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William A. Law, president, Penn Mutual Life Insurance Co., Philadelphia; Mr. Edward B. Leisenring, president, Westmoreland Coal Co., Philadelphia.
The above presents as follows its recommendations and conclusions to which it solicits your helpful and invaluable attention:
Our statement deals with our appraisal of the probable effects on business corporations resulting from the passage in present form of the identical bills introduced before the Senate and House entitled "A bill to provide for the registration of national security exchanges operating in interstate and foreign commerce and through the mails and to prevent inequitable and unfair practices on such exchanges, and for other purposes.”
The title in no way suggests the full intent of the bill and this is significant inasmuch as many business men believe it to cover only the purposes indicated in the title and undoubtedly do not comprehend the extraordinary authority over business which the bill proposes to give to the Federal Trade Commission.
Throughout the bill we find references to "any person who transacts business in securities.'
” This clause is subject to wide interpretation and if retained should be clearly defined to exclude those who buy or sell securities primarily for investment for legitimate corporate purposes as distinguished from those who are primarily engaged in the transaction of a security business as such. It is assumed that this is the intent of the bill.
Section 3, definition no. 9 contemplates regulation by the Federal Trade Commission of all types of corporations, partnerships, associations, etc., including railroads, banks, trust companies, savings funds, insurance and utility companies. This proposed supplementary regulation of the latter groups, even though modified to obviate conflict with present Federal, State, or other regulatory authorities, would at least render administration of such corporations increasingly difficult and add to their cost of doing business.
Section 6 in prohibiting the customary use of unlisted securities as collateral and materially raising the marginal requirements on listed securities for collateral purposes would seriously restrict the obtaining of credit by individuals and corporations. Corporations would be handicapped in borrowing for legitimate corporate purposes on collateral consisting of their own marketable investment or treasury securities. Furthermore, the power given to the Commission to prescribe lower loan values than those as computed by the formula described in section 6 would, where exercised, have an immediately unfavorable effect on the corporation's general credit in all of its business dealings. At a time when every effort of the Government is being expended in fostering the extension of credit it seems anomalous that serious consideration should be given to certain provisions of this bill which, without apparently sound reason, would unduly curtail the purchasing power of the individual and corporation by diminishing their facilities for credit.
Section 8, subsection (a) (5) reverses the usual doctrine of one being innocent until proven guilty by unfairly, in our opinion, placing the burden of proof on & corporate officer in the event an average investor” sues him for damages on the grounds that he was mislead with respect to any of various items on the published balance sheet or other statements.
Section 8, subsection (a) (7) as it now stands would deny & corporation the right, except under such rules and regulations as the commission may prescribe, to either buy or sell its stocks or bonds in any appreciable volume as this would necessarily to a greater or less extent have the "effect of pegging, fixing or stabilizing the price of such securities”. This might prove disadvantageous to corporations purchasing bonds or preference stocks for sinking funds or retirement or selling treasury bonds or stocks for purposes of raising working capital. This subsection would be improved by striking out the words "or effect".
Section 8, subsection 9 denies a corporation the privilege of acquiring an option to purchase, through the means of securities, control or ownership of another corporation. We believe the privilege referred to a legitimate one and should not be prohibited.
With respect to section 10 referring to the segregation and limitation of the functions of broker, specialist and dealer, we wish to raise the question, without endeavoring to answer it, as to whether or not the segregation provided for would have the effect of increasing the financing costs to corporations in general at such time as they endeavored to raise capital through the issuance of new securities. It is suggested that this matter be given careful consideration to make sure that it does not work a hardship on business particularly with regard to the security flotations of small enterprises.
Section 11, subsection (c) (I) grants the Federal Trade Commisssion broad powers to enforce compliance by corporation officers, directors, and stockholders not only with the act but also with any amendments thereto and with any rules and regulations which they may make thereunder. This omnibus authority is in addition to specified information which must be periodically furnished under 11 (c) (II) and (III) and further blanket authority under 11 (e) (III) to call for any files of the corporation or its affiliates which the Commission may desire.
Section 11 is the crux of the bill insofar as business is concerned. We believe it to be neither necessary nor desirable to put American business under Government control. With a full recognition of the desirability of eliminating the unetichical and destructive practices of the few, we do not wish to see the vast majority of business men, whom we must concede are honestly motivated, fettered by a multiplicity of rules, regulations, and authorities, nor do we believe it will be advantageous to the public interest to have managements obliged to devote an increasing percentage of their time to collaboration with accountants and lawyers in the preparation, filing, and dissemination of reports.
