ÆäÀÌÁö À̹ÌÁö
PDF
ePub

considered opinion that the appropriate earnings statements, as prescribed above, issued with the necessary qualifications as to approximation, should become a requirement, that the publication of certified balance sheets quarterly is unnecessary and much too costly, and that the present practice of annual balance sheets is preferable.

The provision as to monthly reports of sales or gross earnings is probably not to onerous for some corporations, although for others it would be very impractical. If a regulatory bill should be passed by Congress, the provision for monthly reports should be flexible enough to authorize the Federal Trade Commission to waive this requirement in justifiable cases.

The provision of section 11 covering registration requirements, which provides that the Federal Trade Commission may modify the rules and regulations for the information to be filed with it before or at registration, together with the penalty provisions of section 17 (a), which apply if the information is "false or misleading in respect of any matter sufficiently important to influence the judgment of an average investor", may easily work out to be an invitation to unscrupulous traders to attempt to profit unjustly. Such traders might trade recklessly in any security in whose registration statement the slightest flaw may be detected, on the assumption that if a profit is made, well and good, while if the speculative transaction results in a loss, such loss may be recovered from the officers, directors, or accountants of the issuing corporation. It is even possible, as the bill is written, for damages to be assessed much in excess of the loss actually sustained.

The possibility of slight clerical errors among the thousands of figures and statements which must be contained in the voluminous reports required under this bill is so great as to raise serious question as to whether or not any corporation official or public accountant of responsibility coula run the risk of possible penalties.

The provision of section 11 as to audit of balance sheets and profit-and-loss statements for proceeding years does not specify the number of preceding years. It would seem to the Controllers Insitute that if specific control of registration of securities is to be undertaken by the Government, it should be done either under much more clearly defined rules and regulations, incorporated into the law, which can only be done after adequate time to study the question or left to the discretion of the regulating commission.

Under section 11 for all securities now listed on exchanges, a registration statement as defined by that section and as further amplified by rules and regulations of the commission must be filed prior to October 1, 1934. Such registration statements include certificates of audit by independent public accountants. Therefore, not only would it be necessary for audits to be made of previously unaudited companies but also new audit certificates would be required of companies at present audited, all to be filed prior to October 1, 1934. This large number of audits could not possibly be completed prior to that date by the public accounting profession of this country.

As now written, the bill would include all railroads which desire listing on an exchange for one or more of their securities. This includes most of the class I railroads, which number about 180. To complete audits of all of these extensive properties by October 1, even if the work were commenced today, would be a physical impossibility.

An alternative method of accomplishing the purposes of the law would be to have the regulatory body supervise the actions and policies of the listing committees of the exchanges and the general requirements for listing within maximum limits to be stated in the law. Thus the Commission would not be given the burden of detailed approval of each individual listing. This procedure would also remove the possibility of investors assuming endorsement of soundness of issues by the Federal Trade Commission if the Commission does not disapprove the listing within the 30 days specified in the bill.

The Controllers Institute wishes to express its concern over the serious situation in which each corporation's directors and executive officers will be placed if this bill becomes law. They will have to decide whether to comply with the law in order to secure listing and have marketability for their corporation's securities or to suffer loss of listing to avoid incurring the excessive expense and terrific liabilities imposed by the law. Officials have already been placed in the position of having to decide whether to incur the serious obligations required by the Securities Act of 1933 in order to secure new financing or even refunding. In most cases, however, it has been possible to postpone decision on this question

by delaying new expenditures, with the resulting harmful effect on business recovery and unemployment, in the hope and expectation that the Securities Act would be modified in the near future.

In the legislation now proposed the situation is much more serious since a decision will have to be made immediately on passage of the bill in order to complete the tremendous amount of work required for securities to remain listed on October 1, 1934. Should it be decided that either the cost, the liability involved in complying with the listing requirements, or the difficulties arising from the undefined future regulation is too great, the only recourse would be to permit the corporation's securities to become unlisted, thus driving trading in the securities into a bootleg market which this law would probably create. The results thereof would be:

(a) The investor would be unable to borrow on his security.

(b) If obliged to sell, the investor could do so only on a market in which a wide spread would very likely exist between the bid and asked prices.

(c) The corporation would find it extremely difficult to finance, even if the obstacles raised by the Securities Act of 1933 could be overcome.

