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Senator McAdoo. I received recently, in one day, about 500 telegrams, and of course it was impossible for me to read all of them. But they were not on this bill but on various matters.

The CHAIRMAN. I am putting in a few, simply because they raise certain objections that I wanted the proponents of the bill to know about.

Now, Mr. Thompson, who is the next witness?

STATEMENT BY HON. HUSTON THOMPSON, ATTORNEY AT LAW,

WASHINGTON, D.C.Resumed

Mr. THOMPSON. Mr. Chairman, it was our intention to have Judge Healy as the next witness, to present some data for the information of the committee, and to answer any questions that they might like to ask. But I think I should, if I might, answer Judge Fletcher's remarks before Judge Healy begins.

The CHAIRMAN. Very well.

Mr. THOMPSON. It seems to me that Judge Fletcher misapprehends that portion of section 11 of the bill which he was discussing. It was the intention, and it seems to me the language is very clear, that we are exempting from filing for registration any papers that might otherwise be required of railroads, which are now under the surveillance or supervision of the Interstate Commerce Commission.

But in order that the matter might be cleared up we took this bill up with Director Sweet of the Interstate Commerce Commission, and went over it, and we have his approval, to the effect that it does not affect them.

And what is more, this factor or phase of it with respect to a charge of one one-hundredth of 1 percent is not levied on railroad securities, because railroads go, first of all, to the Interstate Commerce Commission, and do not come to the Federal Trade Commission. And that is made as clear on page 20 of this bill as we could set it forth in the English language, I think.

There is one phase of the bill, however, which does attach to railroad securities, and that is when they begin to advertise. It is expected and required of them that they shall carry the information in their advertisements which any other corporation would be required to carry in the case of a corporation which files its papers with the Federal Trade Commission. But that is the only respect in which this bill controls railroad securities.

Now, Mr. Chairman, I am sorry there are not more Senators present, because Judge Healy has a demonstration to put on here, one that was put on before the House Committee, and one which is a most remarkable showing. I should like, if possible, to hold him back until later, when there are more Senators present.

The CHAIRMAN. Well, it may be advisable to wait. Quite a few Senators have come in and asked to be excused in order to go to other committee meetings. I do not know whether a delay for Judge Healy would increase our attendance or not. Some have said they will try to come back, and others have said they will try to come in later. But a number of members of the committee have come in and reported and begged to be excused because of other engagements.

Mr. THOMPSON. Then we will call Mr. Holtzoff, who represents the Department of Justice.

The CHAIRMAN. Mr. Holtzoff, come up to the committee table, and please give your full name, address, and occupation. STATEMENT OF HON. ALEXANDER HOLTZOFF, SPECIAL ASSIST

ANT TO THE ATTORNEY GENERAL, WASHINGTON, D.C. Mr. HOLTZOFF. It seems to us that this bill is not any burden and does not constitute any interference with legitimate business, because it does not levy or impose any duty that would bring a hardship or an onerous burden on any corporation or underwriter or fiscal agent of a legitimate business enterprise.

The bill does require pitiless publicity, a requirement which legitimate business will not be injured by, but which no illegitimate business can probably survive.

Now, I should like to say a word as to the theory of this bill, because there has been some discussion about it by some gentlemen who have spoken in opposition.

This bill provides for three principal substantive regulatory measures. First, we have the provision for publicity of all facts which should be known to an investor or a person who proposes to become an investor in a security. That publicity provision is carried out by a requirement imposing the duty upon the issuer of any new security, to file a statement which will disclose all pertinent facts as to assets, liabilities, income, and commissions or profits upon the sale of the particular security.

Now, I should like to call your attention to the fact that

The CHAIRMAN (interposing). Let me interrupt you right there to inquire if this information includes the salaries paid by the applying corporation or issuing corporation. Does it include a statement of salaries, bonuses, commissions, and all moneys received from the corporation by the principal officers thereof?

Mr. HOLTZOFF. The bisl as now drawn does not require the salaries of officers to be stated.

The CHAIRMAN. I think you ought to do that. We will consider that matter.

