Page images
PDF
EPUB

PROPOSALS FOR AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934

CONTINUATION OF TUESDAY, JANUARY 27, 1942

STATEMENT OF HON. JAMES W. WADSWORTH, MEMBER OF CONGRESS FROM THE STATE OF NEW YORK

Mr. WADSWORTH. Mr. Chairman

The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. Mr. Chairman, I understand that Mr. Putney is going to devote some of his testimony to amendments proposed in H. R. 4344.

There has been prepared a comparatively small pamphlet listing those amendments seriatum and with explanations of each of them. I am sure that the members of the committee would regard this as a very interesting document in following this discussion, just as the much larger agenda we have been discussing was useful. So at this point, may I ask that the document be placed in the record. The important part commences on page 4, eliminating the first three pages, which contain the statement which I made when I introduced the bill in the House last April, which is already in the record and it is not necessary to burden the committee's record with it at this time in any event.

The CHAIRMAN. Very well.

Mr. WADSWORTH. I hope that each member has a copy.

The CHAIRMAN. The statement may be inserted in the record. (The pamphlet entitled "Analysis of H. R. 4344" is as follows:)

ANALYSIS OF H. R. 4344

A bill (H. R. 4344) to amend certain provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, was introduced in the House of Representatives by Mr. Wadsworth on April 14, 1041, and was referred to the Committee on Interstate and Foreign Commerce

This bill to amend the foregoing laws was prepared by Mr. Wadsworth after an extensive nation-wide survey of the effect which these laws and their administration have had upon private business since their enactment.

When introducing this bill in the House of Representatives, Mr. Wadsworth said:

"It is a matter of common knowledge that we have had and still have a serious unemployment problem on our hands. When the extraordinary stimulation of the defense program is withdrawn, as it must be eventually, it is highly probable that the problem will confront us in even more acute form.

"It is also a matter of common knowledge that during the last five or six years there has piled up an enormous number of idle dollars, represented very largely in record-breaking bank deposits. The owners of those dollars, the depositors, for some reason or other do not put them to work by investing them in productive enterprises.

"Obviously, idle dollars mean idle men, for if productive enterprises are not supported financially and enabled to expand healthily there can be no work to do.

1399

Our sympathy goes out to those men, and we have been doing our best to carry them along in the hope that with a returning prosperity they will find useful jobs. But we are not doing anything about the idle dollars. Unless we do we may have to abandon the institution of private enterprise and adopt the principle that every man must look to the government for a living and obey the orders of the government in the earning of it.

"Normally a large portion of idle dollars are put to work when their owners have a fair opportunity to invest in securities, stocks, and bonds, offered to the public by business concerns seeking new capital. Without an adequate flow of capital into industry there can be no expansion of the going concern, nor can new enterprises be started. In other words, we have stagnation, and the man who suffers most is the man who wants a job and can't find it.

"Why is it that capital is not flowing freely into industry? Until we find the answer to that question, and, having found it, take measures which will help solve the problem, millions of men will remain unemployed and free enterprise in this country will die a slow but certain death by starvation.

"Intent upon informing myself as accurately as possible, I made up my mind in the early autumn of last year to embark upon an inquiry which might bring out the facts. I directed my inquiry to a large number of persons associated officially with corporations engaged in business activities, asking them to inform me of their respective experiences in endeavoring to obtain capital through the sale of securities, and especially to tell me of the effects, if any, of the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the effect of the regulations issued by the Securities and Exchange Commission.

"My inquiry has not been sent to bankers, investment bankers, brokers, dealers, or underwriters. It has been directed solely to men engaged in the conduct of a productive business. The answers have come in large volume from all over the country-some from large concerns but a much greater number from small concerns. In the aggregate they present an exceedingly instructive picture. From it I gather that certain provisions of our laws and of the regulations are exceedingly and needlessly onerous, especially as they affect the little fellow.

