it to the Congress, as we have no power whatever to make any such disallowance.

Of course, Senator, this is rather departing somewhat, but as you will recall, when Congress passed the Government Corporation Control Act there were 101 Government corporations. They were sprawled all over the lot, not being subject to budgetary, audit, or congressional control. So Congress passed what is generally known as the Byrd-Butler Act, and also the Whittington-Case Act, as they handled the matter in the House, and for the first time these corporations were brought under control for budgetary, audit, and congressional supervision. Prior to that there was no control and they could do what they pleased.

I think that the corporate process has been greatly abused. I think that Congress has been wheedled into making various agencies corporations, mainly so that they can get rid of the suspension power of the General Accounting Office. I think there are too many Government corporations. I think some of them ought to be abolished or be brought back under full supervision. I am not applying that to the RFC. The RFC was one of the first, and very properly a Government corporation. I do not see how they could operate without being a Government corporation.

I might say that I presided in the House of Representatives for 12 days and 5 nights over the passage of the original RFC Act. It was a very bitter battle, so I have been interested in it.

While I am on that, it might be interesting for the record to say that, when this act was passed in 1945, there were 101 Government corporations which were brought under it.

Senator FULBRIGHT. Are you referring now to the Byrd-Butler Act? Mr. WARREN. Byrd-Butler. Since then, 8 corporations have been completely dissolved, 7 are now in process of liquidation, 9 were merged with others, and there are 13 corporations no longer legally subject to audit, and 1 has never been activated. The balance of the corporations originally named, still subject to audit, are 63, and we add to that 2 corporations added since the passage of the act, 6 noncorporate organizations currently subject to commercial-type audit, and then Government Services, Inc., which is a non-Government corporation, making now the number of organizations subject to a commercial-type audit 72, as against 101 when the act was passed. Senator FULBRIGHT. I think it is clear from your statement that the Comptroller General has no power in any way to recover the money that might be illegally loaned in this way; and you also feel that there is no power in any other branch of the Government to recover; is that correct?

Mr. WARREN. I report these things to Congress, and at times Congress feels that these reports are so serious that they order public hearings on them.

Of course, it has been a source of great gratification to the General Accounting Office to know that every single report that I have sent to Congress during my tenure in office, upon which there has been a public hearing, has been unanimously upheld in each instance by either House or Senate committees. Of course, the publicity and the things brought out by such a hearing generally cause the agency not

to do it in the future. But all that I can do in the case of a corporation is merely to report it.

Senator FULBRIGHT. Senator Douglas, do you have a question? Senator DOUGLAS. Mr. Warren, did you go into the matter of what groups were to receive this $15,100,000?

Mr. WARREN. Senator, my general counsel advises me that we have information on that, but that as it had no bearing on the legal phase of it, we did not treat it in detail.

Senator DOUGLAS. Would you be ready to testify concerning it? Mr. WARREN. Yes; with any information that we have.

Senator DOUGLAS. As I understand it, the RFC put up $10,100,000 to insurance companies and forced the insurance companies to put up $4,000,000?

Mr. WARREN. $11,100,000.

Senator DOUGLAS. I thought it was $10,100,000.

Senator FULBRIGHT. I might explain. They put up $11,100,000. One million dollars of that $11,100,000 is to be repaid to the RFC as they disburse it. That is set out on a schedule prepared by the staff of the committee.

Senator DOUGLAS. Then the insurance company put up four million, and the RFC put up $11,100,000 of which $1,000,000 was to be returned?

Senator FULBRIGHT. As they disbursed it.

Senator DOUGLAS. Now, then, I notice in the analysis that has been made of this $15,100,000 that only $1,461,000 was to be used for operating expenses, and that $13,638,000 approximately, was to be used to repay creditors who had claims against Texmass and to acquire properties.

Mr. WARREN. That is substantially correct.

Senator DOUGLAS. Do you have a list of the creditors and the amounts which they are repaid?

Mr. WARREN. I am informed that we do not. It is on the committee schedule.

Senator FULBRIGHT. I may say that that list is the last page of the staff memorandum (appendix, p. 200). It shows exactly who gets the money. That is in the prospectus which we will introduce into the record. That is taken from the prospectus.

Do you have any further questions?

Senator Douglas. No, sir.

