for example? Those are things that cannot be reduced to mathematics. It takes judgment, and the courts are the ultimate arbiters of questions of that kind.

Senator COUZENS. Yes, I understand, but I was trying to bring out whether there should not be some attempt to defraud or cheat demonstrated, rather than just punish a director for an error in judgment.

Mr. BUTLER. I do not think so. I think for a criminal action, of course, you could not convict a man under the penal clause unless intent was shown. But in a civil action where one of two people

The CHAIRMAN (interposing). Does not that emphasize the importance of requiring follow up reports semiannually or, may be, oftener?

Mr. BUTLER. I think it does, sir, and I think that section 15 of this bill empowers the Commission to do so, if in its experience in administering this act, it finds it necessary to require such reports. Senator GORE. Does this power of revocation virtually nullify the limited liability clause in these charters of these corporations?

Mr. BUTLER. You mean the responsibility of directors clause? Senator GORE. Yes. Of course, that would go to stockholders as well.

Mr. BUTLER. It does so far as the directors are concerned.
Senator GORE. Yes.

Mr. BUTLER. After all, the stockholders in most instances are the investing public and not the originators of the issue.

Senator GORE. Yes. This is trying to protect against the directors. Mr. BUTLER. Yes, sir; that is right.

The proposed bill, as I see it, consists of certain fundamental provisions and a number of auxiliary provisions. The fundamental provisions are contained in sections 3 to 12, both inclusive. They are based primarily on the theory of publicity, on the theory that the buying public should be enabled to know sufficient facts to determine intelligently whether or not there is any merit in the security that they are offered. This is accomplished by the provision for registration requiring information concerning the basic property and the organization of the issuing company.

Our requirements in that regard are very much more liberal than the requirements of the British Act. The British Act requires that the prospectus to be filed with the registrar show much more intimate and detailed information than is required in the bill now proposed.

In drafting this bill it has been endeavored, wherever possible, to avoid enumeration and to give the Commission broad powers of regulation, the theory being that they would be in a better position to determine, after practical experience, what information is needed than we could in advance. For this reason section 15 of the act has been added as an auxiliary to other provisions giving the Commission power to call for such further information as it may require and to establish such rules and regulations as it may find necessary in the administration of this act.

We thought, however, that it would be incongruous to have a security registered with the Commission after it should become common knowledge that the security was worthless. For this reason the revocation clause has been added, and the revocation clause is one of the two that have been the most severely attacked. This

attack overlooks the fact that after a security has been revoked by the Commission it is in exactly the same situation as a security that has been enjoined under a fraud law. The attack on revocation has been based chiefly on the ground that once the security had been revoked it would be unmarketable and those who had bought it would be the ones punished rather than the issuers who were responsible.

The same situation exists under the fraud law, and we have found no way to correct it. If a security is enjoined under a fraud law its marketability is certainly destroyed, and the innocent purchasers who had no part in that fraud are punished, along with the fraudulent issuer or dealer who is usually subject to a penalty, but the fraud law no more than this bill can prevent beforehand the issuance of those securities. As a matter of fact, the fraud law does not operate as rapidly as this proposal.

The only novel feature in this bill so far as the United States is concerned--and it is not novel in Europe, for several of the European laws contain similar provisions-is that relating to advertising. As an auxiliary to the publicity required by registration, the bill provides in section 8 that all advertising must contain certain basic information concerning the security offered.

There has not been a serious attack on that provision, although it has been contended by some, newspapers chiefly, that such a provision regarding advertisements would be a great inconvenience to those advertising the security, inasmuch as the information required would take up about as much space as is ordinarily used for the entire advertisement.

Senator COUZENS. Has there been any question raised that the advertising of these facts would give competitors inside information? Mr. BUTLER. The thought has occurred to us, but I have not heard that ground discussed by the opponents of the measure.

Senator COUZENS. You know every time we have attempted to make public records out of income tax returns the bone of contention has been that that gives the competitors inside information which they should not have.

Mr. BUTLER. Yes, sir.

Senator COUZENS. Well, everything that is in an income tax return, in my judgment, should be in these advertisements offering the public securities for sale.

