Page images

(a) Any security issued or guaranteed by the United States or any Territory or insular possession thereof, or by the District of Columbia or by any State of the United States or political subdivision or agency thereof.

(b) Any security issued by and representing an interest in or a direct obligation of any common carrier or other public utility subject to regulation or supervision as to the issue of its securities by a commission, board, or officers of the Government of the United States; or any such security issued by any national bank; or by any corporation created and controlled by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States: Provided, That nothing in this Act shall relieve any of the organizations mentioned in this subsection from submitting to the respective supervisory units of the Government of the United States, in such manner and form as may be required by the respective units, all information, reports, or other documents that are required under the provisions of section 5 of this Act, and such additional information, reports, and documents as are now or may hereafter be required by other Acts of Congress or by rules and regulations pursuant thereto of the respective units: And provided further, That all such organizations mentioned in this subsection shall nevertheless be required to comply with the provisions of section 8 of this Act.

(c) Any security issued by a corporation organized exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual.

(d) Bonds or notes secured by mortgage upon real estate, improved or about to be improved by a residential structure, when the total encumbrances against any single property so mortgaged, including the mortgage securing the bonds and notes exempted by this paragraph, do not exceed $25,000.

(e) Any security, other than common stock, providing for a fixed return, which has been outstanding and in the hands of the public for a period of not less than five years, upon which no default in payment of principal, or failure to pay the return fixed, has occurred for a continuous immediately preceding period of five years, when issued by a person, corporation, or other entity having a total capital stock issued and outstanding not in excess of $100,000.

Sec. 12. That, except as hereinafter otherwise expressly provided, the provisions of this act shall not apply to any of the following transactions:

(a) Judicial, executor's, administrator's, guardian's, or conservator's sale, or any sale by a receiver or trustee in insolvency or bankruptcy.

(b) Sales by or for the account of a pledge holder or mortgagee selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Act, to liquidate a bona fide debt, à security pledged in good faith as collateral for such debt.

(c) Isolated transactions in which any security is sold, offered for sale, subscription, or delivery by the owner thereof, or by his representative solely for the owner's account, such sale or offer for sale, subscription, or delivery not being made in the course of repeated and successive transactions of a like character by such owner for the purpose of engaging in the purchase and sale of securities as a business, and such owner or representative not being the underwriter of such security.

(d) The distribution by a corporation, actively engaged in the business authorized by its charter, of securities to its stockholders or other securities holders exclusively, as a stock dividend or other distribution out of earnings or surplus; or the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock; or the issuance of securities to the existing security holders or other existing creditors of a corporation in the process of a bona fide reorganization of such corporation made in good faith and not for the purpose of avoiding the provisions of this Act, either in exchange for the securities of such security holders or claims of such creditors or partly for cash and partly in exchange for the securities or claims of such security holders or creditors.

(e) Bonds or notes secured by mortgage upon real estate or tangible personal property where the entire mortgage together with all of the bonds or notes secured thereby in the original transaction are sold to not more than five purchasers in an equal number of sales.

(f) The issue and delivery of any security in exchange for any other security of the same issue pursuant to a right of conversion, entitling the holder of the security surrendered in exchange to make such conversion, provided that the security so surrendered has been registered under the law or was, when sold, exempt from the provisions of the law. Upon such conversion the par value of the security surrendered in such exchange, or if of no par value the price at which it was originally offered to the public, shall be deemed the price at which the securities issued and delivered in such exchange or sold.

(g) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof under the laws of any State, when no expense is incurred, or no commission, compensation, or remuneration is paid or required for or in connection with the subscription.

Sec. 13. That it shall be unlawful for any person, firm, corporation, or other entity in any interstate sale, promotion, negotiation, advertisement, or distribution of any securities defined by this Act willfully to employ any device, scheme, or artifice to defraud or to obtain money or property by means of any false pretense, representation or promise, or to engage in any transaction, practice, or course of business relating to the interstate purchase or sale of any securities which operates or would operate as a fraud upon the purchaser. Whenever it shall appear to the Commission, either upon complaint or otherwise, that the provisions of this section (13) have been or are about to be violated, it may, in its discretion, either require or permit such person, firm, corporation, association, or other entity to file with it a statement in writing, under oath, or otherwise, as to all the facts and circumstances concerning the subject matter which it believes to be in the public interest to investigate, and may investigate such facts. Whenever it shall appear to the Commission that the practices investigated constitute a fraud or an attempt to defraud under the provisions of this section (13) it shall transmit such evidence as may be available concerning the transaction or facts complained of the Attorney General, who may in his discretion bring an action either in the district court of the United States, for the district wherein the transmittal of the offer, announcement, advertising, or other communication complained of begins or in the district wherein such offer, announcement, advertising, or other communication is received, to enjoin the continuance of such practices or transactions and/or institute the necessary criminal proceeding under section 17 of this Act. The exemptions contained in sections 11 and 12 of this Act shall not apply to the provisions of this section (13).