Senator FULBRIGHT. Mr. Warren, thank you very much for taking the time and trouble to come down here. We appreciate your assistance in this matter. Thank you very much. In order to present our case in an orderly manner, and to present the facts as I have tried to indicate we would in the opening statement, since the Comptroller has relied upon statements made by the SEC-that is, relied upon in the statement made to the SEC-I therefore think it is proper to call the SEC at the moment.

I have asked the Chairman of the Securities and Exchange Commission to arrange to come to the hearing, and he has designated Mr. Heller, the Assistant Director, Division of Corporation Finance, to represent the SEC.

Mr. Heller, would you come forward, please?

STATEMENT OF HARRY HELLER, ASSISTANT DIRECTOR, DIVISION OF CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C.

Senator FULBRIGHT. Mr. Heller, we are very glad to have you here. I believe, for the record, you are the Assistant Director of the Commission's Division of Corporation Finance?

Mr. HELLER. I am an assistant director of the Commission's Division of Corporation Finance.

Senator FULBRIGHT. Do you have a statement to present?
Mr. HELLER. Yes, sir.

Mr. Chairman, and members of the subcommittee, my name is Harry Heller and I am employed by the Securities and Exchange Commission as an assistant director in that Commission's Division of Corporation Finance. This Division of the Commission is charged with the administration of the Securities Act of 1933 under the supervision of the Commission.

The chairman of this subcommittee, Senator Fulbright, has addressed a request to the Chairman of the Securities and Exchange Commission that a representative of its staff appear before you to explain how and why it was required that a registration statement of Texmass Petroleum Co. under the Securities Act of 1933 be filed with the Securities and Exchange Commission.

I am appearing pursuant to such request since the examination of the Texmass registration statement occurred under my supervision. At the outset let me say that the Securities and Exchange Commission has no jurisdiction over the making of the loan by the Reconstruction Finance Corporation. That is solely the function of the RFC. We are not empowered to pass on loans made by the RFC nor are such loans required to be registered under the Securities Act of 1933.

Generally speaking, that act requires that securities proposed to be offered publicly by the use of the mails or the facilities of interstate commerce cannot be offered unless a registration statement has been filed with the SEC and has become effective. The purpose of the Securities Act is to insure that investors are supplied with adequate and accurate information so that they may make an informed judgment in respect of the securities being offered to them.

After the effective date, a prospectus containing substantially the information included in the registration statement must be supplied to the investor. If the registration statement appears to adequately and accurately disclose all the pertinent facts regarding the securities, the registration statement becomes effective 20 days after the statement is filed, unless an amendment is filed, in which case the amended statement becomes effective 20 days after such amendment is filed unless the effective date in each case is accelerated by the Commission. Let me emphasize that the Commission has no power to approve or disapprove a security because of lack of merit or otherwise. Nor does it guarantee the accuracy or adequacy of the information included in the registration statement. If the registration statement appears to contain an adequate and accurate disclosure of all material facts in respect of the securities, it becomes effective irrespective of the merit and demerits of the securities being offered.

Now let me explain why a registration statement was required to be filed by Texmass Petroleum Corp. Prior to the formation of

Texmass, the promoters of that company had offered and sold to some 350 investors residing in Boston and its vicinity working interests in oil leases in which the promoters retained overriding royalties. These overriding royalties and other assets were subsequently conveyed to Texmass by its promoters.

As part of the plan of reorganization of Texmass and other companies which is a condition precedent to the making of the RFC loan, Texmass is to offer to these 350 investors, in consideration of the transfer to Texmass of the working interests owned by such investors, $500,000 in cash to be derived from the RFC loan, two series of debentures, two series of preferred stocks, and common stock.

As I have already indicated, if a public offering of securities by the use of the mails or the facilities of interstate commerce is to be made, the Securities Act requires that such offering be made only after a registration statement under the Securities Act has become effective. After conferences with the representatives of Texmass, the Commission determined that the proposed offering of debentures, preferred and common stocks to the 350 investors was in its opinion a public offering, and, since the mails and facilities of interstate commerce were to be used in connection with such offering, a registration statement in respect of such securities would have to be filed and become effective before such offering could be made. Accordingly, the company filed a registration statement in respect of the securities to be offered.

