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WASHINGTON, D. C., May 5, 1948. Hon. (HARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D. C. MY DEAR MR. CHAIRMAN: Further reference is made to your request for the views of this Department on H. R. 6443, "To amend the Securities Act of 1933, the Securities Exchange Act of 1934, and the National Bank Act.”
H. R. 6143 is identical to one of two drafts of bills which I transmitted, in my capacity as chairman of the National Advisory Council on International Monetary and Financial Problems, to the Speaker of the House of Representatives on April 21, 1918, and which were referred to your committee on April 22, 1948. Copies of the letter, together with its enclosures, are attached for your information.
The purpose of H. R. 6443, which is explained more fully in the letter of trans- · mittal and accompanying material, is threefold: (1) It would exempt securities of the International Bank for Reconstruction and Development from the requirements of the Securities Act of 1933, which, for example, requires the filing of an elaborate registration statement before a public offering of securities in interstate commerce can be made; (2) it would exempt such securities from the provisions of the Securities Exchange Act of 1934, which contains provisions for regulating security exchanges and over-the-counter markets and transactions on such exchanges and markets; and (3) it would permit national banks and State member banks of the Federal Reserve System to underwrite and deal in securiities of the bank within certain limitations, such transactions now being prohibited by section 5136 of the Revised Statutes.
It is the opinion of the National Advisory Council that these three acts were not enacted with an international institution such as the bank in mind and that compliance with their provisions would tend to hinder the bank in its effort to raise funds in the United States markets. For that reason, and in view of the interest the United States has in continued effeciveness of the Inernational Bank, I strongly recommend favorable action on H. R. 6443.
I would also like to take this opportunity to recommend the introduction, and reference to the appropriate committee, of the second draft of bill transmitted with the letter of April 21, 1948, to the Speaker of the House of Representatives. That draft of bill would authorize the investment of funds of insurance companies organized within the District of Columbia in obligations of the International Bank and its passage would aid raising additional funds for the bank.
Prior to the submission of the bills, the Bureau of the Budget, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency advised that they had no objection to the submission of the bills to the Congress. Very truly yours,
JOHN W. SNYDER, Secretary of the Treasury.
SECURITIES AND EXCHANGE COMMISSION,
Philadelphia, Pa., May 6, 1948. Re H. R. 6443 Hon. CHARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D. C. MY DEAR MR. WOLVERTON: This is in reply to your letter of May 5, 1948, requesting the views of the Commission on H. R. 6443, "a bill to amend the Securities Act of 1933, the Securities Exchange Act of 1934, and the National Bank Act.”
The bill would exempt any security issued or guaranteed by the International Bank for Reconstruction and Development from the registration provisions of the Securities Act of 1933 and from many of the provisions of the Securities Exchange Act of 1934. It would also amend the National Bank Act to permit institutions subject thereto to deal in and underwrite such securities subject to certain limitations. We limit our comment to the provisions of the bill which would create exemptions from the statutes administered by the Securities and Exchange Commission.
The effect of the bill would be that securities issued or guaranteed by the bank would be treated henceforth in the same manner as obligations issued or guaran
teed by the United States or by States or municipalities or instrumentalities thereof, with respect to all of which Congress has deemed it desirable to forego the particular kinds of safeguards for investors that are provided in the Securities Act of 1933 and the Securities Exchange Act of 1934. The provisions of these acts outlawing outright fraud would remain applicable to securities of the bank as they are now applicable to Federal, State, and municipal securities.
The bill presents a broad general question whether in view of the special character of the International Bank, the method of its organization and operation, the nature of its securities, and the national public interest in facilitating its objectives, it is desirable to retain or to forego those safeguards with respect to the securities issued or guaranteed by the bank.
That question is, of course, one of policy involving considerations beyond the scope of this Commission's immediate jurisdiction as the agency responsible for administering the two statutes in question. The Commission does not purport to speak upon that question of broad policy. We shall limit our comment to facts within the special knowledge and experience of the Commission.
