Mr. Loss. The answer is not strictly by rule, but by interpretation. The Commission quite early in its life construed the general fraud provisions, section 17 (a) of the 1933 act, and sections 10 (b) and 15 (c) of the 1934 Act, as in effect prohibiting the same sort of manipulative conduct off the exchanges that section 9 prohibits on the exchanges, and some years ago, I would guess offhand around 1940, the Commission formalized that interpretation in a rule; but the rule was never operative as to over-the-counter securities. The formal rule as such was on the books, but was never operative as to over-thecounter securities, and in a few years the Commission repealed the rule, but made it clear at the time that it was not withdrawing its original construction of the section, which had antedated the rule.

So it has always been the Commission's construction of these broad sections that you cannot manipulate over the counter any more than you can on the exchange.

Now, one of the problems

The CHAIRMAN. Answering my question a bit more directly, would the bank's stabilization operations be free from SEC control in any event?

Mr. Loss. I was just about to say in my next sentence, Mr. Chairman, it puzzles us a great deal. If this bill is adopted, it would probably be advisable to put some statement in the committee report to indicate what the answer to that question is. If the bill is adopted, you would have the bank bonds exempted from section 9, the specific manipulative section, but not exempt from these broad fraud provisions.

Now, if that were the situation you might argue two ways. You might apply our general construction that anything that is outlawed by section 9 is outlawed anyway by the fraud provisions, or you might argue that, in view of Congress' specifically exempting the bank bonds from the specific provisions of section 9, it was obviously Congress intention that we would not indirectly impose the manipulation provisions on bank bonds through the back door, through these general fraud provisions. That should probably be made clear one way or the other somewhere in the legislative history, if this bill is adopted. The CHAIRMAN. It might be preferable to make it by amendment to the bill rather than by mentioning it in the report. I am not very strong for this setting forth of legislative policies in a report. I would rather see it in the form of statutory language.

Mr. Loss. Well certainly that is preferable if it could be done, Mr. Chairman.

The CHAIRMAN. Does SEC authority under sections 7 and 8 of the 1934 act prevent brokers and dealers from selling securities on less than 75 percent margin or is this a regulation of the Federal Reserve Board? As that Board has indicated its approval of the bank's proposal here, could not that Board by change of regulation meet the bank's objection? Why does it not do so if the objection is valid?

Mr. Loss. Under the statute the margin rules are adopted or promulgated by the Board of Governors of the Federal Reserve System and enforced by the Commission. That is, they make the rules and we enforce them.

The present 75-percent requirement is a requirement of the Federal Reserve Board.

The power under this statute to exempt by administrative ruling is given to the Securities and Exchange Commission, and to the Secretary of the Treasury as to certain types of quasi-Government securities. We have a blanket power. The Secretary of the Treasury has a more limited power. Whether the Board of Governors of the Federal Reserve System could exempt in its own regulations—I am not sure anybody knows the answer to that. It probably could if it were disposed to.

The CHAIRMAN. Then it seems to me that at least there is the thought there that as the Board has indicated its approval of the bank's proposal here, why could not that Board, by change of regulation, meet the bank's objections?

Mr. Loss. It might be deemed, Mr. Chairman-I cannot speak for the Board and I do not know whether the Board has a spokesman here today or not-but it might be deemed by the Board and by others to be without the Board's authority to exempt specific types of issues from whatever margin regulation it adopted. That conclusion might be reached, because in section 3 (a) (12) of the 1934 act, which is the rule-making section, the Congress specifically authorized the SEC, and in some respects the Secretary of the Treasury, to exempt by rule, and did not authorize the Board of Governors of the Federal Reserve System to exempt by rule.

So, the question would be one of interpretation as to whether the Board's general rule-making powers over margins are sufficient to comprehend an exemptive rule applicable to a particular security or type of security.

The CHAIRMAN. Well, as you can see by the questioning yesterday, this committee is vitally concerned about the protection given and information afforded the American investors. It feels the securities legislation was well thought out and is of great assistance, I, for one, have always been a stanch supporter of it.

