SEC LEGISLATION MONDAY, JUNE 15, 1959 U.S. SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON SECURITIES, Washington, D.C. The subcommittee met, pursuant to notice, in room 5302, New Senate Office Building, at 10:10 a.m., Senator Harrison A. Williams (chairman of the subcommittee) presiding. Present: Senators Williams and Bush. Senator WILLIAMS. The hearing will come to order. Today we begin several days of hearings on amendments to acts administered by the Securities and Exchange Commission and recommended by it. These amendments are incorporated in the following bills, all introduced by Chairman Robertson, for himself and for Senator Capehart, at the request of the Securities and Exchange Commission. The bills are S. 1178, to amend certain provisions of the Securities Act of 1933, as amended; S. 1179, to amend certain provisions of the Securities Exchange Act of 1934, as amended; S. 1180, to amend certain provisions of the Trust Indenture Act of 1939, as amended; S. 1181, to amend certain provisions of the Investment Company Act of 1940, as amended; and S. 1182, to amend certain provisions of the Investment Advisers Act of 1940, as amended. If these bills are enacted, they will represent the first changes in these acts since 1954. Today we will receive testimony from Mr. Edward N. Gadsby, Chairman of the Securities and Exchange Commission, who will make an introductory statement on all of the bills. His testimony will be followed by that of Mr. Byron D. Woodside, Director of the Division of Corporation Finance, who will speak on S. 1178, and that of Mr. Philip A. Loomis, Jr., Director of the Division of Trading and Exchanges, who will testify on S. 1179. After 2 days of testimony by nongovernmental witnesses, primarily on these two bills, we will receive further testimony from the Securities and Exchange Commission on Thursday, June 18. This testimony will be presented by Commissioner Örrick and members of the staff of the Commission and will be related to the remaining bills, S. 1180, 1181, and 1182. This legislation was requested by the Securities and Exchange Commission, and it is recommended by the SEC as being in the public interest. I ask that the SEC explain and justify each of the bills thoroughly and clearly. In this way, the Congress and the public may have a 1 better understanding of the work of the Securities and Exchange Commission and may understand fully and clearly the need for these particular amendments and the intentions of the Commission in administering them. Without objection, I would like to insert in the appendix of the record the following: First, a copy of each of the bills; a comparative print, showing the changes in existing law which would be made by each bill; each of the statutes which the bills would amend; a justification of each bill prepared by the SEC at the request of the committee; and a staff memorandum on each bill. (See p. 251.) Also any reports that may be received from Government agencies regarding this legislation. (See p. 637.) Commissioner Gadsby is our first witness. We welcome you to the committee hearing, Commissioner, and hope you will proceed in any way you choose. STATEMENT OF EDWARD N. GADSBY, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION Mr. GADSBY. Mr. Chairman and members of the committee, my name is Edward N. Gadsby, and I am Chairman of the Securities and Exchange Commission. I am accompanied today by Commissioner Sargent, of New York, Commissioner Patterson, of Virginia, and Commissioner Orrick, of California; and by various members of the Commission staff. As the chairman stated, we are here today to begin our testimony on Senate bills 1178, 1179, 1180, 1181, and 1182, bills which embody certain proposals our Commission has made to amend various provisions of the statutes we administer. As was stated, the bills were introduced at our request by Senator A. Willis Robertson, Chairman of the Committee on Banking and Currency, for himself and for Senator Homer E. Capehart. Companion bills were also introduced at our request in the House of Representatives by Representative Oren Harris, chairman of the Committee on Interstate and Foreign Commerce, as H.R. 2480, H.R. 2481, H.R. 2482, H.R. 5001, and H.R. 5002. The subcommittee on Commerce and Finance of the House committee held initial hearings on these bills on June 3, 1959. For the benefit of the new members of this subcommittee, I should like to describe very briefly the statutes which we administer. These statutes, six in number, relate in general to the protection of investors in the field of securities and finance. The bills before this committee propose amendments to five of these statutes. In addition to the statutes directly administered by the Commission, we are charged with certain functions in corporate reorganization proceedings under chapter X of the Bankruptcy Act. The securities laws were initiated as the result of investigations of the financial practices of the twenties and their disastrous consequences. The first of these statutes was the