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Mr. THOMPSON. But if it should subsequently turn out that some of the statements here were false, then he would be liable.

Mr. KENNEY. If one director should refuse to sign the statement, then this security would not be issued. It requires all the directors to sign the statement. Mr. THOMPSON. Yes.

Mr. KENNEY. This director, by withholding his consent, would make it impossible to issue this security?

Mr. THOMPSON. That is right; and, after all, have we not come to the time when we want to have as much security as that?

Mr. KENNEY. That would protect the minority, by requiring them all to sign the statement?

Mr. THOMPSON. Yes; that is right.

Mr. MERRITT. I think there is no doubt that the dummy directors are responsible for a good deal. Good-natured people go on a board, and think it is an honor to be connected with such an institution, and the institution only wants them because of their names; because they are known to be honest men or able men. A man like that goes in with a very small interest and takes the honor, and he ought to take the responsibility, it seems to me; otherwise he ought to stay off.

Mr. THOMPSON. Of course, if this bill should be passed, it is going to reduce the number of directorships that people will serve on. They will know what is going out from their companies; and, gentlemen, if you have investigated the Insull situation, and the Kreuger, and a number of others that I could name here, it would look as if it is about time the directors did know.

The question has been raised that often a report may be based on an accountant's statement, and a director has to depend upon an accountant. Well, the purchaser has to depend upon an accountant,

We come back to the question of responsibility. Now it seems to me we make the people who are issuing the security responsible; and they should be.

Mr. CROSSER. The man is not compelled to sign the statement if he does not want to?

Mr. THOMPSON. Oh, no; he is not compelled to sign.

Mr. CROSSER. If he does not know what he is signing, he should not sign? Mr. THOMPSON. That is true.

Mr. HUDDLESTON. May I ask what is the penalty for a false statement under this section?

Mr. THOMPSON. Here is the penalty clause, Mr. Huddleston. It is section 17, page 28:

That whoever shall willfully violate any of the provisions of this act, or the rules and regulations promulgated by the Commission pursuant thereto, shall upon conviction be fined not more than $5,000 or imprisoned not more than 5 years, or both; and any officer, director, or agent or any corporation who knowingly participates in such violation shall be punished by a like fine or imprisonment, or both.

Mr. HUDDLESTON. “Knowingly" affords an ample loophole for the ignorant and the innocent.

Mr. THOMPSON. Yes.

Mr. MAPES. Section 9, on page 19, holds him personally responsible in damages, does it not?

Mr. THOMPSON. That is right. That is the civil phase of the bill, If one of the directors should be careless or negligent, and not know what is going on, and sign a statement, and there should be a loss directly resulting from conditions other than this statement in the information to the Federal Trade Commission, then he is personally liable for the loss to the purchaser up to the amount of the par value of the stock which the purchaser bought.

Mr. WOLVERTON. While you are on that section, Mr. Thompson, may I ask this question, directing your attention particularly to the words in lines 9, 10, and 11, on page 19:

In case any such statement shall be false in any material respect, any persons acquiring any securities to which such statement relates, either from the original issuer or from any other person, shall have the right to rescind the transaction and to obtain the return, either at law or in equity

Now, these words particularlyof any and all consideration given or paid.

Now, is that repayment or return to be made to the purchaser by the director or the issuer, or is it to be made by the person from whom the purchaser has bought?

Mr. THOMPSON. It is upon the issuer, or, in the case of a syndicate, where you have a number of houses that are distributing the stock, any one of those who gives out a statement of this kind.

Mr. WOLVERTON. Then, by way of illustration, if the stock was originally issued, and sold for $100, and subsequently it was sold and purchased for $150, would the person who had paid $150 have a right to hold the original issuer responsible for that amount or only for the amount in which it was originally issued?

Mr. THOMPSON. You mean, after it had gotten out on the market?
Mr. WOLVERTON. Yes.
Mr. THOMPSON. I do not think so; no.
Mr. WOLVERTON. What do you mean, you do not think so?

Mr. THOMPSON. I do not think that is covered in this particular language.

