Mr. BANE. There are about 2,188 listed on national securities exchanges.

Mr. YATES. And you are required to examine these statements under the law?

Mr. BANE. Yes, sir. The annual report filed for the fiscal year 1950 shows 2,648. That includes companies that not only filed annual reports because their securities were listed on exchanges but companies that filed annual reports that do not have their securities listed on exchanges but have a certain volume of outstanding securities-over $2 million. That is under section 15 (d) of the Exchange Act. Mr. YATES. Are you required to approve their annual reports? Mr. Cook. No, sir; we approve nothing.

Mr. YATES. Can you disapprove them if they are not correct? Mr. BANE. We do not disapprove them. It is a question of seeing as far as we can that the reports are adequate and accurate.

Mr. Loss. We do have a statutory obligation to throw the security off the exchange if it files a materially false report. Of course, we could not satisfy that obligation unless we promptly examined the reports. In addition, Congress has provided investors who want to go back of certain reports very significant safeguards, and there is no way they can find out whether or not they are false except through our xamination. And while there is no time limit, Congress certainly contemplated we would promptly examine the reports.

Mr. Cook. There are many other types of reports which we could describe to you which fall within this category of material which must be examined.

Mr. YATES. I used to be with the Illinois Commerce Commission, and we had reports there from the utilities that were comparable to that.

Mr. BANE. I did not give you the figures on the applications for listings increase, but I will say they have increased last year over the two preceding years.

Mr. YATES. Applications for-listings are time reports?

Mr. BANE. Yes. They are applications for listings on the exchange similar to the registration statements.

Mr. Loss. They are time reports.

Mr. YATES. That is, you have to dispose of them as time reports? Mr. Loss. That is right.

Mr. Cook. The important thing, I may add, is that as the number of securities listed on exchanges increases, it means that each year you have an increased number of annual reports to examine, because the accumulated total of listings is larger.

VIOLATIONS OF SEC REGULATIONS

Mr. YATES. How many violations of the regulations were there last year that you actually policed?

Mr. Cook. We have to take that statute by statute and section by section. Which statute do you have in mind?

Mr. YATES. The total number of statutes you are required to supervise. Do you have the sum total of them?

Mr. BANE. I do not think I understand the question.

Mr. YATES. Is this an indication of the total volume of that kind of cases?

Mr. BANE. No. I do not think the answer to that would answer whe is in the Congressman's mind. By "violations," you mean violations as to which we instituted some proceeding?

Mr. THOMAS. Let us pin-point it. You had 730 new listings of corporate stocks and securities in 1951. Mr. Yates is asking how many of them did you actually disapprove. As a matter of fact, do you have any authority to disapprove?

Mr. BANE. No, sir.

Mr. THOMAS. How many suits were brought by people who alleged they were defrauded by those 730 new listings?

Mr. BANE. So far as I know, none.

Mr. YATES. Are complaints filed with your Commission in those cases?

Mr. BANE. Sometimes our examination indicates something is wrong. What we do is examine the applications, annual reports, and so forth to see whether they comply with the requirements and to see whether in complying they furnish adequate and accurate information. We do not then have any proceeding. We write what we call a letter of deficiency and point out what appears to us to be wrong and give them an opportunity to make corrections, and they generally make corrections.

FRAUD INVESTIGATIONS

Mr. YATES. How many cases of fraud did the Commission handle last year?

Mr. LUND. We started 725 new fraud investigations last year. We had a backlog of some 300 or 400 from previous years.

I would like to add, if I may, that our chief aim is to detect and prevent fraud before it gets started, and by being alert and being on the ground we are often able to step in before it gets started. in starting 725 new investigations, we hoped we would not have many real fraud cases.

So

Mr. YATES. What is the aim of the case started as a fraud case; is it to disqualify the company from trading?

Mr. LUND. I think we have a misunderstanding. These are fraud investigations, not cases.

Mr. YATES. Those are investigations rather than cases filed?

Mr. BANE. That is correct, and which result normally in relatively few cases actually where we go into court.

Mr. Cook. You may have securities sold without being registered, in violation of the registration provisions of section 5, and they may be sold on the basis of either the omission to state material facts or on the basis of material misrepresentations. In that kind of situation you could have a fraud case or an investigation to determine whether anyone had been defrauded.

Additionally, you may have an attempted manipulation on the stock exchange itself. For example, a few people may get together and decide they are going to put up the stock of a particular company and may engage in the old technique that all of us are familiar with and put it up. Now, our people are constantly on the watch for that type of operation for the purpose of detecting unusual activity or any unusual fluctuations in a particular security for the purpose of determining whether there is some market juggling afoot. If there

is that kind of manipulation attempted, it could also give rise to an investigation which might result in fraud charges.

BROKER-DEALER INSPECTIONS

Additionally, we have jurisdiction over brokers and dealers, and you get another type of situation there. Brokers and dealers have custody of large amounts of cash and securities of customers.

Mr. YATES. As I remember Chairman McDonald's testimony last year, are not those policed pretty much by the private concerns?

Mr. Cook. No. I would say this, that the private organization, the NASD, (National Association of Securities Dealers), and indeed the New York Stock Exchange, also, polices their own members. Each does a substantial amount of policing work. But Congress has designated the SEC to do the policing for the public, and there is a great deal of difference between attempting self-regulation on the part of an association and the kind of regulation which Congress might determine as appropriate in the public interest. We make brokerdealer inspections and, as indicated in my opening statement, in many of those inspections it was found customers had been overcharged for securities. In some cases it was found that secret profits had been taken.