Securities Act of 1933, sometimes referred to as the "truth in securities" law. This statute has two basic objectives. One purpose is to provide investors with pertinent information concerning securities offered for public sale To by use of the mails or instrumentalities of interstate commerce. achieve this purpose, a prospective issuer is required to file with the Commission and make available for public inspection a so-called registration statement. The principal component of this statement is a prospectus, which must set forth significant information about the issuer and the offering and a copy of which must be furnished to each investor. The other purpose of the statute is to prevent misrepresentation and fraud in the sale of securities generally. The Securities Exchange Act of 1934 is designed to insure the maintenance of fair and honest markets in securities. In general, the statute provides for the disclosure of information concerning securities listed on exchanges, for the regulation of trading in securities on exchanges and in over-the-counter markets, and for the supervision of the activities of brokers and dealers. The Public Utility Holding Company Act of 1935, the one statute as to which we do not propose any amendment, provides for the regulation of holding company systems controlling electric utility companies and companies engaged in the retail distribution of natural and manufactured gas. The Trust Indenture Act of 1939 is closely integrated with the Securities Act of 1933. It was passed after studies by the Commission had revealed that the trust indentures under which corporate debt securities were issued very frequently failed to provide minimum protections to the purchasers of such paper. To deal with this problem, the Trust Indenture Act requires that debt securities publicly offered for sale must be issued under an indenture which meets certain statutory standards and has been duly qualified with the Commission. The Investment Company Act of 1940, together with the Investment Advisers Act of 1940, resulted from a study of the functions and activities of investment companies which was conducted by our Commission pursuant to congressional direction. The Investment Company Act provides for the registration and regulation of companies engaged primarily in the business of investing, reinvesting, holding, and trading in securities. The Investment Advisers Act provides for the registration of persons engaged in the business of advising others with respect to securities. These advisers are required by the statute to conform their activities to certain standards designed to protect the interests of investors. It may be well briefly to outline our internal organization. There are five Commissioners appointed on a bipartisan basis by the President, with the advice and consent of the Senate, and who sit as a body in Washington. In the Central Office in Washington there are three operating divisions: the Division of Corporation Finance, the Division of Trading and Exchanges, and the Division of Corporate Regulation. In addition, we have five officers also reporting to the Commission, namely, the Office of the Secretary, the Office of the General Counsel, the Office of the Chief Accountant, the Office of Opinion. Writing, and the Office of Hearing Examiners. There is also a Division of Administrative Management under an executive director. In the field, there are nine regional offices and eight branch offices, located in various strategic cities throughout the country. As I have already indicated, the amendments embodied in the bills now before this committee would amend five of the six statutes we administer. The general purpose of these proposals is to strengthen the safeguards and protections afforded the public under the securities laws by tightening jurisdictional provisions, correcting certain inadequacies which have been revealed in the course of administrative experience, and facilitating criminal prosecutions and other enforcement activities. The need for added investor protections and the strengthening of our enforcement hand is particularly imperative today in view of the current extremely active securities markets and their adjuncts, and the opportunity which is thereby afforded to a certain marginal element of promoters and securities salesmen to profit unconscionably from unsophisticated investors who are lured by spurious "get-rich-quick" schemes. The recommendations embodied in the bills are the result of continued study on our part and reflect the results of numerous conferences involving the Commission and its staff, industry representatives, and other interested persons. I should note that with one exception there has been no substantive amendment to the securities laws since 1940. The exception was in 1954 when certain important changes were effected in the Securities Act of 1933, and limited changes, largely technical, in the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the Investment Company Act of 1940. The bill which was enacted in 1954 was drafted