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attack overlooks the fact that after a security has been revoked by the Commission it is in exactly the same situation as a security that has been enjoined under a fraud law. The attack on revocation has been based chiefly on the ground that once the security had been revoked it would be unmarketable and those who had bought it would be the ones punished rather than the issuers who were responsible.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 CouzFNs. 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 o and has a right to know what the chances are for success Or fallure.

Senator CouzFNs. 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 CouzFNs. 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 CouzFNs. 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. BUTIER. If there were any misrepresentation of a material fact, yes, sir. Senator CouzFNs. Even though it was made orally? Mr. BUTLER. No; if it were made to the investing public. This bill does not cover— Senator CouzFNs (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 CouzFNs. 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 CouzFNs (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 CouzFNs. Yes. Mr. BUTLER. You would have to make the misstatement knowingly to go to jail. Senator CouzFNs. 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?

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.

16969.2—33–17

Goldman-Sachs Corporation alone sold more than 400 million dollars' worth of stocks, offered to the public at $104 and today quoted at 176, 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:)

APRIL 7, 1933. Memorandum in re Senate 875. 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

SUPERVISION

Since March 4, 1909, building associations in the District of Columbia have been under the supervision of the Comptroller of the Currency (see sec. 691, District of Columbia Code, and title 5, sec. 44, Code of the District of Columbia) and there have been no failures for over 25 years. Two reports are filed by each association with the Comptroller and the bank examiners examine the associations twice a year. PRESIDENT's PRoclamATION

The President's proclamation declaring a bank holiday included building and loan associations, and before they could open in the District of Columbia they had to get a license to do so from the Comptroller of the Currency. All the building and loan associations in the District of Columbia obtained a license to open immediately after the bank holiday while three national banks and a number of savings banks have remained closed to this date. On March 4, 1933, Public Law No. 434, section c, provides that in the future no building and loan association shall do a building association business or maintain an office in the District of Columbia until it shall have secured the approval and consent of the Comptroller of the Currency. This would probably take care of the nearby Maryland situation in the future. For fear Mr. Miller's testimony might have given the committee the impression that building and loan supervision in the District of Columbia is very inadequate, I feel that the record should be kept straight by bringing out the above facts for the information of the committee. C. CLINToN JAMEs, Chairman Federal Legislative Committee, United States Building and Loan League, Washington, D.C.

The CHAIRMAN. I have requested Mr. Penn Harvey, former director of the investment firm of Harris, Forbes & Co., later Charles, Harris, Forbes Corporation of New York, to outline for the informtion of the committee the mechanics of the origination and distribution of investment securities. I think that would be rather interesting to the committee. So I will ask him to come tomorrow, and we will meet tomorrow at half past ten and go on with Mr. Butler. Mr. BUTLER. Mr. Thompson will perhaps be available tomorrow. He could not come today because he was requested to attend an executive session of the House committee. The CHAIRMAN. We will try to hear you all tomorrow. Mr. BUTLER. And, Mr. Chairman, yesterday the committee requested that we prepare a copy of the Senate bill with all of the changes and recommendations to which the proponents of this bill had agreed. I have that prepared, and will submit it. The CHAIRMAN. Then do you think that is final, or is Senator Walcott, for instance, going to submit some amendments here that he wants you to consider? Mr. BUTLER. Yes, sir, we will consider them. But these are the amendments that we have already considered and agreed to. The CHAIRMAN. We might have a confidential committee print of this. Mr. BUTLER. Yes. Senator WALcot.T. But, Mr. Chairman, if you will give me 5 minutes, I can explain these two. They are very short and I think they are wise. I have the H.R. 4314 and Senate bill 875. It has to do with section 12 subparagraph (d), line 5 and line 9, page 23. The words “or their assigns”, it seems to me, should be inserted after the word “stockholders.” That is page 23. Have you H.R.? Mr. BUTLER. I have Senate bill.

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