1

ment, a great part of the functions of what in an economic sense is investment banking is now being conducted by Government. There is the situation.

But business in the United States cannot continue to operate as private business under private ownership unless the investment banking function, through which capital becomes available, continues to operate as private business. The cities and towns throughout this country and the several States themselves will lose a large part of the independence and autonomy they now enjoy unless they can continue in the future, as in the past, to enter freely into the capital market and borrow funds from private sources through the aid of a sound and vigorous investment banking business.

The investment-banking business is certainly not the private-capital market; but it is an essential and important part of the organization of the private-capital market. We believe that it is worth preserving. We have, as I say, a selfish interest in this. But a larger and more important public interest is involved.

At page 19 of its report the Commission expressed doubt that the proposed section 2 (14) would materially affect competition between investment bankers and institutional investors. This is in line with the opinion which the former chairman of the Commission, the Honorable Jerome N. Frank, expressed in his appearance before the House Committee on Appropriations, on December 19, 1940, when he said that "The insurance companies can put cash on the line. They can tell the issuer when he will get his money. They can offer a better price because they do not have to pay a commission. The difference in price, or saving as it is sometimes called, may not always be passed on in its entirely to the issuer. Frequently the saving is split between the issuer and the purchasing insurance companies, both of which may benefit thereby. The investment banker," continued Mr. Frank, “even if there were no Securities and Exchange Commission, cannot put cash on the line because he has not got it until he sells the issue."

Now, I do not think that we can permit that statement to go unchallenged, because it is, in our judgment, not in accordance with the facts as we know them.

However, in that way, Mr. Frank dismissed the Securities Act as an important factor in the situation, and it has been, I believe, the fixed policy of the Securities and Exchange Commission to say in this respect that there is nothing wrong with the act; that this situation did not arise because of the act. Like the Lord Chancellor in Iolanthe, they say the law is excellent and has no kind of fault or flaw. We think it has a very great flaw here. We think it can easily be shown that Mr. Frank was incorrect in his facts and as to the view expressed before the Appropriations Committee of the House.

We are in complete disagreement with the view which he expressed before the House committee. It is wholly incorrect and misleading to say, as he then did, that the investment banker "cannot put cash on the line because he has not got it until he sells the issue." That has certainly never been true of my own firm and I am sure that it has not been true of the great majority of the principal underwriters and dealers in the investment-banking business.

The difficulty under which we are struggling at the present time is, in large measure, due to the law itself. This being so, the situation can be remedied only by a change in the law. It will not, as some

say, correct itself in due course. Difficulties which are due to economic situations may perhaps adjust themselves in time. But it will never be possible for the investment bankers and, for that matter, the smaller investment institutions, to compete on a fair basis with the large insurance companies and other institutions unless the law is amended. Let me, while fully conceding the economic advantage which may rest on the insurance companies, show why it is that the Securities Act has given the insurance companies a very special advantage.

Would you wish me to break here, Mr. Chairman?

The CHAIRMAN. If it is a convenient time, we will adjourn now. Mr. STEWART. Thank you, very much. I would like at this point to submit a tabulation giving a break-down of the figures in table D. as requested by Mr. Boren.

Total dollar amount of domestic corporation and foreign1 issues in all

financing 2

1 Bonds of foreign issuers payable in United States dollars and registered under the Securities Act of 1933. 2 Refer to column (2) of table entitled "Percentage relationship between 'direct purchases' of securities, etc.", of which this is a break-down.

Total dollar amount of bond issues in all domestic corporations and foreign1 financing 2

1 Bonds of foreign issuers payable in United States dollars and registered under the Securities Act of 1933. 2 Refer to column (4) of table entitled "Percentage relationship between 'direct purchases' of securities etc.", of which this is a break-down.

The CHAIRMAN. The committee will stand adjourned until 10 o'clock next Wednesday morning.

(Thereupon, at 12:59 p. m., the committee adjourned to meet at 10 o'clock a. m., Wednesday, November 12, 1941.)

