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TO AMEND THE SECURITIES ACT OF 1933

FRIDAY, JUNE 18, 1937

HOUSE OF REPRESENTATIVES
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C. The committee met, pursuant to adjournment, at 10 a. m., in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will please come to order.

Mr. Wood, are you going to testify first, or do you have any preference as to the order in which you appear?

STATEMENT OF ORRIN G. WOOD, BROOKLINE, MASS. Mr. Wood. Mr. Chairman, I would like to appear first. I am Mr. Wood from Boston, and with me are Mr. Woods from New York, and Mr. Prescott from Kansas City.

The CHAIRMAN. Very well, you may proceed.

Mr. Wood. First, I would like to thank the committee for giving us an opportunity for this hearing.

My name is Orrin G. Wood, and I live at 388 Warren Street, Brookline, Mass. I am a member of the firm of Estabrook & Co., of Boston, and I and the two gentlemen with me are appearing at the request of Mr. Hall, president of the Investment Bankers Association of America. In order to try to present the matter as clearly as possible, I propose to speak on the general theory and policy of the bill. Mr. Woods will speak on the sections pertaining to voluntary readjustments and recapitalizations, and Mr. Prescott will speak on the sections pertaining to the effect of the bill in judicial reorganizaitons.

Frankly, I dislike to appear before this committee on this bill, because for several years I have had most cordial relationships with the Securities and Exchange Commission, both as a member of the Investment Bankers Conference and during my term of office as president of the Investment Bankers Association, but many members of the Investment Bankers Association feel that certain parts of this bill and its effect on the investor should be called to the attention of you gentlemen.

Now, let me say first that the Investment Bankers' Association is in favor of registration of committees and disclosure of the interest of committees in the particular situation.

We believe in a full disclosure of any plan to all security holders but in such simple form that the security holders can readily understand what that plan proposes.

However, it seems to me that this bill goes very much further than any bill that we have at the present time under which the Securities and Exchange Commission is operating.

As you gentlemen know, the Securities Act is a disclosure act. It is based on the theory that if the investor is given full and frank statements of all of the facts that he should be allowed to make up his own judgment.

This bill, however, goes far beyond that. It makes it mandatory for the Securities and Exchange Commission to make certain definite findings, first as to committees, and second in certain instances as to plans. In other types of cases it gives the Commission broad permissive authority in regard to plans.

Now, these required findings which the Commission is required to make not only greatly increase the amount of work which it must do, but greatly add to the responsibilities, the public responsibilities of the Commission to the investor.

It seems to me that the questions to be answered in this situation are comparatively simple. First, whether you gentlemen, as a matter of policy, think that these great responsibilities should be placed on the Securities and Exchange Commission, and secondly, whether you think that if they are placed upon the Commission that the Commission can satisfactorily do the job which will be expected of them by the investor.

I would like for a minute to visualize the field that this act covers. It covers reorganizations, judicial reorganizations. That, of course, is a broad field. How many judicial reorganizations take place at any particular time, I have no particular knowledge; but I think some light is thrown on the subject by Mr. Douglas' statement before you gentlemen the other day that during the last several years thousands upon thousands of corporation debtors in this country have been unable to meet their obligations and have had to go to their creditors for some assistance; but in addition to that, this bill also covers the question of voluntary adjustments, and the definition of voluntary adjustments under this bill is very broad.

İt includes, in addition to readjustments where there has been some failure on the part of the corporation to live up to the terms of aividends, we will say, of a preferred stock, ordinary simple charter amendments where the priorities of any outstanding security or stock are affected and where the changes in those priorities necessitate the vote of the stockholders. It would include in many instances the authorization of a new issue of securities which would later have to be registered under the Securities Act.

I have no figures on this subject but I saw some figures the other day, which, unfortunately, I left behind me, covering 1 year in certain States, and I think I am not overstating the case when I say that the number of cases of voluntary readjustments, as defined in this bill and which would come before the Commission, is vastly greater than that in the reorganization field.