"The expense of complying with the requirements for registering a security for sale to the public, and the long delays which frequently attend that effort, have discouraged a large number of firms, especially small firms, from even attempting to put their securities upon the public markets. Some have given up the attempt entirely, some depend upon bank loans (whenever they can get them) and a larger number resort to selling their securities privately-generally to an insurance company or to a bank, or to a small group of such institutions. This private placement of new securities has become an outstanding feature in recent years and is greatly to be regretted.

"I find also that some of the regulations and practices of the Securities and Exchange Commission extend, in my judgment, considerably beyond the intent of the Congress and are having the result of establishing a sort of reign of terror over honest men, who, fearful of the whims and strange interpretations of the Commission, are afraid to go ahead with their enterprises lest they be pilloried before the public and their reputations injured. In short, the replies I have received point at least to some of the causes for the steady and discouraging decline in the volume of securities passing in and out of the public markets, as well as for the jittery thinness of those markets.

"I ought to say that not one of my correspondents urges the repeal of the securities laws. All agree that it is the duty of the Congress to protect the investor against fraudulent practices of every kind and description. They do believe, however, that certain provisions of these laws, together with certain regulations of the Securities and Exchange Commission, are inflicting serious injury upon the economy of the country without adding in the slightest degree to the protection of the investor. My concern about these things is so deep, and the information which has come to me is so enlightening, that I am today introducing a bill proposing certain amendments to our securities laws, the adoption of which, I believe, will help to put both dollars and men to work and thus to fortify our free institutions.

"And let me add this observation. It is imperative that we enact laws stemming only from the people as represented in the Congress-rather than laws conceived behind the closed doors of commissions and bureaus or of self-serving financial interests. In writing them the Congress should seek its information out among the people and should legislate for their benefit alone, rather than for the enhancement of bureaucratic power or for the advantage of special interests. This is fundamental, and unless we do this, we shall fail in our duty."

PROPOSED AMENDMENTS EMBODIED IN H. R. 4344

(New matter is in italics)

1. Amend the first sentence of Section 2 (3) of the Securities Act of 1933 to read as follows:

"The term 'sale', 'sell', 'offer to sell' or 'offer for sale' shall include every contract of sale or disposition of, attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value; except that such terms shall not include negotiations or agreements between an issuer and any underwriter or between an underwriter and any other underwriter or between an underwriter and any dealer."

Purpose: Investigation has established that in many instances the raising of new capital was materially hampered, postponed or abandoned because of inability to obtain a firm commitment from an underwriter due to the risks arising out of the procedure prescribed by the Act.

Under the present provisions of the Act, an underwriter cannot organize a selling group or enter into any other contract with the dealers who are to distribute the new securities until after the effective date of the registration. As a result, the risk assumed by an underwriter who enters into a firm commitment to purchase an issue is excessive. A firm commitment often is of the utmost importance to the company seeking capital, as the proceeds of the issue may be needed to meet contract or other business obligations.

The above amendment will permit the formation of selling groups in advance of the effective date, without, however, permitting sales to the public until after the effective date. Thus, the risks of a firm commitment can be distributed among the underwriters and dealers in the selling group and, as a result, underwriters will be more willing and able to enter into firm commitments, especially if the "waiting period" is shortened and the registration process simplified as proposed in other parts of the bill.

2. Amend Section 2 (10) of the Securities Act of 1933 as follows:

"(10) The term 'prospectus' means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio, which offers any security for sale; except that (a) a communication shall not be deemed a prospectus if it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of section 10 was sent or given to the person to whom the communication was made, by the person making such communication or his principal, and (b) a notice, circular, advertisement, letter, or communication in respect of a security shall not be deemed to be a prospectus if it states from whom a written prospectus meeting the requirements of section 10 may be obtained and, in addition, does no more than describe the security, state the price thereof, indicate the industry or type of business in which the issuer is engaged, contain the trade-mark or symbol of the issuer or underwriter, and state by whom orders will be executed."

Purpose: The present law does not allow published announcements. of security offerings to contain enough information to be of any practical use to the investing public. For instance, no indication whatsoever of the type of business engaged in by the issuer may appear in such advertisements. This amendment would allow such vital basic information to appear and thus make possible a wider knowledge and distribution of the security and, therefore, a sounder market for investors.

