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7, 1941, the Commission states in connection with this proposal, that is as to the proposal which we have made in 2 (14):

* * it may be urged that registration is not necessary because the institutions involved are in a position to negotiate directly with issuers and to obtain from them directly information substantially equivalent to that made available through registration.

They go on:

It may further be argued that the information contained in registration statements is not of vital importance to the public whose savings are invested by these institutions since the public has no direct control over the investments made by them.

Now, the concept that if an issuer negotiates directly with a buyer— that is the point which underlies the Louisville case, I think. There we find the issuer company selling directly to the buyer.

Mr. REECE. As I recall, in this case the underwriters wanted to sell the stock at 22, whereas under the decision of the Commission the issuer was permitted to sell it at 23.50.

I am not sure that my recollection is correct about that.

Mr. STEWART. I have here a prospectus on the issue. Actually what happened was that the Louisville Gas & Electric Co., which is a subsidiary of Standard Gas & Electric Co., desired to sell 150,000 shares of common stock. Under the provisions of rule U-50, adopted by the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935, it would have been necessary to sell that stock through open competitive bidding, had the Commission not decided to avail itself of the rubber clause in its rule and grant an exemption.

Louisville Gas & Electric Co. or the Standard Gas & Electric which controls it, I do not know which, made application to the Securities and Exchange Commission for permission to sell this stock directly to the public and asked that the provisions of the competitive-bidding rule be set aside. I believe that the Commission had hearings on the subject and decided to grant the exemption permitting the sale. The offering is being done at the present time.

Louisville Gas & Electric Co. has, I believe, qualified itself as a dealer under the laws of Kentucky and has its own salesmen out selling the stock.

The stock, I believe, is being offered at a price of 2312 per share, and I am told that most of the local dealers in Louisville, Ky., have not entered into the distribution of the stock because they feel that the price at which it is being offered is too high a price; the price of 231⁄2 per share.

Mr. Hilliard, who was here the other day, and who is in business in Louisville, Ky., is the source of my information. He tells me that the dealers there felt $22 a share was the highest price at which they could conscientiously recommend the stock.

Mr. REECE. That recalled to my mind, when I read it, an experience which took place in earlier days when the Cities Service put on a house-to-house selling campaign of its own stock, of course, approaching the customers of the company, with the result that the stock was sold at about 60 or 65 with very sad results to the purchasers. In many communities a feeling was present in the community after this occurred that a great many of the people purchased this stock

because of their relationship to the company as patrons or clients, and in selling the stock that approach was utilized to the greatest advantage, and also a feeling was created that the purchasers could more or less get an inside track in the distribution of this stock, and I wonder if the same or similar abuse would be possible in this instance. I have in mind, however, that the Securities Act places prohibitions upon methods of selling which did not obtain at that time.

Mr. STEWART. Well, Mr. Reece, I would answer your question in this way: I think that undoubtedly the Securities and Exchange Commission acting under the Public Utility Holding Company Act of 1935 would probably prevent abuses of the kind which arose in the Cities Service distribution. At the same time, I think it only fair to say that new abuses may be created.

Here is a situation, gentlemen, in which the price is fixed by the selling company. It is not a price which represents the judgment of people whose business it is to work in the markets and arrive at a fair price. The issuing company decided that the price would be 231⁄2 and the Commission in effect says, "O. K. That will be the price. We do not think it is too unreasonable."

They have something in this prospectus-I was trying to find it— that I might actually read as to their view of the price. They do say this: "We are not obligated to find affirmatively that the price is fair; we do find, however, that the price is not outside a reasonable range.

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Again I call your attention to the fact that while this prospectus contains on its front page a statement that the securities have not been approved or disapproved by the Securities and Exchange Commission, it also contains in its body a finding by the Commission under the Public Utility Holding Company Act that the price is not unreasonable. That clearly seems to indicate some conflict.

But, the evil here, I think, is that it is a wrong thing to have the issuer company control a price, or fix a price, and say that it is the price at which a security shall be sold. That is what they are doing here, apparently with the concurrence of the Commission, against the judgment and best advice of the dealers in the local community. Mr. REECE. One of the views in the article which I read in regard to this was written up from the viewpoint that this special consideration was given this company by the Commission because of the high standing which it enjoyed that enabled it to be set apart from the general rules of the Commission. Such news articles are published in the area where the sale is expected to be taking place. I am wondering to what extent that news article might be used as an inducement to purchase the stock.

