file with the Commission states that such person is engaged or is about to engage primarily in the business of rendering investment supervisory services." It is proposed that the foregoing provision of the act be eliminated in its entirety, or, in the alternative, that the word "primarily," which appears twice in the said provision, be deleted therefrom.

LEGISLATIVE HISTORY OF SECTION 208 (C)

There was no counterpart of the present section 208 (c) in the original version of the Investment Advisers Act as it was introduced in Congress with the sponsorship of the Securities and Exchange Commission (S. 3580; see also S.H. 320). (All references to the legislative history of the act relate to the 76th Cong., 3d sess. The hearings on S. 3580 before a subcommittee of the Senate Committee on Banking and Currency are cited as S.H., and the report of this committee (Rept. No. 1775) is cited as S.R. The hearings on a companion bill (H.R. 10065) before a subcommittee of the House Committee on Interstate and Foreign Commerce are cited as H.R.H., and the report of this committee (Rept. No. 2639) is cited as H.R.R. The number following each abbreviated citation is the page reference.) After the Senate committee hearings and after conferences between representatives of the Commission and the Investment Counsel Association of America to adjust the objections of the latter, various revisions of the bill were proposed (H.R.H. 92). Although not specifically mentioned, presumably the revisions so arrived at included the present section 208 (c), since the substance of this appears in H.R. 10065 (H.R.H. 48). The same bill also included a definition of "investment counsel" (H.R.H. 45), although this definition was eliminated from the law as enacted.

The only direct testimony relating to the present provision of the act was given at the House subcommittee hearings by Mr. Schenker on behalf of the Securities and Exchange Commission:

"The other amendment under section 208 was really a change in draftsmanship. You cannot hold yourself out as an investment counselor unless you are engaged in the investment counselor business" (H.R.H. 138).

This testimony takes up three lines out of 1,276 pages of hearings on this legislation, and, significantly, there is no reference in this testimony to the word "primarily." Even more significantly, the provision was not deemed worthy of mention in either the Senate or House committee reports (S.R. 23; H.R.R. 30).

THE EFFECT OF SECTION 208 (C)

As now enacted, this provision makes it unlawful for any registered investment adviser to refer to himself or his business as "investment counsel" unless such adviser is primarily engaged in rendering investment supervisory services, i.e., giving continuous advice as to the investment of funds on the basis of the individual needs of each client (sec. 202 (a) (13)).

There is no definition of "investment counsel" in the act, and, what is more important, there is no finding in section 201 that "investment counsel" constitutes a special class of investment advisers which should be singled out for particular consideration or protection. Nor is there any evidence in the extended hearings on this legislation which would support any such finding.

On the contrary, the legislative history shows that the Investment Counsel Association of America consistently opposed any form of Federal regulation whatsoever (S.H. 711-765). From their own testimony it appears that the members of this group constituted only a negligible fraction of those subject to the act; in 1940 they had 61 or 63 members in 18 or 19 firms (S.H. 723; H.R.H. 91), though they estimated that 540 firms would be subject to registration as investment advisers (S.H. 736; H.R.H. 91). The situation is proportionately unchanged at the present time; there are approximately 50 member firms in the Investment Counsel Association, out of about 1,560 registered investment advisers.

In its present form section 208 (c) is obviously class legislation for the benefit of a small minority in a large field and rests on no foundation showing the Leeu for such special treatment.

THE PROPOSED AMENDMENT OF SECTION 208 (C)

In its broadest form, the proposal would eliminate section 208 (c) in its entirety. It is submitted that no justification has been shown for continuing the separate classification of "investment counsel" within the statutory classi

fication of "investment advisers," and that such an obviously discriminatory provision should be repealed.

If, for reasons which do not appear from the legislative history, this committee should be of the opinion that there is a valid basis for distinguishing those investment advisers who render "investment supervisory services," certainly the distinction should be drawn as to those who actually engage in such business, rather than those who primarily engage in it.