Mr. HOLTZOFF. I want to call attention to the fact that there is a provision in the bill to the effect that the Federal Trade Commission may require the filing of such additional information as it deems wise. And it may prescribe forms upon which information is to be furnished. In other words, we do not look upon our enumeration of the items of information to be furnished under this bill as exhaustive. We enumerate some items, and then state that the Federal Trade Commission may require such others as it may wish. But, of course, if the committee feels that that question of salaries should be specifically stated, why, the bill, of course, can be easily amended in that regard.

The CHAIRMAN. Well, you take, for instance, the ParamountPublix Corporation: Last year I am told the president of that concern received a salary of $500,000, representing that payment of salary per annum, and now the concern is in receivership. I think it important that people applying for registration should state the salaries that their principal officers receive, compensation, fees, and all that sort of thing. I should not want to register a concern like that, or any other concern, whose president is receiving a salary of $500,000 a year. I think a good many corporations have been wrecked by reason of the enormous salaries paid to their principal officers.

Mr. HOLTZOFF. I certainly agree with you, Mr. Chairman. The only question is whther that particular item should be left to the rule-making power of the Federal Trade Commission, or whether it should be expressly included in the bill.

The CHAIRMAN. Another thing: Does this bill require anything like subsequent reports from any corporation applying to be registered so as to issue securities? Is that followed up in any way by subsequent reports, either semiannually or quarterly?

Mr. HoltzoFF. The bill does not expressly provide therefor, but the Federal Trade Commission under the rule-making power conferred by this bill, may require such reports.

The CHAIRMAN. It seems to me it should be done.

Senator ADAMS. Suppose, under this bill, I were interested in a certain security that I had heard of, but had not been approached by a seller, and yet wanted the information on file. How would I get it, and who would bear the expense of providing me with that information? There is some cost necessarily involved, I take it.

Mr. HoltzoFF. As to securities that are already outstanding there is no provision for getting such information. But as to securities to be hereafter issued, the security could not be placed on sale in interstate commerce until the information is filed with the Federal Trade Commission. Now, the bill provides that the information may be made public in such manner as the Commission may prescribe.

Senator Adams. What is your idea about that? I am thinking of myself as a person interested in a new security. We will say that I have heard of it and want to know what the facts are. They have not been brought to my attention by anybody attempting to sell it to me, but I want the information. If you are going to have pitiless publicity, how may I get such information? Is it going to be made available to me, and if so, at whose cost?

Mr. HOLTZOFF. My thought would be that you could write in to the Federal Trade Commission and ask for the facts, and they could get those facts from their files, from the statement that has been filed by the issuer of the particular security referred to.

Senator Adams. But there is nothing obligatory in this bill for them to do it; I mean as the bill now stands.

Mr. HOLTZOFF. No. It says that the Federal Trade Commission may make the information public in such manner as they may designate. In other words, the bill permits publicity of the facts to the public rather than requiring it. But I rather assumed that any commission administering this act would deem it desirable that those facts, that all facts, should be accessible to the public.

Senator ADAMS. For instance, if the Cities Service Co., with its very involved structure, should be putting out a new issue, and that it came within the law, and I wanted the information, it is a question whether or not the Federal Trade Commission would say to me, “Well, now, at your expense we will give you a certified copy of the statement.” Or would they say to me,“Yes, we will furnish the statement to you?"

Mr. HoltzOFF. There is no provision as to expense. I think that is a matter which is and probably should be left to the rule-making power of the Federal Trade Commission, because the question of expense depends to a certain extent upon the appropriations.

Senator Adams. I think there should be a definite policy about that.

Mr. HOLTZOFF. Judge Healy calls my attention to the fact that the bill now provides that this information shall be made available to the public under such rules and regulations as the Federal Trade Commission may prescribe. The bill does not specifically state it, because that information is in the possession of the Federal Trade Commission, and doubtless they will make it available. However, I do not suppose that mimeographed copies of such statements would be a very heavy burden of expense upon the Commission. And, perhaps, they should be compelled to furnish the information free of charge rather than at the cost of the inquirer. I would suppose the fee that the issuer pays should be sufficient to cover that cost. Of course, the fee is covered into the Treasury, but you gentlemen can reappropriate those fees or amounts so covered into the Treasury, to pay the expenses of the Commission, including the furnishing of information.