Sec. 14. That it shall be unlawful for any person, firm, corporation, association, or any other entity to carry or cause to be carried or transmitted in interstate commerce, by or with any means or instruments or agency of transportation or communication, any offer to sell or deliver, directly or indirectly, or to accept an offer to buy, through the use or medium of any book, magazine, newspaper, publication, circular, advertisement, or other printed, written, or spoken communication, when such book, magazine, newspaper, publication, circular, advertisement, or any printed, written, or other graphic or any spoken communication is addressed or otherwise transmitted to any person at any place in any State or Territory of the United States or the District of Columbia, where at that time it is unlawful to sell, offer for sale, tender for sale or delivery, or to solicit subscriptions or orders for such security or securities. The exemptions contained in sections 11 and 12 of this Act shall not apply to the provisions of this section (14).

SEC. 15. (a). That the Commission shall have authority from time to time to make, amend, and rescind rules and regulations for the purpose of executing this Act. It shall have authority to prescribe forms upon which all statements to be filed as hereinbefore provided shall be made, and to require such further data or information as it may deem proper in the public interest to be included in the said statements. Such rules and regulations shall be effective upon publication in the manner which the Commission shall prescribe.

(b) For the purpose of all investigations which, in the opinion of the Commission are necessary and proper for the enforcement of this Act, the Commission and officer or officers designated by it are empowered to subpena witnesses, examine them under oath, and require the production of any books, papers, or other documents which the Commission deems relevant or material to the inquiry.

Sec. 16. That the district courts of the United States, the District Courts of Alaska, Hawaii, Puerto Rico, Canal Zone, and the Virgin Islands, and the Supreme Court of the District of Columbia shall have jurisdiction of offenses and violations under this Act and under the rules and regulations promulgated by the Commission in respect thereto, and of all suits in equity and actions at law brought under this Act. Judgments and decrees so rendered shall be subject to review as provided in sections 128 and 240 of the Judicial Code, as amended. (U.S.C., title 28, secs. 225 and 345.)

Any of the said courts hereinbefore named in this section, within the jurisdiction of which an investigation or inquiry of the Commission is carried on, may, in case of contumacy or refusal to obey a subpena issued to any corporation or other person, issue an order requiring such corporation or other person to appear before the Commission, or to produce documentary evidence if so ordered, or to give evidence touching the matter in question; and any failure to obey such order of the court may be punished by such court as a contempt thereof.

Upon application of the Attorney General of the United States, at the request of the Commission, the said courts shall have jurisdiction to issue writs of mandamus commanding any person or corporation to comply with the provisions of this Act or any order of the Commission made in pursuance thereof.

SEC. 17. 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 five 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.

ŠEC. 18. That the necessary appropriation for the purpose of carrying out the provisions of this Act are hereby authorized. All moneys derived from the fees imposed by the provisions of this Act shall be paid into the Treasury to the credit of miscellaneous receipts.

Sec. 19. That if any provision of this Act, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Act, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby.

Sec. 20. That this Act shall take effect ninety days after its approval.

The CHAIRMAN. For the past several years there has been very much complaint about some characters of securities that have been trafficked in throughout the country. It has come to the point that the President of the United States has thought enough of it to send a special message to Congress suggesting legislation for the regulation of securities moving in interstate commerce.

We have before us this bill, and we also have before us Hon. Huston Thompson, a former member of the Federal Trade Commission, at present with offices in Washington as an attorney, who is a publicspirited man and who has had quite a lot to do with the framing of the mechanics of this bill, and who has made quite a study of these matters. We are going to ask Mr. Thompson to approach this subject in his own way and give us what information he can with reference to the bill.


WASHINGTON, D. C. Mr. THOMPSON. Mr. Chairman and gentlemen of the committee, the chairman has asked me to give you a résumé, first of all, of the foreign laws covering the subject of securities, and then a brief résumé of the history of the question of the control or lack of control of the sale of securities in the United States; then the preparation that we went through with respect to the drafting of this bill, and then a brief analysis of the items covered by the bill.

First of all, permit me to say that the United States is farther behind than any other civilized nation that I know of with respect to preserving the rights of the purchases of securities. In 1908 England put through what was known as the Companies Act. That had to do with the control of the filing of certain information with respect to the security that was to be put out. The act has been amended a great many times, and, I might say in passing, always amended to tighten up any loophole in the act, so as to protect and preserve the rights of purchasers of securities.

Belgium has perhaps the best law. It goes somewhat farther than the British law did originally, although the British law has been so amended that it has been brought considerably up to date.

