Municipalities cannot get good prices unless those bonds are im mediately sold on the facts on which it sells them.

Mr. PETTENGILL. I agree with you on the original issue; but suppose after an issue is in the hands of the public somebody represents, to effect a sale, that the issue is not in default when it actually is in default, what power would you give the Securities and Exchanges Commission over a situation of that sort?

Mr. REED. It is in the law already. It is absolutely prohibited. That is fraud in the sale of securities.

Mr. PETTENGILL. You do not think that the law needs strengthening in that respect?

Mr. REED. No; I do not think that the commission would even attempt to put out regulations covering that. You can not prevent fraud in everything. There is occasional fraud in everything. There is fraud in the sale of houses, horses, and old shoes.

Mr. PETTENGILL. Does the existing law cover misrepresentations in the sale of municipal bonds?

Mr. REED. It does.

Mr. PETTENGILL. It does?

Mr. REED. Yes; but it does not give the commission power to tell people how to sell municipal bonds and to do that goes right back to the municipality. The Commission has found in dealing with corporate securities that it cannot effectively regulate them without going back to the issuers and the issuers of municipal securities are States and municipalities and any additional expense would have to be paid by them. The dealers can do business on five points profit as well as upon one. They would take the regulations, and abide by them. They would have to, but the municipalities would have to pay the price and it would be millions and millions of dollars a year.

The CHAIRMAN. We are very much obliged to you.

Does anyone else have anything to say?

Mr. WOOD. We have two gentlemen who have for some years been in the municipal business. You may want to ask them some questions. They are Mr. Gibbons of New York and Mr. Charles McNear of Chicago. They are here if you desire to ask them any questions. The CHAIRMAN. If they have anything to say or any suggestions to make, I presume we have got time to hear them.

Mr. WOOD. Mr. Gibbons.

STATEMENT OF GEORGE B. GIBBONS, NEW YORK, N. Y.

Mr. GIBBONS. Gentlemen, in speaking I am speaking from the municipal dealers' point of view. As has been explained by Mr. Reed and Mr. Landis, we do not have the slightest objections now and never have had to any laws against fraud. We have always been liable to those laws. Why, if a dealer bought a bond, a thousand-dollar bond for $500 and it was in default, and offered it as a good bond, as paying interest, he would be liable for fraud now, and would have been years ago, and there is no need of a regulation on the part of the commission as to that. He has always been guilty of that.

With respect to the municipal dealers, any change, though it may be very mild, might cause a delay in complying with the regulations. That delay would be costly.

The municipal bonds-and I am speaking of the dealer's point of view, and it also affects the municipality-are sold at a very small profit today, smaller than corporate bonds, and no time elapses between the time they are bought and the time they are offered for sale, as a rule. Many times the dealer has the bonds partially sold before he bids. He may get them and he may not; but he cannot buy the bonds and spend some time getting data and getting it approved by the commission and then sell the bonds for a profit which sometimes is as low as $4 for a thousand-dollar bond, and many issues today are sold at that profit, for long-term bonds, and short bonds as low as a dollar and a half.

The CHAIRMAN. If the language of this bill were to be such as is suggested by Mr. Landis, would that meet with your approval? Mr. GIBBONS. We were talking about it this morning, and if something could be done to change it so that the dealer would be subject to prosecution for fraud and not simply subject to violating regulations, there would be no objection to it, and the provision against fraud already exists; but the regulation pertaining to municipal bonds would, in our opinion, slow up business. It certainly would not produce any better prices to the municipalities than they are now getting, and the only thing that it would do would be to hurt the price and eliminate competition.

If regulations were made which provide that if before a bond is offered it should be approved together with the prospectus and the data verified, it would be satisfactory.

It is perfectly plain that every bit of data upon which a municipal bond is sold is supplied by the municipal officials, and sometimes it is false. There is no question about that. But, that does not necessarily effect the bonds. The merit of the bonds does not depend always upon the honesty and efficiency of the officials of the municipality. It depends upon the ability of the taxpayers to pay the taxes, and whether it is legal or not, and no regulations set out by a commission for the regulation of dealers would have any effect upon the municipalities. If you want to get at the municipalities through the dealers or sellers of the bond, you could by proper regulations almost prevent their sale and it might result in a discrimination in the sale of bonds, and that is always reflected in the price, such as years ago, for instance, bonds of Southern States were in default and for some 20 or 30 years they were not eligible for savings banks in New York City. The result was that the cost of selling those bonds was tremendous.

In other words, there was great discrimination against them. Now, you might have municipalities where the regulations did not apply, such as the large cities, and just have them apply to the small cities. Then it would be costly to the small cities. There might be rules whereby bonds would have to be passed upon by the commission and if the information supplied were not satisfactory there would be delay before the bonds could be sold. That means that the small dealers would not dare buy the bonds and that would throw the business into the hands of the banks and

dealers who have large resources. It would entail greater expense.

Today, you have many bidders who appear; many people with small financial means. The municipality does not care whether a man has $10,000 or a million when he bids on the bonds. It is immaterial to them whether he has $10,000 or ten million. The rules and regulations might prevent a man buying bonds who does not have ample capital, and anything that is done in the way of slowing up that business effects the price and cost to the taxpayer.

Mr. Tremain and Governor Lehman are interested in this first from what it may do for the municipalities. They see it pretty clearly.

That is all I have to say.

The CHAIRMAN. We are very much obliged to you.

Mr. GIBBONS. If there are any questions I will be very glad to answer them.

The CHAIRMAN. Do you have anyone else?

Mr. WOOD. No, sir.

The CHAIRMAN. Then the committee will stand adjourned.

(Thereupon, at 11:30 a. m., the committee adjourned as above indicated.)

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