(d) The National Government and the States in which exchanges are located would lose large tax receipts.

(e) Business recovery would be retarded.

Section 18, subsections (a), (b), and (e) in particular, granting special powers to the Federal Trade Commission also directly affect corporations. These powers

are expressed in such a broad way that the cost and volume of the information might be excessive. The broad powers granted would compel corporations to use such accounting methods and prepare such reports as may be demanded, although they might not meet the needs of the directors and officers of corporations in the regular mangement of the business. Duplicate records and reports would therefore be necessary. The methods to be prescribed for the valuation of assets, determination of recurring and nonrecurring income, etc., also are placed under the jurisdiction of the Federal Trade Commission and would take the operation of business matters out of the hands of those professionally expert who have responsibility of performance. Subsection (e) also gives the Federal Trade Commission power to require corporations to bring their corporate records for secret investigation "from any place in the United States or any State at any designated place of hearing". On account of the great volume of records which might be involved this hardly seems practical.

The Controllers Institute believes that the methods of accounting are internal matters for the controllers of each corporation to prescribe, based upon recognized accounting principles and practices designed to meet the particular requirements of the business, and that the accounting methods and the accounts resulting from them should be approved by independent public accountants auditing the corporation's accounts. We believe that if it is to be the policy of the Federal Government to regulate all corporations such regulation should be confined to major principles and not detail.

The two countries of the world in which it is generally recognized that accounting has had the greatest development are England and the United States. The procedure under which this improvement in correct presentation of balance sheets and income accounts has been developed has been by selection of trained expert accountants as financial officers of companies, supplemented by an annual audit of the methods and accounting principles put into effect by such officers by independent public accountants. The intimate knowledge of the particular type of business and the kind of transactions it carries on, necessary to determine proper accounting policies for such business, requires detailed and recurring investigation which, in our opinion, no regulatory body could undertake and carry out as a substitute for the well developed procedure now in existence. Anyone who has made a study of the development of the presentation of corporate financial statements is convinced that its entire history shows an improvement in the direction of conservative and accurate statements of financial position and earnings.

The foregoing covers the principal difficulties which would arise from the accounting features of the proposed bill. There are other objections to the bill which have been covered by previous witnesses such as:

(1) The deflationary effect of the ineligibility of unlisted securities and the margin requirements.

(2) The indefinite and almost unlimited control of corporate activities placed in the Federal Trade Commission.

(3) The possibilities of driving the security business into the hands of security bootleggers by the heavy restrictions placed on exchange members.

(4) The difficulties arising from liability of directors, officers, accountants, and others under the provisions of section 17.

Section 13 of the bill relating to proxies imposes an undue burden and an excessive cost which must be borne in the last analysis by the stockholders. It should be pointed out that in the vast majority of cases proxies are solicited only to insure à quorum so that necessary corporate business may be transacted at annual meetings thereby saving stockholders expense and time of attending meetings.

Reform of certain phases of the security business is necessary. Reform is always necessary in a dynamic Nation like ours. The only question is how to reform without creating more evils than are remedied.

We feel that the greater benefits to the American people can be secured through a continuation of the evolutionary process of reform through education-education of the public, of security dealers and brokers, and issuing corporations rather than by such a process as is represented by this bill as written. Distinct progress along constructive lines has been made by the development of local blue-sky regulation, by the activities of better business bureaus and similar organizations, through the initiative of the leading organized security exchanges, and through the growth of a more public-spirited point of view on the part of the leading corporations, especially since their securities have become distributed so widely among the general public. To interrupt the evolution of reform through education and public opinion by suddenly setting up stringent regulations impossible of enforcement without driving the security business underground, would result in a set-back to the real progress which has been made so far. The Controllers Institute therefore respectfully recommends deferment of regulation of the securities business until a more thorough study of the subject has been made. The Securities Act of 1933 insofar as it covers issues which would be listed, duplicates to a large extent the listing requirements of the National Securities Exchange Act.

We believe that many of the provisions in the proposed bill, if enacted into law at the present time, would counteract to a large extent much of the moral and economic benefit that has resulted from the aggressive leadership provided by the present administration and much of the legislation passed since March 4, 1933.

