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SECURITIES ACT

FRIDAY, MARCH 31, 1933

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C. The committee met, pursuant to call, at 10:30 a.m. in room 301, Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman), Wagner, Barkley, Bulkley, Gore, Costigan, Byrnes, McAdoo, Adams, Norbeck, Carey, Couzens, Steiwer, and Kean.

Present also: Ferdinand Pecora, special counsel to the committee, and Julius Silver, associate counsel to the committee.

The CHAIRMAN. The committee will please come to order. А meeting of the committee was called this morning to take up S. 875, which will be made a part of the hearings, as follows:

(S. 875, 73d Cong., 1st sess.) A BILL To provide for the furnishing of information and the supervision of traffic in investment securities

in interstate commerce

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act shall be known as the “Federal Securities Act."

SEC. 2. That when used in this Act the following terms shall, unless the text otherwise indicates, have the following respective meanings:

(a) “Security” shall include any note, stock, treasury stock, "blank" stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in a profit-sharing agreement, or right to subscribe to any of the foregoing, certificate of interest in any oil, gas, or mining lease, collateral trust certificates, preorganization certificate, preorganization subscription, and transferable share, investment contract, voting trust certificate, or beneficial interest in title to property, profits, or earnings, or any other instrument commonly known as a security; including an interim or temporary bond, debenture, note, certificate, or receipt for a security or for subscription to a security.

(b) “Person" shall include a natural person, a corporation, a partnership, an association, a joint stock company, a trust and any unincorporated organization. As used herein the term “trust" shall not include a trust created or appointed under or by virtue of a last will and testament, or by a court of law or equity, or any public charitable trust.

(c) Sale” or “sell” shall include every disposition, or attempt to dispose of & security or interest in a security for value. Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing, shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value. "Sale" or "sell” shall also include a contract to sell, an exchange, an attempt to sell, an option of sale or purchase, a solicitation of a sale, a subscription or an offer to sell, directly or by an agent, or a circuidi, letter, advertisement, or otherwise: Provided, That a privilege pertaining to a security giving the holder the privilege to convert such security into another security of the same issuer shall not be deemed a sale of such other security within the meaning of this definition. But such privilege shall not be construed as affecting the status of either security with respect to exemption or registration under the provisions of this Act: And provided further, That the issue or transfer of a right to subscribe to another security of the same issuer, when such right is

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issued or transferred with the security to which it pertains, shall not be deemed a sale of such other security within the meaning of this definition and such right shall not be construed as affecting the status of the security to which such right pertains with respect to exemption or registration under the provisions of this Act; but the sale of such other security upon the exercise of such right shall be subject to the provisions of this Act.

(d) “Issuer" shall mean and include every person who issues, has issued, or proposes to issue any security. Any person who acts as a promoter for and on behalf of an individual, corporation, trust or unincorporated association or partnership of any kind to be formed shall be deemed to be an issuer.

(e) “Commission” shall mean the Federal Trade Commission.

(f) “Mortgage" shall be deemed to include any trust instrument to secure a debt.

(g) “Territory” shall include Alaska, Hawaii, Puerto Rico, the Philippine Islands, the Panama Canal Zone, the Virgin Islands, and the insular possessions of the United States.

(h) “Interstate Commerce" shall mean trade or commerce in securities among the several States or between the District of Columbia, or any Territory of the United States and any State, or other Territory, or between any insular possessions or other places under the jurisdiction of the United States, or between any such possession or place and any State or Territory of the United States or the District of Columbia, or within the District of Columbia or any Territory or any insular possession or other place under the jurisdiction of the United States, or any printed, written, or other graphic communication, or any spoken communication or intercourse relating to or in furtherance of the commerce described in this definition.

(i) “Registration Statement”, hereinafter called “Statement”, shall mean the statement required upon application for registration by section 5 of this Act, together with all documents and other information required therein.

