percent of this 5 percent is paid for the services of the State Street Trust Co., which is custodian and agent in handling the general details of the operations of the trust. I note that a number of witnesses from the investment company industry have testified that they favor some regulation. Perhaps I am more than ordinarily blind to the necessity of regulation. I may be blind. In the case of the large trusts, regulation may not mean a large expense per share; in their case I do not think that regulation necessarily will cost them a great deal per share. However, in the case of the Boston Personal Property Trust, we are a small trust, and I figure that in our case Federal regulation in any such form as that now proposed will mean a very heavy burden on each of our shareholders.

Second, the provision of the proposed bill which prohibits a trust from having in its portfolio any securities of a company in which one of its trustees is a director, unless the trust holds at least 5 percent of the stock of that company, would require us to eliminate all but one of our trustees, or to change entirely our portfolio of investments. The Boston Personal Property Trust has always turned for its trustees to men of experience and standing in the community. Such men are generally directors of companies whose shares would be natural investments for the trust. You have already heard the testimony of Mr. Charles Francis Adams, our senior trustee. We hold the securities of a number of companies of which Mr. Adams is a director. We hold shares in other companies of which one or the other trustee is a director. Never in my experience of 11 years as trustee have I seen an occasion where there appeared to be the slightest conflict of interest in any matter involving the Boston Personal Property Trust and any company or the investment in any company of which one of our trustees happened to be a director-except, perhaps, one case; and in that instance we just did not happen to buy those securities for our portfolio; and in those 11 years I have not seen a single occasion where I could see or imagine or suspect a condition where our trustees were affected in their judgment by the fact that they were directors in the companies whose securities were held in our portfolio.

Third, the proposed investment trust bill would require a complete revision of our trust instrument, and would force every minority shareholder to be in the hands of the vote of a majority of the shares as to who should be the trustees, no matter whether he personally preferred and invested his money upon the agreement that the present trustees would select their own successors. As to the wisdom of such a change, I have already commented.

Fourth, the trust would also have to be revised to eliminate all provisions protecting the trustees against litigation of the kind I have outlined; and, more than this, the bill would require that no complaint of the usual nature against trustees, alleging breach of duty to shareholders, could be settled without actual suit being brought and, after suit, without the consent of the S. E. C. A groundless $50 complaint by a totally unreasonable shareholder might involve the trust and the trustees in hundreds, or even thousands, of dollars of expense, including trips to Washington, and all the incidental difficulties and machinery of dealing with the governmental body— the S. E. C.-which in my judgment is already somewhat overburdened with other duties.

I have not tried to go in tothe vast number of provisions of this very long bill; but I am convinced that if the bill is passed, there would be very serious question whether the Boston Personal Property Trust, which for 47 years has served its shareholders well, would not be liquidated. I do not know whether it is of the slightest importance to the country at large whether we are liquidated or not; and it is not of much importance to the trustees. I just do not know whether our trustees would be willing to do that; I doubt whether our trustees would be willing to continue with a restricted portfolio and different personal obligations, and I doubt whether the beneficiaries would be prepared to continue with the additional expense involved. If it is important for national reasons to control large investment trusts, because of their size and power, or if it is important to provide a medium for the investment of money in investment companies closely regulated by the Federal Government, I suggest for the committee's consideration the possibility of having two groups of investment companies in the United States-regulated companies and unregulated companies and definitely announcing to the public that an investor who puts his money in an unregulated company does so with knowledge that he is not protected by the S. E. C. or by any Governmental regulation and that he takes his chance with only the protection afforded by the common law and the special provisions of the trust instrument, if he is willing to trust the management of any company which is not regulated.

I suggest that it also be left to the decision of the shareholders of companies as small as we are whether they prefer to have their company regulated and supervised or whether they prefer to go on as they now are, with the full understanding that regulation means expense and that regulation means the kind of protection which the S. E. C. desires to give to the investors.

With such an alternative I should be quite willing that our shareholders should make their own decision; and I suggest that it is going a long distance-and I submit a long distance down the wrong roadto so legislate that if, after full disclosure, an investor in Massachusetts prefers to rely on the character and ability of trustees operating under the old, historical form of Massachusetts trust, rather than to invest in some new streamlined vehicle regulated by the S. E. C., he should not have the liberty to choose the older form.

Senator HUGHES. May I ask you a question: How many do you suppose would choose one and not the other?

Mr. BUNDY. I do not know, in general; but I think I have a shrewd guess as to what our shareholders would do.

Senator HUGHES. The fact that a company was regulated probably to the average investor-would make him feel that he was safeguarded to that extent and probably to the detriment of one that was not regulated?

Mr. BUNDY. That is perfectly all right with me, Mr. Chairman. If they prefer it that way, that is all right with me.

Senator HUGHES. You are speaking for your own company?

Mr. BUNDY. I am speaking for my own company, and not in general.

I suspect that there would be media of investment, of our character, in which people would prefer to invest because of the character involved and because of the continuity of management.

