Mr. STEWART. Table B we have previously been discussing gives the dollar amounts. Table C, which is now before us, shows the number of issues involved.

The thing which seems most significant to me about this table is the fact that in the year 1940 we find 393 issues of securities sold without registration under the act. Deducting from that total the 10 railroad issues, which are otherwise exempt, and we have a total of 383 issues.

Now, if we look at the Securities and Exchange Commission's report for 1940, covering the period July 1, 1939, to June 30, 1940, we find on page 246 of that report that only 56 issues of secured bonds and only 40 issue of unsecured bonds were registered under the Securities Act during that period of 12 months.

For the year 1940, we have this strictly comparable figure, as compared with 383 issues sold without registration under the 1933 act there were 61 secured issues and 38 unsecured bond issues, or a total of 99 issues registered with the Commission under the 1933 act.

Mr. BOREN. Mr. Stewart, I do not want to precede your thought on it, but the charts up to this point definitely indicate that the average citizen-the laborer, the school teacher, the farmer, and what not-has not had an opportunity to have purchased at least 47 percent even of the public-utility securities offered for sale.

Mr. STEWART. That would be about right, sir. The large purchasers having large amounts of money have had a great advantage over the smaller investors. I hope to show you as I go along why this is so.

We were told yesterday, or perhaps it was the day before, that the reason lies entirely in the fact that the large insurance companies are hungry. I do not deny that they may have been hungry; but, as I look back to the period before the Securities Act came into existence, I see that the total assets of the big insurance companies were even then very great, indeed. I think that for the companies covered by the report of the Association of Life Insurance Presidents, there were around $18,000,000,000 of assets before the Securities Act came into existence. While the hunger of the life companies may be more intense today, it seems to me that with $18,000,000,000 of assets they were not without an acquaintance with the pains of hunger at that time-prior to 1933-and yet this practice did not exist then.

Mr. BOREN. The fundamental principle of economic democracy involves an opportunity, and the door was closed to purchase and the opportunity of ownership to every citizen; and, of course, frankly, I am a lot less interested in the competitive injustice that might occur to you folks than I am in that principle, and I know that you will fully develop it here. We do not care so much about you fellows, you know, as an individual group, as we do the interest of the public. Mr. STEWART. We realize that, Mr. Boren. Happily for us it is our good fortune today that our interests coincide wholly with the public interest and with the interests of the great majority of investors. Mr. REECE. Mr. Stewart, you would make a good candidate for Congress.

Mr. STEWART. I greatly appreciate the compliment, sir.
Mr. YOUNGDAHL. Mr. Chairman?

The CHAIRMAN. Mr. Youngdahl.

Mr. YOUNGDAHL. There may be another interest involved that may not be important. I do not know. But I would like to have you tell me about that 47 percent of the business that has gone to the private market. No doubt that has affected the organization of the various investment companies throughout the country.

Mr. STEWART. Yes, Mr. Youngdahl.

Mr. YOUNGDAHL. And has resulted in reducing the number of employees, and so forth?

Mr. STEWART. Well, Mr. Youngdahl, it is a fact, as shown by a census which the Investment Bankers Association conducted a year ago that the number of employees in the dealer and investment banking organizations has diminished quite materially in recent years.

The situation in which the investment banking business and the dealer organizations find themselves today is that they are being told that they must content themselves with tilling the rocky uplands and hillsides where there is no covering of earth. They must never, on any occasion, engage in farming down in the fertile valleys below; and, of course, any farmer who has been driven out of the bottom lands to the barren fields above ceases to be a very successful farmer. That is also true of the investment banking business. That does affect the public interest, too. If there is a desire to maintain an organization

Mr. STEWART. As I say, if there is a desire to have in this country an investment banking organization which can effectively serve the public interest, it must be allowed to handle the best corporate issues as well as those which are speculative in character and involve greater elements of risk. The business of investment banking must be well balanced or it cannot continue to exist.

Now, it is tedious to take you through the technical details, but I think it is important to show how the existing situation has come about; how it has been possible for it to develop under the act.

