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out as regularly receiving funds from the public, could continue to buy certain securities without registration, under the proposed amendment.

Mr. WADSWORTH. Do you think that the trustee of an endowment fund of a university could go ahead and make purchases?

Mr. STEWART. I certainly think it would not hurt them any if they restricted themselves in the corporate field to the purchase of corporate securities which had gone through the disclosure requirements of the act. I imagine it would be a wise course for them to follow. I think that if I were in their position I would do so.

Mr. WADSWORTH. That may be so; but would your proposed amendment require them in making those purchases to make them solely from issues that are registered?

Mr. STEWART. No; it does not. But we are not regulating the purchaser in any case here. We are regulating the seller. We are saying that if the seller wishes to have access to the funds of the public he must go through the procedure of registration,

If he can now get funds from an educational institution without making a public offering of securities, he can continue to get them.

We have tried, Mr. Wadsworth, in this draft of ours, to make it operate in the manner which I have outlined. We intended, in other words, to exempt private transactions.

Now, where one should draw the line between wholly private funds and funds such as those of an educational institution I do not know. We applied this test: That, if the buyer holds itself out as regularly receiving funds from the public for investment then they clearly, the seller of securities, is obtaining access to the funds of the public and should go through the registration process.

Mr. WADSWORTH. A university endowment fund could scarcely be described in those terms.


Mr. WADSWORTH. The university does not hold itself out to the public as an investing agency.

Mr. STEWART. No; and it does not regularly receive funds from the public. It receives gifts, of course, as we well know, from people who attach all sorts of conditions to those gifts in many cases.

Perhaps it is inconsistent not to say that all securities sold to such buyers should be registered. It is always hard to know where any line should be drawn, when you are suggesting as you must in cases of this kind, some arbitrary line of dernarcation. What we tried to do, and tried very hard to do, was to separate what is really private from what is unquestionably public.

Returning to clause (a), I shall explain that the exception proposed in this clause would, of course, also enable any issuer, without limit as to the amount or maturity of a security, to sell an obligation to any single buyer, provided that the obligation is evidenced by a single indivisible security and not by marketable obligations. This exemption would be available irrespective of whether an issuer dealt with a bank, insurance company, or other single institution.

Mr. SOUTH. Mr. Chairman-
The CHAIRMAN. Mr. South.

Mr. SOUTH. Mr. Stewart, what is an indivisible security; what do you mean by that?

Mr. STEWART. Well, we mean a single mortgage, shall we say, that cannot be broken up into parts.

Mr. SOUTH. A single what?

Mr. STEWART. A single mortgage that cannot be broken up into separate parts and sold in denominations of say $1,000, or $5,000, or $100,000, or more. In other words, one piece of paper only, which, if resold, would have to be resold as one piece of paper to one buyer.

Mr. CROSSER. May I observe that there might be a single instrument providing security, and at the same time the obligations secured thereby might be numerous.

Mr. STEWART. That would not be in accordance with the intent of this section, Mr. Crosser. If that is possible, under this draft, we would like to tighten it up so that it would not be possible, because the intent very clearly is that it should not occur.

The proposed amendment would also exempt from registration

(b) Any offering of an evidence of indebtedness which has a maturity at the cime of issuance of not exceeding 5 years, exclusive of days of grace, or the principal security for which is an assignment of moneys due or to become due under a contract of the United States entered into for national-defense purposes.

The purpose of this proposed exception is also to exempt from registration instruments evidencing indebtedness which are of the character of bank loans as distinguished from marketable obligations as that term is generally understood. In the field of short-term loans of this character it is difficult to make an absolute distinction between instruments which are in fact bank paper and those which are marketable obligations in the true sense. It seems a reasonable assumption, however, that obligations having a maturity of not more than 5 years may properly be treated as bank paper coming within the purview of the various regulatory bodies which have to do with the supervision of bank loans.

The proposed exception which we are discussing would also exempt from registration any evidence of indebtedness, the principal security for which is an assignment of moneys due or to become due under a contract with the United States entered into for national-defense purposes. I understand that the great majority of such loans are repay. able in 60 monthly installments, so that the 5-year exemption might of itself be sufficient to exclude them from the requirement of registration. It has, however, been thought wise to suggest that no time limit be placed on the exemption of such loans.

