Mr. MAPES. The matter is not clear to me as to just where the line is drawn. Commissioner EICHER. In just a few minutes, I think I will cover that to your satisfaction. Mr. MAPES. My attention was called to one case where the company filed, or attempted to file a statement and one of the employees of the Commission said it did not comply with the law and counsel for the company came to Washington two or three times to get it filed. If he had not known his way around, I think the organization. would have gotten discouraged. Finally counsel insisted on seeing somebody higher up. After he did so it was accepted. Now, to what extent does the Commission have authority over these trust indentures, in somewhat the same way Commissioner EICHER. Do you happen to know, Mr. Mapes, whether that might have been a public-utility holding company case? Mr. MAPES. No; it was a private corporation. Its securities were all going to be taken by stockholders in the company. Commissioner EICHER. From the facts you related I do not understand how that could have occurred, because it is clear-— Mr. MAPES. No one could understand it. Commissioner EICHER (continuing). That the Commission has no authority to refuse to accept the filing that the applicant wishes to make and to let the registration become effective if it furnishes the information required by law. Now I am going into a further discussion of the disclosure question that you have brought up, Mr. Mapes. The Commission's only concern will be with those provisions which relate to the protection and enforcement of the rights of the bondholders. Its work will be completed when the form of the indenture has been qualified under the bill. After the indenture has been executed, it will be enforceable only like any other contract. INADEQUACY OF DISCLOSURE AS A CORRECTIVE It has been urged, I assume by way of confession and avoidance, that all that is necessary is the present requirement of "full disclosure" in the Securities Act prospectus of the defects in the trust indenture. The thought must be that, no matter how bad the indenture, if disclosure is made, the investor has only himself to blame. The same argument must have been advanced years ago when the legislatures of the several States were faced with a similar problem with respect to the form of insurance policies. A short answer to this suggestion is that it is clear from our experience under the Securities Act, even since the publication of our report entitled "Trustees Under Indentures," that the disclosure of the terms of an indenture is not sufficient to bring about the necessary improvements, and that the desired objectives will not be obtained so long as the form of the indenture is determined exclusively by the obligors and the underwriters. A possible explanation is that the underwiriters have concerned themselves primarily with what may be called the business features of the indenture, over which the bill gives the Commission no jurisdiction whatsoever. By "business features" I mean such matters as the wisdom of the issue, the amount of security to be given therefor, the offering price, the maturity date, the interest rate, the sinking fund and redemption provisions, and the like. These also are the features in which the average investor is most interested when he purchases a bond. He thinks much more about them than he does about the adequacy of the provisions relating to the protection and enforcement of his rights. Mr. BOREN. Mr. Chairman. Mr. COLE. Mr. Boren. Mr. BOREN. On that point, Mr. Eicher, it was charged last year in some of the hearings, that the bill departed from the full disclosure theory to the basis of what I believe somebody classified as dominion theory, giving the Securities and Exchange Commission dominion control over the issuance of securities. The point I am getting at is just a tangible analysis for the basis of the bill. You have gone beyond the full disclosure theory. How far have you gone beyond it? First, I understand specifically the statute sets out here the provisions and the regulatory powers given the Commission to govern, not the issuance, but the handling of the issuance by trustees. Commissioner EICHER. The Cole bill, Congressman Boren, goes. not a step further in the direction of what you call the "dominion -theory" than informed opinion in the industry itself recognizes as being utterly essential to make this a workable piece of legislation. Now, Mr. Burke will discuss the changes that have occurred in the development of this bill since you and I were discussing it last year and since it started on its way through the Senate committee in collaboration with the legislative counsel of the Senate, Mr. Wood. There have been some distinct changes made in the bill in that regard and there are just three points left in the Cole bill that provide for administrative implementing by the Commission in carrying out of its functions under the bill. FLOTATION EXPENSES Mr. BOREN. Last year, as I remember, Mr. Amberg testified that under the provisions of even the former bill that under the dominion theory that the trustee would, as a practical matter be unwilling to accept issues, except in cases where the prospective future problems were very slight and in which the fee for handling the issue was exceptionally large. This brings to my thought the second most important factor of the bill in relation to business, which is whether or not this legislation will mean any great expense in the issues, either to the issuer or to the trustee, in making the necessary investigations for issuing prospectuses. Commissioner EICHER. Well, Mr. Burke is going to develop that in his presentation, but I might say in passing that studies based upon estimates made by issuers themselves as to expenses of registration indicate that, for even comparatively small issues, ranging from one to five million dollars, expense of registration averages less than 1 percent of the gross proceeds, and that percentage goes down as the size of the issue goes up. That represents a comparatively small proportionone-sixth to one-twelfth of the total expense of public distribution. Mr. BOREN. Well, are you in a position to indicate as a practical matter the percentage that this legislation will cost in the flotation of issues? Commissioner EICHER. We have an analysis on that subject that was prepared by members of our staff a few weeks ago, copies of which Mr. Branin is now handing you. Mr. BOREN. Mr. Chairman, I would like to have this put in the record at this point. Commissioner EICHER. Do you want it in here or in Mr. Burke's testimony? Mr. BOREN. If it is agreeable to the chairman, I would like to have the analysis put in right now, while we are discussing this. Commissioner EICHER. Well, that is up to the committee. You can either have it done now or in connection with Mr. Burke's testimony. Mr. COLE. As I understand, Mr. Eicher had this other paper which he wanted to go in later as part of his remarks. Do you want to include this in the record later on? Commissioner EICHER. That is right. Mr. COLE. Mr. Boren, would you rather have it all put in at one place, or do you want it put in at this point? Mr. BOREN. The reason I want it at this point, is because it is bringing up