A great volume of corporate financing has been carried on outside the registration requirement of the act. It became possible to do this because of the practice which developed early in 1934 of treating as other than "public offering" and therefore as a transaction exempt from registration under the act, the direct acquisition, from corporate issuers, of securities purchased by a limited number of insurance companies, banks, or other purchasers that is where the theory of exempting purchases by a small number of buyers came in. This theory operated to help the big fellows enormously. The exemption was made available where a limited number of banks, insurance companies, or other purchasers said that they were buying the securities for investment and not with a view to distribution.

It has become common usage to describe such purchases as "private purchases" or purchases of securities "privately offered," the assumption apparently being that any purchase by a limited number of purchasers who state that they are purchasing for investment and not with a view to distribution is in the nature of things not a public transaction and does not involve a "public offering" or any "distribution."

As I have said, the theory underlying this practice does not rest upon any provision of the act nor upon any rule or regulation of the Commission.

The theory that no "public offering" is involved in a transaction in which an issue of securities is acquired by only a small number of

74947-42-pt. 2- 2

institutions or other purchasers for the investment of the funds of great numbers of policyholders, investors, or depositors apparently derives from an opinion contained in various letters written early in 1934 by Mr. Baldwin B. Bane, now Director of the Registration Division of the Securities and Exchange Commission, who was then a member of the staff of the Federal Trade Commission.

As you, of course, know, the Securities and Exchange Commission itself was not appointed until after the Securities Exchange Act of 1934 became law on June 6, 1934. The administration of the Securities Act was originally in the hands of the Federal Trade Commission.

In the letter referred to, Mr. Bane suggested that an offer made to "not more than a small, insignificant number of persons, say 25 or so," was not a "public offering." As to this, the question may well be asked whether an offering made to the trustees of an insurance company looking to the investment of the funds of policyholders or to the officers of a commercial bank looking to the investment of the funds of depositors is not, in the nature of things, affected with a public interest and one which might properly be regarded as a public offering.

According to the report of the Association of Life Insurance Presidents, there are some 65,000,000 policyholders of insurance companies in the United States at the present time. You will find that statement at page 83 of the report of the last meeting of the Association of Life Insurance Presidents.

And I have here what I think is an interesting exhibit, a copy of the report for the year 1940 of the Equitable Life Assurance Society of the United States addressed to its policyholders, which says:

As an Equitable policyholder, you are a member of a great cooperative business institution-a mutual life-insurance society dedicated to providing protection and service to its 2,600,000 members.

The report of the Equitable Life Assurance Society also states: People in all walks of life make up the 2,600,000 members.

The aggregate of approximately $590,456,000 principal amount of corporate securities purchased in the 7-year period ended December 31, 1940, by the Equitable Life Assurance Society in transactions said not to involve any public offering were acquired for investment of funds derived from this great body of 2,600,000 people.

It might be interesting to digress a moment at this point to refer to an article in Time magazine dated November 10. That is the current issue. On page 78 of that publication there is a statement to the effect that

Equitable Life Assurance Society has decided that it will no longer participate in any private security sales of over $5,000,000.

Mr. BOREN. Of over how much?

Mr. STEWART. $5,000,000. I do not know whether that is a new policy of the Equitable Life Assurance Society or not.

Mr. BOREN. What fact could possibly govern a decision as to that amount?

Mr. STEWART. It would be entirely their own decision, Mr. Boren. I do not know why they have arrived at that policy or, indeed, whether they have arrived at it.

Mr. BOREN. I mean, it does not occur to me that there is any particular evident reason that a difference in the amount would change the nature.

Mr. STEWART. It may be that they have decided that the practice which they have followed in the past several years has been a bad practice, but that it would be a good practice if applied only to smaller

issues.

Mr. BOREN. I wonder if diversity of investment is probably not the motivating reason.

Mr. STEWART. I would not attempt to say, although it is, I think, a fact that they have now broad diversity of investments.

Mr. REECE. Mr. Chairman.

The CHAIRMAN. Mr. Reece.

