Mr. PETTENGILL. Is there anything wrong about that?
Mr. LANDIS. I think there is.

Mr. PETTENGILL. I do not mean morally wrong but legally wrong. Mr. LANDIS. Legally wrong? I think there is. The bondholders themselves are in possession of information about a situation which they misrepresent in order to purchase bonds at a sacrifice price. It seems to me just as wrong for me to acquire a bond from you through misrepresentation as for me to sell you a bond through misrepresentation.

Mr. PETTENGILL. In that case you are dealing with bonds that are already out in the hands of the public.

Mr. LANDIS. That is true.

Mr. PETTENGILL. Is the municipality involved?

Mr. LANDIS. No; the municipality is not involved. I do not think the municipality is involved anywhere in this section. Mr. Katz has just suggested to me that he was wondering whether your concern is with the origination.

Mr. PETTENGILL. Yes.

Mr. LANDIS. Our concern is not with the origination of the issues. Our concern is with the subsequent trade in these issues that takes place. If we wanted to go into the field of being concerned with the origination of these issues, we would have to go in for a comprehensive and large legislative program, which is not the purpose of this section.

Mr. PETTENGILL. Well, that was to thought I was leading up to, Mr. Landis. I think I would personally be very much opposed to placing an original issue of municipal or State bonds under any Federal control of any kind or type. I think it would be the opening door to something that I do not want to have a part in the extension of. Is it your idea that the proposed amendment that you have in mind to section 15 (c) is to deal only with fraudulent practices of municipal bonds after they are once in the hands of the public Mr. LANDIS. That is the idea.

The CHAIRMAN. We specifically exempted from the original act municipals and States.

Mr. LANDIS. In the original Securities Act municipal securities were entirely exempted because there was no intention at that time to go into the control of origination and certainly there is no intention to change that theory in this section 15 (c).

Mr. PETTENGILL. In other words, to make it perfectly clear, if a municipality decides to offer an issue of its securities through some authorized agent selected by itself, in the initial sale of those securities to the public, there is nothing you have in mind that would bring it within your jurisdiction?.

Mr. LANDIS. I would not go quite that far.

Mr. PETTENGILL. Well, how far would you go?

Mr. LANDIS. If, for example, that agent makes misrepresentations in the sale of that security, why should not that agent be responsible for those misrepresentations? But, so far as to control that situation in the way in which we control the origination of corporate securities, today, by saying that prior to an issue and registration of them, there must be filed certain data, which must be examined, and that those data must be put before every prospective purchaser, there is certainly no intention to do anything of that nature.

But wherever there is an actual misrepresentation made by one person to another in the sale of a security, which I do not conceive to be origination, the process of origination, because that is the process of sale, under those circumstances, I see no reason why anybody should be exempted from liability for that type of conduct.

Mr. PETTENGILL. It may be a rather fine constitutional question as to whether you can hold the agent of a State responsible even for misrepresentation, because the agent acts only for his principal, in the original sale, does he not? You cannot punish a State or municipality for misrepresentation, can you?.

Mr. LANDIS. Yes; but if I remember the law of agency correctly, the agent is responsible for his misrepresentation even though he makes them at the request of his principal.

Mr. PETTENGILL. At the request of his principal?

Mr. LANDIS. Yes. Of course, the principal is responsible, but there is a joint responsibility there.

Mr. PETTENGILL. But the point that I am making is: What right do we have constitutionally to place any inhibitions upon a State or a municipality in the sale of their securities originally?

Mr. LANDIS. I think that the Federal Government has the right to say that the mails, which are under its direction, shall not be used to effect frauds; that is, I do not think that the principle of our constitutional Government authorizes a State to insist upon its right to use the Federal mails in order to perpetrate a fraud. I do not think that principle carries that far.

Of course, it is true that the Supreme Court has said again and again that so far as State bonds and municipal bonds go, they are immune from taxation by the Federal Government, because the power to tax there is a power to destroy; and being so, it is a power to interfere with the essential processes of State financing. But the essential processes of State financing do not call for the perpetration of frauds.

