However, this whole investigation is in a printed report of the ICC, which I have seen, I think, in connection with the litigation we have been involved in over jurisdiction referred to in my statement. I am reminded in the Louisville and Jeffersonville Bridge case the Interstate Commerce Commission specifically granted approval of the acquisition of New York Central. That was in a proceeding before the Interstate Commerce Commission after the proxy contest. That took place in June of 1954, I believe, June or July, somewhere in there. Senator WILLIAMS. That was just ancillary to another proceeding not dealing with any Mr. WALLACE. That is correct. They would have taken action, of course, if they had found that there had not been a true divestiture. And I would say here, too, that if we had been under the jurisdiction of the Investment Company Act I don't think that we would have been subjected to the scrutiny and investigation on this point that we were at the time of the proxy contest. I don't think that the old management's legal action would have had the at least superficial logic it had in the original action. Of course, it really didn't have any, but Senator WILLIAMS. And are we to conclude that approval was not required of ICC before you gained control of New York Central? Mr. WALLACE. That is correct. There is nothing, of course, that even goes as far as ICC's authority in this matter in the Investment Company Act. Senator WILLIAMS. Thank you very much. Mr. WALLACE. Thank you very much. (The following were received for the record:) Hon. A. WILLIS ROBERTSON, } THE ATLANTIC COAST LINE CO., Wilmington, N.C., June 3, 1959. Chairman, Committee on Banking and Currency, Washington, D.C. DEAR SENATOR ROBERTSON: This communication concerns legislation now under consideration by your Subcommittee on Securities and I will be obliged if you will refer it to such committee. As counsel and attorney for the Atlantic Coast Line Co. (Connecticut company), a corporation existing under the laws of the State of Connecticut, my attention has just been called to S. 1181, introduced on February 26, 1959, to amend certain provisions of the Investment Company Act of 1940, as amended. It is my understanding that hearings have already been held on this bill by your Subcommittee on Securities and that such hearings recessed on June 25, 1959. Approximately 98 percent of the assets of the Connecticut company are invested in securities of railroads. The Connecticut company owns approximately 32 percent of the outstanding common stock of the Atlantic Coast Line Railroad Co., thereby exercising control over that railroad. It owns all of the outstanding stock of the Charleston & Western Carolina Railway Co. and more than 50 percent of the stock of the South Carolina Pacific Railway Co. In effect the Connecticut company is a railroad holding company. Because of its ownership of stock in the Atlantic Coast Line Railroad Co., it was found by the Interstate Commerce Commission in Atlantic Coast Line Railroad Company, et al., Purchase, Finance Docket 15015, decided December 12, 1945, that the Connecticut company is a "carrier subject to the provisions of section 20 (1) to (10), inclusive, and section 20a (2) to (11), inclusive" of the Interstate Commerce Act. It would appear from section 7 of the proposed bill designed to amend subsection (c) (9) of section 3 of the Investment Company Act of 1940 that the Con necticut company may well be subjected to jurisdiction not only of the Interstate Commerce Commission but also to that of the Securities and Exchange Commission if the bill should pass. Such dual jurisdiction would presumably continue until or unless the Connecticut company divested itself of its holdings of railroad stock. The Connecticut company strongly urges that that portion of the bill which would amend subsection (c) (9) of section 3 of the Investment Company Act of 1940 be deleted for the reasons hereinabove mentioned and respectfully requests that this letter be included in the record of the proceedings. Very truly yours, Hon. HARRISON A. WILLIAMS, Jr., PRIME F. OSBORN, THE DELAWARE & HUDSON Co., U.S. Senate, Senate Office Building, Washington, D.C. DEAR SENATOR WILLIAMS: I am writing to you as chairman of the Senate Subcommittee on Securities which is currently holding hearings on S. 1181. This bill, which I understand is sponsored by the Securities and Exchange Commission, would seem to have the effect of subjecting to SEC jurisdiction and regulation under the Investment Company Act of certain companies which are now subject to regulation under the Interstate Commerce Act. The Delaware & Hudson Co. is a holding company whose principal assets consist of the entire outstanding stocks of the Delaware & Hudson Railroad Corp. and Napierville Junction Railway Co. The latter company operates in Canada. Both the Delaware & Hudson Co. and the Delaware & Hudson Railroad Corp. are subject to regulation under the Interstate Commerce Act. It seems obvious to me that any railroad enterprise, if it is to be subject to regulation, should be subject to regulation by the Interstate Commerce Commission. However, as I read the amendment to subsection (c) (9) of section 3 of the Investment Company Act of 1940, as proposed by the SEC, the Delaware & Hudson Co., merely because it is a holding company, could be brought under the jurisdiction of the SEC even though it is not an investment company and does not engage in trading in securities. While newspaper accounts of the testimony with respect to S. 1181 state that the purpose of the proposed change in subsection (c) (9) of section 3 is to bring Alleghany Corp. under SEC supervision, the amendment, as drafted, would seem to go far beyond that by providing for SEC jurisdiction over any company "primarily engaged, directly or indirectly, in the business of investing, reinvesting, owning, holding or trading in securities." The amendment should at least clearly exempt a holding company now subject to the Interstate Commerce Act and whose principal