In this connection it is interesting to note the position taken by the Federal Reserve Board as to the exemption of bank paper, at the time when the present law was under consideration.

I think that this is very important because of the position now being taken with respect of this proposal by those in the commercial banks. I am talking about our present proposal, of course, to which I wish to suggest a further exception in a moment, if I may.

The following is the text of the letter which appears at page 180 of the record of the hearing on H. R. 4314 before this committee of the Seventy-third Congress, first session. The letter appears, addressed to Hon. Sam Rayburn:


Washington, April 3, 1933. Hon. SAM RAYBURN, Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D. C. MY DEAR CHAIRMAN: The attention of the Federal Reserve Board has been directed to H. R. 4314, “A bill to provide for the furnishing of information and the supervision of traffic in investment securities in interstate commerce.”

It appears that this bill is intended to apply only to stocks, bonds, debentures, and other similar securities of the kind commonly known as investment securities, which are issued for the purpose of obtaining capital funds for business enterprises and are purchased by persons for investment.

It would seem that it is not intended to apply to bankers' acceptances or to short-time paper issued for the purpose of obtaining funds for current transactions in commerce, industry, or agriculture, and purchased by banks and corporations as a means of employing temporarily idle funds.

By subsection (a) of section 2 (p. 1, line 7), however, the term "security” as used throughout the bill is defined as including any “note” or “evidence of indebtedness” as well as any stock, bond, debenture, etc., so that the definition appears to be broad enough to include bankers' acceptances and commercial paper.

It seems to the Federal Reserve Board that the bill should be amended by adding at the end of line 9, on page 2. a proviso exempting bankers' acceptances and notes, drafts, and bills of exchange growing out of current commercial, agricultural, or industrial transactions or the proceeds of which have been or are to be used for current commercial, agricultural, or industrial purposes when such paper has maturities not in excess of 9 months. A form of amendment for this purpose is submitted herewith for the consideration of your committee. Very truly yours,

CHESTER MORRILL, Secretary. And he submitted a proposed amendment at that time. The exemption then proposed by the Federal Reserve Board was accepted by your committee, gentlemen, and by the Congress, and now appears in the Securities Act of 1933 as section 3 (a) (3) of that act. So, it must clearly have been understood at the time when the act was passed that all issues of securities whether purchased by bank or not, having a maturity of more than 9 months were intended to be brought within the scope of the act. In practice, because of the operation of section 4 (1) to which I have already referred, this section 3 (a) (3) exemption has virtually become a dead letter.

But we are not suggesting here that all securities sold to a bank, having a maturity in excess of 9 months, be subjected to registration as was apaprently the intent of the Congress when this bill was first passed.

We are, as I say, as presented, suggesting in this present draft, that anything which has a maturity up to 5 years be completely exempted on the theory that that field of short-term money is a field properly reserved for bank loans and that any corporation which wishes, in an emergency, to obtain access to capital through a bank loan should be completely free to go to a bank and obtain a loan of that kind. If it is possible for a corporate issue to have access to a 5 year bank loan without registration, it surely cannot be said that the Securities Act prevents a corporation from obtaining funds in an emergency.

We are suggesting further
Mr. SOUTH. Mr. Chairman-
The CHAIRMAN, Mr. South.

Mr. SOUTH. Before you get away from that, is not this quite a little step-from 9 months to 5 years!

Mr. STEWART. Mr. South, it would be if the act had operated as Mr. SOUTH. As it was intended ?

Mr. STEWART. As I think it was expected that it would operate at the time; but as you see from these figures, the banks, in common with the insurance companies, have managed to buy a great many

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it was

issues of securities. As shown by this chart (table F) the Chase National Bank has been a large purchaser of such issues, along with the large insurance companies, and then in this list we also find the Bankers Trust Co. of New York. They are certainly buying many issues of securities.

Probably there are in those figures amounts which should in all propriety be regarded as bank loans. I do not for a moment dispute the possibility. I think it very likely that a great many bank Ioans have gone into those figures; but at the same time, I contend, gentlemen, there are in those figures the purchase of issues of securities, of instruments which are undeniably securities, that could readily be distributed to the general public at any time. We feel that where a transaction involved the purchase of such an issue of securities, the problem is quite different from that which is involved in a true bank-loan negotiation between a bank and a borrower.

