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I think that needs further study and I also believe that it is of such a different character from your corporate problems, that it. probably should be in a separate section of the act, even if the theory of the act is carried out as it is, which, I hope it will not be.
I just want to say that in my personal judgment, I do not believe that the section forbidding any one to act as an agent to repurchase foreign bonds or to sell to such an agent knowing him to be such will work in the interest of the investors.
Now, in conclusion I have one or two suggestions to make.
This examination of reorganization by the Securities and Exchange Commission is extensive, but necessarily it is in a limited field. There has been no report to the Commission as yet covering the question of voluntary readjustments.
I think before action is taken on that subject, and that is a very important section of the bill, that a report should be made on it.
Now, I would also like to make this statement: After all it is the investor that this bill-I fear badly-is to protect.
I think that in addition to investigating the field of reorganizations, that it would be wise if the Securities and Exchange Commission could get certain trained investors to give them their advice on the effect of this act. Now, when I say "trained investors”, I am thinking of insurance companies. I am thinking of savings banks. I am thinking of the trustee for personal trusts, the man who really knows what he is doing when he is buying securities.
My belief is that it is unwise to act on this bill until the Securities and Exchange Commission has sat down with gentlemen of that kind to find what their reactions to this bill are, whether they think it will help them or whether they think it will hurt them.
Now, I would like one last suggestion, and it is this: Would it not be better to carry this bill out as a disclosure act such as the Securities Act is than to put on the Securities and Exchange Commission the terrible responsibilities which I believe this act puts upon it? And where in my belief it is going to lead to the investor saying to you gentlemen, if you approve this bill, you guaranteed us that this readjustment and this reorganization is equitable and sound. We need think no more about it.
Mr. COLE. Mr. Chairman
Mr. COLE. I asked you a moment ago with regard to the provisions of the Securities Act. I have that act before me. I have reference to section 26 of Public Law No. 291, which for the information of the committee, reads:
Sec. 26. No action or failure to act by the Commission or the Federal Reserve Board, in the administration of this title shall be construed to mean that the particular authority has in any way passed upon the merits of, or given approval to, any security or any transaction or transactions therein, nor shall such action or failure to act with regard to any statement or report filed with or examined by such authority pursuant to this title or rules and regulations thereunder, be deemed a finding by such authority that such statement or report is true and accurate on its face or that it is not false or misleading. It shall be unlawful to make, or cause to be made, to any prospective purchaser or seller of a security any representation that any such action or failure to act by any such authority is to be so construed or has such effect.
That is the provision of the law I had reference to.
Mr. REECE. Have you compared that with section 22 in this bill?
Mr. Wood. The wording is very similar. The only difference I make with regard to it, Nr. Cole, is this, that under the Securities Act you require the issuer to file certain information with the Commission. The Commission's job is to see that that requirement is carried out, that the information is filed. It does not pass on the correctness of the information and it certainly makes no comment on whether the security is good or bad.
That is the difference between the Securities Act and this bill.
Mr. COLE. The thing that concerns me is that notwithstancing the provisions of section 22 of this bill, I cannot see how the Securities and Exchange Commission, can go before a court and intervene through as an intervening petitioner, alleging facts, making oath to them, disagreeing with the plan proposed—without expressing a definite opinion, which they are not required to do in the Securities Exchange Act.
Mr. WOOD. I think that is just the difference.
Mr. Cole. Under this bill we are getting into litigation and in voluntary set-ups, which is going to involve the Government in the expression of opinions, a definite opinion, and requires certain advice which after that is done makes section 22 a rather cowardly statement to make.
Mr. Wood. I do not believe you can make that statement, sir, under this bill. You can make it, but I do not think that the public will believe it—the investor. That is what worries me.
Mr. COLE. I do not like to ask the Government to go in and dictate a reorganization of a company, go so far as to participate in court proceedings, all of the way to the Supreme Court, argue the law and the facts in the case and then after it is all over, assuming that they have won the case, to hand out a declaration saying, "We do not stand upon the opinions we expressed in that case. We are not responsible for anything we said."