The cost of making the reports required by sections 11 and 12 are impossible to estimate with exactness in advance for several reasons, one of which is that only the minimum number of reports required are stated and the number of additional reports which the Commission may further require is left entirely to their discretion. Nevertheless we believe that such costs as would be experienced upon the application of these provisions would be a serious burden on business and that the net benefits, if any, to be derived therefrom would be entirely incommensurate with the costs; furthermore it is conceivable that much of the information filed would result in harmful effects by virtue of its appropriation by competitors both in this and foreign countries. We believe that the rules with respect to publicity of information as made mandatory in this bill are unnecessary for the education of the stockholder inasmuch as a stockholder today can in almost any case secure from the officers of his corporation any legitimate information he desires which is not inimical to the interests of other stockholders. As a matter of fact is it not true that "the average investor” or stockholder will not today even take the time to read, much less study, the report of the board of directors and the financial statement which is mailed to him once a year?
The mailing of a complete stockholders list to each stockholder each time he was solicited for a proxy, as required under section 13 (a), would be obviously burdensome and expensive and an undesirable procedure. Stockholders lists widely distributed would fall into the hands of unscrupulous persons who might use them for an endless number of extraneous and even nefarious purposes.
Section 14 would destroy the market and therefore the liquidity of securities of any corporation which did not subject itself to the rules and regulations of the commission. This would have the effect of forcing the many small companies throughout the country, whose securities are unlisted, to abide by the same commission regulations and subject them proportionately to the same additional expense burdens as would be imposed upon the larger corporations. The so-called family or closed corporations, whose stockholders were so fortunate as to not require the securities thereof as collateral, would enjoy exemption.
Section 17 (a), as is the case with section 8, subsection (a) (7), reiterates the unAmerican principle of placing the burden on the accused to prove he is innocent.
While the penalties specified throughout the act are severe we do not object to them as such except for the all important fact that the wording of many of the prohibitions and regulations are so indefinite as to put even the most honest and conscientious business official in jeopardy of the unscrupulous litigating stockholder and the vagaries of court interpretations.
In conclusion we believe, for the reasons pointed out above, that the burdens and the additional expense incident thereto imposed upon corporation officers, directors and stockholders and business generally, by virtue of the placing of American business under Government control as contemplated in certain sections of the bill in question, would not be in the public interest, and under any circumstances we believe that any legislation with respect to business should be entirely divorced from legislation dealing with the control of security exchanges.
Benjamin Rush, president, Insurance Co. of North America, Phila
delphia, Chairman; Arthur W. Sewall, president General Asphalt Co., Philadelphia; Harrison Hobitzelle, president General Steel Castings Corporation, Eddystone, Pa.; William A. Law, president Penn Mutual Life Insurance Co., Philadelphia; Edward B. Leisenring, president Westmoreland Coal Co., Philadelphia.
NEW YORK PRODUCE EXCHANGE,
New York, March 10, 1934.
House Office Building, Washington, D.C.
entitled, “Statement of Samuel Knighton, president of the New York Produce Exchange in respect to exchanges which maintain a market for trading in unlisted securities as affected by S. 2693 and H.R. 7852 entitled 'National Securities Exchange Act of 1934.'
I am sending also, under separate cover, 50 additional copies of this statement.
I trust that the members of your committee will give this statement careful consideration. Respectfully yours,
SAMUEL KNIGHTON, President. NOTE.—The statement above referred to is in the form of a printed brief and will be found in the committee print.
NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS,
New York, N.Y., March 3, 1934. Hon. Sam RAYBURN, Chairman Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D.C. DEAR SIR: The National Association of Mutual Savings Banks has directed the undersigned to communicate to your committee the views of the association on H.R. 7852, proposed National Securities Exchange Act of 1934.
The association represents 567 mutual savings banks doing business in 18 States of the Union. Their combined resources are $10,856,000,000, their total deposits $9,594,000,000, something like one fourth of the total bank deposita of the United States, and the total number of their depositors is around 13,400,000. These banks are not stock institutions but are organized and operated solely for the benefit of the depositors, and the officials of the banks, as well as the banks themselves, are acting in what is essentially a fiduciary capacity.
