Commissioner DOUGLAS. I have been asked tomorrow morning, sir, to appear before the Senate Committee on Banking and Currency at half past 10.

Mr. LEA. I anticipate that the completion of your statement will require some further time. Do you think that you could be here the following morning?

Commissioner DOUGLAS. I think that I will take an hour and a half or 2 hours, perhaps.

Mr. LEA. Then we will adjourn to meet tomorrow morning at 10 o'clock. Perhaps we can have another witness at that time. We will adjourn with the idea of resuming your statement Thursday morning and should it develop that you could be here tomorrow morning, we will proceed with you tomorrow.

Commissioner DOUGLAS. Yes, sir. I will be glad to do so if it is at all possible.

SUMMARY OF COMMISSION'S ROLE IN REORGANIZATIONS

As I have said, there are compelling reasons for a Federal administrative agency, such as the Commission, to assume a role in reorganization cases. I have mentioned above not only reorganizations in court proceedings but also reorganizations consummated on a voluntary basis. As I have already stated, these voluntary reorganizations present an anomalous situation for it frequently happens that no committees appear in them. Furthermore, such voluntary plans are not subjected to any scrutiny or review as in case of reorganizations in Federal courts. The management alone is the arbiter of the fairness of the plan. As a result, great inequities have been done to security holders. And, as I have stated, State corporation laws afford little protection since the States have provided no system of administrative supervision. Accordingly, one signal and important function which a Federal administrative agency may perform in this type of case is to undertake for the benefit of investors (or at least to have the power in necessitous cases to make) a careful scrutiny and examination of the plans which managements and bankers seek to have consummated. At least a modest advance towards this objective can be made by vesting such power if not the duty-in the Securities and Exchange Commission. As I have said, the investor in case of voluntary plans commonly lacks the protection which an honest and qualified protective committee might give him; and since the reorganization takes place out of court, he lacks the protection ordinarily supplied in some measure in judicial reorganizations by the judge's scrutiny and approval of submitted plans of reorganization. The ordinary investor, left in such cases to his own devices, has been easy prey for self-seeking managements and bankers. Administrative review of these plans in the form of reports to security holders on them can go far toward amelioration of that prevailing condition.

This recommendation is equally applicable to reorganizations in the courts, even though protective committees participate actively. In the last analysis, however worthy and necessary the other functions are which I have already enumerated, the ultimate objective of most protective committees' activity should be the accomplishment, expeditiously and economically, of fair and equitable plans of reorganization. In the achievement of this objective, the assistance of a

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qualified administrative agency can be of enormous service, both to the courts and to investors.

This administrative assistance, as I have just said, should take on its most important form in the work of preparing advisory opinions on the merits, the fairness, and the feasibility of suggested plans of reorganization. Apart from so-called voluntary plans, the work of preparation of such plans; the arms' length negotiations over their terms between representatives of conflicting classes of securities; the "trading-out" of disputed claims; all these repose traditionally in the hands of security holders and their representatives. In another connection, i. e., the Chandler bill, we have recommended that an officer of the court, an independent trustee, be made an active participant in these processes, in order to supply to them the presence of a disinterested, objective guardian of the interests of all the security holders. That is a matter which goes beyond the scope of the Lea bill. But it seems altogether consistent with the purposes of the Lea bill to make provision for the close and careful scrutiny and examination of reorganization plans-the end-product of any committee's activitiesin order to supply a double-barreled assurance that committees have done their work effectively and honestly.

It is only after an objective determination of the merits of a plan that it can be said that a reorganization has or has not fulfilled its purposes. The identical determination is the decisive factor in deciding whether or not protective committees have sufficiently performed the functions which give them their only excuse for being. In this way the administrative analysis of plans and advisory reports thereon would give to investors increased assurance that their representatives have or have not done their work well; it would give them also protection at the stage when protection is most sorely needed, i. e., before they are compelled to vote upon the plan.

In those cases where reorganization takes place under the aegis of a court, provision for such administrative assistance should be of immeasurable benefit to the courts also. For the growing need for such administrative assistance is the result, from another angle, of the flood of reorganization cases which engulfed the courts in the period of the recent depression. They made unprecedented demands upon the experience, skill, and judgment of judges in complex and intricate financial and business matters. Judges, however, are not, and do not profess to be, financial experts. However great their legal training and native intelligence, they are not always in a position to discharge completely the responsibility, which is theirs, to see that only those plans are approved and consummated which are fair in their allocation of assets and earnings and, among other things, give adequate assurance that honest and competent management will assume control of the reorganized company. This is not to say that the courts have done an inadequate job; though frequently they just do not have the necessary time to spend on these complicated questions. Rather, a better job than they have done could be accomplished if they could avail themselves of expert administrative assistance in unravelling the intricate complexities of the many financial matters that enter into every plan of reorganization for larger corporate enterprises.

