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$1,500,000,000 worth of bonds. We tried to do the job in exactly the same way that the Federal land banks did, and we did not have an underwriter. We merely used the dealers as agents and paid them a commission.

Now, you could inquire and find from the Federal land-bank system that in the flotation of this $1,500,000,000 worth of bonds, it was very important and very vital to them that these banks that I am talking about that had bond departments could participate.

Now, all they did in that financing was that they just acted as another dealer, and they helped in the distribution of the securities. We want to do just the same thing that they have done. That is what we are asking for here.

They selected a group of banks scattered around the country—I do not know exactly how many, it was something under 200 banks--and those banks joined with the dealers and helped distribute those bonds, and create a brand new market for it, and the Federal land-bank people were very emphatic in stating how much aid the banks had given them in that operation. That is what we want here.

Mr. BENNETT of Michigan. Why do they object to the SEC in the picture? Is it just on the general grounds ?

Mr. Black. It is the liability.
Mr. BENNETT of Michigan. The regulation is a liability?
Mr. BLACK. Yes, sir.
Mr. BENNETT of Michigan. As a what?
Mr. BLACK. As a dealer.
Mr. BENNETT of Michigan. I wish that you would be more specific.

Mr. LUXFORD. I think that this is the problem, that ordinarily a dealer is protected under the Securities Act, because he relies on an underwriter that has fully investigated the security and gone over the statements in it to be sure that he is not making any mistakes.

Now, in the bank's operation, there is not any underwriter and you cannot expect 1,700 dealers that may be making commissions from $25 to $500 to be making an elaborate investigation of this security, so that they do not have the protection they have in the ordinary case.

Now, while the dealer may be willing to do that, the banks will not do that.

Mr. BENNETT of Michigan. Why would they not do that in a case where the United States Government was backing up the loan? What would be so onerous about that kind of a thing?

Mr. LUXFORD. There is a financial liability attached to it. Here are banks that have lots of business.

Mr. BENNETT of Michigan. Now, where is the liability?

Mr. LUXFORD. I wish that you would correct me on this, anyone from the SEC, but if there is a misrepresentation made, and let us say there has not been reasonable care taken on the part of the dealer when that misrepresentation was made. Then he can be held liable for damages in connection with that security.

Now, in the ordinary case he protects himself by relying on the underwriter making that investigation.

Mr. BENNETT of Michigan. Who would be entitled to damages, the purchaser of the bond ?

Mr. LUXFORD. I believe so; that is right.

Mr. BENNETT of Michigan. That is right; in case the bond were in default.

Mr. LUXFORD. Even if it was not in default, if there was a misrepresentation, a material misrepresentation regarding it.

STATEMENT OF LOUIS LOSS, CHIEF COUNSEL, DIVISION OF TRADING

AND EXCHANGES, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C.

Mr. Loss. I think in 2 or 3 minutes we could clear up some misimpressions that may have crept in as to the nature of the liabilities, if you would like.

There are three liability provisions in the Securities Act. There is section 11, which says that if a registration statement contains any false statements or omits to state material facts, then the issuer and the officers and directors of the issuer, and the underwriter, are civilly liable to any buyer.

Mr. BENNETT of Michigan. You mean civilly liable for what?

Mr. Loss. For damages, if the buyer sues within a period of 1 year, or in some circumstances 3 years, and can show that the market has gone down.

Mr. BENNETT of Michigan. If the market goes down.

Mr. Loss. Obviously if the market has gone up, the buyer has not suffered any damage.

The second civil liability provision, 12 (1), imposes a similar liability on any person who sells a security in violation of the registration and prospectus provisions. That is, if you sell a security which should be registered and it is not, you have an absolute liability, or if you sell a security which is registered and you do not give the buver the official prospectus.

Now, the third provision likewise applies to everybody, whether or not a security is registered. If you sell it by means of any fraudulent statements or omissions, you are liable in that case. That is not entirely, but largely, a codification of the common law deceit liability.

Now, one of the exemptive provisions we adopted for the bank last year in the case of its first offering under the Securities Act of 1933 has the effect of exempting anybody who deals in the bank's bonds from the definition of underwriter, so that today there is no liability under section 11. There is likewise no liability for failure to deliver a prospectus, because a person who is neither an underwriter nor a dealer has no obligation to deliver a prospectus, and banks are not dealers, and by virtue of this rule they are not underwriters.

The CHAIRMAN. Does that leave only the fraud section?

