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 it may not be necessary to make truthful public disclosure of relevant information concerning the securities which he has to sell, is certainly not a concept which finds any justification in the language of the present act as it stands today, nor in the record covering its passage through Congress.

If such a concept was accepted by the Congress and written into the act it would be possible for any corporation seeking to obtain access to the funds of the public to employ its own corps of salesmen and to sell its securities directly to the public without registration. Under the Public Utility Holding Company Act, of course, the Commission could reach out and take jurisdiction, but with respect to industrial issuers and other corporations, if you accept this concept, then the issuer corporation could go ahead and sell its securities directly.

The purchaser would be negotiating directly with the issuer and could, of course, obtain from him through his salesmen such information as the purchaser thought necessary. The purchaser would be left to his own devices.

The question whether in this respect the issuer may deal directly with a limited or large number of purchasers is, we think, wholly beside the point.

Then there is the further argument mentioned by the Commission that the information contained in registration statements may not be of vital importance-I quote that word from their report-to the people whose savings are invested.

At this point I would particularly ask you to remember the discussions which we had here last week on the question of section 5, where the Commission came before you and urged before you how very necessary they think it is to have a prospectus delivered, 24 hours in advance, to purchasers of securities. The illustrations on the easels which I have submitted to you have shown that the great majority of those purchasers, as measured by dollar amount of securities, the great majority of the purchasers of such securities are informed institutional buyers. But when we come to section 5, gentlemen, the statement is made that these people must have a prospectus in advance. And when we come to the question of requiring registration of direct sales to a limited number of buyers, to the large insurance companies, we hear it said that the prospectus and the registration statements are not vitally important.

Somewhere in between those two extremes must lie the truth.

If it is a valid argument that the public is not concerned about registration except where they have direct control over the manner in which their funds are used in the making of investments, then surely all sales to banks, insurance companies, corporations, and other professional investors should be exempted from the registration requirements of the act irrespective of whether such sales are made to such buyers directly by the issuer, or by or through an underwriter or dealer. All of the buyers acting for these institutions and corporations are in a position to demand adequate information concerning securities which are offered to them for purchase and, generally speaking, may be well able to protect themselves without the aid of a 1933

act, registration statement, or prospectus. But if this view is to prevail, then obviously the Securities Act should be very greatly limited in its scope and application and made to apply only when securities are sold to uninformed individual investors, as is the case with respect to the so-called blue-sky laws of many of the States.

We believe, however, that while the registration statement and prospectus may not be of vital importance to institutional investors generally, it is of considerable value to them. We believe that the "truth in securities" principle embodied in the registration requirements of the act represents one of the greatest improvements in business practices brought about in recent years. We think it a sound practice. We think it wholly proper that it be made applicable to all transactions in which issuers seek to gain access to other people's money through the sale of a new issue of securities. Those who oppose the view are in effect saying that the Securities Act should be repealed or, what amounts to the same thing, that pathways around it should be left open so that the act will not apply to more than a part of the great volume of corporate financing which takes place in transactions which are essentially public in character.

The CHAIRMAN. It will be necessary for the committee to adjourn at this time for today, and we will expect to meet at 10 o'clock in the morning. We may have only a comparatively limited session for tomorrow also. Possibly we can run longer tomorrow than today. Friday morning I think we will be able to resume with our normal schedule.

The committee will stand adjourned until 10 o'clock tomorrow morning.

(Thereupon, at 11:25 a. m., the committee adjourned to meet the following morning, Thursday, November 13, 1941, at 10 a. m.)

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

THURSDAY, NOVEMBER 13, 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 come to order. Mr. Stewart, you may proceed.

Mr. STEWART. Mr. Bollard is the witness this morning, Mr. Chair

man.

The CHAIRMAN. Very well, Mr. Bollard.

STATEMENT OF RALPH H. BOLLARD, VICE PRESIDENT OF DILLON, READ & CO., NEW YORK, N. Y.

Mr. BOLLARD. Mr. Chairman: My name is Ralph H. Bollard. I am vice president of Dillon, Read & Co. of New York.

In previous hearings before your committee on this proposed amendment various committee members have expressed interest in the effect of private placement procedure on nonparticipating investors; that is, investors who did not participate in these private placements.

In response to this interest I wish to present to you information which I believe plainly and unmistakably shows that this effect has been extremely damaging and widespread on numerous, and economically important, classes of investors throughout the United States, involving very large aggregate of investment capital.

This information is contained in an analysis of private placements for the 5 years ended December 31, 1939, completed by Dillon, Read & Co. in March 1940. At that time the year 1939 was the latest annual period for which detailed information was available. Although information is now available for later periods the analysis has not been carried beyond 1939. Mr. Stewart submitted tabulations to you last week showing that private placements increased from more than $800,000,000 in 1939 to more than $1,500,000,000 in 1940 and that the proportion of private placement issues to all bond financing from 37 percent in 1939 to approximately 48 percent in 1940. The figures for 1940, if added to our 5-year analysis, would only greatly increase and accentuate those developed by our 5-year analysis.