The word "primarily" even in a dictionary sense has an uncertain meaning, since it may mean "principally," "essentially," "fundamentally," or even "substantially." Interpreting an analogous provision of the Federal Reserve Act, the Supreme Court held that "primarily engaged" in the underwriting business meant "substantially engaged," and was applicable to a firm whose underwriting activities produced from 15 percent to 30 percent of its gross income, with a greater percentage coming from the brokerage business (Board of Governors v. Agnew, 329 U.S. 441 (1947)). However, the Securities and Exchange Commission construes section 208(c) of the Investment Advisers Act to mean that one is not "primarily engaged" in rendering continuous investment advice to clients unless it is his "principal business and all or substantially all of its investment adviser business consists of giving" such advice. See instruction for item 10(c) of form ADV. If this interpretation is adhered to by the Commission, legislation is necessary to correct the inequitable results of section 208 (c). The injustice-and at the same time the absurdity-of the present provision becomes apparent from just one example. Moody's Investors Service has an international reputation for its financial and statistical publications. Since it was founded in 1909, its manuals and other publications have been accepted as standards by Government agencies and courts. It is unlikely that anyone could attempt to render "investment supervisory services" adequately without making use of some or all of Moody's publications, or their equivalnt. (Members of the Investment Counsel Association of America subscribe to an aggregate of 245 copies of Moody's various statistical manuals and 73 other Moody's publications, 26 of which are devoted to Moody's opinions rather than statistical information. In addition to its publishing activities, Moody's also renders "investment supervisory services" to its own clients through "personal management service" and "bank supervisory service" accounts. There is reason to believe that Moody's is one of the first firms in this type of activity, both in number of accounts and in volume of funds supervised. Yet Moody's may not call itself an investment counsel since this supervisory activity constitutes only 30 percent of its gross business. But John Doe, with a few investment supervisory clients and no more equipment than a subscription to Moody's publications, may properly style himself as an "investment counsel." And John Doe can, and probably will, point out to a prospective client that Moody's is not an "investment counsel," and is barred by law from being an "investment counsel"; nothing in the act prohibits such a representation.

It is submitted that the present distinction in section 208 (c) is unfair and ridiculous, and that the word "primarily" should be deleted therefrom. The test of an "investment counsel" would then be whether one were "engaged in the business of rendering investment supervisory services," without a meaningless quantitative test as to the extent to which one is so engaged.

An analogy from the practice of law may be helpful. A lawyer who spends half his time reporting and publishing the decisions of the supreme court of his State is nonetheless a lawyer when he spends the other half of his time in private practice. To deny him the style of "lawyer" or "counsel" because he is not primarily engaged in practice is unthinkable. So, too, an organization like Moody's which renders investment supervisory services on a vast scale should be nonetheless styled an "investment counsel" even though also engaged in related publishing activities.

CONCLUSION

It is respectfully submitted that S. 1182, when reported out of this committee, should provide for the repeal of section 208 (c) of the Investment Advisers Act of 1940, or, in the alternative, that the word "primarily" appearing twice in said paragraph should be eliminated.

Senator WILLIAMS. Our final witnesses this morning are Mr. F. A. Stahl, president, and Mr. George C. Baron, counsel, of Standard & Poor's Corp. We will be very happy to receive your testimony, gentlemen, if you will proceed in your own way.

STATEMENTS OF F. A. STAHL, PRESIDENT, AND GEORGE C. BARON, COUNSEL, STANDARD & POOR'S CORP.

Mr. STAHL. My name is Frederick A. Stahl. I am president of Standard & Poor's Corp., 345 Hudson Street, New York, an investment adviser registered as such with the Securities and Exchange Commission as well as in a number of States. We employ over 500 employees. We collect information with regard to business affairs and securities, and disseminate that information, together with our advice on securities, to the public. We do not act as brokers, dealers, or underwriters, nor do we take custody of clients' funds or securities. Our services extend from the purely factual, such as "Corporation records," to and including a personal supervisory service, which we call "Planned investments." Our printed services also include advisory bulletins, such as "The Outlook" and "Poor's Investment Advisory Survey," the "Bond Outlook," etc.

We support the amendments to the Investment Advisers Act of 1940 embodied in S. 1182.

We feel that these amendments have become desirable in view of the widespread participation by the public in the securities market. While we feel that any fringe element in our industry is in a very small minority, under present circumstances we recognize that a strengthened Investors Advisers Act will be a protection to the public. At the same time, and in clarification of the Investment Advisers Act and to assist in its administration, we urge your committee to consider and recommend two further amendments.

These two amendments are as follows:

1. Present law: Section 202 (a) (12) of the Investment Advisers Act provides that the word "control" shall have the same meaning as in the Investment Company Act of 1940. Section 2(a) (9) of the latter act provides, in substance, that an owner of "more than 25 per centum of the voting securities of a company shall be presumed to control such company." Section 205(2) of the Investment Advisers Act further provides that every investment advisory contract shall incorporate a provision that it is not assignable, and section 202 (a) (1) defines an "assignment" as including a transfer of a "controlling block" of a corporate advisers' outstanding voting securities.

