I would like to have Mr. Stewart's full interpretation of subsection (c) beginning in line 13 on page 10, and if it does not fit into your plan at the moment, it will be satisfactory to me just so that this morning sometime you give me a full interpretation of that section.

Mr. STEWART. I would be very glad to answer that now, if you wish me to, Mr. Boren.

Mr. BOREN. I had in mind the possibility that it might be a matter of practice. In the first place, you refer to an issuer having issues purchased by someone affiliated with the issuing firm.

Mr. STEWART. The intention there, Mr. Boren, is this: It is to exempt from registration all intercompany transactions. That is the clear intent, to exempt transactions between associated organizations. It has no other purpose than that. If a company has a transaction with one of its subsidiaries, we want to make sure that there is no question involved as to registration under the act. That is it completely.

Mr. BOREN. Does it also cover a company whose stock is held, we will say, by 50 people, for example, and that company offers a new issue of stock or bonds, as the case may be, and the offering is made only to the 50 people who are currently the owners of the stock for say an increase in capitalization? Does it exempt that type of transaction?

Mr. STEWART. Not if the amount is over $3,000,000, Mr. Boren.

Mr. BOREN. And, in the case of practices similar to those carried on by the Bell Telephone Co., or the American Telephone & Telegraph Co., I guess it is-I do not know the exact name of the company. In my section it is the Southwestern Bell, which is a subsidiary I think. They permit purchase of stocks by their employees, stock in the company, I think on a deduction from their salary basis, or something of that character; does it exempt that sort of transaction, if the total is less than $3,000,000?

Mr. STEWART. I think that a transaction of the nature of that which you have mentioned would be treated as a transaction subject to the registration requirements of the act today.

I think perhaps that the problem to which you are addressing yourself is one which is proposed to be dealt with under section 3 of the act, 3 (a) (1), on page 11 of the print, which I am not discussing this morning; but it seems to me that the sale of stock to employees would be dealt with by that proposed provision. I am sure that the Commission will explain its concept of that fully when we reach that item on the agenda. I think that it is the one which would apply in the circumstances you have outlined, rather than the proposals which we have here.

Mr. BOREN. I wanted to be sure that there is no intent and purpose in this subsection (c) which I am overlooking.

Mr. STEWART. There is, of course, a very wide

Mr. BOREN (interposing). What led you to put that section in there as an alternative?

Mr. STEWART. Two (14)?

Mr. BOREN. No; this particular subsection (c).

Mr. STEWART. Merely to make certain, Mr. Boren, that transactions which are truly private transactions are exempted from the registration requirements of the act.

It seems to us that where there is an intercompany transaction, where the corporation is in effect dealing with itself and not with the public, that an exemption should be provided to cover such cases.

Mr. BOREN. Does not the present act cover such a proposition or give such protection as that? Does this amendment supplant something, or would it take something out of the present act?

Mr. STEWART. The effect of this proposed amendment, if the excep-1 tions were not written in might be to require the registration of such issues, to avoid that we put in the proposed exemption.

Mr. BOREN. I have finished, Mr. Chairman, and I apologize for the interruption.

Mr. PADDOCK. Mr. Chairman.

The CHAIRMAN. Mr. Paddock.

Mr. PADDOCK. We have a letter from one of the officers of a large insurance company opposing an amendment to this section. Have you any information as to the attitude of the smaller insurance companies toward these proposed amendments? Do they, the small companies, feel that they are being deprived of their normal outlets for funds?

Mr. STEWART. I think, Mr. Paddock, they feel so most definitely, and very strongly. Whether they will come here and say that to you or not, I do not know; but it is a fact that there was a meeting in Chicago recently of the smaller insurance companies, that is, those which are not members of the Association of Life Insurance Presidents. At least, it is my understanding, that they are not members of the association which takes in all of the big fellows. And, there was certainly in that smaller association a very strong group which felt very keenly that they were being greatly injured by the operation of this exception which gives the advantage to the big fellows.

Mr. PADDOCK. Is it your contention, Mr. Stewart, that the public, as represented by the policyholders of these large insurance companies, who buy at private sales, is entitled to whatever protection. registration affords just as the balance of the public is?

