this kind if gotten to the public would be a revelation and protection to it.

The CHAIRMAN. How would that conform to the requirements of other acts with reference to foreign securities?

Mr. THOMPSON. Well, foreign countries, Senator, handle this situation in a different way. In England, so we are informed, one of the great banks or group of great banks practically controls the introduction of all foreign securities into that country, into England. And they do it without a law. Apparently there is no law. They just act. But we could not, I believe, function in that way in this country. Senator GLASS. They have great acceptance houses there. Mr. THOMPSON. Yes.

Senator GLASS. With large capital and managed by experienced bankers, and we have banks managed by grocerymen, and so forth. Mr. THOMPSON. And then, Senator, those houses that you speak of work in cooperation all the way through. So that they really have a uniform method of procedure, but it is extra-territorial, so to speak, so far as the Government of Great Britain or England is concerned.

(5) Security pledged or to be pledged for the loan;

(6) General financial condition of the borrowing government or subdivision thereof;

(7) Whether or not the borrower has ever defaulted on the principal or interest of any other security sold in the United States or other foreign country and, if so, the date, amount, and circumstances;

(8) Proposed method of distributing the securities to be issued under the loan; (9) Proposed price at which security is to be offered to the public in the United States and elsewhere;

(10) Cost thereof to the person, corporation, or association or other entity underwriting or negotiating the loan and the net amount to be returned to the borrowing government or subdivision thereof from the sale of such securities.

The CHAIRMAN. Mr. Thompson, I am sorry to interrupt your interesting statement. The committee ought to decide how long they are going to sit. It is now nearly 5 minutes of 12. Will the committee go right on or will we hold an afternoon session?

Senator BARKLEY. Mr. Chairman, what is coming up today? The CHAIRMAN. I do not know whether the agriculture bill will be reported or not. If so, we may not be able to come back.

Senator BARKLEY. If we do not have much on the floor we might have, I think, an afternoon session. If this agriculture bill is going to be under consideration I doubt if we can do it.

Senator COUZENS. Mr. Chairman, I understand that they are going to have the 30-hour week bill up today. That is the Black bill.

The CHAIRMAN. I believe that will be in order. Now the question is for the committee to decide whether we will try to hold an afternoon session or not and how long we will stay now. (After a pause.) Suppose we go on for a while, or we may recess until half past 2.

Senator COUZENS. Mr. Chairman, I move that we recess at 12.15 until 10 o'clock tomorrow morning.

Senator GOLDSBOROUGH. I would like to ask Mr. Thompson a question before we close.

Mr. THOMPSON. Senator, the House Committee adjourned over until tomorrow and they are expecting us back there tomorrow. Senator WALCOTT. At what time?

Mr. THOMPSON. I think they assemble at 10 o'clock.

Senator WAGNER. I think we ought to go on, Mr. Chairman.

Senator BARKLEY. I think we ought to try to have an afternoon session, but if this agriculture bill or this 30-hour a week bill is going to be considered, some of us want to be over there while it is under consideration. It may not, any of it, be taken up.

Senator GLASS. Mr. Chairman, I have to leave the committee right away. I would like to ask the privilege of asking Mr. Thompson one question before I leave, and that is to point out to me where he exempts the notes and bills of exchange from member Federal Reserve banks. The CHAIRMAN. I did not put the motion. Do you want to amend that to meet this afternoon?

Senator WAGNER. I move that when we adjourn now we meet at 2:30.

Senator GLASS. If that is to be done, I can ask my question at 2:30.

The CHAIRMAN. It is a question for the committee. The Senator from Michigan moves that when we adjourn at 12:15, we adjourn until tomorrow morning. The Senator from New York amends that by saying 2:30 this afternoon. All in favor of the amendment say aye. (Ayes.) Opposed, no. (Noes.) The ayes seem to have it. So when we adjourn we will meet at 2:30 this afternoon.

Senator GLASS. I will ask the question then, Mr. Thompson. Senator GOLDSBOROUGH. May I ask just one question before we adjourn?

The CHAIRMAN. All right, Senator.

