Mr. THOMPSON. Mr. Marland, of course, the Commission can call for information other than that which is set forth here. We have a general catch-all phrase which permits us to call for other information. But I do not see any objection to putting that language in there.

Mr. MARLAND. To the effect that any collateral agreements between the Government borrowing and international investment bankers lending should be disclosed, and there should be a provision in this act which permitted that disclosure.

Mr. THOMPSON. We will take that into consideration.

Mr. MARLAND. There is one other question I would like to ask. Is there any provision in this bill which would prohibit the director of a domestic corporation which is issuing bonds or other securities from being the investment banker of that company and from making a commission or a profit on the bonds or securities that that corporation sold? It occurs to me that the investment banker should not be permitted to act as a director of a corporation and create securities and make a profit on the sale of those securities of the corporation. He cannot very well serve two masters, himself and the interests of the stockholders of the company.

Mr. THOMPSON. I do not believe that under this bill you would have any authority to stop a situation of that kind. I think your question, involving the wisdom of that, is something to be considered. Mr. MARLAND. Do you think you might insert something in connection with that in the fraud section of your bill?

Mr. THOMPSON. Not unless there had been a fraud committed, because I think that a man might possibly be a member of the issuing company and of the investment house and might be in the clear and clean so far as what he was doing was concerned, so that it would not come to him in the fraud section.

Mr. MARLAND. Do you not think that the statement filed should show that the investment house issuing the securities was also represented on the board of directors of the corporation authorizing the issuance of the securities?

Mr. THOMPSON. I think under the rules that would undoubtedly be required. But now I am thinking in terms of the advertising. I do not think in your advertising you can go into such detail. In other words, there is the expense to be considered and that sort of thing. You have got to limit the advertising. I think that could be brought out and would be brought out under the rules of the Commission; all relations would be required to be exposed to the Commission.

Mr. MARLAND. One of the greatest evils existing in the security business today is the fact that the investment banker is also the director of the corporation creating the security. He is making a profit on the issuance of securities which he helps to authorize the issuance of. There is nothing in this bill to prevent that.

Mr. THOMPSON. Particularly of the affiliate companies; I think that is so. I do not know and cannot speak with any authority whatever, but I rather imagine that will be taken care of in other legislation.

Mr. PETTENGILL. Following what Mr. Wolverton said about worthless stock, I want to know if I understand the theory of this bill correctly. Suppose somebody took out a patent to get gold out of sea water. You and I and everybody here and everybody on the

Commission might think that that idea and the patent were worthless, utterly worthless. But if they tell the truth about it when they offer it to the public and say, this is a speculation, then as I understand there would be nothing here to prevent that from being done. might prove to be immensely valuable, as many inventions have proved by experience to be valuable, when nobody anticipated that they would be.

Am I correct about that?

Mr. THOMPSON. That is right. May I answer right there on that point, that when I was on the Commission and we were functioning under the blue-sky law, there were some promotions started in the Southwest which looked perfectly ridiculous, as wildcat as they could be. Of course, they were advertised as great opportunities for investment and profit, and all that kind of thing. In one of those wildcat schemes, they drilled wells and one of them brought in a 10,000-barrel well. Where would we have been if we had said, "You cannot go ahead with that speculation"? That is what the Government is faced with in a lot of things.

Mr. PETTENGILL. In other words, if they tell the truth about it to the public?

Mr. THOMPSON. Yes.

Mr. PETTENGILL. Take my illustration of getting gold out of sea water. It might be that that company was insolvent; that whatever money it got went into machinery which immediately was worth less than they paid for it. Yet it might prove to be immensely valuable. But if they tell the truth about it, that is as far as we intend to go, in principle.

Mr. THOMPSON. That is the understanding of this bill; that is the basis of this bill. You are speaking now about the fraud section, are you not?

Mr. PETTENGILL. About the whole theory of the bill. As I understand it, the truth must be told to the purchaser.

Mr. THOMPSON. Yes. My attention has been called to section (f) on page 13

That the enterprise or business of the issuer, or person, or the security is not based upon sound principles, and that the revocation is in the interest of the public welfare.

