Mr. MACLEAN. I believe so.

Senator KEAN. That other houses have to load purchases with at least three quarters of 1 percent in the case of municipals in order to get out even.

Mr. MACLEAN. I think that is a fair statement, as a general statement.

Senator KEAN. And in regard to other bonds you testified it would be 1% percent.

Mr. MACLEAN. Yes; or possibly 2 percent.

Senator KEAN. Or 2 percent.

Mr. MACLEAN. Yes, sir.

Senator KEAN. That you have to load an issue 2 percent to come out even, before you make any profit at all.

Mr. MACLEAN. Yes, sir.

MEMORANDUM

APRIL 7, 1933.

In connection with the expense of distributing securities at retail by an investment banker, it should be borne in mind that the business is not a brokerage business. When a broker executes an order, he is through, and therefore can do business on a narrower margin. An investment banker has a continuing liability and expense which remains until the maturity of the issue. He has a responsibility to his customer to keep acquainted with the condition of the utility, or industry, or municipality whose bonds he has put out. In case trouble arises, he must give time and thought to working out the situation in the interest of the security holder. He also undertakes to do numerous things for the customer, such as collecting coupons without charge. All of this means that the investment banker must maintain an organization, the expense of which is not inconsiderable, in order to discharge his duty to his clients.

Senator KEAN. That is all that I have to ask.

(Thereupon Mr. MacLean left the committee table.)

Senator COSTIGAN (presiding). Mr. Creigh, please come around to the committee table and take a seat opposite the committee reporter. Give us your name, address, and business.

STATEMENT OF THOMAS CREIGH, GENERAL ATTORNEY CUDAHY PACKING CO., CHICAGO, ILL.

Mr. CREIGH. My name is Thomas Creigh. I am general attorney of the Cudahy Packing Co., Chicago. Having been with them something like 30 years I have had a good many business experiences, I think. I happened to be in the room the other day, when Mr. Breed was making his statement before the committee and

Senator CoSTIGAN (interposing). It has been suggested to the committee that you had some recommendations to make in regard to the provisions of the bill now under consideration.

Mr. CREIGH. Of course, I do not know what suggestions have been made to the committee, but my angle of it is at a very small point. Possibly it has been covered already. Now, just for the high spots.

The word "security" is defined here in such a way as it would take in a personal note, we will say, of any merchant. If, for instance, we may take the packing companies, and in our ordinary business with a butcher we should happen to have a butcher who is insolvent, or about to become so, and a series of notes of a little reorganization should be made and issued to pay creditors, under the law, if this

bill were enacted into law, all of them would be covered and a permit would have to be secured.

Now, I have not the slightest idea that you intended to cover such matters, down to the individual.

Senator ADAMS. I think the disposition was to exempt even what was known as commercial paper.

Mr. CREIGH. I was going to start out with the undoubted feeling that you must except what we will call commercial dealings, such as a little reorganization. Then to take my company as an example. It is a very large borrower of money at times, with a very substantial credit rating, with commercial brokers and banks handling many of our items. Of course, I should think that the routine business ought not to be within this bill. We are not promoters of stocks, bonds, or anything like that. It is just ordinary commercial dealings.

The bill itself as drawn, and as is proper, and it was drawn I suppose at least with the assistance of my very good friend, Huston Thompson, is broad enough to be quite a target for these things; but its fundamental purpose is the protection of the public, the investor, and that is something which is necessary. I know nothing of the details of the work of the promoter or of the seller of stocks and bonds and other securities to the public. But from the standpoint of the legitimate, old-time, well-established business, I did have some thought that we probably ought not to be within the terms of the bill. I do not mean our company alone, but all other such institutions. The bill seems to relate largely to what I think is the major difficulty, and I think it is the hardest to apply, the protection of securities to be offered to the public.

Senator ADAMS. You would recognize the propriety, would you not, of the fraud sections being made applicable even to commercial paper? In other words, you have in Chicago, as you know, note brokers. That is one of the centers of note brokers of the country.

Mr. CREIGH. Yes, sir. And they are very valuable at times. Senator ADAMS. Yes; I understand that they are very essential. And if one of those note brokers, some intermediary, should misuse these things, misuse the mails, I take it you would concede it would be proper to provide for prosecution of them, even though you do not think he should be required to make a registration of those securities. Mr. CREIGH. So far as the note broker is concerned I do not know anything about his business and I won't attempt to discuss it.