It is also our opinion that the Securities Act of 1933 in its present form is a definite deterrent to economic recovery and to the flow of private capital in industry, and unless substantially modified is bound to bring many serious evils in its wake. This in our opinion is equally true of the National Securities Exchange Act reviewed by this statement, and we believe, therefore, that not only should the proposed law not be passed, but that it would be wise legislation to make drastic revisions of the Securities Act of 1933. Since such revisions can probably not be worked out quickly, it would in our opinion be desirable to repeal that law now and in lieu of both of those acts, appoint a commission for the purpose of studying the question thoroughly and reporting to the next session of Congress with proposed legislation to accomplish such reforms as might appear advisable after such study. As a suggestion, the make-up of such a commission of study in addition to representatives of the legislative authority and appropriate Government departments, might well include men selected from the stock exchanges, investment banking business, banks, insurance companies, legal profession, public accounting profession, and corporate executive and accounting officers. It is worth noting that the Federal Reserve Act, our most important piece of financial legislation, as finally enacted in December 1913, effecting a vast improvement in our whole banking and currency system, was incubated and perfected only over a period of several years.

We are very appreciative of the courtesy extended to us in permitting us to be heard on our reactions to the bill as presented. We offer to place our services at the disposal of the committee for any elaboration of the above or any study which it desires to obtain.

Respectfully submitted.

CONTROLLERS INSTITUTE OF America, By EDWIN F. CHINLUND.

Approved by the Board of Directors:

DANIEL J. HENNESSY, President.
ARTHUR R. TUCKER, Secretary.

Hon. SAM RAYBURN,

WASHINGTON, D.C., March 8, 1934.

Chairman Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C.

MY DEAR CONGRESSMAN: The National Association of Building Owners and Managers, representing an industry with $6,000,000,000 of invested capital, has a direct and vital interest in the National Securities Exchange Act of 1934, now under consideration by your committee. Our membership consists of Federated Associations in 41 cities and of associate members in 90 other cities of the country. We call your attention to the fact that the issues involved in this proposed legislation affect much more than the operation of security exchanges, and will have far-reaching influence upon the industry this association represents.

We would point out that regulations so drastic as to restrict greatly the security business and endanger the transaction of many legitimate enterprises related thereto, would have a ruinous effect upon property accommodating financial institutions in all of the principal cities of the country.

Specifically, such curtailment of the security operations would result in our industry in loss of tenants, contraction of space occupied by such tenants, and obsolescence of special equipment and facilities provided for their use, which, with the difficulty of adapting much of this space to other purposes, could not fail to produce further impairment of real estate values. The investment in properties devoted to these uses in many communities is sufficiently great to make this a matter of far-reaching consequence.

Furthermore, the industry, as you must know, has suffered, and is still suffering, severe distress. Our recent survey of rental conditions, covering 1,900 office buildings, in 35 cities, shows a total vacancy of 48,447,161 square feet, and an average vacancy for these buildings of 27.57 percent. In addition to this, our inquiries have shown a delinquency in the payment of rent to the extent of 15 percent of a year's rental. This 15 percent delinquency has the same effect upon current income as if vacancies were increased by this same percentage, so that practically all office buildings of the country have a combined actual and potential vacancy of 40 percent. From 1929 to 1933, the income for the industry decreased $217,000,000, while operating expenses, not including taxes, decreased $58,500,000, or only about one quarter as much as the decline in income." result of the drastic shrinkage in operating net income, hundreds of buildings have been forced to default on their bonds, have been unable to pay their ground rent, and in many cases have insufficient funds to meet tax bills. A survey of 929 buildings in 16 cities shows that 24.3 percent of these buildings are in financial default.

As a

It may commonly be assumed that the effects of legislation regulating stockexchange operations would concern only those cities in which important exchanges are located. The point we desire to emphasize is that in our industry alone, they will affect all of the larger and many of the smaller cities of the country. In the limited time at our disposal, we have canvassed the opinion of member-organizations, and a substantial majority of the cities affected have thus far registered disapproval of those features of the act which would tend to restrict seriously the volume of security business.

You have already been informed by the representatives of the Real Estate Board of New York, Inc., that the building occupancy of stock-exchange tenants in that city represents at least 5,000,000 square feet of space, with a rental value of $15,000,000 annually.