by the Commission after conferences during the fall of 1953 with the then chairman of this subcommittee and with members of the committee staff and representatives of the securities industry. Your committee, in its report recommending passage of the bill, stated that it expects that the Commission will advise with it concerning any additional legislative authority deemed necessary to carry out the basic intent of these acts. In accordance with this direction, the Commission undertook a further study of the statutes with a view to formulating appropriate amendatory recommendations. During 1956 there were submitted proposals for amendment, which related primarily to the Securities Act and the Securities Exchange Act. Bills were introduced in both the Senate and House of Representatives, but no action was taken thereon. In the summer of 1957, we submitted more extensive proposals for amendments, most of which are also contained in the bills now before this committee. While we were formulating these proposals, Senator Fulbright, then chairman of the parent committee of this subcommittee, and Representative Oren Harris agreed that there would be no objection to the Commission's discussing the proposals with representatives of the securities industries. In January 1957, the Commission circulated a draft of proposed amendments and in the following month held a public conference on those proposals, at which interested persons were heard. Further conferences were then held with representatives of interested industry groups. The Commission then reexamined its proposals in the light of all the comments it had received, and in June 1957 circulated a revised draft of proposed amendments. Thereafter, another conference was held with interested industry representatives. Conferences were also held with representatives of the Department of Justice. Our proposals for amendment were submitted to the 85th Congress and were introduced in both Houses. No action, however, was taken on these bills. After the close of the 85th Congress, the Commission reexamined its proposals and in January and February of this year submitted the revised proposals embodied in the bills now before your committee. On April 7, 1959, members of the Commission's staff again conferred with industry representatives concerning such revised proposals. In the light of the comments thus received, we have again reexamined our proposals and will suggest certain modifications at the appropriate times in the course of the testimony on the specific bills. We have previously prepared and have submitted to the Congress a statement with reference to each of these bills which contains a section-by-section analysis setting forth as to each proposal a summary of the present law, the problem which is sought to be met by the amendment, and the remedy provided for in the bill as submitted. These justifications were inserted by Senator Robertson in the Congressional Record for this session at pages 2672 to 2684. We shall ask that these analyses be also incorporated into the record of this hearing. (See appendix, p. 253.) On the assumption that this procedure will be satisfactory to your committee, our oral presentation will be confined principally to a summary of the more significant proposals for amendment. I may point out for the record that our proposals were drawn up before we were advised of the introduction of the Alaska omnibus bill, H.R. 7210 and S. 1541, and that we had suggested in our drafts the changes required by the Alaska statehood bill. Consequently, there is some overlapping between these bills and the Alaska omnibus bill which your counsel may wish to consider in your report on our proposals. In accordance with the suggestion of this committee, our testimony today will be directed to S. 1178 and S. 1179. In general, S. 1178 would amend the Securities Act of 1933 to (1) clarify the jurisdictional basis of the civil liability provisions of the statute; (2) extend civil and criminal liability to documents filed with the Commission pursuant to Commission rules in connection with exempt offerings; (3) increase from $300,000 to $500,000 the size of offerings which may be exempted from registration under section 3(b) of the statute; and (4) make it clear that a showing of past violations is a sufficient basis for injunctive relief and that aiders and abettors may be responsible in civil and administrative proceedings. Senator BUSH. May I ask a question, Mr. Chairman? Senator BUSH. That increase from $300,000 to $500,000 passed the Senate once, did it not? Mr. GADSBY. Two years ago. I believe it passed the Senate and was not acted on in the House. The proposed amendments to the Securities Exchange Act of 1934 covered by S. 1179 would make comparable changes with respect to injunctive relief and liability of aiders and abettors. In addition, changes are proposed which would (1) make it a violation of this act to embezzle moneys or securities entrusted to the care of an exchange member or a registered broker or dealer; (2) clarify and |