Mr. STEWART. I feel, Mr. Paddock, that registration under the act and the disclosures which go with it, are protections which are of importance to any person whose funds are being invested by

trustees.

Now, it will be argued, probably most persuasively, by the gentlemen speaking for the insurance companies, or perhaps by the insurance companies themselves, that they do such a thorough job of analysis and study that nothing could come to light through registration under the Securities Act that could protect their policyholders. I do not share that view. As much as I respect the experience and great judgment of the men in the insurance companies, I think that even they may at times fail to uncover or detect flaws in the affairs or in the operation of a corporation which would come to light through registration. And, again, registration does place certain definite liabilities, under the act, through section 11, upon directors of corporations, which cause them to engage in a good deal of soul searching before they sign a registration statement. Whether they do that with equal effectiveness to satisfy a request of an insurance company, I doubt.

Mr. PADDOCK. How do you feel about the value of the registration as a protection to the stockholders of the issuing companies?

Mr. STEWART. Well, I think that it probably does them no harm. I think that perhaps there is more than a little truth in what is claimed in the Brookings Institute report and by the Commission, that the thorough examination of corporate affairs which goes on in connection with the preparation of a registration statement is very healthy at times.

Those who have sat with the officials of a corporation in the preparation of a registration statement and who have gone through the searching inquiry which is then made into every aspect of the issuer's business will, I think, tell you that it cannot be other than helpful. Every question does not come to the attention of a corporate officer from day to day. He is doing his particular job and doing it well, but he is perhaps not listening to or reading every report that comes in. Men working as officials of a corporation are loathe to criticize each other; but when you have someone from outside come in and sit down across the table from you, saying that he must have the answer to this question or to that question; that he must see this record or that record, then you do get a searching examination which at times brings out most illuminating facts.

Mr. BOREN. Mr. Chairman—

The CHAIRMAN. Mr. Boren.

Mr. BOREN. One other question. We have been looking at this problem all morning from the standpoint of the purchaser of the security. I am not certain whether the issuer will be represented in the hearings or not. Do you know anything about the disposition on the part of the issuer to feel that any restriction of private offering would result in any handicap to him in the disposition of the total issue of his securities?

Mr. STEWART. It has been said here several times, Mr. Boren, that we have not consulted issuers. I respectfully wish to disagree with that statement, because we have, as a matter of fact, kept very closely in touch with great numbers of issuers, constantly. Our whole organization, in investment banking, is always seeking to talk with issuers; always establishing contact with issuers, and I am confident that we know pretty well what they think. I must add that I do not know many issuers who feel that it is desirable to have their affairs made subject to the scrutiny of any Federal body, no matter what it is. I do not think you will find many issuers anywhere in this country who would welcome being required to prepare a statement of all of their corporate affairs and required to submit that statement to the examination of any administrative agency. Of course they do not wish to be made subject to such requirements. We recognize that.

There are, however, many issuers who have for years been required to make full disclosure of information about their affairs. Let us take the whole field of public-utility companies, for example. Every public-utility issuer subject thereto is required by the Public Utility Holding Company Act of 1935 to make full disclosure of all corporate information, so that the duty of filing under the 1933 act is really not a very great additional duty to impose upon them, especially if, as we are suggesting, you eliminate completely all duplications.

Mr. BOREN. But the public-utility company is already required to disclose the full information they have. There is no additional burden on that score. But, your chart indicates that 40 percent of their offerings are disposed of by private sales. Then, I wonder if the public utilities would contend that it would be a handicap on the disposition of their securities, disposition of any complete issue, if they had to engage in a public instead of a private offering.

Am I correct in assuming that there would be no difference from the standpoint of the Federal agency examining the material facts of their business set-up?

Mr. STEWART. There would be this difference, Mr. Boren. If you file a registration statement under the 1933 act, all of the directors, all of the persons signing the registration statement, become subject to section 11 penalties or liabilities. There is no such liability attaching to a "declaration"; no similar liability attaching to the registration statement filed under the 1935 act. So that there is that factor in the picture and I think it has been a real factor on many occasions.