Mr. STEWART. I could not say, Mr. Reece, what would be the right answer to that question. I think, however, that the practice is a bad one. There is no doubt that the Louisville Gas & Electric Co. is a sound company. There is no doubt that it enjoys a high standing and that its securities are held in esteem by the people in the local community; but that, Mr. Reece, is true of almost every one of the operating companies in the larger cities throughout the whole of the United States. I think the Detroit Edison Co. in Detroit is highly regarded by the people of Detroit; the Cleveland Electric Illuminating of Cleveland also is highly regarded.

Mr. REECE. The Cities Service was very highly regarded in these communities where they put on their sales campaigns, so much so, that when I refused to purchase the stock myself, I was made to feel that I was being unpatriotic and it would probably be used to militate against me among this great group of the great Cities Service family in that area.

Mr. STEWART. I think there is no doubt that the element of local patriotism is strongly appealed to in the distribution of these securities and in practice is being invoked by the Louisville Gas & Electric Co. today, to the best of its ability, to bring about the distribution of stock at a higher price than that which the local dealers think is a fair price.

Mr. BOREN. Mr. Chairman-had you finished, Mr. Reece?
Mr. REECE. Yes.

The CHAIRMAN. Mr. Boren.

Mr. BOREN. If I understand the problem aright, the local dealers voluntarily turned down a possible $150,000 in commissions in order to keep their operations within the limit that they felt fair with reference to their clientele. If they had accepted the offer of the revised organization and handled the securities and sold them at 23.50, which I believe, was the price mentioned, they could have done so and gone ahead and sold them as the company is doing, and made, as dealers, something like $100,000, or $125,000, or $150,000 in commissions; but they refused to do that because, as dealers, they thought the price was out of line,

Mr. STEWART. I am sure, Mr. Boren, that is the correct answer. That is completely in accordance with my understanding of the situation.

Mr. BOREN. I think it is a fine tribute to the dealers in that particular case and locality.

There was a suggestion made by some one of the correspondents who have been providing us with these articles and information concerning this transaction that the Securities and Exchange Commission should have additional power with reference to the price that could be charged to the public. In this case, as I understand it, the Securities and Exchange Commission found that the price was not an unreasonable spread. I think that is the language that they used. What would be the attitude of the dealers on giving the Securities and Exchange Commission any additional power where the price element is concerned?

Mr. STEWART. Well, that arises, I assume, Mr. Boren, under the Public Utility Holding Company Act of 1935.

I would say that the powers of the Commission at the present time under sections 6 and 7 of the Public Utility Holding Company Act are already more than sufficiently broad in respect of that matter.

Now, it does not enable them to fix a price, true; but if you read the opinion which was issued by the Commission in the Consumers Power case-I think it was published in a release issued on December 28, 1939-I am not sure whether it was 1939 or 1940, the years go so quickly-but certainly two of the Commissioners said that it was plainly their duty not to permit a sale to go through if they thought that the price was not reasonable. In other words, if the price were unreasonably high, that it would be their duty to investors to see that the price was kept within a reasonable range.

Mr. BOREN. Now, what powers could they invoke to prevent the sale of securities at unreasonably high prices?

Mr. STEWART. Well, I assume that they could refuse to permit the declaration to become effective under section 7 of the act if they thought that the price was unreasonable, because-if I may turn to that section of the act here, I will read you the precise language. Section 7 of the act, in clause (d) says:

(d) If the requirements of subsections (c) and (g) are satisfied, the Commission shall permit a declaration regarding the issue or sale of a security to become effective unless the Commission finds that

(1) the security is not reasonably adapted to the security structure of the declarant and other companies in the same holding-company system;

(2) the security is not reasonably adapted to the earning power of the declarant;

(3) financing by the issue and sale of the particular security is not necessary or appropriate to the economic and efficient operation of a business in which the applicant lawfully is engaged or has an interest;

(4) the fees, commissions, or other remuneration, to whomsoever paid, directly or indirectly, in connection with the issue, sale, or distribution of the security are not reasonable.