If you have a large open-end trust, operating all over the United States, with salesmen in every aistrict, I think you probably would find that they would come under that regulation.

Thank you.

Senator HUGHES (presiding). Thank you.

Mr. Orr.

STATEMENT OF JAMES H. ORR, PRESIDENT, RAILWAY AND LIGHT SECURITIES CO., BOSTON, MASS.

Senator HUGHES. Mr. Orr, will you please proceed?

Mr. ORR. Thank you, sir.

Mr. Chairman and Senators, my name is James H. Orr. I am president of the Railway & Light Securities Co.

You have just heard from Mr. Bundy, who is the representative of the oldest investment trust in the country. I think I can say that the Railway & Light Securities Co. is the oldest investment trust company with senior securities outstanding.

I wish to confine my remarks in reference to the proposed Investment Company Act to three phases of its effect on the Railway & Light Securities Co. and its stockholders and on other comparatively small investment companies in a similar position. The points which I should like to discuss briefly are the following: first, restrictions pertaining to senior securities, both debt and preferred stock; second, increased expenses resulting from operations under the numerous regulations specifically set forth or contemplated under the broad delegations of regulatory authority; and, third, the unwarranted management prohibitions resulting from the provisions relating to conflicts of interest.

In so limiting my comments, however, I do not endorse the balance of the act which I think is, as a whole, cumbersome, complicated, and largely unnecessary.

Before discussing the three points which I shall concentrate on, I should like you to have in mind the general set-up and history of Railway & Light Securities Co.

Railway & Light Securities Co. was organized in 1904 with a capital structure consisting of bonds, preferred stock, and common stock. This form of capitalization has continued to date. At present, there are outstanding $4,000,000 in face amount of 4%1⁄2-percent collateral trust bonds, $2,113,600 par value of 6-percent preferred stock, and $3,327,000 of common stock, the latter figure being computed at asset value. Senior securities, therefore, represent two-thirds of its total capitalization. Interest charges and preferred dividends have been paid without delay since organization, a period of 35 years; and, in addition, a dividend has been paid on the common stock in 27 of the last 30 years. Until 1928, the purpose of the company as set forth in the charter was the holding, for income and for sale, of securities of railways and other public utilities; but in 1928, with the express approval of the stockholders, the company was reincorporated under the laws of the State of Delaware, and the purpose was broadened so that securities of all classes of corporations could be purchased. Six of the nine directors can be classified as investment bankers or affiliates of investment bankers-not all from the same investmentbanking house, however. For the most part, these investment

bankers or their firms have been interested in the company since its inception. Subject to the supervision of the directors, an investment manager or investment adviser, as defined in the proposed act, furnishes services to the company; and approximately one-half of the stock of this investment manager or adviser is owned by the Railway & Light Securities Co.

Now fit this statement of facts into the three phases of the bill on which I want to comment, and which are the points which I think affect us very seriously. By so limiting them, I do not mean to endorse the balance of the bill, which I think is cumbersome, complicated, and largely unnecessary. You have already heard comments regarding these other points, from Mr. Myers, this morning. As I say, the three points to which I shall confine my comments relate to restrictions pertaining to senior securities, both debt and preferred stock; increased expenses resulting from operations under the numerous regulations specifically set forth or contemplated under the broad delegations of regulatory authority; and, last of all, the unwarranted management prohibitions resulting from the provisions relating to conflicts of interest.

Following those in order, first let me consider the restrictions pertaining to senior securities. Our problem on this is not in the future; it is right now.

We have made up a chart showing what the effect of our operations would be, as governed by these proposed provisions, or showing the effect of this provision on our operations since 1906.

You will recall that the bill provides that you cannot pay dividends unless you have an asset coverage of 300 percent and, incidentally, let me offer this chart for the record at this point.

(The chart entitled "Railway and Light Securities Company, Per Cent Asset Coverage per Outstanding Bond at Par for Determining Dividend Payments Under Investment Company Act of 1940," appears on the opposite page.)

Mr. ORR. In the middle of the shaded zone on the chart is a heavy line which shows 300 percent. Fluctuating around that is the computed asset coverage, as computed in the method prescribed in section 19 of the bill. If you look at that chart, you will see three zones: a "free zone," where you went over 400 percent and where the S. E. C. can raise the 400 percent statute limitation, too.

Then you see a shaded zone which is a 200- to 400-percent zone, over which the S. E. C. has jurisdiction.

Below that is a zone where we have gone below 200 percent; and the bill provides that when we are operating in such a zone we can pay no dividends.

At the present time we are operating at about 240 percent, so we are below the 300 percent mark, and we cannot pay dividends on either preferred or common stock unless the Securities and Exchange Commission tell us that we may.

As a matter of fact, in 28 out of the last 34 years, when we paid preferred dividends, we would not have been able to pay themaccording to the provisions of this bill-without the approval of the S. E. C.

This, to my mind, does rather grave violence to dividends and to the contractual rights with respect to dividends, as between the various classes of security holders.