Mr. Loss. That is right, from which this bill would exempt them. And the fraud section is very largely, but not entirely, a codification of common law fraud provisions anyway, and in some respects if I were representing a plaintiff I would rather sue at common law than under this provision, because there are some defenses under this that are not available at common law. That would be the only difference that I can see.

Mr. BENNETT of Michigan. The whole thing is more or less theoretical

Mr. Loss. As far as 11 and 12 (1) are concerned, they are exempted.

The CHAIRMAN. This is not only theoretical, but having in mind the issuer of these bonds, it is difficult for me to understand that under any conceivable situation any fraud could be chargeable to the issuing of the bonds of this bank.

Mr. Loss. I might mention one other thing, and that is that even if this rule of ours were deemed invalid, and even if it were deemed to be in excess of our powers—we think it is a valid rule, but even if the court should hold it invalid-there is a section of the Securities Act, 19 (a), which specifically provides that no provision of the act imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation of the Commission, notwithstanding that such rule or regulation may after such act or omission be amended or rescinded or be determined by judicial or other authority to be invalid for any reason. So they are fully protected by the rule.

Mr. BENNETT of Michigan. Then it strikes me that if you get rid of the prohibition that banks cannot deal in this thing, the fraud and other provisions are largely theoretical, and it is taken care of by an order of the Commission under their present authority as they did in the first place.

Mr. BLACK. I would like, if I could, to have our counsel here tell you his conversations that he had with counsels of the banks about this question. STATEMENT OF LESTER NURICK, ATTORNEY, OFFICE OF GENERAL

COUNSEL, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT, WASHINGTON, D. C.

Mr. NURICK. I went up to New York for the purpose of discussing this matter with counsel of the largest banks in New York. Banks are notoriously conservative, and these counsel told me that this was the section that prevented them from dealing in the bank's bonds. I asked them the question that you asked : Suppose we got exempt from the National Bank Act and did not get exempt from the Securities Act, would you still be willing to deal in our bonds, and the answer was that they would not.

Now, that may be partly as a matter of policy and partly as a matter of law, but that is the answer that they gave me.

It is more than that. It is not only a legal question as to what the liability is, but as Mr. Lynch said before, it is a question of attuning their operations to dealing in securities which they are not customarily handling, and that, too, they said, was another reason why they would refuse to deal in securities which were not exempt from the Securities Act.

Mr. Loss. May I correct one statement which I made, which one of my colleagues pointed out to me was in error.

Although we have excluded banks from the definition of underwriter, they are technically dealers within the meaning of the Securities Act, although not within the meaning of the Exchange Act, and therefore under the present law a bank would have to use the official prospectus and failure to use the prospectus would impose a liability under section 12 (1).

Mr. BENNETT of Michigan. You could not waive that?

Mr. Loss. We have no authority. There is no liability under 11, but there is liability under 12 (1) for failure to use a prospectus for 1 year after the offering, as well as the fraud liability under section 12 (2).

The CHAIRMAN. The prospectus is helpful to the investor as far as he can understand it.

Mr. Loss. I was straightening out the mistake that I had made.

The CHAIRMAN. Well, that seems to conclude the hearings and I want to express my appreciation not only to the parties who have appeared before us from the several departments of government that have sought to be helpful to us in consideration of this matter, but I also want to pay or express my particular appreciation to the members of the committee who have been so faithful in the attendance of these hearings, and the part that has been taken by them.

Today has been a long day, and yet the committee members who are here have remained throughout the entire time, and I want them to know that I feel personally very appreciative of the interest that they have taken.

That will conclude the hearings, gentlemen.

I offer for the record an article appearing in the Wall Street Journal of May 18, 1948, entitled “World Bank Seeks Exemption from Laws Protecting Investors to Get Wider Market for Its Securities."

Also an article appearing in the Commercial and Financial Chronicle, issue of Thursday, May 31, 1948, entitled "A Look at World Bank Bonds” by John H. Rumbaugh, of New York City.

(The articles are as follows:)

[From the Wall Street Journal, Tuesday, May 18, 1948] WORLD BANK SEEKS EXEMPTIONS FROM LAWS PROTECTING INVESTORS TO GET

WIDER MARKET FOR ITS SECURITIES

(By W. C. Bryant) WASHINGTON.-Should Congress establish some kind of warning signal for l'nited States investors in case the World Bank embarks at some future time on a hectic lending policy?

That question is perplexing members of two congressional groups—the Commerce Committees in the House and Senate. These two committees are studying the bank's request that it be exempted from laws passed to protect the American investing public.

