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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. 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 17, 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. 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
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.
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,
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, 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 Senatcr 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 WALCOTT. 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.
Senator WALCOTT. In the Senate bill it is section 12, line 5 and line 9, page 23, subparagraph (d). I think that makes it more complete "of securities to its stockholders or their assigns."
Mr. BUTLER. All right, sir.
Senator Walcott. And in line 12 “or their assigns” at the end of the word “stockholders".
Now, in section 11, Senate bill 875, at the top of page 21, line 1, subparagraph (b), “issue of its securities or its accounts," where they are certified accounts.
Mr. BUTLER. I do not believe I followed that, sir. The CHAIRMAN. I do not see that on page 21. Senator WALCOTT. Oh, wait; I beg your pardon. I have the House bill. Line 17, page 20 of the Senate bill—'or its accounts” after the word “securities”.
Don't you think that is sound?
Senator WALCOTT. Now here is a question which has to do with the policing of it. So much for those. Those are merely small technical errors. Here is one on section 14. It would stop all interstate package shipments and telephone calls unless it was changed.
Mr. BUTLER. The amendment I have just suggested, reads as follows-
Senator WALCOTT (interposing). You see, the sender of a message is the guilty person. That is, in other words, you could not force, for instance, a telephone company to police every message, could you?
Mr. BUTLER. The greatest consideration that caused us to amend that provision was that a company or an issuer might consider advertising by radio in, let us say, Chicago, with the intention of only selling in Indiana and Illinois and Minnesota, perhaps Wisconsin.
Senator WALCOTT. Yes.
Mr. BUTLER. And the securities that he had in mind might not meet the requirements of the law of Idaho, but he had no intention of selling them there, and this is a penal provision. So we thought it best to eliminate the offer entirely and make it purely transportation.
Senator WALCOTT. That is it. That take care of it.
There is one more here with reference to broadcasting, if any broadcast be used under the specifications set forth in paragraphs (a) and (e), inclusive. It is in line 15, section 8, page 16 of S. 875. The CHAIRMAN. What is the suggestion?
Senator WALCOTT. In line 16 I should say “the broadcast of”“offering or the broadcast of”. Any objection to that?
Mr. BUTLER. That is line 15?
Senator WALCOTT. Yes; page 16, after the word “by”—“the broadcast of any spoken communication". It seems to me that ought to be included.
Mr. BUTLER. We have stuck in our amended copy the word "by" in line 14, making it “any spoken communication," which would seem to cover broadcasts.
Senator WALCOTT. "Or any spoken communication."
Mr. BUTLER. In other words, it was ungrammatical in the original | copy.
Senator WALCOTT. That is correct. I would accept that. That is just as good as "broadcasting". I have as an alternative there 'the utterance of” in the old act. That satisfies me.
I think that covers everything, Mr. Chairman.
The CHAIRMAN. The committee will adjourn then, to meet at half past 10 tomorrow,
(Accordingly, at 12 o'clock m. the committee adjourned, to meet again at 10:30 o'clock a.m., of the next day, Saturday, April 8, 1933.)