While the bank is not controlled by the United States, which is a member nation with a minority interest, the bank, under the articles of agreement, inay borrow funds or guarantee loans only with the approval of the member in whose markets the funds are to be raised. Similarly, the bank may not buy or sell securities it has issued or guaranteed without the approval of the meinber in whose territories the securities are to be bought or sold. It is provided in the Bretton Woods Agreements Act that whenever, under the articles of agreement, the approval of the United States is required before an act may be done by the bank, the decision as to whether such approval shall be given or refused shall be made by the National Advisory Council on International Monetary and Financial Problems, under the general direction of the President. Moreover, the National Advisory Council is charged with responsibility for recommending to the President general policy directives for the guidance of the representatives of the United States on the bank. The National Advisory Council consists of the Secretary of the Treasury (as chairman), the Secretary of State, the Secretary of Commerce, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Board of Directors of the Export-Import Bank of Washington, and the Administrator for Economic Cooperation.
In some respects the powers of the National Advisory Council are broader, more flexible, and more direct than those of this Commission, which has no authority under either of these acts to approve or disapprove the sale of particular securities provided a correct and adequate disclosure is made of the pertinent facts concerning them. To that extent the arrangements under which the bank carries out its operations provide facilities for protecting the interests of American investors, which, although they differ from the mechanisms applicable to nonexempt securities through the laws administered by the Commission, may be better adapted for effective application to the operations and the securities of an instrumentality of international policy such as the bank. Presumably, the policy determinations of the National Advisory Council would take into account the interests of American investors and their need for protection against the types of abuses which led to the enactment of the securities legislation administered by this Commission, especially if the safeguards of these laws are withdrawn.
In recognition of these circumstances the Commission does not oppose the proposed legislation insofar as it would apply to the bank and to securities issued or fully guaranteed by the bank. We shall, however, point out certain possible consequences that might flow from these exemptions in the broad form proposed which suggest the possible desirability of limiting the scope of the exemptions in certain particulars.
The first aspect of the problem is the proposed exemption of the bank and other persons from the registration and reporting requirements of the securities acts. Under the registration provisions of the Securities Act of 1933, new securities issues may not be publicly offered through the mails or instrumentalities of interstate commerce unless, in general, a registration statement adequately describing such securities has been filed with the Commission and a prospectus embodying such information is supplied to purchasers. These provisions have their counterpart in sections 12 and 13 of the Securities Exchange Act of 1934, which require somewhat similar registration statements to be filed with a national securities exchange and with the Securities and Exchange Commission respecting securities registered on the exchange, and which also require periodic reports to be filed so that the basic information may be kept current. As previously noted, securities issued by the United States, by any State, or by any political subdivision thereof, are exempted, but those issued by foreign governments are not.
Securities which are obligations of the International Bank do not fall exactly into either category, although the special interest of our Government in such securities, together with its practical authority to condition the method of their flotation in this country, render applicable to some degree the considerations which led the Congress to exempt United States Government securities from the securities acts.
The foregoing discussion is applicable particularly to securities issued by the bank. However, in the case of securities guaranteed by the bank a special problem is presented. Under the Securities Act of 1933 a guaranty is considered to be a security distinct from the underlying obligation, and registration of each is required. Under the present language of this bill, the proposed exemption from the Securities Act of 1933 would extend to "any security issued or guaranteed" by the bank. The bank's guaranties would be covered by this exemption since, whether full or partial guaranties, they would be deemed securities issued by the bank, and as such would offer no problems different from other securities issued by the bank.
The additional exemption of the underlying obligations guaranteed presents different considerations. As we understand it, the bank is particularly concerned with the possibility of being able from time to time, as the condition of the capital markets may warrant, to add its guaranty to the securities of foreign issuers which it acquires in the course of its lending operations, and to release such securities in the private capital markets. A requirement that these securities be registered would render such a practice unfeasible where the bank does not actually control the foreign issuer. Where the securities of the foreign issuer are fully guaranteed by the bank as to principal and interest, they would be purchased essentially on the strength of the guaranty and they would ordinarily be the approximate equivalent, so far as investment value is concerned, of securities issued by the bank itself.
However, under the articles of agreement, the bank may guarantee foreign obligations "in whole or in part” (art. IV, sec. 1 (a) (iii)). Presumably a guaranty "in part” may take such forms as a partial guaranty of principal, a guaranty of interest alone, or a guaranty which is no more than an assurance that if funds are available to the foreign issuer to meet its obligations in terms of local currency there will be available for purposes of payment an adequate amount of the currency in which the obligation is payable.
