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execution on the assets of the corporation, and thus hurt the remaining shareholders.

4. The proviso appearing on page 8 at lines 8 to 17 puts the responsibility on the Securities and Exchange Commission to make exemptions. In the past the members of the Securities and Exchange Commission have seemed to me perfectly human officials and therefore unwilling to take any more responsibility than is absolutely necessary:

5. Section 3 is entitled "Exempt solicitations.” If the act were merely designed to include solicitations and did not relate to other matters, many of the provisions in these exemptions would cover the situation involved. If I might respectfully suggest, the words "exempt solicitation" should be "exempt securities." Inasmuch as you have defined security in a very broad, inclusive manner, I think there is nothing to be greatly concerned about by changing the "solicitation" to "Securities." To illustrate my meaning, section 3 (A), subdivision (2), exempts solicitations in connection with a railroad reorganization or readjustment, as such term is defined in subsection (m) of section 77 of the Bankruptcy Act. It seems to me that the Interstate Commerce Commission is far abler to judge the reorganization of a railroad than the Securities and Exchange Commission is or ever will be. The Interstate Commerce Commission, as you know, not only has the jurisdiction of the issuance of securities in a reorganization proceeding in which a railroad is involved, but it also has the jurisdiction of the issuance of securities in connection with any kind of a readjustment in which a railroad is involved. It would seem to me that the regulation of committees who have securities of railroads on deposit would be far better and much more ably handled by the Interstate Commerce Commission than by the Securities and Exchange Commission, with all due respect to the Securities and Exchange Commission.

As another example, subdivision (4) exempts solicitations in respect to any notes, drafts, bills of exchange, or banker's acceptances which have a maturity at the time of issuance of not exceeding 9 months. The effect of this exemption is so limited that almost any unsecured indebtedness having a maturity in excess of 9 months, involved in any reorganization, would be up against the necessity of being connected with the filing of a declaration; and the same with subdivision (5) with respect to religious, educational, beneficent, or charitable corporations.

It is my recommendation, to obviate this difficulty, that instead of calling section 3 "Exempted solicitations”, and limiting the exempted solicitations to the character set forth, that it should be called "Exempted securities and exempted transactions", and that sections 3 and 4 of the Securities Act of 1933, as amended, should be incorporated as section 3 of this act.

6. This act includes much more territory than is contemplated under the Securities Act of 1933, as amended. In other words, a California corporation which could issue its securities without the necessity of registration under the Securities Act of 1933, as amended, would nevertheless be under the necessity of complying with this act. We, in California, see no reason why the same exemptions as are in the Securities Act of 1933 should not apply to transactions affected by the committee act of 1937.

7. There are certain conflicts between this bill and Mr. Sabath's bill, H. R. 6963, with reference to the proposal of plans of reorganization. This is apparent from a comparison of the two bills.

8. I particularly wish to recommend to you the exemption of corporations whose affairs can certainly not be of national interest. As is well known, the number of corporations which have assets in excess of $100,000,000 is very limited, but the corporations which have assets under $250,000 are many thousand in number. Mr. Sabath's bill eliminates corporations having assets under this amount, and it would seem to me that the same type of exemption might very well be given in these proceedings. You are undoubtedly familiar with the California Corporate Securities Act, and you therefore know that without any question it is the strictest blue-sky statute in existence in the United States, not excluding the Secruties Act of 1933. In most States there are now blue-sky laws, with the exception of Nevada, and with limited bills in Delaware and one or two other States. It would seem to me that the investor was running no great risk by leaving this matter to State control.

It is, of course, well known that the preparation of registration statements, and similarly the preparation of declarations under the Committee Act of 1937 would involve very substantial expense. Without going into the question as to whether the Securities and Exchange Commission could change its rules to eliminate a lot of this expense without hurting the protection which the act offers, nevertheless it seems unlikely that the Securities and Exchange Commission

will do so. Insofar as a large corporation is concerned, the expense, while substantial, is not a particularly hard bill for the corporation to stand, but insofar as small corporations are concerned, the expense is quite prohibitive.

I certainly trust that you will be able to eliminate the ordinary type of voluntary readjustments which do not require representative action, and in any case that you will be able to provide for exemptions in the act not less in extent than those now provided for in the Securities Act of 1933 as amended. Yours respectfully,

HOMER D. CROTTY. The CHAIRMAN. The committee will stand adjourned, to meet at the call of the chairman,

(Thereupon, at 11:25 a. m., the committee adjourned to meet at the call of the chairman.)