Mr. WOLVERTON. What would be his recovery, then-$100?
Mr. THOMPSON. The original price, if I understand you correctly.

Mr. WOLVERTON. Yes; but he has given $150 for the security after it is out on the market. This section undoubtedly gives a purchaser the right, not only to rescind, but to recover, and I would like to know in what amount recovery may be had.

Mr. SADOWSKI. In line 15 it is provided :

That the amount so recoverable from persons signing the statement shall not exceed the price paid for such securities.

That would mean the price he paid for it.

Mr. WOLVERTON. Then the issuer would be liable for any price that it would subsequently sell for?

Mr. THOMPSON. I should think so; yes.

Mr. PETTENGILL. Does the act apply to anything except the original sale?

Mr. THOMPSON. The act does not apply to anything except the original sale. In other words, take for example the case of a purchase in any one of the brokerage houses here in Washington of a security. You usually get a street certificate signed in somebody else's name. Now, in such case, there would not have to be any notice sent to the purchaser.

But in the original sale, when the certificates are issued, and if in the original sale there is discovered later on a false statement, and one that does not conform to the statement that has been filed with the Federal Trade Commission, then the person purchasing that certificate can go to the original seller of the certificate, the issuer, and recover the loss which he has sustained.

Mr. PETTENGILL. And that is all part of one original issue?
Mr. THOMPSON. That is right.

The CHAIRMAN. All right, Mr. Thompson; will you proceed with the details of the bill?

Mr. THOMPSON. On the subject of the information required, which is section 5, we have combined there the requirement under the socalled Taylor bill and the Uniform Sales of Securities Act, and we have paraphrased where we could the language of those two acts.

Now, insofar as that section is concerned, I might call your attention to language under paragraph (4), line 15:

The amount of the funded debt, with a description of the date, maturity, and character of such debt, and the security, if any, therefor.

If there had been, let us say, in the case of Company A an issue of bonds, $5,000,000, and subsequently a second issue of bonds or other securities, then this statement would have to inform the Commission of the prior security and of the prior rights insofar as that security is concerned, and would have to show what assets were given for this particular issue.

Now, I call your attention to paragraph (5):

A detailed statement of the plan upon which the issuer proposes to dispose of the securities.

I pause to amplify with regard to this at this time.

Mr. BULWINKLE. Mr. Thompson, pardon me just a minute. I do not want to interrupt you; but why put in “90 days” in paragraph (4)—"Not more than 90 days prior to the date of filing such balance sheet"?

Mr. THOMPSON. That was to facilitate the bookkeeping situation of the companies. We have talked to a number of the companies, and they said that they needed some time. We also wanted to protect the Commission's position under the act by not going too far back. So, after discussion, we fixed it at 90 days, I believe that is the same time as in the Uniform Sales of Securities Act.

Mr. BULWINKLE. Do you not think there should be, then, a provision there also for additional changes in the statement that may have been filed for registration?

Mr. THOMPSON. Yes; we have in the bill and would also under the rules have the right at the date of the filing of the papers, to call for any later information if any condition had changed. I am using the personal pronoun, but I have nothing to do with the Commission, of course, myself.

Now, then under paragraph (6), I wish you gentlemen would run your pencils through the phrase in line 21, “the amount returnable to capital investment.” That is a printer's mistake or our mistake, we have already taken care of that in a previous paragraph.

Mr. MAPES. That is a duplication?

Mr. THOMPSON. That is a duplicationthe amount returnable to capital investment.

Then, reading on:

And the amount of all commissions and other considerations paid or to be paid

After the word "paid” insert the words “by or," so that it will read:

Paid by or to the issuer.

We have situations, strange as it may seem, where there are commissions that both go to the issuer and are paid by the issuer; so we want to cover that.

Then, under paragraph (b), at the bottom of page 10:

Each statement relating to securities issued by a foreign government or political subdivision thereof shall contain:

And then we set those forth. They may be of interest to you to read at this time. You will see how we diverge there from the requirements for a domestic corporation or for a private corporation of a foreign government.