Now, because of the proposed section 2 (14), some of the gentlemen in the commercial banks have told us that what we are attemptting to do here is to subject the commercial banks to regulation by the Securities and Exchange Commission. They have pointed out to us that the commercial banks are already regulated by the Comptroller of the Currency, by the Federal Reserve Board, by the Federal Deposit Insurance Corporation and are also subject to regulation under State laws. They say that it is a bad thing which we would do through this proposed section 2 (14). That under it the commercial banks would be made subject to regulation by the Securities and Exchange Commission. I must say that I do not know how that interpretation can reasonably be read into the proposals which we are making here.

What we are saying-what we are suggesting to you gentlemenis that when an issuer obtains access to the funds of the public by selling an issue of securities of more than 5 years' maturity, that the issue of securities shall be registered.

We do not say that if an issue of securities is registered, a bank cannot buy them. Far from it. We say that if a bank buys an issue of securities having a maturity up to 5 years it can buy them at any time it wants to, and that the issuer can make the sale without registration, with respect to maturity not exceeding 5 years. We do not enter into the question whether, or when, a bank can make bank loan or buy an issue of securities. We would give the issuer a clear exemption.

There was a time in history when a loan running up to 5 years would not have been thought of as a short-term loan. As a matter of fact, in practice today, I think that the majority of banks feel, as a matter of policy, that it is not sound for them to make loans, long-term loans, that run over 5 years. Some of the large banks do not do it. Others have a different policy-perhaps it is a wise policy. I do not know. I would not attempt to discuss that here. But, I do say that when we enter into the field of corporate securities where issuers are selling issues of securities maturing in more than 5 years, which may at any time, in the discretion of the purchaser, be resold to the public generally provided only that the original exempt purchase was made for investment and in good faith, then we are entering into a field as to which it is clearly


proper to say, as was intended by the original act, that there should be full registration under the Securities Act.

In order to clarify beyond any question of doubt the fact that we wish to exempt from this proposal anything that might even remotely be called a bank loan, we suggest that there be inserted in proposed section 2 (14), in the draft, the following new proposal.

Mr. CROSSER. Where? Mr. STEWART. May I give copies of this to you? These are copies of our proposed change in section 2 (14).

The proposal, sir, is to insert the following new clauses (d) and (e) at line 17 of the print before the present clause (d); to insert

Mr. CROSSER. Do you want to strike out the present clause (d)?

Mr. STEWART. No, sir; we wish to reletter present clause (d) as clause (f).

I might say that we have submitted this draft to the Securities and Exchange Commission, and I am advised by the Assistant General Counsel of the Commission that the Commission has no objection to our introducing this further change into our proposal; that they take with respect to it the same position that they have taken with respect to the proposal as a whole; that they do not propose but that they do not oppose

it. It reads as follows:


1. Insert the following new clauses (d) and (e) :

“(d) any offering, made to one or more banking institutions, member banks, or trust companies specified in section 3 (a) (2), of an evidence of indebtedness or participation therein which does not have (i) interest coupons, (ii) interchangeability of units of one denomination for units of other denominations, (iii) a covenant by the obligor with a trustee under an indenture, mortgage, deed of trust, or similar instrument or agreement to pay the indebtedness or the interest thereon, (iv) provision for payment to bearer otherwise than through endorsement of a negotiable instrument, (v) provision for registration of ownership, or (vi). the right to obtain any such characteristic, or (e) any bona fide pledge of a security as collateral, or any realization on such collateral, including the acquisi. tion of such security by the lender pursuant to the terms of such pledge,”

2. Reletter present cause “(d)” as “(f).”

The intent of this draft proposal is to recite all of the characteristics of a security as distinguished from a bank loan and say that if the instrument which the bank acquires as evidence of a bank loan, has none of these characteristics of a security, which make it marketable, then, it should be exempt from the registration requirements of the Securities Act, and be treated as a bank loan. As a bank loan it would be subject to those regulations which apply to bank loans, to the provisions of the Banking Act, of State laws, wherever applicable and to whatever there may be in the way of supervision by the Comptroller of the Currency, the Federal Deposit Insurance Corporation or the Federal Reserve Board. I do not think it can reasonably be contended that under this

pro posal which we are making, with this further amendment written into it, that anything which could by any stretch of the imagination be called a bank loan would here be made subject to registration.

I think that fact deserves emphasis. Again I say that if the banks are acquiring issues of securities which they may resell, we think it

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