I think that outside of the field of the utilities it can be said with complete accuracy that there are many, many corporations who do not wish, under any circumstances, to be required to file registration statements with the Securities and Exchange Commission. And, despite what the gentlemen from the Commission say to you, this fact, the fact that if they must travel the road through registration along here [indicating], they must climb over all of the hurdles and fences which the 1933 act has imposed, and go through all of these procedures, while if they make a direct sale to the insurance companies they travel along the level road, where there is not an obstacle of any kind in their way, leads to the inevitable result of course, issuers prefer to travel along the level road which avoids registration. Mr. BOREN. But aside from that factor which I, of course, understand, again in your judgment, is there any justification for assuming that those 47 percent of all public utilities securities would not have found as rapid and complete sale by issues and issuers if there had been public offerings, as they found under the private method?

Mr. STEWART. It is my feeling, Mr. Boren, and I think it can be adequately buttressed and supported by statistics, that in many cases the public-utility companies who sold their securities to the insurance companies without registration would have had a better deal; would have sold their securities on a more attractive basis, had they gone through the public offering route, irrespective of the fact there would have been in such transactions a "spread" between the price paid by the underwriter and the price paid by the public.

I should like later on to submit some statistics on that point to the committee.

I am sure, Mr. Boren, that there have been no circumstances under which the requirement of registration would have made it impossible for these companies to obtain capital on a satisfactory basis.

Mr. BOREN. Is it your contention that the securities sold in a private offering by their nature are quality securities which would have an equally ready or more ready sale in public offering?

Mr. STEWART. Well; they are not quality securities because of the fact they are sold under the exemption. They are quality securities largely because of the fact that when they are issues of large amounts

and are purchased by insurance companies, they are subject to those provisions of State laws, insuranec laws, such as the insurance law of the State of New York, which definitely precribes the character of investments which insurance companies may buy.

Mr. BOREN. The point that I am arriving at is, it is only the quality securities, by and large, that are sold in private offerings, is it not? Mr. STEWART. It has so worked out in practice. As measured by dollar amount, certainly they are mostly of high quality, but there is nothing in present procedures which limits the exemption to securities of that kind. Indeed, a very low-grade security might be purchased by an investor under present exemption. The present exemption does not take quality, or the lack of it, into consideration. I am talking about the present law and about the character of a security which is being sold by an issuer claiming the present exemption.

Mr. BOREN. I understand that, but as a matter of practice it is the quality securities that are kept off of the public market and put into private transactions.

Mr. STEWART. As a matter of practice, the insurance companies and others who are shown in that list (table F) have certainly taken the cream of the crop.

Mr. BOREN. They have got the cream of the crop.

Mr. STEWART. Yes.

Mr. BOREN. That is what I am arriving at.

Mr. STEWART. They have obtained the best securities of United States corporations, the best of them. They have taken them, and other people throughout the country, the savings banks, the smaller institutions and other investors have been denied the opportunity of getting any part of that great amount of high-grade corporate securities.

I would like to say this, since the custom has developed of referring to these transactions as private transactions, I would like to emphasize that the word "private" appears nowhere in the act. That is not a statutory term and we contend that there is nothing "private" about most of the offerings which have gone through under the exemption which has been permitted in view of the present provisions of section 4 (1).

Mr. REECE. These matters are handled in the form of negotiated contracts, are they not? That is, an issuer negotiates with the prospective purchasers, and eventually evolves a contract with one of them to take the issue?

Mr. STEWART. Well, the theory under which the exemption has become available, Mr. Reece, is that each issuer negotiates separately with each buyer. There may be 20 buyers in a transaction, buying an issue of bonds. The theory under which the exemption is availble, and the theory that is required to be followed by the New York State law in any such transaction subject to that law is that the transaction is a transaction between the issuer and each buyer, and no other person. Whether this requirement is actually observed in practice, I do not know. I do not know whether an issuer would in practice actually go to one buyer, have a talk with him and then put on his hat, go away, and without any help from the buyer to whom he first talked, look up some other fellow, and separately