come from those three rather than being deposited with still a fourth agency, the Securities and Exchange Commission.

From our standpoint, what we are concerned with is primarily the control of transactions in the interest of preventing fraud by brokers and dealers, whether they be registered or not registered. I can see some justification for taking this point of view, that so far as the ordinary private individual is concerned, the control of his transaction should be governed by ordinary statutory law, namely, the general concepts of fraud which are already in the statute, and he should not be required to go to the administrative regulations of anybody in order to determine just what he can or cannot do.

But, from the standpoint of the brokers and dealers, who are already within the administrative scheme, it is not an imposition on them for them also to concern themselves with the rules and regulations of an administrative body insofar as they affect this section.

In fact, the brokers and dealers, as I see it, would be benefited by a power of that nature which will enable more careful definition of these fairly elusive terms, such as fraud, concealment, and the like. This section would enable them to get a gradual annotation of those concepts through the process of administrative regulation. The CHAIRMAN. Do you have your suggested amendment written out in some form that you can submit to the committee?

Mr. LANDIS. I do not have that yet. The last discussion that I had with the municipal-bond dealers was at 9 o'clock this morning and I think for the first time we finally got to an understanding of where the difference in viewpoint was.

I thought for a time that they objected to any control under section 15 (c), and from our standpoint I did not see how they were justified in that position. But I can understand their position when they say, "No; we are not objecting to your having an administrative power to determine what are fraudulent practices, but we object to your being able to say to us 'you shall conduct your sales of municipal bonds in such a way and not in that way which is not intrinsically fraudulent simply because by doing it in one way it may be possible for fraud to enter"."

To make that concrete, their contention is this: That under this section we would have the power to say that no municipal bonds shall be sold unless facts, we will say A to X, were stated in a prospectus, with reference to those bonds, and were also verified by some independent source, because any other thing might lead to concealment, might lead to a nondisclosure of material facts.

Personally, I do not conceive that that power is in section 15 (c), but I can admit that it might be possible for somebody to see that, and therefore, if that be so, I see no objection to straightening that language to make clear that that scope of regulation over the activities of the municipal-bond dealers is not intended and was not intended to be covered by that section.

If that is the position that the municipal-bond dealers take, it seems to me a position which is the same as the intent of this section 15 (c) and therefore it becomes merely a question of phrasing that section adequately to carry out that intent.

The balance of this act contains a series of amendments of the Securities Exchange Act which are purely formal in character. All they do is to tie in certain other sections of the act to carry out

the substantive provisions of the earlier sections, with one exception, and that is section 8.

Section 8 brings into the Exchange Act a principle which is already applied in the Securities Act, which I think is a beneficial principle of administration, and that is this. Doubt always arises in the border instances as to whether or not a particular regulation is within the power of an administrative body. If the regulation is enacted and somebody acts in good faith in reliance upon that regulation, it seems to me very unjust that he should be penalized if perhaps some court at some later time might find that that regulation was not within the power of the Commission.

Therefore, the Securities Act, when it was amended in 1934, embodied the principle that so long as any individual acts in good faith "and in reliance upon a regulation passed by the Commission, the mere fact that that regulation may as of some later date be upset, should not penalize him.

What section 8 does is simply to carry that principle of immunity where there is reliance upon the regulatory authority to the provisions of the Exchange Act and as such I think is a wise principle. I think that in main outline explains this bill. I would be ready to be at your service with reference to any particulars that may be contained in it.

Mr. COLE. Mr. Chairman, I should like to ask a question. The part of this bill dealing with unlisted securities, I understand, embodies the recommendation of the Commission following a study which the bill of 1934 directed the Commission to make; is that correct?

Mr. LANDIS. Yes, sir.

Mr. COLE. And in the 1934 bill you were required to make a report to Congress, as I remember it."

Mr. LANDIS. Yes, sir.

Mr. COLE. Has that report been made?

Mr. LANDIS. It has.

Mr. COLE. And the recommendations accompanying the report are incorporated in this bill?

Mr. LANDIS. Yes. This bill carries out those recommendations. Mr. COLE. When was that report filed?

The CHAIRMAN. I think January 4.