Now, we can appreciate how up to $3,175,000,000 a reasonable argument can be made that the bank obligations are akin to United States Government obligations, and the argument can be made that they be given the same exemption. We also appreciate that Mr. Black has a diplomatic problem were a definite limitation to be spelled out in any exemption. It may well be that the protection of investors, nevertheless, would require such spelling out.

I am wondering, however, if it could be handled in another way. Could the statute contain a provision giving you the right to make and to withdraw an exemption? Could you suggest some language on that? Or, as an alternative might the limitation be made only for 1 year, and then successively renewed until this $3,000,000,000 limit were reached, or some other consideration, I cannot see now, would dictate opening up the exemption all the way to $8,000,000,000 ? Now, those are the suggestions that I had in mind to make on this. If the SEC objects to its having the authority because of lack of "standards," how can it choose between duty to investors and foreign policy. Is not the answer, it is the SEC's duty to think of the investor? If foreign policy requires lending money which is risky on the part of the individual investor, should not the Government accept such risk by lending its own funds? What standards does the SEC need, but investor protection?

Commissioner HANRAHAN. I have a statement on that, Mr. Chairman. One of the suggestions which we have heard and discussed with respect to alternative ways of meeting the problems to which the bill is addressed was to give the SEC discretionary power to exempt from the Securities Act and the Securities Exchange Act securities issued or guaranteed by the bank. Under present circumstances we would consider such a provision unfortunate for several reasons. The bank's operations are a part of the Government's over-all foreign program. To the extent that the SEC would be obligated to make decisions related to conflicts between that program and enforcing the disclosure requirements we would be thrown into the field of international financial policy. That is not now our field, either by law or by virtue of any special competence derived through experience or ready sources of specific information. Furthermore, unless this suggestion is materially expanded beyond its present apparent scope or intention, we would be without any guides to the factors we should weigh or the weight to be given to various possibly relevant factors in making the necessary choices between facilitating the bank's operations and protecting United States investors. To formulate such a set of guides would require care and study; we do not think it can be done with any hope of procuring legislation in this session. Moreover, in connection with the added field of responsibility such legislation would throw upon the Commission, there would have to be considered also the possibility that material changes in the staff organization of the Commission might have to be made.

We now have power to exempt any securities to the extent we deem it consistent with the public interest under the Securities Exchange Act of 1934 to do so. We have a more limited rule-making power under the Securities Act. The concept of public interest under both of these laws gathers its content from the provisions and purposes of those laws and to the maximum extent we deemed it proper and consistent with the standards of those acts we have already exercised our power under both the acts in favor of the bank. We refused exemptions, for example, from the antimanipulation and margin requirements of the Securities Exchange Act of 1934. To go further would require us to consider factors beyond our usual concerns which might overbalance the provisions of the acts we administer. Only by making of the Commission an agency with sufficient power, experience, and information to make policy decisions in the field of foreign finance could we administer such legislation with assurance that we could administer wisely the legislative function it would delegate.

And on this problem I would like to say that our Solicitor, Mr. Foster, has given some thought to the proposal as outlined in your question, and I would like for him to make a statement with regard to the exemptions.

Mr. FOSTER. In response to a suggestion from your staff, we undertook last night to draft an amendment to the present bill which would impose a time limitation for the exemptions as proposed in the bill, leaving the period of that time blank, because we did not venture to suggest what would be an appropriate time. I am sure that the bank would like a long time and I think it would be a problem for the committee as to how long a time they wanted to give, if the committee decides to adopt legislation along that line.

The principal drafting problem which that suggestion presented was just what happened when the cut-off date arrived with reference to securities which had been issued or guaranteed by the bank during the exempting period.

According to Mr. Black's testimony, a major factor in the reasons which the International Bank is advancing for the exemption is to encourage commercial banks to deal freely in these securities, and in the course of our drafting we assumed that a temporary exemption might defeat its purpose if the exemption were completely terminated at the cut-off date.

The exemption which we have drafted provides that, so far as the exemption from the Securities Act is concerned, the exemption unless extended by a subsequent act of the Congress would not apply after the specific date, except that the exemption shall continue applicable thereafter as to securities issued or guaranteed by the bank and outstanding prior to that date.