A survey of similar conditions in Chicago, Detroit, Indianapolis, Los Angeles, Denver, Spokane, Louisville, Baltimore, and Pittsburgh reveals that in these nine cities 105 office buildings would be affected, with 2,987,270 square feet of space occupied by tenants engaged in the security business, the invested capital represented by such occupancy being estimated at $69,700,680.

We are opposed to those features of the proposed legislation, which by reason of drastic requirements, would bring about a serious curtailment in the operations of this business, and strongly recommend that material modifications be made in the act with respect to restrictions so imposed.

We ask as I am sure you are disposed to do that in the consideration of this legislation you weigh fully the contingent effects upon this, as upon other avenues of business throughout the Nation.

Very sincerely yours,

NATIONAL ASSOCIATION OF BUILDING OWNERS AND MANAGERS, By R. B. BEACH, Executive Secretary.

Hon. SAM RAYBURN,

WASHINGTON, D.C., March 7, 1934.

Chairman Interstate and Foreign Commerce Committee,

House of Representatives, Washington, D.C.

MY DEAR MR. CHAIRMAN: I respectfully request that the enclosed statement be interested in the record in connection with the hearings on the National Securities Act of 1934.

This is a statement of Mr. Richard G. Babbage, representing the Real Estate Board of New York. Mr. Babbage appeared before the Senate committee on March 6, and would like to have his statement included also in the House hearings for the consideration of your committee.

Sincerely yours,

HARRY J. GERRITY.

STATEMENT OF RICHARD G. BABBAGE, REpresenting tTHE REAL ESTATE BOARD OF NEW YORK IN REGARD TO S. 2693, THE SHORT TITLE OF WHICH IS "NATIONAL SECURITIES EXCHANGE ACT OF 1934"

The Real Estate Board of New York is a corporation organized under the laws of the State of New York, having its place of business at 12 East Forty-first Street, New York City. Its membership of 2,348 is made up of owners of New York City real estate and of management agents and brokers. It is the representative real estate association of the Borough of Manhattan in said city.

As a result of an investigation, we find that the Stock Exchange tenants occupy at least 5,000,000 square feet of space in the city of New York. At an average price of $3.40 per square foot, this would produce a rental of $15,000,000. In this space there are employed over 35,000 employees, who, it is reasonable to suppose, receive an average salary of $1,500 a year, which would make the aggregate salaries amount to $52,500,000.

Another great class interested in this real estate are those who hold the mortgage securities issued against it. It is impossible to state the number, but these securities are held by savings banks, life-insurance companies, and individuals in all walks of life.

Anything that affects the value of real estate affects these owners and holders of mortgages. A serious vacating of space at the present time might cause the rentals to be insufficient to carry the properties.

The Real Estate Board having given consideration to the provisions of the proposed bill is of the opinion that the Act would greatly deflate the securities industry, if it would not destroy it. All the interests, therefore, represented by the Real Estate Board would sustain a very serious loss in connection with the devaluation of their properties.

We do not contend that the Stock Exchange does not need regulation but we do contend that it is unnecessary to pass a law which would be so serious in its effects that it might destroy that organization. We have the impression on the act that its draftsman was not so much concerned over curing the evils in the exchange alone but was seeking to bring around governmental operation of the industry and of the listed corporations, and to make it so difficult and expensive for them to carry on business that the industry would be dissipated. An act of this character should be drafted by some unprejudiced person. It is to be hoped that the act, when amended, will be the result of a competent, intelligent, and sympathetic draftsmanship and will be confined to its alleged purpose of curing the evils instead of fixing absolute Government control upon the stock exchange and the corporations listed on it. The provisions making it difficult and dangerous to do business under the act and imposing unnecessary expense should be eliminated.

The different provisions of the act have been subject to so much discussion that I shall not attempt to take them up again with the committee. To sustain the foregoing statements, I will call attention to one or two of them, which, I think, illustrate the general character of the act.

The provision in relation to proxies is so written that it would be practically impossible to hold a corporate meeting under it. The requirement for filing a statement with a list of stockholders and the later requirement that you are to send a copy of that statement to every stockholder from whom you desire a proxy is entirely impracticable and out of line with all corporate practice. It is ele mentary that the purposes of the meeting are stated in the notice of meeting and that the proxies should enable persons holding them to vote for any question

« ÀÌÀü°è¼Ó »