The only object of mutual savings banks is the safekeeping and provident investment of the funds of depositors who are generally the small savers of the country, accumulating funds for old age or special purposes. These total savings represent an average deposit of $715.32 for approximately one out of every nine people in the country.
By limitation of statute as well as by force of the very nature of the business in which they are engaged and of their relations to their depositors, the security holdings of these banks are confined almost exclusively to those of the soundest and most conservative investment type, as contrasted with speculative issues. Typically and generally, their investments in securities of the character dealt in over the exchanges are bonds, and not stocks. Their test of desirability is stability and dependability, to the subordination of measures of return or of capital profit.
The organized savings banks have no comment to submit regarding what they conceive to be the primary purposes of the proposed measure. They leave that discussion to those who are engaged in the activities which the bill, as we understand its general tenor, purports to regulate. This communication is confined to what we deem to be departures from the policy which the bill, as we read it, is intended to embody, and to particular provisions which appear especially to threaten the proper and just interests of investors such as savings banks.
Our criticisms of the bill may be summarized as follows: 1. It fails to differentiate between stocks and bonds.
2. It forbids the combined services of dealer and broker in bonds, freqnently valuable to the holders of conservative investment securities.
3. Even outstanding bonds of municipalities, States and their political subdivisions, and railroad bonds, would be excluded from the exchanges except under burdensome conditions with' inevitable impairment of values.
4. In the matter of loans on bonds, the bill unjustly discriminates against mutual savings banks in favor of member banks in the Federal Reserve System.
5. Frequently, the registration requirements for bonds already issued would not affect the interests of the issuer of the security, but would penalize the holders thereof.
It is in the above order that we shall discuss our objections to the bill.
1. We take it that in large part the bill is the outgrowth of disclosures during the recent and continuing stock-exchange investigation. So far as we have observed, that investigation accorded very little or no attention to the characteristics of transactions in bonds of the type required by savings banks and trustees institutions, or to the practices of those who specialize in transactions in high grade investment bonds. It seems plain that the principal evils to which the bill is directed have to do with corporation control, or are associated with the practice of conducting transactions in stocks on margin.
Throughout the bill there are provisions which in terms include bonds and bond dealers and brokers but which the policy of the bill makes applicable only to stock and stock-handling houses. Consider section 15 (a), it is difficult to perceive the justification for requiring tedious reports, with monthly supplements of reflect changes, from owners of 5 percent or more of a company's bonds. Bondholders as such exercise no control over the management of the issuer and its policies. In fact, that it was the holders of the stock and not of the bonds who are in contemplation is suggested by the fact that the title of the section reads "Transactions by directors, officers and principal stockholders."
That proper differentiation be made in this respect between bonds and stock is a matter of material importance to the savings banks. It is by no means unusual for a savings bank to hold in excess of 5 percent of a particular class of securities of a particular issuer.
The burdensome provisions in other sections of the bill looking to the furnishing by issuers of voluminous data as a condition to listing securities for trading on exchanges in most instances plainly reflect the desire that complete information regarding corporation control be disclosed to the public. Bond ownership does not ordinarily mean an opportunity to participate in management.
Section 6 (b), dealing with margin requirements is also plainly aimed at stocks, as there can be no sound reason to require margins such as are there specified to carry high-grade bonds.
2." As stated above, purchases of securities by members of this association are almost wholly limited to those of the soundest and most conservative investment type. The same thing is true of all institutions of a like fiduciary type. Chiefly because of the low yield which goes hand in hand with their high degree of stability, such securities are often, perhaps usually, held in comparatively large blocks by investment institutions, and change hands so seldom that there is no active market for them. Consequently when an institution, such as a savings bank, desires to sell or buy a large block of such securities, there may not be bids to buy, or offers to sell, in quantities sufficient to complete the transaction without undue delay.
Investment houses handling high-grade bonds have therefore developed and have acquainted themselves with the selling and the buying needs of institutional investors of the kind mentioned. They must be prepared to purchase large blocks of these securities with the view of disposing of them to other investors, perhaps a number. Taking the other side of a transaction, it is often necessary for an institutional investor desiring to purchase a block of seasoned securities to depend upon a security house which had acquired the securities previously, perhaps by gradual accumulation,
A dealer in bonds cannot carry in his inventory all issues of the kind of bonds in which he deals, and cannot carry issues which he possesses in quantities sufficient to satisfy every demand of his customers. Consequently, it is desirable for the customer that the dealer be permitted to handle some transactions in part or in whole on a brokerage basis, going in behalf of his customer to the exchanges, or, as it usually is done, to over-the-counter markets to complete or to effect the transaction. The alternative to either to force the customer to resort to other sources of supply, or to compel the dealer to endeavor to sell the customer "something just as good.” A situation similar in principle is presented where the customer desires to sell an issue which a security house is not in a position to acquire on its own account, or to acquire in the quantity in which offered.