Sec. 3. That, until there shall have been registered with the Commission the statement hereinafter referred to in accordance with the terms and conditions provided by this Act and by the rules and regulations promulgated pursuant thereto, it shall be unlawful for:

(a) Any person to make use of the United States mails or of any means or instruments of transportation or communication to offer in interstate commerce securities, other than those issued by a foreign government or subdivision thereof, for sale or to solicit or accept offers to buy such securities in such commerce;

(b) Or for any person to make such offer to sell to or to solicit or accept an offer to buy in interstate commerce through the use or medium of any book, magazine, newspaper, or similar publication, or by any circular, advertisement, or printed, written, or other graphic communication or document, or by any spoken communication carried or transmitted through or by such mails or means or instruments of transportation or communication, or any of them;

(c) Or to carry or cause to be carried in interstate commerce, by any means or instruments of transportation, for the purpose of sale or for delivery after sale, either directly or through the medium of another, any security not issued by a foreign government or political subdivision thereof;

(d) Or for any person to sell or offer for sale or to accept an offer to buy or to announce or advertise in the United States any security of a foreign government or a political subdivision thereof: Provided, That the provisions of this section do not apply to the securities and transactions exempted by sections 11 and 12 of this Act.

Sec. 4. That all securities heretofore referred to in section 3 of this Act shall be registered with the Commission under the terms and conditions hereinafter provided, by filing a registration statement signed by the issuer or issuers, its or their principal executive officer or officers, the principal financial officer or officers, and the directors, trustees, or managers; if there is no board of directors, by the persons or board having the power of management of the person, corporation, association, or other entity issuing the said securities: Provided, That, when such statement relates to securities issued by a foreign government or political subdivision thereof, it shall be signed by the person or persons, or, if a corporation, association, or other entity, by the principal executive officer, the principal financial officer, and the directors, or, if there is no board of directors, by the persons or board having the power of management of the person, firm, corporation, association, or other entity negotiating the loan or acting as the selling agent or underwriting such security for sale in the United States as the Commission may require. Signatures of all such persons when printed on the said statements shall be presumed to be so printed by authority of the person whose signature is so affixed, and the burden of proof, in the event such authority shall be denied, shall be upon the party denying same. The affixing of any signature without the authority of the purported signer shall constitute a violation of this Act. Similar statements shall be filed for each subsequent issue of securities, unless otherwise exempted by this Act, not covered by the original and succeeding statements. The aforesaid statement shall be verified by oath in such manner and form as the Commission may prescribe.

SEC. 5. (a) That the said statement, when relating to a security other than a security issued by a foreign government or political subdivision thereof, shall contain the following information concerning the said securities and the person or other entity issuing them:

(1) The name under which the issuer is doing or intends to do business, the name of the State or other sovereign power under which the issuer is organized and the location of the issuer's principal business office.

(2) The names and addresses of the promoters, directors, trustees, and officers, if the issuer be a corporation or association or trust; of all partners, if the issuer be a partnership; and of the issuer, if the issuer be an individual.

(3) The purposes of incorporation, if incorporated, and the general character of the business actually to be transacted by the issuer.

(4) A statement of the capitalization of the issuer, including the authorized and paid-up amounts of its capital stock, the number and classes of shares into which such capital stock is divided, a description of the respective voting rights, preferences, rights to dividends, profits, or capital of each class with respect to each other class, the amount of capital stock of each class issued or included in the shares of stock to be offered, the amount of the funded debt, with a description of the date, maturity, and character of such debt, and the security, if any, therefor; a balance sheet showing a detailed list of its assets and liabilities on a day not more than ninety days prior to the date of filing such balance sheet; a statement of the annount of the issuer's income, expenses, and fixed charges during the preceding fiscal year, or if in actual business for less than one year, then for such time as the issuer has been in actual business.

(5) A detailed statement of the plan upon which the issuer proposes to dispose of the securities offered for registration; the price at which they are offered to the public and the net amount returnable to capital investment; the names of the syndicate, if any, underwriting the securities offered for registration; a copy of the security offered or to be offered and a copy of any circular, prospectus, advertisement, or other description of such securities then prepared by or for such issuer or underwriter or by or for the applicant for registration (if the applicant shall not be the issuer) to be used for distribution or publication to the public.