(1) Name of borrowing government or subdivision thereof. (2) Purpose or object of the loan. (3) Date and terms of the proposed loan. (4) Date and terms of the underwriting agreement, the names of the members of the underwriting syndicate, including all bonuses and commissions paid or to be paid by the foreign borrowing government and all payments or charges paid or to be paid for the privilige of underwriting the loan or for any other purpose in connection therewith.

(5) Security pledged or to be pledged for the loan.

(6) General financial condition of the borrowing government or subdivision thereof.

We have had situations where foreign governments were attempting to borrow in order to balance their budgets. This is the section where such a fact would be brought out. Of course, if that fact were carried in an advertisement, it would be notice to the purchaser that his money was going to pay debts and not for some new enterprise that the foreign government was attempting to put on.

(6) General financial condition of the borrowing government or subdivision thereof.

You will see that if we had had information of that kind in times past there would have been about $800,000,000 loss in foreign securities in this country.

(7) Whether or not the borrower has ever defaulted on the principal or interest of any other security sold in the United States or other foreign country and, if 80, the date, amount, and circumstances.

(8) Proposed method of distributing the securities to be issued under the loan.

(9) Proposed price at which security is to be offered to the public in the United States and elsewhere.

(10) Cost thereof to the person, corporation, or association or other entity underwriting or negotiating the loan and the net amount to be returned to the borrowing government or subdivision thereof from the sale of such securities.

Now, in so far as domestic corporations and private corporations of foreign governments are concerned, we require them to give certain specific information, and to carry essential parts of it in their advertisements. In so far as a foreign government is concerned, we require specific information from its selling agents but leave it to the discretion of the Commission as to the type of information which shall be advertised; we do this because of international relations.

We can

treat their American seller just as we do all domestic sellers, and demand of him the information required when we could not do so directly with a foreign government. It is left to the discretion of the Commission as to the character of the advertisement that is to be put out.

We come now to the fee. We are suggesting to this committee that there be an allowance of a hundred thousand dollars for the first year in the administration of this act. We have estimated, figuring from the securities that were put out last year, that if we take one one-hundredth of 1 per cent of the securities that are sold-and, of course, last year was really, I suppose, a subnormal year-it will give an income of about $175,000, and we think that that should be enough to carry on the proper administration of this act. This income will not begin to come in for some time and so we are suggesting that there be a hundred thousand dollars provided here.

Next is section 6, which covers the subject of revocation. I do not know whether there should be any discussion there except to say that this language with reference to revocation is taken from the Uniform Sales of Securities Act, and is almost identical with it.

It covers the question of whether the issuer is bankrupt or in a bad condition financially, or has been notorious, let us say, in the selling of securities under false conditions. It goes back, in fact, to the business character of the one who is issuing the securities and to his financial standing.

In the event that the Commission decides to revoke a registration which, as you understand, would immediately create a condition of penalizing those who have registered and who go ahead in the face of that revocation, we provide that when the order is made by the Commission, the Commission having had a hearing if the issuer desires, then if he asks for a hearing within 30 days, the hearing shall be granted. But if there is no hearing asked for, then the order shall become permanent.

Now, if the Commission rules permanently against the revocation, then he will have the right to go to the Court of Appeals of the District of Columbia. That is, the one complaining has that right.

You gentlemen might consider the question of whether you want to extend this jurisdiction to the Circuit Court of Appeals of the district where the complaining issuer lives. There is something to be said on both sides of that situation.

If you have the District of Columbia Court of Appeals, you will have uniformity of decisions, and you will save the Government the expense of sending attorneys out to these court of appeals districts, as far out, let us say, as on the Pacific coast.

On the other hand, that might work a hardship on the person who is complaining, to have to come here and try his case.

After thorough consideration of the matter, we have finally incorporated here a section which gives jurisdiction so far as appeal from the decisions of the Commission are concerned, to the Court of Appeals of the District of Columbia.

Mr. PETTENGILL. Is the revocation held in suspense pending the court hearing, or does it operate as a temporary restraining order?

Mr. Thompson. During the 30-day period after the order is entered, there is a suspension, during which the person may ask for a hearing. If they ask for a hearing, they suspend the order until it is made final.

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