Mr. LANDIS. The 3d of January, I think it was, the day after Congress came back into session. I have some copies of that report available.

Mr. COLE. That is all.

The CHAIRMAN. Are there any further questions?

Mr. PEYSER. Mr. Landis, I have had a communication which refers to the Comptroller of the State of New York as well as the Comptroller of the City of New York and in which the writer of the communication cites that a certain section there, section 15 (c), line 14, should have an amendment, by adding the words "other than an exempted security." The argument advanced is that it would affect municipal credit as well as State credit and adversely affect the prices of city and State bonds.

Now, that amendment contains only four or five words, I think, "other than an exempted security." Have you considered that?

Mr. Lasons. Yes. That is exactly the point on which I wis falking a few minutes ago, with reference to these municipal-end dea,ers

Mr. Peyser. And that is the amendment that you may there is no objection to?

Mr. LANDIS. No. There is obiection. I think, to that amendment as it is suggested, but I think that we can meet the point that is raised there by a revision of the last four or five Enes of that

Mr. Peyser. That would cover that same situation?

Mr. LANDI. That won.d cover the same situation. I think it will be acceptable to the municipal-and dealers. It is this. that they have a fear of intensive regulation of the municipal-bond field. which is not sought by this section 15 (2. All that is sought is a power to penalize fraudulent transactions wherever they may oceur. whether they occur in the municipal-cond field or the corporatebond field or any field. That le all that is sought here, and I cannot see that the existence of that power, provided it is limited to that, would interfere with municipal financing or make it more costly.

Mr. PEYSER. Have you had a communication from the comptroller of the State of New York!

Mr. LANDIS. I have.

Mr. PEYSER. And the city as well?

Mr. LANDIS. Yes.

Mr. PEYSER. Along that same line?

Mr. LANDIS. Along that same line. And that is in substance largely the discussion that we had this morning and have been having the last 2 or 3 days, to see if we cannot circumscribe that language so as not to give rise to fears of that type which I personally feel are not well founded, but which is arguable, and, therefore, I felt that any basis for the argument should be eliminated from the Jegislation.

Mr. PEYSER. Their argument is that there is a certain amount of sales resistance which would be set up against the municipal and State securities, and which might affect the price of those securities. Whether I am correct in that belief, or whether they are, I do not know.

Mr. LANDIS. For example, it is true, I think, that if that section gives this roving commission to us which some people suggest it might give, we might so abuse our powers in that connection as to increase the cost of municipal financing. My contention, of course, is that it does not create that. But if it can be eliminated to the satisfaction of everybody concerned, there is no objection from the Commission's standpoint, certainly.

Mr. PEYSER. Mr. Chairman, I ask that the two telegrams to which I have referred to be made a part of the record at this point. The CHAIRMAN. Without objection, the communications referred to may be made a part of the record at this point.

(The telegrams referred to are as follows:)

Hon. THEODORE A. PEYSER,

House of Representatives:

MAY 5, 1936.

Section 17 of securities net now prohibits fraud in dealing in municipal securities by law, and section 10 (b) of Securities Exchange Act of 1934 now

prohibits manipulative practices in municipal securities by law. If Senate bill 4023, which passed Senate April 24 under suspension of rules and is now before the House, becomes a law all municipal bonds will be subject to the broad rule making power of the section under the guise of preventing fraud and concealment. This is not government by Congress but by Commission and may seriously affect municipal credit. This bill may be an attempt to force regulation over matters other than fraud and should be amended by adding to section 15 (c), line 14, the words, "other than an exempted security." This bill in hands of interstate and foreign commerce commission, Reyburn chairman. Hearing on same tomorrow morning at 10 a. m.

LEHMAN BROS.

Hon. T. A. PEYSER,

House of Representatives:

APRIL 29, 1936.

In the opinion of all municipal bond dealers and State Comptroller Morris Tremaine and New York City Comptroller Frank Taylor, if Senate bill 4023, section 15 (c) is passed without amendment by House of Representatives, it will in the opinion of counsel make municipal bonds subject to section regulation and will adversely affect municipal-bond prices and in that way affect municipal credit. Necessary amendments in order of preference follow page 15, line 16, parenthesis should contain the words, "Other than an exempted security", "commercial paper", "bankers' acceptances or commercial bills", close parenthesis. Second proposal, page 15, line 13, omit the words "Or any other person." Third proposal, page 15, line 22, omit remainder of paragraph with words beginning "or otherwise." The inclusion of one of these roposed amendments is regarded vitally important to good municipal credit.