assets are railroad securities. I am sending copies of this letter to the Chairman of the Interstate Commerce Commission and the Chairman of the Securities and Exchange Commission. Sincerely yours, DONALD D. DART, General Counsel. (The following was received with reference to the above:) DONALD D. DART, Esq., SECURITIES AND EXCHANGE COMMISSION, General Counsel, Delaware & Hudson Co., DEAR MR. DART: This is in response to your letter of June 29, 1959, in which you state that the Commission's proposal embodied in S. 1181 and H.R. 2481 to amend section 3(c) (9) of the Investment Company Act of 1940 is too broad. You express the view that the proposal would extend the jurisdiction of this Commission to encompass the Delaware & Hudson Co. You state that the Delaware & Hudson Co. is purely a holding company whose principal assets consist of all of the outstanding stock of two railroad companies. Since it does not appear that your company falls within the definition of an "investment company" under section 3(a) of the act, it would appear that you need have no concern regarding the proposal to amend section 3(c) (9). Your company apparently is not primarily engaged in investing, reinvesting or trading in securities and, hence, does not come under section 3(a) (1). Section 3(a) (2) pertains to face-amount certificate companies and is inapplicable. Section 3(a)(3) sets forth a quantitative or statistical test encompassing a company owning or holding "investment securities" having a value exceeding 40 percent of the company's total assets. Since "investment securities" do not include the securities of majority-owned subsidiaries, it would appear that paragraph (3) of this section is likewise not applicable to your company. In any event the proposed amendment to section 3 (c) (9) was not intended to bring under the scope of the act, a company primarily engaged in a business other than that of an investment company, whether directly or through majority owned or controlled companies. The tests of section 3(b)(1) and 3(b)(2) under which companies, prima facie within the terms of section 3(a), are, nevertheless, excepted from the act because of their primary engagement in noninvestment company operations, directly or indirectly, would still apply except that the burden would be on the Commission to make the showing of primary engagement. If you have any further questions regarding this matter, please advise me. Sincerely yours, EDWARD N. GADSBY, Chairman. Senator WILLIAMS. Commissioner Gadsby is our final witness this morning. Good morning, Commissioner. Glad to have you back. We appreciate your cooperation in being available this morning. STATEMENT OF EDWARD N. GADSBY, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION-Resumed Mr. GADSBY. Thank you, Senator. Senator WILLIAMS. I see that you are prepared to give us your views on many of the things that have been suggested, many of the ideas that have been advanced, in these hearings. Mr. GADSBY. That is right, Senator. Senator WILLIAMS. And you have done this through the prepared document I have here. Mr. GADSBY. I have a statement which I am prepared to deliver to the committee; yes, sir. Senator WILLIAMS. Does this represent pretty much your full and comprehensive response to our requests? Mr. GADSBY. With some exceptions, Senator. Some of the testimony which has been given, of course, is so recent that we have not had an opportunity adequately to digest it or to consider any possible changes we might make in view of the testimony which has been placed before you. Senator WILLIAMS. In that connection, I know you sat patiently through the long hearings this morning and heard some new thoughts advanced here by witnesses representing the New York Central and the Alleghany Co. There might be, I would judge, some observation you would want to make on that, certainly, when you think it through. Mr. GADSBY. We have had that particular situation, of course, well under consideration, and, as I have indicated in my statement, we are dealing with the Interstate Commerce Commission in this regard. Senator WILLIAMS. We have a date for comment, do we not, July 6? Mr. GADSBY. I believe so; yes. Senator WILLIAMS. For comment on the conflict, or however we want to describe that area? Mr. GADSBY. Yes. Senator WILLIAMS. In addition to this single statement of some 20 pages, you have other memorandums that you want to present? Mr. GADSBY. Yes; in my statement I have alluded to some seven documents, some of which constitute specific comments on specific provisions that have been attacked or criticized, and some of which are other material which we think would be of value to the committee in its consideration of our suggested amendments. Senator WILLIAMS. Fine. I would think the most efficient way to handle this would be to submit your statement and various specific observations in the several documents to the committee for the record. Mr. GADSBY. Very good. Senator WILLIAMS. And then if you would like to now summarize or generalize on your observations, why, we will be glad to hear that. (Discussion off the record.) Mr. GADSBY. There is one additional thought that occurred to me after this statement came to me. The chairman was somewhat perturbed at the suggestion that we base our injunctive actions upon past acts, and it occurred to me perhaps that the closest parallel that 1 could show to what we were actually trying to do is the case of an injunction against a trespass. There, you see, you are enjoining against future acts on the basis of past acts, where you would have a man who was trespassing across your land. You are suing for injunction against further trespass on the basis of his having done past acts, and similarly here we are enjoining future violations on the basis of the defendant having violated in the past. I think the case is fairly close, and it gives you an idea of the legal principles involved. Senator WILLIAMS. The analogy might be apt. It is based, however, on the presumption that past acts give good warning