Now, with this very vast field to cover which, in my judgment, will be greater than any field now covered by the Securities and Exchange Commission, there will have to be a vastly increased staff of the Securities and Exchange Commission.

I am not touching on the question of added expenses, because if the job is well done that added expense will pay for itself. But, I would like to call your attention to two facts: Reorganizations usually occur either during the end of or just after a depression such as we have been

through. They come in tremendous numbers. Readjustments that are as broad as are covered by this bill are going on daily.

In the first place, the staff which the Securities and Exchange Commission will have must cover this entire country, and will have not only to be familiar with the legal aspects of readjustments and reorganizations, but in order to do the job required by this bill, that staff will have to be familiar with all types of industries-public utilities, extractive industries, manufacturing industries, and distributing industries, and also financing companies. And, it will not only have to be familiar with those businesses in general, but it will have to be familiar, also, with all the peculiar problems which each particular company that is to be reorganized or readjusted will have-problems of production, of sales, of finance, and of management. Secondly, this staff will at times have to be largely and quickly expanded.

Mr. REECE. Mr. Chairman-
The CHAIRMAN. Mr. Reece.
Mr. REECE. May I interrupt you?
Mr. Wood. Yes.

Mr. REECE. Is it not, in a measure, true of the courts which are called upon to pass upon these matters pertaining to bankruptcies and receiverships, that they must be familiar with these same matters to which you refer? If so, I should think that might be a reason for having another agency given some responsibility in these matters which might be a continuing organization with trained personnel to gather this information, so as to have it available to the courts, which now have authority over the bankruptcies, receiverships, and reorganizations?

Mr. Wood. May I answer
Mr. REECE. If I may complete, before you answer.
Mr. WOOD. Yes.

Mr. REECE. In that same connection, you refer to this legislation as going farther than the present Securities and Exchange Act.

Mr. WOOD. The Securities Act.

Mr. REECE. The Securities Act. It would seem to me that in that connection we should also consider the bankruptcy and receivership laws.

Mr. Wood. Bankruptcy and what; I did not get that.
Mr. REECE. The bankruptcy laws.
Mr. Wood. Bankruptcy laws; yes.

Mr. REECE. And see how far those laws go, because this, in addition to being supplemental to the Securities Act is in a way supplemental to the bankruptcy and receivership laws.

Mr. Wood. Well, I think your question covers simply the question of judicial reorganizations. You realize that this bill as drafted also covers voluntary adjustments, which do not now come before the courts.

Now, I would say also- I am not a trained lawyer-but I would say this, that this bill puts on the Securities and Exchange Commission a much more drastic responsibility for approving a plan in reorganizations than I believe the courts now undertake.

The Commission not only must pass upon the equity of the plan, but it seems to me that when it passes on a plan and says it is good or bad, that the Securities and Exchange Commission, before the

public, would be going further than that and saying not only is this equitable, but it is a good workable plan for the corporation.

In addition to that it passes on one thing which I think is a very dangerous thing for any public body to pass on. It passes on the question of management.

Now, when you pass on the question of management, you can say that the management is honest and it is going to work for the security holders; but that is not the only thing that the security holder wants to know. He wants to know that the management—and he will expect that the Commission has said so-is able to operate that business well.

Now every one of us who have struggled with managements in difficulties and out of difficulties knows that there is not any single thing in the field of industry that is harder to make a judgment on than management.

So, it seems to me both in judicial reorganizations you go further in this bill than the courts have been accustomed to go but that you in addition attempt something which is much wider than the judicial reorganization, namely the voluntary adjustment, which is not now in the hands of the courts at all.

The CHAIRMAN. Mr. Wood, what particular language do you have in mind there?

Mr. Wood. I was referring to reports to be made in reorganizations and readjustments.

The Chairman. In your remarks, which you have just made, are they based upon any particular language in the bill?