LEHMAN BROS.

Mr. TERRY. Mr. Landis, I received a telegram this morning from the mayor of my home town, Little Rock, in which he saysLITTLE ROCK., ARK.,

Hon. DAVID D. TERRY,

Washington, D. C.:

May 5, 1936.

Understand Senate bill 4023 up for hearing before House Committee on Interstate and Foreign Commerce tomorrow morning. As mayor of Little Rock, and having recently sold a municipal issue of 4 million, and in the process of selling 22 million additional, am very much interested and request that municipal bonds be exempt in section 15 (c) along with commercial paper, bankers' acceptances, and thereby not make municipal bonds subject to control of Securities Commission which would have tendency to depress prices on outstanding issues and it will increase the cost of new issues.

MAYOR R. E. OVERMAN.

You say that your purpose is only to prevent fraudulent practice? Mr. LANDIS. That is all that our purpose is.

That telegram is indicative of the same sort of question that Mr. Tremain raises. I have also received a telegram of that nature from the city of Tacoma, and some other cities, which are worried. about it, but I think that that worry can be straightened out.

Mr. TERRY. You think the amendment you are proposing will take care of that?

Mr. LANDIS. Yes. I have not got the words in form yet. As I say, we were discussing this just before coming over here, with a group of the municipal-bond people, and I think we can get to a satisfactory solution on that. If not, of course, we will inform you of that fact.

Mr. PEYSER. May I ask you another question? Is it your idea, then, Mr. Landis, to suggest such an amendment as will cover that point?

Mr. LANDIS. To suggest an amendment which will remove any of these doubts to the effect that this is an encroachment upon a certain field, an extension of our powers, or to give any indication that this would even deposit powers with the Commission which, if abused, would create the situation that you speak of.

Mr. PEYSER. That is all.

Mr. PETTENGILL. Mr. Landis, what evil exists in the sale of municipal securities, or has existed?

Mr. LANDIS. Well, there has been fraud in the sale of those securities, as in the sale of other securities:

Mr. PETTENGILL. In what respect?

Mr. LANDIS. Misrepresentation.

Mr. PETTENGILL. Of the taxable property, and so forth, behind the security?

Mr. LANDIS. Sometimes of that, sometimes of the character of the obligation.

Mr. PETTENGILL. As to whether it is

Mr. LANDIS. As to whether it is a general obligation or a special obligation.

Mr. PETTENGILL. Those fraudulent practices that have come to your attention, have they been by word of mouth or printed literature?

Mr. LANDIS. Usually by word of mouth. I do not know of any that have come to our attention recently which have been by printed literature.

Mr. PETTENGILL. How do you expect to cover the situation where the fraud consists in misrepresentation by word of mouth by salesmen?

Mr. LANDIS. If interstate commerce is involved in the transmission of that security, in the completion of the sale, we assume that we have jurisdiction in those instances. Of course, if no interstate commerce is involved anywhere in the sale of that security, then, no matter what fraud is perpetrated, it is completely within the control of the States rather than of us. But it would have to be word of mouth plus, we will say, the subsequent use of the mails. or instrumentalities of interstate commerce in the transmission of that security.

Mr. PETTENGILL. Do you know of any historical examples where fraud has been practiced in the sale of municipal securities which would conceivably come within the power of the Federal Government to deal with it?

Mr. LANDIS. A particular one?

Mr. PETTENGILL. Yes.

Mr. LANDIS. I have not one at my fingertips; no.

Mr. PETTENGILL. The question in my mind is whether there is any evil here that it is within our power to cure that amounts to enough to justify us in changing the law.

Mr. LANDIS. Well, I think, for example, in the report sent up to the Congress on Monday, there is an illustration of one situation which would be within the purview of this section. There you will find, for example, that it has been the practice of certain bondholders' committees for defaulted municipalities to buy in outstanding bonds at sacrifice rates, largely due to a misrepresentation of the existing situation.