With respect to the exemption which the bill proposed to accord from the Securities Echange Act of 1934, there is a similar continuation of the exemption with respect to securities issued or guaranteed prior to whatever cut-off date might be fixed, with the qualification that immediately after the cut-off date any exemption from section 9 or section 15 (c) of the Securities Exchange Act would immediately terminate.

Section 9 is in general an antimanipulative provision. Section 15 (c) is the related antimanipulative provision which applies to brokers and dealers, but by definition would not apply to commercial banks.

I understand that counsel for the International Bank has some hesitancy about the wisdom of the qualification which would terminate even as to outstanding securities any exemption which had been granted in section 9 and section 15 (c). I think they can speak with reference to that more specifically than I can.

I think their argument is based largely upon reference to section 9, to a possibly psychological repercussion upon commercial banks who might purchase the securities.

In our discussion with them, the members of our staff are not persuaded that those phychological fears were of substantial consequence, as the representatives of the bank expressed; but we recognize that that is perhaps their problem rather than ours, and a problem of salesmanship.

Mr. BENNETT of Michigan. Why could not the law be amended, if it is going to be amended at all, to have a cut-off date when the securities issued by the bank no longer are backed by the United States Government?

Mr. FOSTER. Again this was the bank's problem, but our understanding of it when we drafted it was that to do that openly might have undesirable repercussions in their relations to other member nations; that if the exemption was for a limited period of time and continued from time to time in the discretion of the Congress, Congress might very well decide not to renew the exemption at the point where the amount of obligations issued by the bank exceeded the amount which was covered by the United States Government guaranty, or, of course, the Congress then in session might have a different view as to policy

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considerations, but that by fixing a time limit requiring further legislation at a time when it was unlikely that the bank would have exceeded the limit of the United States guaranty, Congress would accomplish that result without giving it such label as would or might offend the point of view of other member nations.

Mr. BENNETT of Michigan. What kind of a label would you put on it?

Mr. FOSTER. There would be no label at all, except the exemption. It is accorded for 3 years, 2 years, or 4 years, or 1 year, whatever the committee brings out. In other words, that would be an exemption for a trial period and it would also leave the Congress completely free to reexamine the matter at some future point of time before the date when the total outstanding securities of the International Bank exceeded the obligations of the United States to make good the International Bank commitments.

Mr. BENNETT of Michigan. Do you think the foreign countries would not recognize what we were doing if we just put a 2-year limitation in? Mr. FOSTER. It would not be so patent and it would leave the matter completely open, because I assume that the considerations which would influence the Congress in future years would be not only the considerations as to whether you pass the commitments of the United States, but the extent to which in the intervening period the other member nations had fully lived up to their obligations and commitments. I am not taking into consideration the bank's provisions, but simply giving my understanding of the problem which was reflected in our drafting of many exemptions, in which we have had some cooperation from the representatives of the bank.

Mr. BENNETT of Michigan. I suppose from the diplomatic side of the picture it might be a rather touchy subject; but with the record that a lot of the countries who are members of this bank have for paying their indebtedness to the United States or for carrying out the agreements to pay their indebtedness, so well known not only to the Government but to the people of this country, I do not think that they ought to be offended if Congress in the interest of the investor in this country who is putting up his money should be a little bit skeptical about whether the investor will get it back.

I think our prime consideration is the investor. So far as I am personally concerned, if the Commission could suggest some means by which we could facilitate for the bank the handling of its securities and the sale of them without taking away from the investor any of the protective devices that he now has, I think that would be a happy solution of this situation. But the minute you facilitate the sale of these foreign securities to the American investor by depriving him of any of his present protection, there is where you get on thin ice. You get into a spot where it is pretty hard to justify the position taken, it seems to me, and yet if the Commission, the Securities and Exchange Commission, or its staff, could suggest some means by which we could help Mr. Black out of his dilemma in the handling and the sale of his securities, without having to put these securities in a special category and give them the status of Government bonds and exempt them from all of the other requirements, I think that would certainly be a happy way out of it.

Commissioner McCONNAUGHEY. Mr. Congressman, on the question of the marketing-and I am speaking entirely extemporaneously