Mr. PETTENGILL. There have been some instances where States have repudiated their bonds. In your eyes or in mine that might be morally a wrong thing to do. But they have done it. Do you assert any power to prevent a State from repudiating its bonds? Mr. LANDIS. Absolutely not.

Mr. PETTENGILL. What would you do in case bonds which had been repudiated by the act of a State legislature were found floating around in the hands of the public?

Mr. LANDIS. For example, if the broker or dealer under those circumstances would sell an individual one of those defaulted bonds and tell that individual that this bond is not in default, I see no reason why that dealer should not be punished for committing a fraud.

Mr. PETTENGILL. That is all, Mr. Chairman. Thank you, Mr. Landis.

Mr. KENNEY. Mr. Landis, you have set forth two lines of criticism that were offered to the bill. The first had to do with the language on page 15, line 13. Would you mind telling us who it was that offered that criticism; what was the source of it?

Mr. LANDIS. The source of that criticism? It was the American Bankers' Association.

Mr. KENNEY. Were they the only ones?

Mr. LANDIS. No; that is not the only source. Another source of criticism was the Comptroller of the Currency and the Federal Reserve Board, who also make that same point, namely, that jurisdiction over this matter was already in the hands of these two agencies and therefore that there might be a tendency for an overlapping of jurisdiction if a further jurisdiction were granted to the Securities and Exchange Commission in that respect.

You will remember in the Securities Exchange Act that the terms "broker" or "dealer" are specifically defined to exclude banks, and therefore they felt that this was a departure from that principle, by including the words "any other person", which brought banks within the jurisdiction of the Commission.

Mr. KENNEY. That is all.

The CHAIRMAN. If there are no further questions, we are very much obliged to you, Mr. Landis. We hope when you get your amendment in shape you will let us have it.

Mr. LANDIS. Thank you, Mr. Chairman.

The CHAIRMAN. Is there anyone representing the stock exchanges here who wants the same thing with reference to this matter? Is there any objection to regulation?

Mr. Lockwood, do you have anything to say, representing the curb?

Mr. LOCKWOOD. The New York Curb Exchange feels that this bill meets the problems in an intelligent and constructive manner. The CHAIRMAN. We are very much obliged to you, Mr. Lockwood. The American Bankers Association, Mr. Fleming.

STATEMENT OF ROBERT V. FLEMING, PRESIDENT, AMERICAN BANKERS ASSOCIATION, WASHINGTON, D. C.

Mr. FLEMING. Mr. Chairman and gentlemen, I think that Commissioner Landis has stated the position of the American Bankers Association, which is similar to that I believe, of the Federal Reserve Board program.

We feel that if there is to be any regulation that it should be under existing supervisory boards.

The CHAIRMAN. The language suggested and sentiment expressed by him is satisfactory to you?

Mr. FLEMING. That is correct.

The CHAIRMAN. What about the Investment Bankers?

STATEMENT OF ORRIN G. WOOD, REPRESENTING THE
INVESTMENT BANKERS ASSOCIATION

Mr. WOOD. In regard to Mr. Fleming's statement, I have got this one thought in mind. We have every sympathy with the desire of the American Bankers Association not to increase the number of regulatory bodies they are under.

On the other hand, we do not believe that the ordinary municipal dealers outside of the banks should be under one set of regulations and the banks under another, if the banks are dealing in the same thing.

That would make, or might very well make, it impossible for the vast majority of outside municipal dealers to compete with the banks in the matter.

The CHAIRMAN. That is not the question, Mr. Wood. The question is whether or not the regulation is adequate.

- Mr. WOOD. It is what?

The CHAIRMAN. The question is whether or not the bank regulation is adequate.

Mr. Wood. The question is whether or not it is adequate. It seems to me that is correct, but it seems to me also that the question is whether it is really identical, so that they are working under the same rules.

I think it is possible to work out some arrangement where that can be done without putting them under additional regulatory bodies.

That is the one thing that I would hope that we could work out together with Mr. Landis.