In short, the savings banks have found that they require the services of dealers in high-grade securities who are also empowered to act as brokers. This combination service will be denied to them if the provisions of section 10 of the bill become law. The restrictions there proposed should be removed as to security houses dealing in bonds of the type held by savings banks. It may well be that such dealer-brokers should be subjected to some regulation by the Federal Trade Commission, including perhaps a requirement that they make known to their
customers instances in which they are exercising a combination function. But it seems plain that to forbid such houses to provide the valuable services which have heretofore been availed of by institutional investors, such as savings banks, would be highly unsatisfactory, and might have the effect of preventing the savings banks from realizing quickly on their assets in time of emergency.
Many savings banks, as well as other institutions of somewhat like fiduciary character, have rules which in practice postpone, sometimes for considerable periods, the final consummation of transactions in bonds, pending formal approval or ratification.
During the intervening time, it is necessary that the bonds which have been contracted for be carried by the investment house. The investment house, in turn, must arrange for credit in order to carry the securities. The provisons regarding extent of margin contained in section 7 (b) would severely limit the continuance of this service which the investment houses have furnished the savings banks, and other like investors. It is plain that such requirements are not apt when the security is a high-class bond.
Investment houses handling high-grade bonds are usually found among the subscribers to issues of state and municipal bonds, and bonds of like character, all involving purchases in large amounts. It is plain that if it is necessary for the investment house to possess such bonds in its own name for a period of more than 30 days before a loan can be had thereon, as contemplated in section 6 (c). the ability of investment houses to finance such issues, and to provide them for savings banks or the like, will be drastically curtailed.
3. The bill proposes what in effect approached the retroactive application of the Securities Act of 1933 in that it applies the substance of certain provisions of the earlier act referring to registration and its consequences to seasoned investment securities tested by the experience of years. It is with surprise, therefore, that we find that it fails to exempt from its requirements as to registration municipal bonds, bonds of States and political subsdivision, and railroad bonds, all exempted in the Securities Act.
The ground for exemption in the Securities Act is plainly because obligations of the classes specified possess guaranties not found in securities generally. As to governmental issues of the several orders, there is a presumption in favor of soundness and against deception in the nature of their issuers. Railroad bonds must pass the scrutiny and obtain the approval of the Interstate Commerce Commission. It is difficult to conceive of justification for a refusal to accept like guaranties in connection with the acceptance of those already outstanding bonds for trading on the exchanges.
4. At the time of the adoption of the Banking Act of 1933, and throughout the administration of the provisions of that and associated laws, constant reassurances have been made that there is no intention to discriminate against or in any way injure banks which are not members of the Federal Reserve System Subsection (y) of section 8 of the Banking Act of 1933 expressly incorporates that policy.
Adherence to that policy would be abandoned at least in some measure if the provisions of section 7 (a) become law. To forbid a bank which is not a member bank of the Federal Reserve System to lend on any registered security would be to deprive such a nonmember bank of a very important and legitimate part of the business in which it is in justice entitled to participate.
It is the practice of mutual savings banks in certain localities, particularly Massachusetts and Connecticut, to make loans to brokers secured by high-grade securities as collateral. We can hardly believe that it was the intention of the framers of the bill to prohibit mutual savings banks from participating in such legitimate financing of securities as the banking laws of the several Sates provide It has been demonstrated that they prove to be a strong secondary reserve and with proper arrangement of maturities provide an unfailing source of available money received regularly. Mutual savings banks should not be prevented. where other conditions are proper, from making such loans secured by safe and sound securities.
It would also seem unwise to fix by legislation rigid margin requirements with no differentiation whatever as to the classes of securities on which loans may be made under the banking legislation of the several States. These severe restrictive provisions would limit unduly the amount which savings banks might loan on high-grade securities. These provisions would also apparently limit the borrowing capacity of mutual savings banks on securities which they own in the case of sudden temporary emergency where money might be needed to pay their depositors.