Mr. Wood. Yes, I think I can find that for you quite quickly. I have a little plan here. It is section 13. I have this plan which I have made up that probably no lawyer would approve, but it is an analysis for me. I prefer it.

It says that the Commission shall render a report on any reorganization plan required to be submitted to it by a court, under certain conditions, and then in (d) reports which the Commission is required or authorized to make shall contain a statement as to whether or notthis is on line 2, page 45—the provision which has been made in the plan for management of the reorganizing issuer is in the interest of the security holder.

I think that covers your question.

The CHAIRMAN. You referred also to the workability. I suppose the economic feasibility of the plan would also come in. Do you have any language in mind in reference to that?

Mr. Wood. No; except it seems to me, sir, that if the Commission is going to pass on a plan for the benefit of the public, the public will necessarily expect that it is going to pass on the plan in both ways, and it will want to know, not only whether or not the plan is equitable as between various classes of security holders, but whether it is an operable plan for the company. That is a conclusion or deduction that the public would not fail to make.

Mr. Mapes. The word “may” is used through that section.

Mr. Wood. There are two types of authority granted. Some are required and some are permissive.

Mr. MAPES. What would you interpret the section as far as making a finding on a report is concerned?

Mr. Wood. I would interpret it

Mr. MAPES (continuing). Generally.

Mr. Wood. In any plan before the courts not involving an amount less than $5,000, that the Commission unless

Mr. MAPES. $5,000,000.

Mr. Wood. $5,000,000; that the Commission, unless it is an intervener must make report to the court, a statement on the plan to the court: But the Commission may also go further than that. There are many permissive sections, such as that the Commission may render a report on any other plan of reorganization upon the request of the court. The Commission may render a report on any reorganization plan described in (a) or (b) or upon any plan of voluntary readjustment, if it deems it appropriate in the public interest to do so.

Now, just on that point, it seems to me that as time goes on and if the Commission reports on a plan of voluntary readjustment, that more and more, the public is going to expect them to pass on all plans of voluntary readjustments.

Mr. MAPES. Section 13 is confined, is it not, to reorganization?

Mr. Wood. In (c), Mr. Mapes, you will see that they are allowed to report on any plan of readjustment if it appears to them necessary or appropriate in the public interest or for the protection of investors.

Mr. MAPES. That would include the voluntary?
Mr. Wood. That would include the voluntary.
Mr. MAPES (continuing). Reports.

Mr. Wood. Yes. I believe that if some security holder applies to the Commission for its opinion as to a particular plan, or perhaps if a group of security holders apply, the Commission is going to feel that under its duty to the public it must report on that plan, and I think after that ball is started rolling it is going to roll up just like a snowball.

Mr. MAPES. Have you drafted proposed amendments to meet your criticisms of the bill?

Mr. Wood. I have some suggestions to make. If I may, I will defer them to the end of my talk, or I can give them to you now, whichever you prefer. If you would like to have them now I can give them to you. I would prefer to do it a little later on, if I may.

Mr. MAPES. Very well.
Mr. Wood. May I go on, sir?
The Chairman. Yes.
Mr. COLE. Mr. Chairman-
The CHAIRMAN. Mr. Cole.
Mr. Cole. I want to ask one question at that point.
Mr. Wood. Yes.

Mr. Cole. In the Securities Act, it is my recollection that this committee insisted very definitely on a provision to the effect that the Federal Government in the exercise of its power under the Securities Act would in no way guarantee any securities.

Mr. Wood. I think that is so, sir.

Mr. COLE. I understand that your criticism of the bill now before us is to the effect that if the Securities and Exchange Commission is a party in a court proceedings or in a reorganization out of court, to the extent of almost dictating management, or at least expressing opinions that might prevail, that then a purchaser of securities growing out of such reorganization might very properly look to the Government for protection under that guaranty.

Mr. Wood. I do not think that they will fail to do so, sir. I think it will follow just as sure as day follows night. And I think it will

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