We have been in communication with counsel for the bank on this point, and they agree with us that in the case of a partial guaranty there could be no justification for exemption of the underlying obligation. Accordingly, they have agreed with us that the proposed addition (H. R. 6413, p. 1, lines 5-7) to section 3 (a) (2) of the Securities Act of 1933, namely: "or any security issued or guaranteed by the International Bank for Reconstruction and Development;" should be stricken, and that the following should be substituted therefor: "or any security issued by the International Bank for Reconstruction and Development (including any guaranty by said bank whether or not limited in scope), and any security fuily guaranteed by said bank as to both principal and interest;'' Counsel for the bank have also agreed that in place of the following language (H. R. 6443, p. 2, lines 13–15) in the proposed new section 3 (a) (12) of the Securities Exchange Act of 1934: "securities issued or guaranteed by the International Bank for Reconstruction and Development;" there should be substituted the following: "securities issued by the International Bank for Reconstruction and Development (including guarantees by said hank whether or not limited in scope), and securities fully guaranteed by said bark as to both principal and interest;"
A second aspect of the proposed legislation involves exempting securities of the bank from provisions of the Securities Exchange Act prohibiting various types of manipulative activity, and exempting them also from rules of the Commission designed to prevent abuses in the conduct of otherwise proper trading activity. The bill does not contemplate exemption from the antifraud provisions of section 17 of the Securities Act, nor from certain of the provisions of the Securities Exchange Act applicable to clearly fraudulent activities. The scope and extent of the exemption afforded is precisely that presently applicable to Federal, State, and municipal securities. So far as concerns the activities of the bank and its agents, it may be noted that the activities of the bank in the securities markets of this country are subject to substantial although not complete controls by the National Advisory Council, as indicated above.
Such controls would not, however, apply to the activities of private persons who are not agents of the bank. As we understand the position of the bank, it desires that there be an active sustained market for its securities, and, to this end, that the large number of dealers who do business exclusively in Federal, State, and municipal bonds, and who in consequence are exempt from regulatory provisions applicable to brokers and dealers generally, should feel as free to deal in the bank's securities as in any other exempted securities.
To the extent that this may remove a restriction on manipulative activities affecting the bank's securities, it is relevant to note that it is unlikely that any private group of dealers could, by their trading activities, substantially affect the price of any particular issue of the bank's own securities or of securities fully guaranteed by the bank, in view of the substantial equivalence of these issues, the large amounts involved, and the ability the bank would have to engage in trading activities itself, under tie supervision of the National Advisory Council. However, if the credit of the bank should be seriously impaired, the guaranteed issues would develop investment characteristics of their own, depending upon the credit of the principal obligor, and the smaller of these issues could become susceptible to manipulative activities by private persons. Such a contingency could, of course, be met by future legislation.
To the extent that dealers in the bank's securities would be exempted from other regulatory measures applicable to brokers and dealers generally, it is, of course, a fact that under the acts as they now stand such immunities are avail. able to persons dealing in securities already exempted.
We may note finally that the bill would exempt securities issued or guaranteed by the bank from those provisions of the Securities Exchange Act which regulate trading on margin. This subject is within the special competence of the Board of Governors of the Federal Reserve System, and accordingly we do not undertake to comment thereon.
By reason of lack of time, we have not been able to ascertain from the Bureau of the Budget the relationship of the comments expressed herein to the program of the President. Sincerely yours,
ROBERT K. McCONNAUGHEY,
SECURITIES AND EXCHANGE COMMISSION,
Irshington, June 2, 1948. Re: H. R. 6443 ELTON J. LAYTON, Clerk, Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D. C. DLAR SIR: This is with reference to the notice of proposed hearings to be held by the committee on June 4, 1948, with respect to H. R. 6443, a bill to amend the Securities Act of 1933, the Securities Exchange Act of 1934, and the National Bank Act to provide certain exemptions for securities issued or guaranteed by the International Bank.