Mr. YATES. Are these not unusual instances, or is this a regular occurrence?

Mr. Cook. Oh, they do not occur in great number, but they occur with regularity.

Mr. YATES. The investigation job still has to be done.
Mr. Cook. Yes.

HOOVER COMMISSION RECOMMENDATIONS

Mr. YATES. As I remember the recommendations of the Hoover Commission, there were certain points they made with respect to regulatory agencies. Have their recommendations been adopted by the Securities and Exchange Commission? As I remember, they did not take them agency by agency, but they picked all of the regulatory agencies and made certain suggestions.

Mr. Cook. I do not want to be too categorical, but my impression was that Reorganization Plan No. 10, which was sent up to Congress by the President a little less than 2 years ago, had as one of its principal purposes compliance with the recommendations that had been made. That plan was not disapproved by Congress. Accordingly, it has become effective and we have been operating under it for about the last 18 months.

INVESTMENT COMPANIES

Mr. PHILLIPS. How many investment companies are there now? Mr. Cook. You have reference to investment trusts?

Mr. PHILLIPS. Yes.

Mr. BANE. There are 368 registered investment companies.

Mr. PHILLIPS. Has there been an increase of them in the last several years?

Mr. Cook. Very substantial. There are two types of investment companies. One is the closed-end company. That is a company

which has securities outstanding, and they are not redeemable. The other type is the open-end company, which has redeemable securities. The holder of a security in an open-end company can turn it in to the company and get his pro rata part of the assets at any time. There are certain exceptions to that; but, generally speaking, that is a fair characterization.

During the last few years there has been a remarkable increase in the growth of those funds, and today the assets of open-end mutuals run well over $3 billion. They had their development only in a very small way in the early 1930's, and it was not, I would say, until the 1940's that the securities of the companies commenced to be sold in any substantial volume. But in the last few years the growth has been

enormous.

AUTOMOBILES

Mr. PHILLIPS. How many automobiles does your agency have? Mr. Cook. We have one-a 1946 Ford. I think it probably costs the Government more to maintain it than it would to replace it. Mr. PHILLIPS. Did all seven of you come down in that Ford this morning?

Mr. Čook. As a matter of fact, some of us came in that car, and the rest came in mine, which I use, as other Commissioners use their own cars, in connection with transacting public business. And that is entirely agreeable to me for my own part.

REIMBURSEMENTS FROM OTHER AGENCIES

Mr. YATES. In connection with the work you do for other agencies, do you receive any compensation for that from the other agencies? Mr. Cook. The answer, generally speaking, is "Yes".

Mr. YATES. How much did you receive last year from other agencies?

Mr. RIORDAN. Last year we received, as reimbursement from other agencies, $12,000. So far this year we have received $10,960. Mr. YATES. From what agencies?

Mr. RIORDAN. The Economic Stabilization Agency, the Veterans' Administration, where we loaned them two trial examinersMr. YATES. You say you "loaned them two trial examiners"? Mr. RIORDAN. Hearing examiners.

Mr. YATES. For holding hearings?

Mr. Loss. The Administrative Procedure Act more or less contemplated that trial examiners would be to some extent interchangeable. They are simply required to listen to the evidence and find the facts. So that they are somewhat general examiners.

Mr. YATES. You say you received compensation from the Office of Economic Stabilization and the Veterans' Administration?

Mr. RIORDAN. And a few other agencies. We have received reimbursements from the House of Representatives Appropriations Committee.

Mr. YATES. You mean apart from your ordinary appropriations? Mr. RIORDAN. Yes, sir. One of our accountants did some cost studies for the Committee on Appropriations of the House of Representatives. We also received reimbursements from the Defense Production Administration. In effect, some of our employees were

transferred to that agency and during the time of processing the papers we loaned these employees on a reimbursable basis. Some were there for 30 days before the papers were processed.

Mr. YATES. Did they go physically to the other agency?

Mr. RIORDAN. Yes. The same is true of reimbursements from the Economic Stabilization Agency. The Federal Reserve Board borrowed a hearing examiner from us. The United States Senate Subcommittee on Elections borrowed one of our employees on a reimbursable basis.

Mr. YATES. And the sum total you received from all of the agencies and the House of Representatives Appropriations Committee was approximately $12,000.

Mr. RIORDAN. That was last year. The reimbursements I am speaking about this year happened since July 1, for which we have received $10,000.

Mr. THOMAS. Thank you very much, gentlemen. It is always nice to see all of you.

Mr. Cook. Thank you very much for hearing us so fully. We always like to come before your committee.

THURSDAY, JANUARY 17, 1952.

SELECTIVE SERVICE SYSTEM

WITNESSES

MAJ. GEN. LEWIS B. HERSHEY, DIRECTOR

BRIG. GEN. LOUIS H. RENFROW, DEPUTY DIRECTOR

COL. CLOYD T. CALDWELL, CHIEF, FINANCE AND PROCUREMENT DIVISION

LT. COL. BERNARD T. FRANCK, III, LEGISLATIVE AND LIAISON OFFICER

MAJ. CHARLES W. MALLENDER, BUDGET OFFICER