The registration statement having been filed, our sole function was to analyze such registration statement to determine whether or not the information contained in such prospectus in respect of the debentures, preferred and common stocks was adequate and accurate so that all future investors could intelligently determine the investment merit of such securities.

The RFC loan was of importance in this analysis solely in its relation and effect upon the securities which were being registered. The registration statement was filed on January 13, 1950, and was assigned to the appropriate members of the staff for examination from the legal, accounting, and engineering standpoints as well as for compliance with the requirements of the form on which it was filed and the relevant rules and regulations under the act. In prefiling conferences with representatives of the registrant it became apparent that one of the principal difficulties in obtaining what appeared to be accurate and adequate disclosure turned around the factors affecting the present and future value of the securities being offered.

Upon review by the Commission's petroleum engineering staff of the reports prepared by various petroleum engineers in respect to the company's oil and gas reserves, and after conference with the engineers who prepared such reports, it appeared to the staff that the reserve estimates contained therein were too high; that upon a reasonable estimation of these reserves there was no present value behind the securities proposed to be offered, and that the prospects of any future values were remote and contingent.

Thereafter the Texmass Co. proposed, in lieu of furnishing an estimate of oil and gas reserves in the registration statement, to state the fact that the securities offered were without present value and of extremely remote and contingent future value on the first page of the prospectus in bold-face type and also agreed to make a more detailed statement of such facts on the second page of the prospectus.

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This resulted in furnishing to prospective purchasers in a readily understandable form the ultimate conclusion as to the effect of the factors of value, such as the estimated amount of reserves, the dollar value of oil, lifting costs, rate of extraction, instead of an itemization of these factors themselves.

The statement proposed, with appropriate revisions and provision for proper emphasis in presentation, appeared to be supported by the facts and to accomplish the statutory purposes of the disclosure provisions of the act. Upon compliance with the Commission's requirements directed to this end, the registration statement was declared effective as of March 23, 1950.

That is all I have to say, sir.

Senator FULBRIGHT. Thank you, Mr. Heller. For the record, Mr. Heller, would you identify the original Texmass prospectus so that we may have it in the record. Is that the original?"

Mr. HELLER. No. This is the first amendment. This is not the original, Senator.

Senator FULBRIGHT. Identify it then for what it is.

Mr. HELLER. This is amendment No. 1 to Form S-1, registration statement under the Securities Act of 1933 of Texmass Petroleum Co. Senator FULBRIGHT. First amendment?

Mr. HELLER. This is the first amended prospectus.

Senator FULBRIGHT. Will you identify this one, Mr. Heller? I believe it is the second amended prospectus?

Mr. HELLER. Yes, Senator, this is the second amended prospectus of Texmass Petroleum Co.

Senator FULBRIGHT. And this, I believe, is the final prospectus? Mr. HELLER. This is the final prospectus as it became effective. (The three documents referred to will be found in the files of the subcommittee.)

Senator FULBRIGHT. I wonder if you will read for the record the material presented on page 3 of the final prospectus under the caption "Nature of offering."

Mr. HELLER (reading):

The securities offered by this prospectus are being offered to the participants in the investors' groups described below, and to certain other persons and corporations. Each participant in the investors' groups is free to accept or not to accept the offer as he sees fit. See "Offerings Made Hereby." Such securities will be junior to the RFC loan referred to below in the maximum amount of $15,100,000, which loan will be secured by a first mortgage on all the company's properties owned and to be acquired, and will be subordinated to such loan and to an unsecured $200,000 note.

Based upon recent reports by petroleum engineers, it appears that the developed oil and gas reserves and the reserves contained in the proven but undeveloped acreage controlled and to be controlled by the company are insufficient to create a present value for the securities offered hereby.

Accordingly, the only hope for value accruing to such securities in the future appears to be based upon the possibility of future important discoveries in unproven acreage (of which the company has relatively little) or at unproven levels. Even if during the 10-year loan period the company makes the minimum payments required by the loan agreement, there will remain at the end of such period an unpaid principal amount of approximately $6,150,000 which will then be due and owing. If this amount is not paid or refunded, the securities offered hereby, all of which rank junior to the loan, will in all probability be wiped out. Considering the above, investors should realize that the company's securities offered hereby are highly speculative, that they have no present value, and that any future value thereof is very remote and is dependent upon future development of substantial additional oil and gas reserves which cannot be counted upon.