(6) The purpose for which the securities to be offered are issued or are to be issued, the amount of capital and other securities, commissions, and bonuses, a detailed statement showing the items of cost, property, services, patents, good will, and any other consideration for which such securitie commissions, or bonuses have been or are to be paid or issued, the consideration received or to be received by the issuer, the amount returnable to capital investment, and the amount of all commissions and other considerations paid or to be paid to the issuer and all other persons for or in respect of the issue, sale, or offer of the said securities.

(7) The amount of capital stock which is to be set aside and disposed of for services to promoters, if any, and a statement of all stock issued from time to time for services to promoters.

(8) If the issuer is a corporation, there shall be filed with the statement a certified copy of its articles of incorporation with all amendments and of its existing bylaws. If the issuer is a trustee there shall be filed with the statement a copy of all instruments by which the trust is created or declared and in which it is accepted and acknowledged. If the issuer is a partnership or an unincorporated association, or joint-stock company, or any other form of organization whatsoever, there shall be filed with the statement a copy of its articles of partnership or association and all other papers pertaining to its organization.

(9) All of the statements, exhibits and documents of every kind required by the Commission under subsection (a-1) to (a-9) of this section, except properly certified public documents, shall be verified by oath in such manner and form as may be required by the Commission.

(b) Each statement relating to securities issued by a foreign government or political subdivision thereof shall contain:

(1) Name of borrowing government or subdivision thereof;

(2) Purpose or object of the loan;
(3) Date and terms of the proposed loan;

(4) Date and terms of the underwriting agreement, the names of the members of the underwriting syndicate, including all bonuses and commissions paid or to be paid by the foreign borrowing government and all payments or charges paid or to be paid for the privilege of underwriting the loan or for any other purpose in connection therewith;

(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.

(c) The filing of the statement specified in subsections (a) and (b) of this section and the payment of the fee hereinafter provided shall constitute formal registration of the security concerned.

(d) At the time of filing the said statement, as hereinbefore prescribed in subsections (a) and (b) of this section, the applicant shall pay to the Commission a fee of one-hundredth of 1 per centum of the aggregate par value of the securities to he sold and for which the applicant is seeking registration, but in no case shall such fee be less than $50. In case of stock having no par value the price at which such stock is to be offered to the public shall be deemed to be the par value of such stock.

Sec. 6. That the Commission may revoke the registration of any security by entering an order to that effect, if upon examination into the affairs of the issuer of such security, or in the case of securities issued by a foreign government or a political subdivision thereof, into the circumstances relating to the loan or the affairs of the person or persons negotiating or underwriting the issue in the United States, it shall appear that any such issuer or person:

(a) Has violated any of the provisions of this Act, or any authorized order of the Commission of which such person or issuer has notice, but the burden of proof shall be on the person or persons asserting lack of notice; or

(b) Has been or is engaged or is about to engage in fraudulent transactions; or

(c) Is in any other way dishonest or has made any fraudulent representations in any prospectus or in any circular or other literature that has been distributed concerning such issuer or person or securities registered; or

(d) Is not conducting its or their business in accordance with law; or
(e) T'hat its or their affairs are in an unsound condition or insolvent; or

(f) That the enterprise or business of the issue, or person, or the security is not based upon sound principles, and that the revocation is in the interest of the public welfare.

In making such examination the Commission or other officer or officers designated by it shall have access to and may compel the production of all the books and papers of such issuer, representatives, or underwriters, and may administer oaths to and examine the officers of such issuers, representatives, underwriters, or other entities or other person connected therewith as to its business and affairs and may, in its discretion, require the production of a balance sheet exhibiting the assets and liabilities of any issuer, representative, or underwriter, or his income statement, or both, to be certified to by a public accountant, approved by the Commission.

Whenever the Commission may deem it necessary, it may also require such balance sheet or income statement, or both, to be made more specific in such particulars as the Commission shall point out or to be brought down to the latest practicable date.

If any issuer, representative, underwriter, or other entity shall refuse to permit an examination to be made by the Commission such refusal shall be proper ground for revocation of registration.

If the Commission shall deem it necessary it may enter an order requiring an immediate showing of continuance of the right to sell securities, and upon failure of the person in whom such right has been reposed to make a satisfactory showing, and an order entered to that effect, such right shall be suspended. Notice of the

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