The bank wants this exemption so it can sell its securities to American investors more easily. It's particularly interested in drumming up business among well-heeled individuals.

The idea is that if two amendments are passed, more banks and other dealers in securities will be able to handle World Bank securities. It stands to reason, say World Bank officials, that if there are 5.600 to 10,000 more dealers available, there'll be that much better chance to distribute World Bank bonds widely.

Congressmen have confidence in the cautious officers now running the International Bank for Reconstruction and Development-better known as the World Bank. But the bank's management is bound to change in time. Some legislators fear if the laws are relaxed, a less careful group of officers might dilute the value of the bank's securities, and thus cause losses to American investors.

INVOLVES TWO LEGAL QUESTIONS

The Bank's request for a free and easy lending path in the United States, seconded by Treasury Secretary Snyder, involves two legal questions:

First, whether Congress will waive section 5 of the Securities Act of 1933, which requires inyone proposing to issue securities to register a fuul statement of the terms and pertinent financial data with the Securities and Exchange Commission, The bank wants to bypass this requirement.

Second, whether Congress will pass an amendment to the banking act to permit United States banks to trade in World Bank securities-that is, act in the role of dealers handling the purchase of the bank's bonds and debentures for their customers.

Banks have many investors relying on them for advice, have trust funds to invest, and in other ways could increase distribution of World Bank securities, officials of the bank argue.

LIMITATION SUGGESTED

A member of the House Commerce Committee suggests that Congress might grant these exemptions only so long as the Bank does not have outstanding at one time more than $3,175,000,000 in bonds. That's the amount the United States Government contributed to the Bank's $5,000,000,000-plus capital. Should foreign nations ever default on the Bank's loans and other members are unable to contribute their share to the deficit, this $3,175,000,000 in United States dollars could be used to make good any obligations.

To the extent that the bank keeps within this limit, therefore, its securities are backed 100 percent by the United States Government, the Congressman reasons. If the Bank exceeds the limit, it would again have to register its issues with the SEC and it would lose its banker dealers. This reversal would sound a warning to the investing public.

The World Bank's authorized capital stock is 10 billion dollars, of which 8.2 billion dollars is outstanding. Eighty percent of the subscription of each member of the Bank is "not available for use in lending operations, but can only be called and used to meet the bank's obligations." In case of a drastic series of defaults, the whole $3,175,000,000 contributed by the United States in capital might be jeopardized. Of course there would have to be a pretty serious world situation to bring this about. Other countries' capital would be affected too, of course.

A somewhat different approach has been suggested by another lawmaker. Ile would grant the two exemptions carte blanche at this time, on the assumption that the Bank will not borrow or lend anything like $3,175,000,000 in the next year or two. In the House committee's report on this legislation, he would make clear that the legislators will consider tightening the laws again, if the Bank approaches that danger point. A call for congressional hearings would also sound a warning to investors, this member thinks.

SOME LAWMAKERS SUSPICIOUS

World Bank and Treasury officials have been considering a request for exemptions for about 2 years. The fact that they waited until near the close of a busy session of Congress, on the eve of Presidential conventions, to make their request formally irks some of the lawmaker's and makes them a little suspicious.

The Securities Act provision was enacted to protect the public against securities that are misrepresented by the companies issuing or selling them. It requires the issuer to submit his statement of pertinent facts to the SEC and let it lie there 20 days, before he approaches any prospective customer or dealers. If the SEC isn't satisfied with the statement it can call for more information. After the 20-day waiting period, a detailed prospectus must accompany every offer to sell.

Last Thursday, officials of the National Association of Security Dealers, the Investment Bankers Association, and the SEC met to discuss possible amendments to section 5 that would apply to all security issues.

The banking act exemption, if granted, woull provide the Bank with a wider market, since there will be a host of new dealers in a position to offer its securities for sale. The more potential buyers they have, the more stable the Bank's prices will be, the international bankers reason.

Statistics on the first World Bank issue are cited to show that a wider investing public is needed. Of the 250 million dollars in bonds commercial banks took 114.7 million dollars or about 46 percent, 21 percent went to insurance companies, almost 8 percent by savings banks, and only 15 percent were bought by individuals. Subsequently, these investors have seen their bonds selling consistently below par.

The difficulty of getting a broader investing public is not entirely due to a lack of dealers. The bank has to consider the terms it will offer in relation to the United States Government's interest-rate policy. The Treasury and Federal Reserve Board now believe that the long-term rate for United States Government bonds should not go above 2.5 percent. If the World Bank, backed with $3,175,

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