PROPOSALS FOR AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934

WEDNESDAY, NOVEMBER 12, 1941

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The committee met, pursuant to adjournment, at 10 a. m., in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will please come to order. You may proceed, Mr. Stewart.

STATEMENT OF R. McLEAN STEWART, CHAIRMAN, SECURITIES ACTS COMMITTEE, INVESTMENT BANKERS' ASSOCIATION OF AMERICA-Resumed

Mr. STEWART. Mr. Chairman, during the course of the hearings on Friday I referred to the "small-number-of-purchasers" theory which has been established in practice by the Securities and Exchange Commission under section 4 (1) of the act.

I quoted the opinion expressed by Mr. Bane in a letter written in 1934, April 1934, in which he said that the exemption was available where an offering was made to a small number of persons, perhaps not more than 25.

This interpretation of the act has, of course, operated to the advantage of the large purchasers, the reason being that if there is an issue, let us say, of $100,000,000, and the interpretation of the act is that exemption from registration is available only when an offering is made to no more than 10, 15, 20, or 25 persons, obviously, the average purchase must be a larger one than would be the case if that limitation was not applied.

So that in practice it has worked out, in the case of large issues of securities, that the only possible way in which the exemption can be obtained by the issuer is by making a sale to a small number of large purchasers who can buy as much as five, ten, fifteen, or twenty million dollars of an issue.

Now, we are certainly not contending that the act as it stands today should be interpreted so as to permit the number of persons to whom an offering or a sale may be made to be increased beyond present limits; but we do want to point out to you that the interpretation which has been placed on section 4 (1) through Mr. Bane's letter does give a very real competitive advantage to the large purchasers. That

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has contributed in large measure to the result exhibited on the chart on the easel.

In the case of the English Companies Act, the concept of what constituted a public offering differs in several respects from the one which has developed under the Securities Act of 1933.

I have here a letter written in March 1939, by Messrs. Slaughter & May, attorneys, of 18 Austin Friars, London. We had asked them for an opinion as to what constituted a public offering under the English Companies Act. They say in part:

If a company itself offers the shares to a few insurance companies, trust companies, or other investors, well known to it, there is no offer to the public. It is an offer to a circle of friends, even if the number may be 50 or 100; but if the company were to make a half dozen copies of the offer and send a boy to deliver them at the office of any insurance companies or investment companies which he may pass on his way to lunch, that would be an offering to the public. They say also:

If the issuing house employs an intermediary to procure the subscriptions, and that intermediary puts before the company a list of 10, or 20, or more of its own friends who may like to subscribe, and the company then authorizes the intermediary to make the offer to those people, that, in our opinion, would not be an offer to the public; but if the company gave the intermediary a free hand to offer to any of the intermediary's business associates, it would seem to us that those associates though not the public, the intermediary would be the public.

Whether, in operation under the 1933 act, the same theories could be applied, I do not know. Certainly I do not think it could be said that the issuers who sold the large amount of securities shown by the charts as having been sold in transactions which were said not to involve any "public offering," have sold them only to a circle of "friends." I do not think that that intimate relation could be said to have existed between the great body of corporate issuers in the United States and the insurance companies. It may have developed as a result of the practice of the past few years; but it certainly did not exist in the beginning.

The point of this reference to the English Companies Act is to show the need for a statutory definition of the term "public offering." In the absence of such a definition there is no telling what concept may in time develop in practice and come to be accepted under the Securities Act of 1933.

A question has been raised as to whether the insurance companies have actively engaged in the solicitation of direct corporate financing, or whether the initiative as, in general, been taken by corporate executives who have come to the insurance companies, without solicitation, to negotiate the direct sale of their issues.

A great volume of such financing has, no doubt, come to the large insurance companies without solicitation of any kind on their part. It is, perhaps, also true that the insurance companies have in many instances actively sought after the business. But whether the initiative has been taken by them or by corporations desiring to sell securities is not of much importance one way or another. As the matter now stands, the fact seems to be that a wholly unexpected and unintended result of certain ambiguities in the Securities Act of 1933 have placed the great insurance companies, and to some extent the large banks, in a position of unique advantage. Under the Securities Act, as it has been interpreted, these great institutions, which