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Senator GORE. You do not think they should be required to be paid in a different form than the stock that is issued to the actual investor?

Mr. CARTER. I do not think so.
Senator REYNOLDS. You could not get the salesmen to accept it.
Senator GORE. They do some of that.

Mr. CARTER. In my opinion it is most important that line 14, subsection A under section 11 on page 20 be amended to delete the following words:

Or political subdivision or agency thereof.

That refers to municipal securities. I see no reason for excluding them.

Senator REYNOLDS. I did not get that. I was talking to Senator Gore.

Mr. CARTER. Omitting the words or political subdivision or agency thereof”, which has the effect of omitting municipal securities from the operation of this law.

Senator GORE. Does "thereof” relate back to the States or to these foreign governments?

Mr. ČARTER. I think it refers to the United States, subdivisions or agencies of the United States.

Senator REYNOLDS. Isn't it true that a great many of the municipal securities are almost worthless now?

Mr. CARTER. I do not know how many, but there are some that are worthless, and they are sold on a basis of assessed valuation.

Senator REYNOLDS. In my State a great many of them defaulted.

Mr. CARTER. They are sold on the basis of assessed valuation which means nothing to the security holder. The assessed valuation of the property of a village is of no value to him unless he could foreclose and take possession of it and dispose of it. He is really interested in the ability of that subdivision to pay the interest on his bond, and that depends upon the budget and their expenses and their income.

Senator GORE. Are you setting up a red light here or striking one down in your suggestion?

Mr. CARTER. I am setting up a red light, Senator.
Senator GORE. Yes.

Mr. CARTER. I think we have omitted a class of securities that should be included.

Senator GORE. I see.
Senator REYNOLDS. You think they should be included?
Mr. CARTER. Yes, sir.
Senator REYNOLDS. Municipal bonds?
Mr. CARTER. Yes, sir; I think they should put out statements.
Senator REYNOLDS. I think you are absolutely right.
Senator WAGNER. Well, a statement as to what?

Mr. CARTER. Put out a statement as to their receipts and expenditures, their budget for the year.

Senator WAGNER. I suppose they are usually public records.

Mr. CARTER. Not very easily accessible in many cases, however, Senator. Frankly, I myself have seen very few statements of income and expenditures of muncipalities that would be comparable to that of a company.

The CHAIRMAN. I suppose they would have to do that as a basis for the bond issue. How can they sell bonds without getting out a statement to that effect.

Mr. CARTER. They have been able to sell them in the past on the basis of the assessed valuation, but I should not buy any now on that basis. I do not believe many of us will, either. I think it is a matter of expenses and their income.

The CHAIRMAN. Yes.

Mr. CARTER. My last statement is this: I hope, gentlemen, that you

will go slowly with this bill, because I think it is a most important one. The security business now is at a low ebb, and we have, I think, time to work it out on proper lines.

Thé CHAIRMAN. There is some suggestion made about whether or not the words "certify” or “certified” ought not to be explained or defined, perhaps in the beginning of the bill where we describe certain things and use certain words to mean certain things. We use generally the word “certify" and "certified" without even a definition. Have you anything to say about that?

Mr. CARTER. I think it is a little confusing as it is now in the bill, Senator, and I think it would be well to frame a definition of the word or suggest another word where we use the word “certified.”

The CHAIRMAN. I would be glad to have your suggestion about that. You can write it and put it in a letter after you have considered it a little further, or you can give it now.

Senator WAGNER. Have you any opinion, Colonel, as to whether this ought to apply to issues outstanding and for sale?

Mr. CARTER. I think not. I think not. I think you have safeguards over many issues that are outstanding now that are even far more far-reaching than this. I think the accounting phases of these issues are very well protected, much better than as provided in this bill.

Mr. PECORA. Accounting features, but not the selling.

Mr. CARTER. Not the selling, but the accounting features, I think there are much better features provided for in the present methods of the stock exchange than in this bill.

The CHAIRMAN. And you think the selling feature ought to apply to issues already made or to future issues?

Mr. CARTER. I think not. I do not see why it should apply to these issues that they have out now, because if there are any unsound issues or any issues put out that are fraudulent, they are being attacked right now and being taken care of by the Department of Justice, I think.

The CHAIRMAN. You think the whole bill ought to apply to future issues?

Mr. CARTER. I do; yes, sir.