what I consider to be the second most important question. Commissioner EICHER. I do not think this will interrupt the continuity, but Mr. Burke is planning to introduce it in connectionwith his remarks. Mr. BOREN. Mr. Eicher, would you be opposed to having this statement go in now, or would you prefer to leave that until Mr. Burke takes the stand? This is where the 1 percent comes in and from a cursory examination of this schedule, I wanted to get definitely to the point. I was under the general impression that the cost would be considerably more than 1 percent. Commissioner EICHER. Well, Mr. Burke will develop that much more fully, but it is true, that the average expense that is related to the necessity for registration, as gathered from reports made by issuers themselves, even for issues from one to five million, is less than 1 percent of the gross proceeds. Mr. BOREN. Well, is that analysis confined entirely to the present situation or is it in any way reflective of the cost that might be incurred by the enactment of this legislation? Commissioner EICHER. AS I have tried to demonstrate throughout my own statement, there will be very little reason for additional expenses or costs in the administration of this particular bill because of the fact that it dovetails naturally into the work that is already being done by the Commission's staff in connection with the registration of the securities. Mr. BOREN. Of course, the cost I have reference to is the cost to the issuer or the trustee, or both, as the case may be. I have finished, Mr. Chairman. (The statement referred to is as follows; see also p. 263 for expenses of a sample individual issue:) EXPENSES OF FLOTATION OF INDENTURE SECURITIES The appended schedule presents the results of an analysis (the figures are taken from the registrants' own estimates) of the expenses of flotation of issues of indenture securities registered under the Securities Act during the 22-year period from January 1, 1936, to June 30, 1938. The significant fact demonstrated by these figures is that the expense of registration represents a comparatively small proportion of the total expense of publicly distributing such securities. They provide a clear answer to the suggestion that expense of registration (and, inferentially, the expense of complying with the present bill) has, or will have, a materially retarding influence on financing through the public distribution of indenture securities, and a clear indication that we must look elsewhere for the cause of the alleged trend toward private rather than public sale of indenture securities. In fact, for issues of $1,000,000 or more, underwriters' commission and discount was from four to nine times as important a factor in total cost as was registration expense. It is to be noted that the item of registration expense did not prevent the registration of a total of $9,363,597,000 of securities of all types during the 2 years ended June 30, 1937. To summarize, on indenture security issues from $1,000,000 to $5,000,000, total expense of flotation constituted 4.7 percent of the gross offering price. But almost three-fourths of this total (3.57 percent of offering price) represented expenses wholly unrelated to the necessity of registration, including 3.3 percent for underwriters' commission and discount. And of the remaining 1.16 percent for printing, legal, accounting, engineering, miscellaneous, and registration fees it is only fair to assume that a substantial proportion (from one-third to one-half) would have been incurred even if no registration were necessary. This trend is even more marked in the case of the larger issues. On issues from $10,000,000 to $25,000,000, of total flotation expenses of 3.1 percent, more than two-thirds was for underwriters' commission and discount, and only one-fifth for expenses even partially attributable to registration. And for issues of $25,000,000 or more, more than three-fourths of the total expenses were for underwriters' commission and discount, and only about one-seventh for expenses even partially attributable to registration. In either case, in considering expenses partially. attributable to registration, allowance must, of course, be made for the one-third to one-half of such expenses which would have been incurred even if no registration were necessary. As pointed out elsewhere, the provisions of section 307 for incorporation by reference and for consolidation of proceedings with those under the Securities Act, insure against any substantial increase in registration costs. And by exercising the privilege of commencing its proceedings for qualification of the indenture before filing its formal registration statement for the bonds themselves, the issuer can guard against delay. Summary of expenses of flotation of indenture securities registered under Securities Act, Jan. 1, 1936, to June 30, 1938 sion and discount..... 6.2 6.0 5.5 (1) Underwriters' commis- Percent Percent Percent Percent Percent Percent Percent Percent Percent 3.8 3.3 2.4 2.1 1 This summary assumes that 1% of the following expenses (detailed in the attached break-down) are not attributable to the necessity of registration: Printing and engrvaing, legal fees and expenses, accounting fees and expenses, engineering fees and expenses, other and miscellaneous expenses. Expenses of flotation 1 indenture securities registered under Securities Act, Jan. 1, 1936, to June 30, 1938 6.2 (1) Underwriters' commis- Percent Percent Percent Percent Percent Percent Percent Percent Percent sion and discount..... 6.0 5.5 3.8 3.3 2.4 2.2 2.0 2.1 1 Figures cover 192 issues for which comparable data were available, out of a total of 402 issues registered excluding 10 debenture issues registered by investment companies, percent figures represent percent of gross offering price. From 1 to 2 of these expenses are probably not attributable to the necessity of registration. Mr. REECE. Mr. Eicher, the expense of registration to which you refer is the entire expense of registration and does not have particular reference to the additional expense that would be incurred by reason of the provisions of this bill if it should be enacted into law. As I recall when Commissioner Douglas was before the committee last year testifying on this bill, he stated that it was his opinion that most of the information which the Commission would require in order to determine if the indenture meets the standards set out in the bill, would be supplied to the Commission in connection with the application for registration, so that the additional expense, at least the additional administrative expense, in connection with the enforcement of the provisions of this bill would be relatively small, both as regards to the expenses of the Commission and the expenses of the applicant. Is that still the feeling of the Commission? Commissioner EICHER. Yes. In fact, the Cole bill, which is a summation of the recent drafts provides specifically for incorporation by reference of all pertinent material that is on file with the Com mission. If it should be found desirable by this committee in the further study of that particular phase, I think it may be possible entirely to eliminate from the bill the requirement for the filing of a separate |