By way of introduction I wish to point out that our analysis was confined entirely to developing information showing certain important effects on investors of private placement procedure. My testimony will, therefore, be confined entirely to this one aspect of private placements-their effect on investors.

Secondly, I want to point out that the figures shown are undoubtedly material understatements. We included in the 5-year analysis. only those individual private placement transactions which consisted of bond or note issues of $1,000,000 or more each. We excluded any railroad, railroad equipment, municipal, and other governmental issues which may have been handled as private placements. We excluded such issues because the Securities Act does not require their registration and our analysis was concerned only in indicating how the avoidance of registration by private placement sales had damaged investors.

Furthermore, we arbitrarily excluded reported private-placement transactions regarding which it was impossible to obtain detailed information without unduly delaying the preparation of the tabulation. Doubtless an unknown number of private placements consummated in the 5-year period were not even reported.

The analysis deals with a very large number of transactions occuring over a 5-year period. The data presented and the statements which I shall make in my testimony are based on information collected from numerous sources. We have taken great care to avoid inaccuracies but in such compilations there is always the possibility of some error. I believe that any errors at most are not of sufficient magnitude to affect the total figures importantly and that many of the figures and the more important totals are material understatements. With your permission I will summarize the information developed by this analysis and then review the figures with you in some detail. The analysis shows in the 5-year period more than 22 billions private placements issued; that those 22 billions were among the choicest investments created in the 5-year period-this, I think, is very significant-that their purchase was concentrated among a comparatively few investors-78 percent went to the five largest life-insurance companies and to the great commercial banks of New York City; and that investors who had no opportunity to buy any part of the 22 billion of choice new investments had taken from them 114 billion of choice investments already owned. The 14 billion investments lost were paid off by the private placement issuers with funds derived from these private placements.

In other words, the combined effect of private-placement procedure for the 5-year period on all investors except the favored few participating was to lose 114 billion choice investments already owned, and no opportunity to buy 21⁄2 billion choice investments newly created.

Before we proceed to consideration of the detailed figures it will be helpful to review some of the factors which have caused this immense flood of private placements and also the conditions which have made private placements such a choice preserve for the relatively few favored participants.

As Mr. Stewart has shown you in the tabulations he has placed in evidence, private placements have developed as a general practice only

since the passage of the Securities Act of 1933. Further, he has outlined in detail the considerations which have led issuers to avoid registration under the existing provisions of the act exempting "transactions by an issuer not involving any public offering." He has explained how issues offered and sold only to members of a very small group came to be regarded as exempt from registration requirement; how, by means of such sale, issuers avoided the time and moneyconsuming registration procedure.

It is important, in considering the effect on investors of private placements to bear in mind that for such issues to avoid registration under the existing provisions of the Securities Act they must be offered only to a very small group. Even the number of possible purchasers with whom the transaction is discussed, whether or not resulting in purchase, must be kept very small. The maximum number to which negotiations must be limited has not been fixed either by the act or by rule of the Securities and Exchange Commission. In general practice the number has rarely exceeded 15. In most cases it is much smaller.

Now, from that it follows that in any private-placement issue for even a few million dollars, each member of the purchasing group must have large purchasing power. It also follows that security · issues thus sold must be of choice investment quality. Only choice issues can be sold in the large amounts which must be purchased by each participant.

From the necessities which I have just outlined, arises one of the most serious vices of private placements-there must be no opportunity for investors generally to purchase these securities. Indeed, the entire negotiation ordinarily is confined to the particular smalĺ group of prospective purchasers. Otherwise there is danger of transgressing the requirements for the so-called private transaction.

Thus it is that private placements have come to constitute almost. a monopoly of these choice investment issues confined to relatively a mere handful of investors. These investors are of necessity those whose financial resources are such that they can invest very large sums in a single security issue. There have been single transactionsthat is, single purchases of as much as $25,000,000 by a single purchaser.

Naturally these purchases have gravitated to the large life-insurance companies whose central offices are in and about New York City, and to the great New York City commercial banks. That is the point where the tremendous purchasing power is concentrated and if a person wants to arrange for a large issue, he must go where this purchasing power is concentrated, where there is a group of large buyers who can take the entire issue most readily and quickly. Opportunity to acquire an increasingly large portion of the choicest securities has come to be almost a monopoly of this small group. Safeguards imposed in the Securities Act as it now stands, intended to benefit the average investor, actually are working out to deprive him of the opportunity to acquire many choice investments at all. Furthermore, he has lost a huge total of choice investments already held. In 1939 alone, $691,000,000 of publicity held investments were refunded by private placements. Of this total $481,000,000 were legal investments for savings banks in one or more