and ample warning that there will be future acts. Mr. GADSBY. From the very nature of things, you cannot enjoin a present act because the man just isn't trespassing at the moment. He isn't trespassing, and you have got to assume that his course of action in the past indicates a course of action in the future. I do want to state, Senator, if I may, that this statement and the attached documents will be supplemented by other memorandums which will meet other points which we have been unable to cover up to the present time. Those documents we will attempt to have in your hands by the July 6 date that you set. Senator WILLIAMS. Very well. Mr. GADSBY. If I may summarize this statement in a few words, perhaps I should call your attention to the fact that there is relatively little, relatively few areas in which there is any serious controversy in these bills. Certain industry groups have picked out one or two sections, and I think there are not more than half a dozen sections out of the 80-some sections of the bill that are in serious dispute; that is, as to anyone who is not making a shotgun attack upon the entire effort of the Commission to improve the standards of the acts. There are a few places, of course, where industry and ourselves have been unable to agree and where we have come to an impasse as between us. Those we will have to submit to the committee for resolution, of course. The bulk of the proposed amendments, I think, are noncontroversial except for the, as I say, shotgun attack upon any amendment of these bills. As for that attitude, of course, we have no sympathy with it, because we are specifically directed by the Securities and Exchange Act to submit proposals for improvement of the bills as our administrative experience shows that they are desirable, and we consider that it is our duty to propose such amendments. With those few remarks, Mr. Chairman, I am prepared to file with the stenographer the statement which I propose to make before your subcommittee and to offer for the record the various memorandums and other documents to which reference is made in the statement. Senator WILLIAMS. All right, we will receive those for the record and thank you for your full cooperation with our efforts at these hearings that we have had. (The documents referred to follow :) STATEMENT OF EDWARD N. GADSBY, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION Mr. Chairman and members of the subcommittee, you have heard testimony for several days from industry representatives and members of the bar with respect to the Commission's legislative program. You have requested our comments with respect to the objections that have been raised and we shall submit for the record memorandums discussing these matters in detail. Mr. Chairman, I want to express my appreciation to you and the subcommittee for postponing our appearance scheduled for yesterday until today and for your suggestion that the record will be held open until we have sufficient time to permit the Commission to consider some of the questions, or suggestions, which we have been unable to complete by today. Certain of these suggestions merit more deliberate consideration than has been possible in 3 or 4 days' time. This morning I would like to address myself briefly to questions raised by members of this subcommittee and certain objections advanced by representatives of industry and the bar. Before doing so, and since the testimony of industry representatives has necessarily been largely devoted to those areas in which they disagree with our proposals, I think that in the interest of putting the matter in context I should point out the rather limited area of disagreement. Our proposals embrace some 87 amendments to 5 of the statutes which we administer. Aside from the rather broadside attack by the National Association of Securities Dealers upon the proposed amendments to the Securities Act and the Securities Exchange Act, there is really very little disagreement. The New York Stock Exchange and the American Stock Exchange took firm exception to only two provisions in our program. The National Association of Investment Companies took exception to only two provisions, and spokesmen for the investment advisory industry unanimously endorsed our program. Given the natural reluctance of regulated industries to submit to additional regulations, I think this is a remarkable degree of unanimity and a tribute not only to the fair-mindedness of most elements of the industry, but also to the reasonableness of our proposals. Preliminarily, I might observe that some of these objections reflect a difference of opinion as to the protection which should be afforded investors under the securities laws-I would note parenthetically that certain witnesses here have taken, to say the least, an extremely narrow view of the matter. There is also a divergence of views as to the rulemaking authority which may properly be delegated to an administrative agency such as ours. It is our view that a congressional authorization of this character does not necessarily require a cataloging of abuses but only a showing of an area of potential imposition which would require agency action as necessary in the public interest, subject to appropriate standards. Fears of administrative abuse have been alluded to, which find no basis in fact in the 25 years of the Commission's history nor does the record before this subcommittee demonstrate otherwise. In addition, objection has been made to clarifying amendments which would give statutory expression to existing judicial precedent. Finally, suggestions have been made for the introduction of procedures at variance with those which have become part of the basic fabric of administrative law and the relationship of the administrative agency to the judiciary. We are fully mindful, as has been pointed out during the course of these hearings, that our government is one of laws and not of men. But at the same time, within the framework of our system, it has been recognized that certain discre |