Senator ADAMS. And those securities go out through note brokers? Mr. CREIGH. Yes, sir. But as to registration of note brokers and making certain provisions in this bill as regard note brokers' business practices, that is his side of the matter. But as I read the bill, rather superficially I confess, if an issuer of securities should, perhaps five years after having floated a bond issue, have done something that is held to be fraudulent or a deceptive practice, then the investing public holding those securities is penalized upon the cessation of ability to sell that perfectly good paper. And that is the point at which I wish to make a major suggestion to you; and that is the point where I thought when Mr. Breed was here, some members of the committee and Mr. Breed were rather far apart in understanding each other.

To illustrate: Under the Federal Trade Commission Act, for example, and under the Packers and Stockyards Act, there are provisions that will prevent unfair trade practices. That leads, through

a hearing, to an order to cease and desist. That is entirely proper. But under this language that you have here, it might be that if a cease-and-desist order were entered on a relatively insignificant practice, say, that one of our salesmen did something that was unfair as against somebody else's business and such an order were entered, why, the whole financial structure of the company might be involved, to the extent of our securities not being merchantable. Whereas, at the very time the thing that called that to the attention of the Federal Trade Commission or the Secretary of Agriculture, who, with us, occupies a similar position, we would have had a hearing, and then if thought proper there would be entered an order to cease and desist, and there would have been the benefit of all the criminal statutes, and all others bearing thereupon, that would prevent the very evil complained of. Surely that, as a practical remedy, is adequate to the offense.

And so it is that I say it ought not to be covered in this security proposition to the extent of this very strong language, if I register the point to you. In other words, I think that the penalties now in force are ample; that the enforcement provisions are adequate at the present time to prevent those things, and that the very, very wide language, that might and perhaps would cover matters unrelated to securities, should not be in this bill.

Senator ADAMS. I think the penalty provisions could be made a little more applicable. We have had suggestions, like those Mr. MacLean just made, that old securities should be limited. But fraudulent practices and the transfer of them, and public communications in old securities, that ought not to be permitted if improper. Mr. CREIGH. If the fraud is in connection with the handling of those securities, well and good. But that is not all that this language covers. I am speaking of a possible case where a salesman of ours might engage in some fraudulent practice. For instance, suppose that a salesman might sell a few pounds of meat, might engage in fraudulent practices in connection therewith and there should be a cease and desist order entered. It might then under the language of this bill affect our bond issues, either old or new. This would be detrimental to a sound company. With 12,000 men we are not able to control them all down the line to the last degree.

Senator ADAMS. Then you think it is possible in your organization to get some dishonest man in your employ who has sneaked in on you? Mr. CREIGH. Well, I have found them several times. And I wish we could find a human executive who would be able to compel all employees to always operate within all these technical provisions of the law. I would not have any objection to this language insofar as it applies to the major things you are trying to cover. And that is safety in the flotation of securities to the public. That is the thing. Senator ADAMS. Where does the bill cover what you refer to in the matter of the act of a subordinate?

Mr. CREIGH. Section 6, subsection (a) provides for the withdrawal of the proposed permit upon which securities are issued in event the issuer has been or is about to engage in a fraudulent transaction. Here we are talking about commercial brokers handling our paper. Well and good. But suppose we have a salesman out soliciting meats up in Nashua, N.H., or at some place in your State of Colorado, or in Senator McAdoo's State of California, and that salesman is about to

engage or does engage in a fraudulent transaction. What earthly relation would that have to our company's short-term paper borrowing of say one million or five million dollars? None at all. And yet under this language

Senator ADAMS (interposing). And you think that would cover a case where a man puts too much cornmeal in sausage, we will say. Mr. CREIGH. Isn't it in the language of the bill?

Senator ADAMS. Would that be considered as having application to these things covered by the bill itself rather than as independent frauds? For instance, take a case of some man short-changing somebody, do you think that would be covered by the language of the bill? Mr. CREIGH. I say that such a thing as I have mentioned ought not to be, but the language contained in the bill is of such a wide character that I fear it might be construed to cover other situations that we do not contemplate.