The CHAIRMAN. As to selling and everything else, listing, and all that?

Mr. CARTER. Yes, sir.

The CHAIRMAN. Then we would have to change the language of the bill in that respect; would we not?

Mr. CARTER. Yes, sir.
The CHAIRMAN. It is a little ambiguous now?
Mr. CARTER. Yes, sir.

The CHAIRMAN. Any further questions of this witness? If not, Colonel, we are much obliged to you.

Senator GORE. I want to ask Colonel Carter another question. I want to say this: That so far as the main purposes of this legislation is concerned, of course, I am in favor of it, but I figured it ought to be limited largely to the assembly of facts, authenticated facts, the giving of publicity to those facts, so that those who contemplate investments can arrive at the facts and then reach their own conclusions. I think it ought to be limited to that largely, but this bill goes a great deal further than that, does it not?

Mr. CARTER. Yes, sir.

Senator GORE. This bill authorizes this Commission to pass judgment on what a man intends to do in the future. If he intends to be dishonest the Board can interfere. I do not think that is within the function of this Congress. My point is, Mr. Chairman, you cannot protect the fool against his folly.

You said, Mr. Carter, that the value of stock ought to be predicated on its earning power. That is true. It ought to be. I think you said it was. You could not insist on that statement standing up in 1929, could you?

Mr. CARTER. No.

Senator GORE. People bought stock without any reference to the underlying property, its present earning capacity, or its future earning capacity. Of course, that was a frenzy.

Mr. CARTER. It is a matter of judgment. We had a period when

Senator GORE (interposing). Well, it was a matter not so much of judgment as it was enthusiasm or feeling.

Mr. CARTER. That is right.

Senator GORE. I do not know how you can protect against that. When you state what the earnings are and what the properties are and their reasonable value, I think then you have got to just let people form their own judgment. I think a great deal of this bill ought to be stricken out, Mr. Chairman.

Mr. CARTER. A statement of earnings over a period of time, Senator Gore, gives the investor a great deal better opportunity to judge for himself whether the company is going to continue its earnings. Senator GORE. One year would be no guide? Mr. CARTER. One year would be no guide. Senator GORE. It might be the sum total of several years. Senator WAGNER. He has suggested 3 years.

Mr. CARTER. I have suggested 3. I think three would be the minimum. There are many companies putting out earnings statements going back 10 years in their annual reports published to their stockholders.

The CHAIRMAN. Are there any other questions? If not, the committee stands adjourned until 10:30 Monday.

(Accordingly, at 12:58 p.m., the committee adjourned until 10:30 a.m. Monday Apr. 3, 1933.)

SECURITIES ACT

MONDAY, APRIL 3, 1933

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to adjournment on Saturday, April 1, 1933, in Room 301, Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman), Glass, Wagner, Barkley, Bulkley, Gore, Byrnes, Adams, Norbeck, Goldsborough, Townsend, Carey, Steiwer, and Kean.

The CHAIRMAN. The committee will please come to order. We will go on with the hearings on S. 875. The members of the committee will find the bill in their folders. The first witness this morning will be Mr. Huston Thompson.

Mr. Thompson, will you please come before the committee table, and state your full name, address, and occupation?

Senator Adams. And don't forget the Colorado end of your address.

Mr. THOMPSON. And Colorado.

STATEMENT OF HON. HUSTON THOMPSON, ATTORNEY AT LAW,

WASHINGTON, D.C. The CHAIRMAN. Now, Mr. Thompson, I believe you are quite familiar with all provisions of this bill, S. 875. Without our asking many questions about it, I will request you to proceed to make your statement.

Mr. THOMPSON. Mr. Chairman and gentlemen of the committee: This bill has been given several days' consideration by the House Committee on Interstate and Foreign Commerce. There have been several witnesses before that committee, but there are others to come who will make suggestions as I understand with respect to amendments to the bill.

In order to get the background, and a brief one, of the bill it seems to me that the first thing is to give a sketch of the experience of foreign governments with securities, because we drew this bill to some extent from the language of acts in force in other countries.

In the first place, Great Britain in 1908 enacted the British Companies Act. From time to time that act has been amended, and on the occasion of each amendment the intention was to tighten up the act and make for greater protection for the purchaser. The most recent recodification or redrafting of that bill took place in 1929.

The Belgians have had a very excellent law for a number of years. The Germans have a bill, which is very strict I might say, and they

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