3. Amend Section 3 (b) of the Securities Act of 1933 to read as follows: "(b) The Commission may from time to time by its rules and regulations, or by order, and subject to such terms and conditions as may be prescribed therein, add any class of securities or any issue of securities to the securities exempted as provided in this section if it finds that the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering; but no issue of securities shall be exempted under this subsection where the aggregate amount at which such issue is offered to the public exceeds $500,000."

Purpose: The expenses of registering an issue of securities are so great as to be almost prohibitive for the small concern. The above amendment would permit the Commission in proper cases to exempt small issues up to $500,000 where registration is not necessary either because of the small amount involved or the limited character of the offering, and to grant specific exemptions by

order where general exemptions are for any reason not practical or desirable. The law at present permits exemption of issues up to $100,000 by general rules and regulations of the Commission.

4. Amend Section 4 of the Securities Act of 1933 to read as follows:

"The provisions of section 5 shall not apply to any of the following transactions:

"(1) Transactions by any person other than an issuer, underwriter or dealer; "(2) Transactions by an issuer not involving any public offering; "(3) Transactions by a dealer (including an underwriter no longer acting as an underwriter in respect to the security involved in such transaction), except transactions within six months after the effective date of the registration statement relating to the security involved in such transaction (excluding in the computation of such six months' period any time during which a stop order issued under section 8 is in effect as to such security) and except transactions as to securities constituting the whole or a part of an unsold allotment to or subscription by such dealer as a participant in the distribution of such securities by the issuer or by or through an underwriter;

"(4) Transactions on a national securities exchange;

"(5) Brokers' transactions, executed upon customers' orders, but not the solicitation of such orders. The term 'brokers' transactions,' as used in this section, includes net trades and similar transactions on a principal-to-principal basis where the dealers' profit is not in excess of the usual and customary brokerage commissions but does not include any such transactions involving a security in which the dealer has had or will have a long or short position for a period of more than twenty-four hours immediately preceding or imme diately after such transaction."

Purpose: The changes in this section are designed primarily to reduce needlessly heavy costs and requirements in connection with the use of prospectuses. These changes substantially shorten the period during which a prospectus must be delivered by dealers to purchasers after the completion of the original distribution of the security issue and eliminate the necessity for delivery of a prospectus with securities purchased on an exchange when the securities and the exchange are subject to S. E. C. regulation.

5. Amend the last sentence of Section 6 (a) of the Securities Act of 1933 to read as follows:

"A registration statement shall be deemed effective only as to the securities specified therein as proposed to be offered, but no limitation shall be placed by the Commission directly or indirectly upon the amount of securities to be offered nor upon the duration of the proposed offering; nor shall any registrant be required to enter into any undertaking to reregister or to deregister any securities."

Purpose: From time to time the Commission, without any apparent authority in the Act, has compelled companies to reduce the amount of securities being registered or has forced companies to agree to reregister securities after a certain period of time has elapsed. This has proved unduly burdensome and expensive for the companies involved. As the expenses of the company are indirectly borne by investors in the company, this arbitrary practice should be expressly forbidden.

6. Amend the first sentence of Section 7 of the Securities Act of 1933 to read as follows:

"The registration statement, when relating to a security other than a security issued by a foreign government, or political subdivision thereof, shall consist of a prospectus and a supplementary statement, which taken together shall without duplications contain the information, and be accompanied by the documents, specified in Schedule A, and when relating to a security issued by a foreign government, or political subdivision thereof, shall consist of a prospectus and a supplementary statement which taken together shall without duplication contain the information, and be accompanied by the documents, specified in Schedule B; except that the Commission shall by rules or regulations, or by order upon the application of any person interested, provide that any such information need not be included in respect of any class of issuers or security or of any issuer or security if the requirement of such information or document is inapplicable to such class or such issuer or such security and disclosure fully adequate for the protection of investors is otherwise required to be included within the registration statement. The Commission shall promptly revise its forms for registration statements and applicable rules and regulations so as to require in the prospectus only such information as it shall find material and necessary to enable the average

« PreviousContinue »