Incorporated in that notice is a request for our comment on a telegram of May 26, 1948, addressed to your committee by Mr. L. R. Billett, chairman of the hoard of governors of the National Association of Securities Dealers, Inc. May I refer you to a letter addressed to Hon. Charles A. Wolverton on May 6, 1948, over the signature of Robert K. McConnaughey, acting chairman, setting forth in full our views as to H. R. 6443 insofar as the bill provides exemptions from the Securities Act of 1933 and the Securities Exhange Act of 1934 for securities directly issued and those guaranteed by the International Bank.
Mr. Billett's telegram deals with two features of the bill. One, it objects to the exemption from the Securities Act of 1933 and the Securities Exchange Act of 1934 of issues guaranteed by the International Bank (as distinguished from those directly issued by the bank), and two, it ohjects to changes in banking legislation which would permit national banks and members of the Federal Reserve System to underwrite and deal in securities issued or guaranteed by the International Bank.
From Mr. Billett's telegram it appears that he has no objection to the exemption from the Securities Act of 1933 and the Securities Exchange Act of 1934 proposed in the bill for direct obligations of the bank. His difficulties are with securities guaranteed by the bank. As our letter of May 6 makes clear, we had some difficulty with the proposal to grant exemptions for obligations only partially guaranteed by the bank (as is possible under the articles of agreement). However, the companion Senate bill to H. R. 6443 (S. 2636) has been modified according to our suggestion to limit the availability of exemptions under the Securities Act of 1933 and the Securities Exchange Act of 1934 only to securities directly issued and fully guaranteed by the bank as to both principal and interest. We refer you to Senate Report No. 1387 on S. 2036. The matter is discussed in the above-mentioned Senate report and is fully discussed at pages 4 and 5 of our letter of May 6, copies of which are enclosed for your convenient reference.
The comments made by us in our letter of May 6 would seem to be fully applicable to the issue raised in Mr. Billett's telegram respecting exemption of guaranteed issues from the Securities Act of 19:33 and the Securities Exchange Act of 1934. Thus we believe that the committee will find our letter of May 6 contains a complete statement of the Commission's views respecting those aspects of the bill which full within the Commission's competence.
Since Mr. Billett's comments regarding amendment of the National Bank Act do not touch the direct statutory concerns of the Commission, we are itin our comment to the other aspects of his telegram. Sincerely yours,
EDMOND M. HANRAHAN, Chairman.
BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM,
Washington 25, D. C., May 6, 1948. Hon. CHARLES A. WOLVERTON, Chairman, Interstate and Foreign Commerce Committee,
House of Representatives, Washington, D. C. MY DEAR MR. ('HAIRMAN: This refers to your letter of May 5, 1948, regarding H. R. 6443. The bill would exempt securities issued by the International Bank for Reconstruction and Development from the Securities Act of 1933, from the Securities Exchange Act of 1934, and, with certain limitations, from the provisions of section 5136 of the Revised Statutes which relate to dealings in securities by national banks and State member banks of the Federal Reserve System.
The provisions of the bill follow a recommendation made to the President pro tempore of the Senate and the Speaker of the House by the Secretary of the Treasury, as chairman of the National Advisory Council on International Monetary and Financial Problems. The chairman of this Board is, as you know, a member of the Council. The Council expressed the view that the acts which would be amended were not enacted with an international institution such as the bank in mind and that compliance with their provisions would tend to hinder the raising of funds by the bank in the United States markets. Accordingly, for these reasons and in view of the interest the United States has in the continued effectiveness of the bank, the Council recommended that the acts be amended.
The Board is in entire accord with the conclusion of the National Advisory Council on this matter. The Board believes that the proposed changes are desirable, and it favors the enactment of H. R. 6443 for that purpose.
The Board has given special consideration to the proposed exemption from the provisions of section 5133 which relate to dealings in securities by member buks of the Federal Reserve System. Section 5136 in its present form prohibits such banks from acting as dealers in most types of securities. That section, however, now includes exemptions for securities of the United States Government, of States and municipalities, and of a number of Government instrumeutalities. Because of the participation of the United States Government in the International Bank and this Government's special interest in the institution, the Board feels that the proposed exemption for the bank's securities is a logical and desirable addition to the existing exemptions and that it does not represent any departure from existing principles, Very truly yours,
S. R. CARPENTER, Secretary.