Germany has a very strict law. France has a law. All of the dominions of Great Britain have laws. And so I might go through the list and tell you that practically all civilized nations except ourselves have laws protecting the public by informing the investor.

Now, that does not mean that we do not have protection in this country. We have, of course, the "blue sky" laws of the States, and in many respects they have been very valuable in stopping the sale of unsound securities. I believe that today all but one of the States of the Union have “blue sky" laws. There are some of the Territories that do not have “blue sky” laws.

These “blue sky" laws of the States have failed, as is very obvious, in meeting the great problem, and that is due to a number of facts, First of all, a lack of unifomity of laws, and, second, the fact that, on the subject of extradition, those who are putting out securities can sell and send them across the State line into another State without being able to be reached so far as a criminal penalty is concerned. You only extradite and bring a man back after he has fled from a State. Well, nowadays securities can be sold from New York State over into Illinois, and the consummation of the contract can only be terminated by the consent of the seller from New York, and in that way the person in Illinois suffers if the security is not a good one; and yet the wrongful act has been committed outside the State, and there is no way of reaching the person outside of the State.

I may say that back in 1919, when we first presented a bill to Congress, known as the Taylor bill, and named after Congressman Taylor of Colorado, practically all of the States were unanimous in favor of a Federal securities act, and I believe that the same condition prevails today, and perhaps even more strongly.

The first bill that we had, of note, in the United States was the Taylor bill, and that grew out of the situation that arose after the war. We may forget it, but we had a very speculative period shortly after the war and during the war, and while the sales of our Victory loans and other loans of the Government were going on, the question of the speculation in securities that were being traded in turn for Government securities became such a problem that the Secretary of the Treasury at that time, Senator Glass, called upon the Federal Trade Commission and asked if there was not some way of controlling this situation. At the same time the Capital Issues Committee, which had been created during the war as a war-time organization, in order to help out on the question of the sale of these governmental securities, saw the problem much as the Secretary of the Treasury did, and so they advocated the passage of a law known as the Taylor Act. At that time the Secretary and his counsel came over to the Federal Trade Commission and asked the Commission if it did not have jurisdiction to meet this situation, and after having presented a brief to the Commission, the Commission decided that it had a jurisdiction, or at least under the emergency it would go ahead and function until its jurisdiction was challenged.

So the Federal Trade Commission set up the machinery, and I happened to be the one that set up the machinery for the Federal Trade Commission at that time. We very quickly found that it was not simply the wildcat securities of the West that were being sold, but we found many coming out of the city of New York and our other great financial centers that needed to be taken care of; and so the Commission also recommended to President Wilson that there should be legislation.

Thus you see the move came from two sources—the Capital Issues Committee and the Federal Trade Commission. We had a hearing before the Judiciary Committee of the House on the Taylor bill, but at that time business did not have the same light that it has today, or at least that I hope it has today, and so the invesment bankers swarmed down upon the situation and the bill was defeated. It never, I believe, got out of committee.

The next bill that came on that we take note of was the Denison bill. It covered the general sale of securities through the mails. It had the approval, it may interest you to know, of 38 of the States of the United States, and it passed the House in the Sixty-seventh Congress. Now, in this bill we have incorporated the main feature of the Denison bill so far as the committing of an act of fraud by way of misrepresentation through the mails in the distribution or sale of securities is concerned.

Then we had the Sabath bill-Congressman Sabath's bill. That was a fraud bill. . We cover the subject of fraud in this bill of ours. It had to do with the communication of false information with reference to securities, and was somewhat like the Denison bill, although I do not believe it was limited to the question of the mails.

We had also the LaGuardia bill.

Now, in the preparation of this bill we had a number of proposals so far as legislation is concerned before us. We had the British act before us.

We had this case of Lord Kelsant before us—the King v. Kelsant—which arose under the British act; and, if you recall, several months ago Lord Kelsant was sent to prison for violation of the act. It is rather interesting to note that he was sent to prison for failing to give the information that he should give; in other words, for concealing information. So you can get some conception of the strictness of the ruling of the British courts with regard to their securities.

We had before us the Martin Fraud Act of New York. That act has been in force now for quite a little while, and has some very good sections in it.

We had the French Securities Act-a translation of it-and we garnered or gleaned from it the best that we could.

We had the Uniform Sale of Securities Act.

It was drafted by the commissioners of 38 States, I believe, in connection with the American Bar Association. We have followed the language in this bill wherever we could, and somewhat of its policy. That act, I may say, was worked out by lawyers and commissioners from the various States, and was then taken up before the American Bar Association. On two occasions the association has adopted and approved of it.

So you see that we have a number of precedents here that have had approval by high authority.

Now approaching the policy of this act:

« PreviousContinue »