TUESDAY, JULY 20, 1937


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

The CHAIRMAN. The committee will come to order, please.

We are very glad to have with us this morning Congressman Wilcox, of Florida. He has given a study to this question involved under H. R. 6968, that enables him, I am sure, to make a practical and useful contribution to the committee. Mr. Wilcox.


IN CONGRESS FROM THE STATE OF FLORIDA Mr. Wilcox. Mr. Chairman, I doubt if my knowledge of the particular bill and the specific provisions of the bill itself will enable me to be of a great deal of assistance to the committee in the working out of the final details; but my knowledge of the subject is largely in its broader aspect and the necessity for regulation, supervision, and control of bondholders' protective committees, so-called.

In 1935, under appointment of Congressman Sabath, who at that time was conducting an investigation into real estate reorganizations, I was designated to conduct that part of the investigation dealing with bondholders' committees, representing the holders of municipal, State, county, and other governmental bonds.

Unfortunately, the funds available for that particular work were rather limited, and my investigation was probably not as complete as it might have been, and, certainly, not as complete as I would have liked for it to have been.

I filed with the Sabath committee a complete report of the investigation which I conducted at that time, and in that report I set forth the facts as developed from those hearings.

I was greatly impressed, Mr. Chairman, with the necessity for regulation of these so-called protective committees, representing bondholders, in negotiation with governmental units which were in default, either as to the payment of principal or interest or both on their bonded indebtedness.

My investigation developed this fact, Mr. Chairman, that when a governmental unit, municipality, county, or drainage district, or what not, finds itself unable to meet its obligations, a group of bond brokers usually get together and form themselves into what they designate as a bondholder's protective committee.



They assume to represent bondholders; they are not elected by the bondholders; the bondholders do not get together themselves and select their representatives; but this thing operates in reverse order.

The representatives get together and designate themselves to represent the bondholders. Ordinarily these committees are composed of officials or representatives of the original bond houses that handled the sale of the municipal bonds in the first instance.

Customarily, they are New York, or Chicago, or Detroit bond houses. They get together in an office in New York, and they say that Pumpkin Center is about to default, or has defaulted, in the payment of its debts, and we hereby designate ourselves as a committee to represent the bondholders. They employ the lawyer who has represented the bond houses in the original issuance of the bonds. They prepare a deposit agreement under the terms of which they vest title to the bonds to be deposited with them in the committee. They give themselves unlimited power to deal on behalf of the bondholders; to institute such litigation as may occur to them as proper; to employ such assistance, such technical experts, advisers, and such lawyers and auditors and others as, in their opinion, is proper, and pay them such rates of compensation as they see fit. Usually the deposit agreement also provides that the committee itself may fix its own compensation. It may take such action as occurs to them to be proper. The agreement also contains, ordinarily, a provision that the mere deposit of the bonds is an acceptance of all of the terms of the deposit agreement. Then they run advertisements in the financial papers and they circularize their own customers to whom the bonds were sold in the first instance, and, usually, they simply advise the bondholders that a protective committee, composed of the undersigned, has been designated to represent the bondholders. They, of course, do not tell the bondholders who designated the committee. They do not disclose the fact that they designated themselves; but, ordinarily, these advertisements and notices leave the bondholder under the impression that by some court order or by election or otherwise they have been selected to represent the bondholders. The bondholder, of course, deposits his bonds with the committee. I venture the assertion that in at least 75 percent of the cases, the bondholders never see the deposit agreements. They know nothing of the contents of the agreement, or what the powers or authority of the committee itself is.

After the bondholder has deposited his bonds with the committee, then they assume to act on behalf of all of the bondholders and to institute such action as they see fit.

As I say, there is no control; there is no regulation; there is no supervision of their action. They employ whomsoever they wish, to do whatever they think is proper, and they pay such compensation as occurs to them. There is nobody to say “no”; there is nobody to supervise or to regulate their expenditures or the action which is taken by them.

Mr. HOLMES. Mr. Chairman, may I ask a question?
The CHAIRMAN. Mr. Holmes.
Mr. Wilcox. Yes, sir.

Mr. Holmes. In your studies and from your experience, how general is that applicable to the various 48 States?

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