That is a pretty broad statement. Your illustration might come within the terms of that caluse—that is, extracting gold from sea

water.

Mr. PETTENGILL. It might also come under the language in lines 15 and 16 immediately above.

Mr. THOMPSON. But as to the speculative feature of it, I have difficulty in keeping in mind the idea of unsoundness. I am thinking more of the speculative feature all the time. I think that is the thing we must not stop, speculative investments.

Mr. PETTENGILL. In other words, if a man wants to invest money in a proposition to make gold out of sea water, we do not want to stop it.

Mr. THOMPSON. I should think that is true.

Mr. PETTENGILL. As long as he knows what he is putting his money into and wants to take the risk.

Mr. THOMPSON. Yes.

Mr. PETTENGILL. Now, I do not want to start any war with any foreign nation. They are sensitive, or otherwise, but it is not plain to me how we would handle the situation of this sort: A foreign government wants to sell securities in this country. If the American underwriting house buys them, and makes a profit through the spread, then that American underwriting house comes under the jurisdiction of the Commission, does it not?

Mr. THOMPSON. That is correct.

Mr. PETTENGILL. But, suppose that instead of that being the way in which the underwriting house gets their profit, that the foreign government designates the International Investment Co. as its agent, and pays it as an agent for whatever bonds it sells.

Now, then, how are you going to stop that without offending the foreign government? Would you accomplish the same thing by supervision?

Mr. THOMPSON. Well, I think it would come under the act; we would probably offend, but not in a diplomatic sense. In other words, we would not be giving the offense direct to the foreign government. We could still say to the foreign government, "You can sell your securities in this country"; nevertheless any person who became the representative over here would come within the terms of this bill, and would have to make the revelations required by it.

Mr. PETTENGILL. Whether in the capacity as underwriter or agent? Mr. THOMPSON. As agent. I will read what this says.

Corporation, association, or other entity negotiating the loan or acting as the selling agent or underwriting such security for sale in the United States as the commission may require.

That is at the bottom of page 6.

Mr. PETTENGILL. The main line of thought, Mr. Thompson, is, take a new issue, we will say, by an Indiana corporation, where we have an Indiana blue-sky commission. It seems to me that this commission would place itself in a ridiculous position, perhaps, if it permitted advertising to go out when the Indiana commission, closer to home, investigated the situation and denies it.

Mr. THOMPSON. You mean that there might be a conflict between the two?

Mr. PETTENGILL. Yes; and I am just wondering if you could not consolidate State authority with Federal authority by providing that the company issuing both for intrastate sales and interstate sales, that it should not register with you until it has secured the consent of the blue-sky commission of its own State.

Mr. THOMPSON. Well, Mr. Pettengill, I would be afraid of that for this reason: Some States are so anxious to get companies in their States that they let down the bars a good deal, and their approval or disapproval might not be of as much value as we would want, and I do not think that it would be of the value to the Federal Government, for example

Mr. PETTENGILL. You do not think that the investigation made at home would be of any value?

Mr. THOMPSON. I say in some of the States. Now then, we cannot discriminate as to States. The Federal Government must keep its hand on the intrastate part of the business.

Mr. PETTENGILL. Yes; I appreciate that. At the same time, a situation might arise where you have given your approval to a company which has been denied approval at home.

Mr. THOMPSON. Well, we do not

Mr. PETTENGILL. Now, to reverse it, where approval is given in the home States, then I think it would be quite all right in that case for you to deny it, for you to deny any interstate transactions, but, to give it, the other way, where it has been denied at home, and to approve it in Washington, seems to me to create all sorts of difficulties.

Mr. THOMPSON. Well, our control would only go so far as the interstate sale is concerned like in the original package. When a package is broken up and distributed, then the State law may impinge and might very well differ with us, as far as that is concerned, on the local control of the situation.

Mr. PETTENGILL. I appreciate that, but it just occurred to me that before the license, or before the registration, or before the Federal authorities did that, the applicant should first secure the consent at home, and that it be a disclosure that they make in their application to the end that they might be required, as a part of the application to the Federal authorities, that they state that they have secured the approval of the State of their principal place of business. Mr. THOMPSON. I may say, that point had not occurred to me, but to all of the State officials of whom we have inquired, seemed to be very much in favor of this kind of law, and they think that it will help them.

