view to embodying the least possible burden on legitimate transactions without, at the same time, providing means for evasion of the law's restraining clauses by fraudulent manipulators. The exemptions of the Taylor bill differed considerably from those found in the majority of the States. By specific designation, only shares of stock came within its provisions, and, for this reason, bonds and other evidences of indebtedness or interest were exempted on the theory that fraudulent promoters were interested only in the sale of stocks for which they could promise fabulous though uncertain returns.32 That may have been correct at that time but no longer applies, as has been well demonstrated during the past few years by the expenditure of more than $800,000,000 for almost worthless foreign bonds 82 Hearings, supra, pp. 19-20.