Problem: If the definition of "control" in the Investment Company Act is applied to the Advisers Act, then any transfer of a minority voting stock interest in a corporate investment adviser, so long as it involved more than 25 percent of the latter's voting securities, would be presumed to constitute an "assignment" within the definition of section 202(a) (1) of the Advisers Act. And by specifically excluding a minority interest in a partnership, it might well be thought that a minority interest in a corporate investment adviser came within the statute. From this it would seem to follow that even the death of a minority stockholder, so long as such deceased stockholder had owned more than 25 percent of the voting stock, would be presumed to constitute an assignment of each and every investment advisory contract to which such corporate adviser was a party. This seems to be a strained result and not within the basic intent of the Advisers Act. The definition of "control" in the Company Act is understandable. Investment companies subject to that act are invariably widely

held. (See, for example, Investment Company Act section 3 (c) (1) exempting an issuer whose securities are beneficially owned by not more than 100 persons.) Thus, a 25 percent voting stock interest usually represents voting control of an investment company subject to that act. On the other hand, it is well known that stock and interests in investment advisers are not widely but very closely held. Thus, the death of a minority stockholder owning more than 25 percent of the voting securities of an investment adviser, would unnecessarily upset the business of an incorporated investment adviser, without in any way benefiting the public interest.

Proposed remedy: We therefore urge that the definition of "control," as incorporated by reference from the Investment Company Act of 1940, should be eliminated and section 202 (c) (12) of the Investment Advisers Act of 1940 be amended to read as follows:

(12) "Investment company," "affiliated person,”

the word "control" is eliminated at this point

and "insurance company" have the same meanings as in the Investment Company Act of 1940.

A further desirable result of the above amendment would bring the provisions governing partnerships and corporate investment advisers into conformity and the two types of organizations treated alike. There seems to be no valid reason for applying two such drastically diverse rules as might result from the present provisions.

2. Present law: The present statute does not give the Securities and Exchange Commission, which is charged with the enforcement of the Investment Advisers Act, the authority to exempt any transaction where the same might be necessary and appropriate in the public interest and consistent with the act. Such a provision has been embodied in the Investment Company Act of 1940 and over the years has been applied without any harm or detriment to the public.

Proposed remedy: We propose the addition of a provision reading as follows:

SEC. 211 (c). The Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, analysis, report or transaction, or any class or classes of persons, analyses, report or transactions from any provision or provisions of this title or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title.

We e suggest the addition of this subdivision as section 211 (c) with the remaining provisions of section 211 being relettered appropriately. Upon adoption of the bill now before us, the Securities and Exchange Commission would have much greater and wider powers. We respectfully urge that in the exercise of such greater powers, there should be a correlative authority to exempt persons and transactions which may not be within the basic intent of the act, and the exemption of which will not contravene the purpose of the act and the protection of the investing public. We urge that the adoption of the above provision would simplify administration with regard to particular transactions.

In closing, I would like to thank the committee for this opportunity to be heard and its consideration of my proposals.

Senator WILLIAMS. Thank you very much.

Mr. STAHL. Now I have an additional statement to make which was not prepared in time to have a distribution of its content. This relates to the matter on which there has been testimony by my two pred

ecessors.

Senator WILLIAMS. All right, proceed.

Mr. STAHL. Since preparing and forwarding my statement dated June 17, 1959, I have been informed that during testimony by representatives of the Securities and Exchange Commission before this committee, questions were asked with regard to who and what are investment advisers. As I explained, our function is to gather information and disseminate the same to our subscribers, together with our advice. Roughly, our functions fall into three categories; namely, (1) factual publications such as our Corporation Records, (2) advisory publications such as the Outlook and Poor's Investment Advisory Survey, and (3) the personal supervisory service which we call our planned investments department. The latter is a personal service furnished to individuals, estates, and trusts and similar funds. We obtain our information from registration statements, government and private agencies, reports published by the companies themselves, trade journals, and so forth. In addition we maintain a "field staff" whose function it is to visit corporations between published reports and obtain more and detailed information directly. And our analysts and executives also call upon corporations for information as to their business and affairs.

Our planned investments department was established in 1929 and, in connection with that service, up to 1940 we referred to ourselves as "investment counsel." However, with the adoption of the Investment Advisers Act in 1940, because we were not primarily in the business of giving personal supervisory services, we found ourselves unable to call ourselves investment counsel, although we immediately registered as "investment advisers." At the present time about 20 percent of our business is derived from our planned investments department which furnishes this personal supervisory service.

I have also been informed of a proposed amendment to sections 208 (c) and 203 (c) (2) of the Investment Advisers Act of 1940, which would eliminate the requirement that only investment advisers who were primarily engaged in the business of furnishing personal supervisory services could call themselves investment counsel, and which would permit investment advisers, a substantial part of whose business consists of such personal supervisory services, to call themselves investment counsel.

The present statute has permitted a single individual to call himself an investment counsel, whereas our company, with over 500 employees and, we think, a much broader experience and business, could not do so.

We think the proposed amendment would cure that situation. It will eliminate a source of friction within the industry itself. It will permit firms such as ourselves, with approximately 20 percent of our business derived from such personal supervisory services, also to call ourselves investment counsel.