Senator GOLDSBOROUGH. Mr. Thompson, I understood you to say that the directors' liability followed the provision of the British act. Is that correct?

Mr. THOMPSON. Yes.

Senator GOLDSBOROUGH. Are you not in error about that, for this reason, that it goes a bit further, because a director is not permitted to accept the statement of a certified accountant, in this bill? Mr. THOMPSON. In this bill?

Senator GOLDSBOROUGH. Yes. Therefore, does it not go further than the British act?

Mr. THOMPSON. Now let me see, Senator; if you will have reference to the penalties on page 28, section 17, line 13,

That whoever shall willfully violate any of the provisions of this act, or the rules and regulations promulgated by the Commission pursuant thereto, shall upon conviction be fined not more than $5,000, imprisoned not more than 5 years, or both, and any officer, director, or agent or any corporation who knowingly participates in such violation shall be punished by a like fine and imprisonment, or both.

Senator GOLDSBOROUGH. In other words, you contend it would have to be the willful act of the director?

Mr. THOMPSON. Yes; that is the idea.

The CHAIRMAN. I want to offer for the record certain letters which have been received bearing on this subject, which seem to be entirely pertinent, and I will have the reporter put them in the record. (The letters presented by the chairman are as follows:)

Hon. DUNCAN U. FLETCHER,

MINOT, KENDALL & CO., INC.,

Boston, Mass., March 31, 1933.

Senate Office Building, Washington, D. C.

DEAR SIR: As I read the securities bill it is necessary, according to section 8 F, that a statement containing information be delivered to each purchaser with the delivery of the security.

Recognizing fully the desirability of protecting the investor by giving him in writing the facts on which the sale was made, nevertheless from a practical operating viewpoint this provision creates tremendous difficulties.

If for instance we, as dealers, should buy a single bond and sold it to a customer by showing him a Moody's Manual Report on the company, we should be under the necessity of copying the general facts, earnings statement, balance sheet, and all other important facts to attach as a statement to the bond when sold.

Furthermore, as I understand it, rescission of the sale could be demanded by the customer if it should later prove that the facts set forth in the manual were inaccurate. In other words we become responsible for the accuracy of the statements in the manual or from any other source which we consider trustworthy and are supposed to act as guarantors of the accuracy of such statements on which for many years we and investors, large and small, have been accustomed to rely with good cause. I am frank to say that I do not see how business can be done

under such circumstances.

Supposing also that these Moody statements should be based on reports made to the Federal Government and that without our knowledge the value of the securities held in a portfolio or the inventory of the issuing company should radically change for the worse or a property should be sold out from under the mortgage the day before at less than its book cost, it would appear that the investor would be entitled to recission years afterward.

These are conditions impossible to conform with. Many other suppositions could be set up.

It occurs to me that if it were made allowable to refer specifically on the bill of sale to the source of information, as, for instance, the Moody's Public Utilities Manual 1932 as being the authority on which the sale was made, it would accomplish the desired purpose. The investor would be put on definite notice which, if not in accordance with the facts, would give him an opportunity if taken advantage of forthwith of rescinding the transaction.

Sincerely yours,

WALDO KENDALL, Vice President.

P.S.-It is interesting to note that swindlers, in view of the profits they make, can well afford to set up all this material of which I have spoken above, whereas the entirely reputable houses working on narrow margins of profit would find their business seriously crippled on account of the expense involved and the fact that they would still be in business at a time when a customer might make a claim for rescission.

Hon. DUNCAN U. FLETCHER,

Senate Office Building, Washington, D. C.

NEW YORK, April 1, 1933.

MY DEAR SENATOR: You are probably already flooded with messages in regard to the securities bill which is now before Congress, in which event I hope you will pardon my having troubled you with my own suggestions.

There are certain details of the bill in its present form which in my humble opinion and experience will work great hardships on honest corporations which are faced with the absolute necessity of refinancing, if they are to keep solvent and thereby preserve the interests of their thousands of investors. I am sure for the common welfare of everyone, Congress should have such restrictions called to their attention.