Mr. BUTLER. The theory underlying the whole publicity provision of the bill is that when a person or a group of persons, for the purpose of making a profit, offer so-called "securities" to the public, they should be compelled to give full publicity to what is underlying that security in order that the investor or potential investor may determine for himself what the chances of success are in connection with that security. No attempt is made to prohibit the sale of speculative securities. Every one realizes that many of the biggest industries in the United States began in speculation, and no endeavor whatever is made in this bill to prohibit or to deter investment in speculative enterprises.

It is felt, however, that the investor has the right to know that it is speculative and has a right to know what the chances are for success or failure.

Senator COUZENS. Would an optimistic statement as to the future of a speculative enterprise which turned out to be unduly optimistic be an offense against the directors?

Mr. BUTLER. Would that be an offense of the directors?

Senator COUZENS. Yes; I mean would that be an offense that the directors would be punishable for?

Mr. BUTLER. That would depend entirely upon the character of the statement. If it were a statement of fact and the facts were not supported, that would be, yes, sir. If it were a statement of opinion, I do not believe that would be considered a misstatement of a material fact.

Senator COUZENS. Well now, you will pardon me for being a little personal, but when we started the Ford Motor Co. there were just a few of us got around the table and sold the stock to each other.

Mr. BUTLER. Yes, sir.

Senator COUZENS. And no circulars were issued. During that time there might have been some representations made, I do not know. But under the bill would they be punishable?

Mr. BUTLER. If there were any misrepresentation of a material fact, yes, sir.

Senator COUZENS. Even though it was made orally?

Mr. BUTLER. No; if it were made to the investing public. This bill does not cover

Senator COUZENS (interposing). I just want to know how far you extend the "public." Would you consider around this table the public? If we sold some securities around this table without advertisement? Would that be selling it to the public?

Mr. BUTLER. If we were a group that entered into a contract among ourselves for the formation of a company, that would not be the public because, in using the word "promoter" in this act, the Supreme Court's definition of that word was in mind which very definitely defines the word "promoters" as persons who are promoting the formation of a company not yet in existence. Incidentally, when I said that many of our greatest industries began as speculative enterprises, I had in mind the Ford Motor Co.

Senator COUZENS. I was a promoter in that case. Would I have gone to jail if I had made a misstatement under this law? Mr. BUTLER. If you had knowingly made

Senator COUZENS (interposing). Oh, now you are coming to another thing, knowingly and not knowingly. That is the question I am trying to raise all the time, is whether the promoter does or does not know.

Mr. BUTLER. You asked if you would go to jail?

Senator CoUZENS. Yes.

Mr. BUTLER. You would have to make the misstatement knowingly to go to jail.

Senator COUZENS. And to be punished civilly; I could not get out under the statement that I did not know.

Mr. BUTLER. That is correct; yes, sir.

Senator GORE. Now, in regard to optimistic statements and as to the future, I believe the Supreme Court has held in mail fraud cases that an expression of opinion as to what is going to happen in the future does not constitute a breach of the law.

Mr. BUTLER. Does not constitute it?

1

Senator GORE. Yes, sir.

Mr. BUTLER. To continue with the brief digest of the law. Following the publicity provisions found in sections 3 to 8 are clauses 11 and 12 which exempt, first, certain securities, and, second, certain transactions. Those exemptions have been very largely taken from existing State laws, but many of their exemptions have been eliminated.

One that has been eliminated and that has caused considerable comment, is the exemption generally found in State laws of securities listed on certain stock exchanges. This for a time gave us considerable difficulty and was finally eliminated altogether.

It is extremely doubtful whether a bill of this kind would cover a transaction consummated on any stock exchange. It appeared that this would be purely an intrastate transaction, and therefore not subject to Federal regulation-unless that were accomplished as I believe is being attempted now, in a proposal that is being considered by the administration, by denying the use of the United States mails to stock exchanges that do not comply with certain prescribed regulations relative to the listing of securities on the various exchanges. Senator GORE. Do not the things prescribed in this bill have to happen before the stocks would ever advance to the point of being listed on the exchanges?