Mr. REECE. I have heard that one of the insurance companies took a rather large offering amounting to thirty or forty million dollars and then in a short time sold ten or fifteen million dollars of it to other smaller insurance companies. Is that an isolated instance, or is that done by insurance companies generally? The way I heard this, it places the insurance company almost in the position of an underwriter, having sold this ten or fifteen million dollars at a profit of some one or two points.

Mr. STEWART. There certainly is an interesting point of law involved there, Mr. Reece. I do not know that I can answer it. I would say this: It has not yet become a general practice on the part of the insurance companies to resell large amounts of the securities, which they have purchased as shown on this chart; but there have been some sales, it is true.

The case to which you refer is, I think, the sale by the Equitable Life Assurance Society of an amount of about $10,000,000 of bonds of the New York State Electric & Gas Co. In that transaction, the purchase of the bonds by them in the first instance was made in competitive bidding under the Commission's rule U-50, issued under the Public Utility Holding Company Act, so that the securities were actually registered at the time of the initial sale. They were registered under the Securities Act.

The Equitable Life bought the whole $30,000,000 and it subsequently resold $10,000,000 of them. The resale by the Equitable was not registered, and the resale was made at a profit. According to our best information, the profit was fairly substantial. That transaction did take place.

At about the same time, or within that general period of time, that company-the Equitable Life-also sold other securities which it had purchased without registration under the Securities Act, and which had never been registered at any time.

Again, according to our best information, they made a profit on the transactions.

Now, whether they will some day adopt a change in policy which will lead them to decide that that whole $590,000,000 of securities purchased without 1933 act registration during the last several years should be resold, I cannot say; but I can say this, that if they could establish and I am sure they could-that under the present act they had purchased those securities in good faith with the intent of holding them for investment and that they had now changed their minds

for some good reason, they would be completely free to resell those $590,000,000 of securities without having them registered under the act in any way or without assuming any liability under the act as an underwriter.

Mr. REECE. How long had these bonds to which you refer been held before the sale of the $10,000,000?

Mr. STEWART. I think that the New York Electric & Gas bonds had been held, probably, a matter of 2 months.

Mr. REECE. A short time?

Mr. STEWART. Yes. The other bonds which had been purchased and resold without registration had, I think, been held probably for more than a year; perhaps as long as 2 years. I could get the exact date for you. It is not at my finger tips at the moment.

Mr. BOREN. Mr. Chairman.

The CHAIRMAN. Mr. Boren.

Mr. BOREN. Referring back to lines 6 and 7, on page 10, the question I asked you awhile ago about that provision as drawn leaving an open gate, as I described it, that could be utilized for that practice.

Mr. STEWART. No; Mr. Boren. I am not talking at the moment about that. I am not talking about our proposed amendment. I am talking about the situation that exists today under the act as it stands today.

Mr. BOREN. Well, but under lines 6 and 7 of that provision, on page 10, in our discussion awhile ago, without having the information Mr. Reece brought out here, I raised the question, was it not possible and probable that some company would buy and resell, as a part of my question, as I recall it. You indicated that it was not a common practice; that it could become a common practice, perhaps.

Mr. STEWART. Mr. Boren, this proposal in 2 (14), the exemption to which you were specifically referring, relates to any offering of a single indivisible security which is purchased for investment by not more than one person.

Now, that concept of an "indivisible security" does prevent easy resale.

Mr. BOREN. I see.

Mr. STEWART. In other words, if they buy a $10,000,000 mortgage in a single indivisible security and it really is indivisible, obviously they could not sell it except as a $10,000,000 piece to some other purchaser who is able to acquire an investment of that character. That is one reason for the "indivisible" in the proposal, to prevent easy resale and distribution.

Mr. BOREN. The thought I had in mind was identical with the example you have given here as to the possibility of the investment, one company buying as you say with the intention of keeping it as an investment and then reselling it for a profit.

Now, where in the provision you folks have made is there any change in the present law affecting that situation?

Mr. STEWART. We have not attempted in here, in this present draft, to reach through the initial transaction to prevent resales of securities which were purchased in good faith generally under one of the exemptions of the act.

Mr. BOREN. Mr. Chairman, I do not want to pursue the question any further, but I do have one more question that I want Mr. Stewart to answer for me sometime this morning.