Mr. Wood. I think insofar as the value of securities issuing therefrom are concerned there is one other bad thing in it and that is you may have a real division between the courts and the Securities and Exchange Commission if they should happen to disagree on a report.
Mr. MAPES. You are referred now to section 13?
Mr. Wood. Just a minute, Mr. Mapes. I will have to look at it. I am referring to the section which covers the requirement of the Securities and Exchange Commission reporting on plans. Yes, that is section 13, sir.
Mr. Mapes. It would seem to me that there might be a conflict there between the court and the Commission.
Mr. Wood. I think there is a great possibility that it will arise in certain cases.
Mr. Mapes. Of course, that language could be perfected, to avoid that.
In one of your first statements you said, as I understood, that you believed in complete disclosure of the plan and a clear statement of it.
Mr. Wood. A clear statement of any interest that any committee member might have.
Mr. MAPES. A clear statement of the plan, so that parties interested could clearly understand it?
Mr. Wood. Yes.
Mr. MAPES. Have you any objection to the provisions in this bill providing for the disclosure or the filing of the plan with the Securities and Exchange Commission?
Mr. Wood. No, sir; none whatever.
Mr. Wood. Yes, sir. I think that schedule, if a great deal of it goes into the prospectus, is going to be confusing rather than helpful to the investor.
I think that both the disclosure of interest and the plan should be made as simple as possible in the prospectus.
That brings up one other point, if I may say so, Mr. Mapes. I wonder whether the committee should not consider the consolidation or redrafting of a number of acts.
Let me give you a possible case, as I understand it. This, frankly, goes the limit, but it will show you what could happen: Suppose there is a public-utility corporation registered under the act and it is a holding company, and it has two subsidiaries, and those subsidiaries have outstanding, we will say, two classes of bonds each, and two classes of stock, preferred and common.
The holding company has preferred and common. And, all of those securities in whole or in part are in the hands of the public,
Now, what has got to happen if the holding company wants to simplify that structure in accordance with the wishes of Congress, and I think the very wise wishes of Congress that holding companies should be simplified?
I think that is perhaps outside of the field of the committee, but it is what I see as a danger.
Mr. MAPES. Do you intend to point out the provisions in the schedule that you think are unnecessary and would not be helpful to the public?
Mr. Wood. No, sir; I have not studied it enough; but my own theory is this: I think-I cannot speak for the Securities and Exchange Commission-but I think that they are working on the problem. I think that most of the investment bankers feel that the prospectus by which we sell new securities contains so much information that the average investor, is confused. Our information is that work is being done on that at the Commission in the hope that that situation can be simplified and that a clearer presentation of those facts can be made to the investor.
Unless a simple prospectus can be developed under this bill I am very much afraid it will lead to the same confusion. Mr. Mapes. This bill is suggested by the Commission. Mr. Wood. What? Mr. MAPES. This draft is a suggestion of the Commission. Mr. Wood. Yes; it is.
Now, I cannot tell for I have not studied that question: It may be that every one of these items should go to the Commission in the registration statements. I am not prepared to say. But, I hope that a great many of them will be eliminated in the prospectus, otherwise I do not think that the investors would know what is happening and this bill will lead them to believe from the statement of the Com
mission that everything is all right, that the plan is 0. K'd and guaranteed.
Suppose it wishes to consolidate with its subsidiaries and in doing so to issue new preferred and common stocks for the stocks of its subsidiaries, and to call the four bonds of its operating subsidiaries and issue in their place a new first-mortgage bond on all the property of the new and consolidated company. What will it have to do?
(1) The holding company will have to file its plan with the Securities and Exchange Commission and have the plan approved under the Public Utilities Act.
(2) The declarations will have to be filed by the committees or committee soliciting proxies under this bill. It is possible that there may have to be a committee for each class of stock-six in all.
(3) Information will have to be filed under the Trust Indenture Act in regard to the indenture of the new bond issue.