Mr. BUTLER. Yes, sir. In that way we do indirectly control transactions on the stock exchanges without mentioning them specifically.

Senator GORE. Yes.

Mr. BUTLER. We felt that we were justified in eliminating this exemption when it became known to us that stock exchange regulation is being considered in other legislation based on the post roads clause of the Constitution.

Following the publicity features of the bill, the drafters thought it wise to include a fraud provision similar to the Martin Fraud Act, of New York. The opponents of the bill have for many years contended for a fraud law, and we have attempted to give them one in this bill as an auxiliary to the registration.

Senator GORE. What was that?

Mr. BUTLER. I say, following the publicity features of the bill-
Senator GORE (interposing). Then it is a fraud provision?
Mr. BUTLER. There is a fraud provision.

Senator GORE. I see.

Mr. BUTLER. The opponents of this class of legislation have for many years contended for a Federal fraud law rather than a law of this type or of any other type, and we have attempted to give them a fraud similar to that in the State of New York by including section 13 of this bill.

Incidentally, it is interesting, in view of some testimony given by a former witness concerning the effectiveness of the New York fraud law, to read a statement that has just been handed to me. The New York fraud law was enacted in 1921, about the time that most of the securities laws in the United States were enacted, and not, as was testified, since those laws were enacted. This statement reads:

According to information from a reliable source, in New York State between 13 and 14 billion dollars' worth of securities of questionable character have been sold in the State of New York since January 1, 1928. In other words, more than 2 billion dollars' worth of stocks and bonds have been sold in that State every year for the past 5 years.

Goldman-Sachs Corporation alone sold more than 400 million dollars' worth of stocks, offered to the public at $104 and today quoted at 1%, a decline of 98 percent.

Senator GORE. Now right there: Was it your point that this Martin Fraud Act is unavailing and inefficient, ineffective?

Mr. BUTLER. I am attempting to show the

Senator GORE (interposing). Extent that the evil prevails?
Mr. BUTLER. Yes, sir.

Senator GORE. That is one thing. I guess everybody knows that and admits that. But doesn't that prove the ineffectiveness of the Martin law now, if you are citing it as a model?

Mr. BUTLER. For 15 years past, or more, opponents of Federal securities legislation have recommended the fraud type of law in lieu of other types of law, and before this committee, as before other committees, have contended that the fraud law is the most effective type, that the minute a fraud is committed or about to be committed the Attorney General and his securities division immediately proceeds to stop the fraud and save the people from being mulcted in the sale of worthless securities.

Senator GORE. And your point is that the Martin law is a fraud law and nothing more and that it has not been effective to prevent fraud or to protect the public?

Mr. BUTLER. My point is that the Martin law is presumed to be the highest type of fraud law that exists in the country, and that in spite of the fraud law these transactions have occurred.

Senator GORE. Yes. It looks like you have made a case if that is your point.

Senator WALCOTT. There is a point that I raise there.

The CHAIRMAN. Now, Mr. Butler, how much time are you going to want? We cannot finish today.

Mr. BUTLER. I think that I can finish résumé in a half hour.

The CHAIRMAN. Yes. Well, we have got to stop here then, and let you go on tomorrow, I guess.

Mr. BUTLER. All right.

The CHAIRMAN. Senator Walcott wants to introduce some amendments, I think, and I have a letter here from Mr. C. Clinton James, of the Building and Loan Association, pointing out that the building and loan associations of the District are under the jurisdiction and control of the Comptroller of the Currency; that there are building and loan laws that enable him to license and authorize these building and loan associations and get their reports. But this I will put in the record. It shows that the building and loan associations all opened up after the moratorium was called and are doing business here under the supervision of the Comptroller of the Currency.

(The letter is as follows:)

Memorandum in re Senate 875.

APRIL 7, 1933.

The CHAIRMAN SENATE COMMITTEE ON BANKING AND CURRENCY.

SIR: On April 3, on page 227 of the testimony of Mr. Walter Miller, Senator Barkley asked Mr. Miller the following question:

"Is there any law here in the District of Columbia regulating the building and loan associations?

"Mr. MILLER. I believe there is some regulation in the District

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