Senator ADAMS. Very well.
The CHAIRMAN. You may proceed with your statement.

Senator GORE. On that point, Mr. Holtzoff, have you considered this: There is going to be a great deal of delay if this information has to be gotten here at Washington. Have you considered the point as to whether or not it would be practicable, or too expensive, to have those reports filed either with the postmaster in the capital city of the State or the clerk of the Federal court in the capital city of a State?

Mr. HOLTZOFF. Well, it seems to me, Senator Gore, that the only delay would be the transmission in the mails. I may be wrong about it, but I am under the impression that there isn't any place in this country from which a letter could not arrive in Washington within 4, or at the most, 5 days. Now, if you were to file the information in the capital city of a State, or with the clerk of the Federal court in the capital city of a State, you would have those reports scattered all over the country, and it would be difficult for the public to get the information. The clerks of the Federal courts would not have the machinery, probably, to make the information public. They certainly would not be in position to inspect the data to see whether it complies with the requirements of the statute.

Senator GORE. Oh, that matter would be settled here in the central office. My point is whether the information could be made available in that way.

Mr. HoltzOFF. Perhaps I misunderstood your question. You mean after the information is filed here in Washington it could be furnished in the capital city of a State?

Senator GORE. Yes.

Mr. HOLTZOFF. The only difficulty then would be, and perhaps that wouldn't be very burdensome, you would have to require the issuer of a security to furnish enough copies or statements to have one go to the clerk of every Federal court.

Senator GORE. Or to the capital city of each State.

Mr. HOLTZOFF. Yes. That could be done, I suppose. I got the thought that you meant to have that action supersede the filing with the Federal Trade Commission.

Senator GORE. Oh, no.

The CHAIRMAN. You may proceed with your statement, Mr. Holtzoff.

Mr. HOLTZOFF. This requirement about publicity is followed up, and the publicity requirement is the major regulation; that is followed up by the regulation as to advertising, because many losses to investors have been caused by reliance not only on false but on incomplete prospectuses. So that the requirement as to advertising is to the effect that certain facts must be contained in every advertisement or prospectus, including such facts as profits and losses, earnings, and so forth.

Now, also that additional information may be obtained from the Federal Trade Commission. The purpose of that provision is to put a prospective purchaser on notice, because many of the public would not otherwise know that they can get additional data before determining whether to buy a security or not, from the Federal Trade Commission.

There are similar requirements as to foreign bonds. And the only difference between the two is as to the contents of the advertisements. When we come to foreign bonds it is provided that the Federal Trade Commission will prescribe what shall be contained in the advertising matter.

Now, these publicity statements, the statements that are filed with the Commission, are required to be signed by officers of the company and by all of the directors. And we have a remedial provision in a subsequent place in the bill to the effect that in case any of those statements are false, the person relying thereon may rescind the purchase of any security and recover back the consideration that he paid. And we also have a provision that any purchaser shall be presumed to have relied upon those representations.

Some question has been raised about the so-called "directors' liability.” And the suggestion has been made that, after all, and in the case of large corporations especially, the director has the right to rely upon the accountant's statement, and that he should not be made liable in case of any error in the prospectus. Well, it seems to

me

Senator GORE (interposing). Will you state that last point again? I did not catch it.

Mr. HOLTZOFF. The argument has been made by some of those who have spoken in opposition to the bill that a director should be excused from liability if he can show that in making an error in the prospectus he relied upon the statement of the accountant. Now, it seems to me that if such exemption or provision is inserted in the bill, it would, if I may use a colloquialism, take the teeth out of the bill. One of the reasons why so many losses in securities have been suffered by investors is because so many directors have felt no sense of responsibility in signing a prospectus.

Let us assume that a director makes an innocent mistake, but that, as a result of his mistake, an innocent investor suffers. Who should bear the loss of the mistake, the man who set the machinery in motion which resulted in the loss or the man who suffered the loss?

I am thinking of the old Squibb case that we studied in our law schools, where the principle was laid down in the English common law that the person who starts some contrivance in operation which

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