(5) in the case of a security that is a guaranty of, or assumption of liability on, a security of another company, the circumstances are such as to constitute the making of such guaranty or the assumption of such liability an improper risk for the declarant; or

(6) the terms and conditions of the issue or sale of the security are detrimental to the public interest or the interest of investors or consumers.

Mr. BOREN. Then, in this case, the point in question would clearly indicate that either the Commission was wrong in finding that the spread was reasonable or else the dealers were mistaken in refusing to accept what they considered excessive profits from what they considered an exorbitant price based on the findings.

Mr. STEWART. I think it should be made clear, Mr. Boren, that there is no question of spread involved here as "spread" is understood ordinarily; that is, there is no question about the commission that would be paid to the dealer. The commission to the dealers at 22 would have been the same as the commission at 232. The point in dispute, the point which

Mr. BOREN. Is the price.

Mr. STEWART. The price to the public.

Mr. BOREN. That is the

Mr. STEWART (Continuing). The dealers said that the price was not a reasonable or a fair price, and the Commission said that it was not an unreasonable price. So, there is a difference of opinion there between the dealers and the Commission as to what was a fair price.

Mr. BOREN. Here we find the unusual situation of a commission set up by Congress to protect the public interest passing favorably upon matters where the dealers who have an opportunity to make a profit out of it reject the opportunity to make such profit because they feel that the Commission is in error and that the price is unreasonable to the public.

Mr. STEWART. That is absolutely true.

Mr. BOREN. So, if the dealers are right, the Commission is wrong, and is greatly in error in this case.

Mr. STEWART. The dealers have felt so strongly that they were right that they have, as you say, been willing to forego their profit; completely on their own free action, they have been willing to forego the

taking of a commission of around $100,000, in the local community. That is really big money to the dealers in the city of Louisville, Ky. It is only the local dealers who are affected by it.

Mr. BOREN. I would like to remark for the record, Mr. Chairman, that when the Commission comes back on the stand, if they do, that we have an explanation of the Commission's attitude as guardians of the public on this subject.

The CHAIRMAN. Very well.
Mr. SOUTH. Mr. Chairman.
The CHAIRMAN. Mr. South.

Mr. SOUTH. Without being at all familiar with this deal or transaction, I would like to suggest that it is barely possible that these Louisville dealers were rather disciplining or fighting back at this kind of a transaction, and I would not want to assume 100 percent that it was, as it appears on its face, and I say that in all kindness. In other words, if a trend has developed which they believe to be against their own best interest and even against the best interests of the public they then would be justified in using such weapons as they found available to combat that trend, and I simply want to suggest that, that element could have entered into this transaction, and I make no attempt to say that it did or did not.

Mr. STEWART. I wholly agree with you, Mr. South, that some element of that kind might be in the situation; but nonetheless, there is only one utility company in Louisville, Ky. The dealers in Louisville, Ky., have only one company to deal with so far as local distribution is concerned. They are not much interested in what happens in the local distributions of the Detroit Edison Co.'s stock, the Pacific Gas & Electric stock at San Francisco. Their problem is right there on their own doorstep, and it seems to me that what they were really concerned with was this definite individual problem right there in Louisville.

Referring to what Mr. Boren said a moment ago, since we are discussing this subject here, I hope you will permit me, Mr. Chairman, to say that to those of us in this business it has been a most amazing thing that the Securities and Exchange Commission, operating under the Public Utility Holding Co. Act of 1935 has adopted a rule, rule U-50, which in practice certainly operates most effectively for the benefit of issuers generally; but does not good, and we think a great deal of harm to the investing public, because it is a device by which the highest possible price is abstracted from the buyer for the benefit of the issuing corporation, under rule U-50, for public-utility distributors.

That is the way it works.

I would like to say, Mr. Chairman

The CHAIRMAN. It will be necessary for the committee to adjourn shortly, but you may proceed until the second bell rings.

Mr. STEWART. All right, sir. I was referring a moment ago, and I think it important to do so again, to the actual quotation from the Commission's report of August 7 at page 18 of its report, which I read, and in which it is said:

In opposition to the proposal (contained in 2 (14)) it may be urged that registration is not necessary because the institutions involved are in a position to negotiate directly with issuers and to obtain from them directly information substantially equivalent to that made available through registration. It may

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