Another thing I have to say: We have been talking with Mr. Landis this morning; and, as usual, I want to say to you gentlemen that we have found him very cooperative and willing to listen, and I am very hopeful we can work out an arrangement which will clear up the doubts of the large number of municipal dealers and municipalities.

The question arising in my mind is, if that cannot be done, whether it will be possible for us to present our objections later to this committee.

The CHAIRMAN. Well, I think we will close the hearings today, Mr. Wood. Whatever you have to say, I think would be well for you to say now.

Mr. WOOD. May I ask that Mr. Reed present our thoughts, because I am not a municipal man, and he can present our side. I thank you.

STATEMENT OF ROBERT R. REED, NEW YORK, N. Y.

Mr. REED. I am a little embarrassed because I understood that there was to be an arrangement with Mr. Landis.

I should like to say this, that this matter came to me yesterday morning and that I did not feel able, and I was quite reluctant to come down on short notice representing the dealers.

Ninety percent of our work is for the municipalities, and after thinking it over and reading the bill, I decided to go back to them and tell them I would come down, and with the understanding I was speaking solely from the point of view of the municipalities.

We are bond counselors. The bonds are sold at public sale under our opinion. Our city clients include Rochester, Albany, Newark, Jersey City, just as an illustration; Richmond, Norfolk, Houston, Montgomery, Fort Worth, and others of a similar type, and many smaller ones all through the country.

I did not feel when they spoke to me, and I do not feel yet that the dealers are going to be put out of business by any severe regulation. Municipalities will still have to do business through the dealers, but the municipalities would be very severely penalized by any really effective regulation that looks to full disclosure of information or any similar principles that apply to ordinary corporate securities. Municipal bonds are bought and sold

The CHAIRMAN. You have been in conversation with Mr. Landis and Mr. Wood?

Mr. REED. I have; but the understanding was that if we could not agree on any amendment we might be heard further by the committee?

The CHAIRMAN. There was not any agreement with me.

Mr. REED. I realize that, Mr. Chairman. The agreement was among ourselves. But I wanted to present that.

Our objection is to giving the Commission power such as a policeman would have to tell people that they could not go down into a certain dark section of a park because crimes sometimes are committed in that section, as distinguished from prosecuting a man when he is guilty of crime down there.

Municipal bonds are bought and sold on a very close price, because they are sold on the market on which they are bought. Anybody who buys them buys them at a public sale, a competitive sale. They could not buy them this way subject to later satisfying the Commission as to the information which they have been able to obtain from the municipality. They do not know what that information is when they buy and sell them, because in many cases they cannot get information and in other cases it would be for a long time with the Commission.

We have, perhaps, as fine a Commission as we ever are going to have under this act, and I know perfectly well that Commissioner Landis has no idea of doing the things I have suggested.

The CHAIRMAN. I do not think that anyone on the committee has any such idea, either.

Mr. REED. The suggestion was made a moment ago that this should not apply to the origination of securities, but that this could be met completely by exempting the securities within a period of 30 or 40 days, or 2 months after issuance; but that is not what should be done, or what we really have in mind as to what the Commissioner has in mind.

It is to make the section read, not to make rules to prevent fraud but to make fraud a crime-that is the commission of fraud-in violation of the rules. In other words, it must be both a crime and a violation of a rule, and not simply the violation of a rule telling a man how he must do his business to prevent fraud.

The things are very different and we hope that we can agree on that. If we cannot, we will ask permission to discuss the matter by letter.

Mr. PEYSER. May I ask a question?

The CHAIRMAN. Mr. Peyser.

Mr. PEYSER. What is your thought on this suggestion on "other than exempt securities?" Would that not cover it in a very few words?

Mr. REED. That would cover it completely, but the Commissioner does not want or seek that.

Mr. PETTENGILL. Mr. Reed, may I ask you a question?

Mr. REED. Yes, sir.

Mr. PETTENGILL. What distinction do you make between the origin and subsequent sale of municipal bonds?

Mr. REED. Well, if they are exempted for a period after origination, you cover them, but resale by a dealer who buys at public sale is, for all practical purposes the origin of the issue.