In the beginning I should like to say that I am, as of course I should be, in entire sympathy with the purpose for which the bill is intended; namely, to protect investors from fraud. I believe that this purpose is laudable, and I only wish to see the act revised so that it will not consitutute 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 accounts would constitute no defense if eventually some error was discovered. As a matter of fact, I know of no certified public accountant who, 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 well

intentioned 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 confidenceman will be aided rather than hampered by the lessened competition of legitimate securities which will not be offered if prospective offerers 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 were 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 becoase 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 the most liquid and conservatively run bank in New York that I know of 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 this 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 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.

There has just been handed me a memorandum 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, which I am here quoting in full:

"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 of 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 the 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 169692-33-7

that little or no securities can probably be sold there anyway, and the right to advertise in a newspaper which may have a few subscribers in such a State should not be denied a security issuer.

I am informed that the restraints upon business resulting from the British Companies Act in London have been so severe and out of proportion to the benefits believed to have been secured that it is proposed to delete many of the restrictions now in that law and included in the proposed securities act here, on the ground that they impose substantial and unreasonable restrictions through trying to paternalistically protect investors about whom it may unfortunately be said that "if they do not lose it one way they will another." It is regrettable that there are some such people for whom the saying is still true that "a fool and his money are soon parted" and no amount of legislation by Congress can change such a fundamental fact of human nature.

In our effort to see that wholesome legislation is made as complete as possible, let us not have an eighteenth 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.

I have hesitated about expressing my ideas on this legislation in view of the undoubtedly wide experience of those who drafted the bill in its present form; however, since 1907 my time has been given almost exclusively to matters connected with the financing of corporations, and during the past 10 years I have been actively assisted in the raising of several hundred million dollars. I therefore believe I can also speak from considerable experience, and I have given you my suggestions in the hope that you will find them useful.

Very truly yours,

Hon. DUNCAN U. FLETCHER,

United States Senate, Washington, D.C.

H. C. HOPSON. CHICAGO, April 1, 1933.

DEAR SIR: As dealers in commercial paper we are particularly interested in the new Federal Securities Act now before Congress. In our reading of the act we notice that "any evidence of indebtedness or note" is included. We cannot believe that this was the intent of the bill and that it was meant to include "evidence of indebtedness" having a maturity of less than 12 months. If this bill should go through in its present form, it would make it impossible for dealers in commercial paper and bankers' acceptances to function. These are two types of obligations which have a record of safety only second to Government bonds through this and many past depressions. They are eligible for rediscount at the Federal Reserve banks and under the Federal Reserve Act our currency is based on them. If commercial paper and bankers' acceptances are included in this bill under the heading of "evidence of indebtedness as they are at present, dealers cannot continue to function and hence the small banks all over the United States outside of the large centers will be unable to invest their funds in commercial paper and bankers' acceptances, as the dealers are the only source from whom they can buy this type of security.

Commercial paper and bankers' acceptances are based on self-liquidating transactions, and we cannot help but feel that it was not the intent of the Federal Securities Act to include this form of self-liquidating security, but that the Act was to cover the marketing of securities that had to do with capital investment and which are bought by the investing public. Commercial paper and bankers' acceptances are practically all bought by banks.

While the act, as we read it, does not aim to eliminate the dealers in commercial paper and bankers' acceptances, yet if the dealers are forced to fulfill all the requirements of it, it in fact will eliminate them. A merchant or manufacturer borrows through the medium of commercial paper for the purpose of financing a merchandise transaction. Time is frequently the essence of this transaction, and it would not be possible to wait in order to comply with all the requirements of the act. A grain merchant or a cotton merchant might want to buy either of those commodities and is forced to act quickly.

All through this depression we have had a demand for commercial paper way in excess of our ability to meet it, and the loss to banks buying commercial paper has been such a negligible fraction of 1 percent that this type of investment is in steady demand today, second only to government bonds.

We sincerely hope that your committee will use its efforts to eliminate from the act evidence of indebtedness maturing within a period of a year.

Very respectfully yours,

LANE, ROLOSON & Co.