(4) If the new bond issue is to be sold to the public it must then be registered under the Securities Act.
All this information must be filed with the same Commission and much of it will be a duplication of information filed in other papers. I call your attention to the fact that the expense and the delay may in many cases make it impossible through changing markets, or just through the item of expense, for that simplification to take place.
Mr. MAPES. As I recall the provision relating to the prospectus, it does not contemplate stating all that is in the plan,
Mr. Wood. No; not all. That prospectus text, if I may quote it in brief to you, simply says that the prospectus shall include such information in the declaration as the Commission may prescribe and such additional information as the Commission may require.
There is no thought in my mind that the Commission will ever require that exhibit A and all of the other things in the registration statement should be in a prospectus; but my point is that I hope the prospectus will be simple. After all, what we want is for the investor to understand what he is doing.
Mr. Mapes. You would not object to the Commission exercising its judgment as to what should appear in the prospectus?
Mr. Wood. I would hope that they would consult, not necessarily investment bankers, (of course I hope that they will do that); but certainly experienced investors, and see what information they want in the prospectus.
Mr. CROSSER. Is that all?
STATEMENT OF GEORGE D. WOODS, VICE PRESIDENT AND DIREC
TOR OF THE FIRST BOSTON CORPORATION
Mr. CROSSER. Mr. Woods, will you give your full name and connection, for the record?
Mr. Woods. My name is George D. Woods. I am a vice president and director of the First Boston Corporation, an investment banking concern.
I am here as a representative of the Investment Bankers' Association.
I have read the committee act of 1937, and I have read the remarks of Chairman Lea in the Congressional Record in connection with it. I have read parts of the Securities and Exchange Commission report on the practices of the protective committees.
Mr. Wood, who has just completed making a statement, has suggested that I confine my remarks to those sections of the bill that have to do with voluntary adjustments rather than treat with the bill in a broad sense.
In connection with the question of voluntary adjustments, it seems to me there are several categories. All of them are treated with in the legislation that you gentlemen are considering.
The first one that I want to mention has to do with the desire of a solvent corporation that has a long and satisfactory record, to make some quite usual and orderly change or adjustment in its capitalization. For instance, asking its common or voting-stock holders for the right to get out a new issue of preferred stock or the right to get out an issue of mortgage bonds that is, to place a mortgage on its property. A corporation wishing to take such an action, which might well be in the best interest of all security holders, would be under the terms of the act as it is now drafted, obligated to file a declaration which would be of considerable length with the Securities and Exchange Commission and furthermore, having filed the declaration, the management of that corporation, all bankers connected with the corporation; all counsel connected with those bankers, would be barred from going to the security holders; that is, the common voting stockholders, and asking for approval of any such an orderly business transaction.
It is my thought, and I wish to make the suggestion, that the committee give consideration to the elimination entirely from this bill of all provisions relating to any such routine operations, by a solvent, going concern.
The second category of voluntary adjustment that I want to touch on, has to do with mergers and consolidations.
Again assume solvent going concerns, with sound and satisfactory records of earnings and business history; if two or three or more such business concerns, whether they are manufacturing or public utility concerns doesn't particularly matter, wish to merge or consolidate, it seems to me that it is making them go to too great a length entirely to subject them to the same rules and regulations and requirements that a bankrupt concern in court proceedings in a reorganization plan is subject to. I would like to suggest to the committee that in connection with mergers and consolidations if there is a feeling, and I believe there is such a feeling, that complete information is not furnished to stockholders, that the committee amend the Securities Act or change the act now under consideration in such a fashion that full disclosure I should say the same full disclosure-is made in connection with mergers and consolidations as is made in connection with original issues of securities.
It is my very definite feeling that mergers and consolidations of solvent, going concerns which may well be in the interest of all of the security holders involved would, as a practical matter be impossible if nobody connected with the management; nobody connected with the underwriters who originally purchased and distributed the securigies, were permitted to solicit proxies to bring about such mergers and consolidations.