Mr. PETTENGILL. It just occurred to me that if it were a condition precedent in their application to the Federal authorities, that they would have to obtain the authority back home, that where they come under the control of the State blue-sky laws, that that would give to the State authorities a tremendous incentive, to carefully enforce their own laws and that they would be able to protect themselves.

Mr. PARKER. Mr. Pettengill, will you let me ask a question?
Mr. PETTENGILL. Yes.

Mr. PARKER. How would you put in effect the operation of this law as it affects a paper like the Chicago Tribune, which goes all over the States of Michigan, Indiana, and Illinois?

You

Mr. PETTENGILL. You mean, as to the Chicago Tribune? Mr. PARKER. If your law were different from other States. would simply stop the importation of that paper into your State, if it carried an advertisement that was not legal in your State. Mr. PETTENGILL. Well, I would say this, that if the law of Illinois prohibited a transaction within its own State?

Mr. PARKER. Yes; exactly. That is what I mean.

Mr. PETTENGILL. That was denied in Illinois?

Mr. PARKER. What I am speaking about is, here is a paper that is published in Illinois, and is sent into Indiana. Take a case where the paper is published in Illinois, and is shipped to your State, in interstate commerce. That is what I was thinking about. How would you draw that distinction, if you carry out your theory?

Mr. PETTENGILL. Well, when they come here asking for permission, they are asking for a privilege, are they not?

Mr. PARKER. To advertise; yes.

Mr. PETTENGILL. That is right, and we can say to them, "Have you the approval of the blue sky commission of your own State?" They say, "No." We would say, "Why not?"

Mr. THOMPSON. Mr. Pettengill, some States, you know, do not require permission in advance. Some of them only have fraud law; three of them. It would seem to me that it would work an awful hardship, too, on investment houses, if they wanted to have an interstate sale. They usually do not want their sales to be confined to one State, and yet, before they could get permission from us, or register with this Commission, they would have had to get the consent of many States, which would be a tremendous handicap, it would seem to me, in getting out their issues.

Mr. PETTENGILL. Well, would there be any objection, Mr. Thompson, for the Federal law to require that the issuers should notify the Federal Commission of any revocation that it has received from any State authorities?

Mr. THOMPSON. I think that that would be a very good thing.

Mr. PETTENGILL. Well, or any fraud action brought in a State, either under the common law, or the State blue sky law, they should immediately notify you of that being done.

Mr. THOMPSON. Yes; I think that that would be a very wise provision, and I think that that can be covered by the rules. Mr. PETTENGILL. Thank you very much.

The CHAIRMAN. Mr. Thompson, when would publications begin, with reference to this? When application for registry is filed? Mr. THOMPSON. Only when they start selling; when they start selling and distributing.

The CHAIRMAN. Now, do you not think that there would be very much difficulty about that? It seems to me that this would be wise. Why not give publicity when the application for registry is made.

Mr. THOMPSON. I guess that there must be a misunderstanding here. The registry is not a thing which they are compelled to do. It simply provides that, in the event they do not, they suffer the penalty. It is not a thing that is absolutely required of them, compulsory. It is a voluntary matter. Of course, if they do not, then they subject themselves to this penalty.

The CHAIRMAN. Now, what effect does it have on the stock that is registered and that registration is revoked?

Mr. THOMPSON. Well, I think that a revocation of that kind would practically stop the sale of the stock.

The CHAIRMAN. Well, there is no proposed law here to stop it, is there?

Mr. THOMPSON. The Commission can revoke for either one of two causes. It can either advise them that they have deviated from the statements which they have made, or that they have made a false statement.

The CHAIRMAN. Well, what will happen then?

Mr. THOMPSON. Then the revocation would occur and then, if they went ahead, they would subject themselves to the $5,000 penalty, and the 5 years in jail, or less, or both.

The CHAIRMAN. Now, a stock is registered with the Federal Trade Commission, and that registration is revoked. That means that they cannot sell that stock without a penalty?

Mr. THOMPSON. I think they could go ahead and sell, but they would subject themselves to the penalty of the bill.

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