Such assistance would not usurp power from the courts, but it would strengthen and implement them in the performance of their onerous and burdensome reorganization functions. It would not

usurp power from the courts because such reports would be advisory only. They would deal with the fairness and equity of the treatment accorded to various classes of security holders and claimants by the terms of the plan, and the adequacy of the steps taken to discover, disclose, and collect all assets of the corporation or of individual security holders. This would include all causes of action against officers and directors of the corporation and the underwriters of its securities. Such reports could treat also of the reasonableness and propriety of the fees and expenses of the reorganization; and would examine carefully into the provisions made in the plan for the management of the reorganized corporation in order to ascertain whether such provisions were in the interests of the security holders. It could examine into any other material and significant phases of the plan.

A similar provision is embodied in the Chandler bill, of which I made mention earlier. That provision, however, deals only with reorganizations under Section 77B of the bankruptcy act. A large area for such administrative assistance may remain in Federal equity receiverships, a field equally deserving of attention and in the past, equally susceptible, if not more so, to the abuses which I have already discussed. The two provisions need be carefully integrated, and in combination, should effectively cover all occasions on which there is resort to any Federal courts in the course of effecting a reorganization. In addition, should a State court, or agency, wish of its own initiative to call upon the Commission for its aid in the scrutiny and analysis of reorganization plans, provision should also be made empowering the Commission to render advisory reports when it is requested to do so by such State court or agency.

As a companion measure, the Commission should be given the power to intervene in reorganization proceedings, so that as a party in interest it could perform additional advisory functions in the court. There have been in the past necessitous cases where throughout the whole proceeding security holders have not had the benefit of able and disinterested advice and representation. That is to say in many proceedings there has not been an articulate, well-informed investor point of view. The Commission on intervention would not be representing any particular class of security holders. It would be present in the case in the public interest and in the interest of investors to see that unfairness or inequity was not done, that honesty in administration took place, and that reorganizers were not engaged in exploitation. The right of the Commission to intervene and to be heard on all phases of many of these cases would, in my judgment, supply a conditioning influence over the whole proceeding and supply the court with counsel and advice which in many cases have been sorely lacking. In conclusion, the existence of widespread and persistent abuses in the reorganization field calls for vigorous and aggressive actionaction as constructive and as progressive as that which produced the Securities Act of 1933, the Securities Exchange Act of 1934, and the Public Utility Holding Company Act of 1935. There is such a national investor interest and stake in these reorganizations that mild or temporizing remedies will not suffice. The necessary reforms call for revisions in the present system along the evolutionary route made apparent by the experience of the last 4 years.

Mr. LEA. If there are any persons present who desire to appear as witnesses in this hearing, I would be glad if they will give their names and addresses to the clerk, and a statement of those whom they may represent, so that we can continue the hearings in an orderly way, as much as possible.

So we will adjourn to meet tomorrow morning at 10 o'clock.

(Thereupon, at 11:55 a. m., the committee adjourned to meet the following morning, Wednesday, June 9, 1937, at 10 a. m.)

TO AMEND THE SECURITIES ACT OF 1933

WEDNESDAY, JUNE 9, 1937

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The committee met at 10 a. m., Wednesday, June 9, 1937, Hon. Robert Crosser presiding.

Mr. CROSSER. The committee will please be in order. We will hear from Mr. Lowenthal.

STATEMENT OF MAX LOWENTHAL, COUNSEL TO SUBCOMMITTEE OF INTERSTATE COMMERCE COMMITTEE OF THE UNITED STATES SENATE

Mr. LOWENTHAL. Mr. Chairman and gentlemen, my name is Max Lowenthal. I have had a number of years of practical experience at the bar in dealing with the general subject matter which the bill now before your committee seeks to legislate upon.

I have served in the capacity, from time to time, as counsel to committees, as counsel to receivers and trustees, and in other capacities in this general field.

At the present time I am counsel to the subcommittee of the Senate Interstate Commerce Committee conducting the railroad investigation.

I have for a number of years studied and written, both for legal and for lay periodicals, on the general subject matter here under discussion.

Yesterday, Commissioner Douglas of the Securities and Exchange Commission discussed this bill in two general divisions. One, relating to the subject of protective committees; and the second division, relating to the participation, to a limited extent, of the Securities and Exchange Commission in proceedings for the reorganization or readjustment of the capital structure of large corporations.

I should like to call your attention to the second division and in particular to sections 12 to 14 of the bill.

It may be helpful if I first discuss very briefly what it is that the ordinary investor needs, first, in connection with the reorganization of a corporation which has become insolvent.

The ordinary investor there needs two jobs. One is in the nature of a repair job and the other is in the nature of a reconstruction job. The repair job is with respect to the loss to which he has already been subjected, of which loss the receivership or bankruptcy of the company is simply a mark or indication.

Ordinarily the loss, when a company gets into receivership or bankruptcy, falls entirely on the investor. There are two other groups