Now, let me go to the other points: For many years there have been offered bills seeking to license corporations and to try to control them through licensing. Theoretically that is sound. But what business fears terriffically is that such a system of licensing might bring about disaster because of some act of some subordinate; that even extreme financial catastrophe might come about by means of Federal licensing, in that for a minute transaction the whole business of the company might be shut down. Certainly no one would contemplate that that would be a fair measure for the operation of an administrative act.

Senator ADAMS. How would you revise that section in order to meet your objections?

Mr. CREIGH. Well, in the first place, I would want to have your whole bill addressed to the one subject, that is, the flotation of securities to the public. And then in connection with fraudulent acts connected with such promotion, provide a reasonable and businesslike regulation. But do not get your language so broad and comprehensive as to get into other fields and have it relate back to the financing. I thank you gentlemen very much.

Senator MCADOO. Let me ask you a question. You do not think that this bill as drafted would interfere with your ordinary credit operations in the selling of notes or short-time paper that the banks call commercial paper, either direct or through brokers, do you?

Mr. CREIGH. Well, I think the broker would come in here.

Senator McADOO. He is subject to this bill if he makes false representations. But as to the issuer, and that is how you are concerned, how would it affect you?

Mr. CREIGH. Well, under this section 6 as I understand it, although perhaps I have read it only superficially, if we come along through the broker to put out paper, the ordinary short-term commercial paper, we would have to undergo the same registration, wouldn't we? Senator MCADOO. Well, if you are issuing it to the public. Mr. CREIGH. Well, how about the banks?

Senator MCADOO. I am talking about the banks.

Mr. CREIGH. Well, it seems to me the banks are the public. The language here is rather comprehensive. And I will assume that the broker who is handling our paper, which we think is pretty good, is trying also to sell it to individuals.

Senator MCADOO. I am not speaking about the broker. Of course, he comes under the provisions of this bill.

Mr. CREIGH. If the broker is to register, and I am not arguing for him, but I am sincerely calling your attention to this language, because from my reading of it I feel that our company might be required to become a registrant. That might be advisable on a big transaction, and then we will go ahead.

Senator MCADOO. To illustrate my point: In the ordinary conduct of your business you are borrowing from banks, or through brokers, we will say, $2,000,000. Do you think that such a transaction should by any means be comprehended within the meaning of this bill?

Mr. CREIGH. Well, I will start my answer by saying that I have read this bill rather hurriedly, but I do think that view is warranted by the language of the bill.

Senator ADAMS. I am disposed to think it is covered by the bill as it now stands.

Mr. CREIGH. I feel very certain it is, but that is stated from a superficial reading of it. I should think you might well and properly cover such a transaction if you desire.

Senator MCADOO. I can see a tremendous handicap to business if every ordinary borrowing in the conduct of one's business means repeated registration and compliance with the terms of the bill.

Mr. CREIGH. Under section 2 of the bill, security is defined to mean any evidence of indebtedness to any person. Now, "person" is any individual. Then the issuer here is to go ahead with his business. Now, not his business related to that flotation, but if the issuer "has been or is about to engage in any fraudulent transaction. That does not mean in respect to the paper, but, as I say, it may be in the sale of meats. Then the license is withdrawn, and banks and investors cannot sell bonds that are perfectly good. You certainly do not intend to cover such a situation as that.

Senator MCADOO. You are now talking about bonds. Mr. CREIGH. Well, short-term paper is the same thing. Senator MCADOO. It will cover bonds, of course. But the ordinary credit operations of a business institution, what about them? Mr. CREIGH. Here is the language in section 2, subsection (a). Senator MCADOO. Such operations, I take it, would not be included in the bill.

Senator ADAMS. They ought not to be.

Senator MCADOO. If they are, then the bill ought to be amended. Mr. CREIGH. Here is the section 2 (a) and that covers it quite clearly, it would seem. It is perfectly right to draw the fire of those who have objections to offer. That is the way to begin to legislate. But when we draw the fire we should crystallize on the idea underlying the bill, that is a public flotation.

Senator MCADOO. Well, the public does not get any of your short-term notes, I take it.

Mr. CREIGH. Well, I do not come in intimate contact with that matter, but I have seen many cases where the ordinary public is willing to take our 90-day paper. And I hope they will continue. But I should certainly hate to see, because a piece of bacon went bad or was fraudulently sold, that the broker could not market that paper.

169692-33--16