You will note that for the years 1940 Mr. Stewart's figure is almost twice that of the Commercial and Financial Chronicle. The sources of the figures which I have shown in column 2 for the years 1934-37 are the Securities and Exchange Commission's Selected Statistics on Securities and on Exchange Markets, table 35, page A-35; and for the years 1938-40 are the Commercial and Financial Chronicle, volume 152, page 178, of the January 11, 1941, issue. For the year 1937 we have used the Securities and Exchange Commission figure of $447,768,000. For that year, which is the only one in which our two sources overlap, the Commercial and Financial Chronicle reported a figure of $456,302,000.

I wish also to read into the record a further pertinent statement, bearing upon the validity of the enormous figure for private placements in the year 1940 which was submitted by Mr. Stewart, and bearing particularly upon the ratio of 43.59 percent which was arrived at in table D submitted by Mr. Stewart and referred to thereafter in his testimony. In the January 11, 1941 issue of the Commercial and Financial Chronicle, volume 152, page 177, the following statement was made in regard to the percentage volume of private placements, and I quote:

Private financing in 1940 was in the greatest aggregate volume of any year in the period covered by our compilation, which starts with 1937. And since 1937 was the first year that such issues commenced to assume prominent size, it seems safe to say that 1940's volume was the greatest of any year to date. The year's total of such issues, $792,636,289, was 8.8 percent above 1939. In each year covered by our compilation, the total has expanded. The past year, however, was the first in which it failed to expand at as great a rate as total corporate placements, which is evidenced by the fact that the proportion of private issues to the total dropped in 1940 to 29.1 percent from 33.2 percent in 1939; in 1938 the proportion was 31.8 percent and in 1937, 18.7 percent. increase in proportion of private placements from 1937 to 1938 occurred in face of a decrease in the total of corporate sales.

The

We regret to say that we can only reach the conclusion that Mr. Stewart's figures suffer from one of the most serious vices which may infect a statistical tabulation, namely, a complete lack of fair comparability with other statistics against which they are placed.

From an examination of the supporting data for Mr. Stewart's tables, we have noted two important factors which seem to destroy the comparability of the 1940 figures with those of previous years. These will be obvious to the members of this committee if they will glance through the supporting data contained in the Analysis of Direct Purchases which Mr. Stewart submitted in his brown volume of mimeographed data, which you gentlemen have, I believe. First, to a very small extent beginning in 1939 and to a greater extent in 1940, Mr. Stewart has included adjustments of interest rates as new issues of securities, including in the latter year an adjustment of interest on $75,000,000 of New York Telephone Co. bonds which had been included as a new issue in the 1939 figures.

Interest adjustments do not appear to have been included in the earlier years, although we know that such adjustments were then being made. We seriously question the propriety of treating as a new private placement a transaction in which an issuing company goes to an institutional investor and obtains an adjustment in the terms of the securities held by that institution.

Secondly, again commencing to a slight extent in 1939 and rising to a tremendous volume in 1940, Mr. Stewart's supporting data include short-term bank loans of 5 years and less. These bank loans would not be affected by the new section 2 (14), which has been proposed by the securities industry, and we do not believe that it was any more appropriate to add these into the figures for 1940 than it would have been proper to add them into the figures for prior years, when presumably the necessary information was not as readily available. At this point I believe that I should speak of one further factor which carries undue weight in the 1940 figures on private placements. This is true not only in Mr. Stewart's figures, but also in the figures reported by the Commercial and Financial Chronicle, to which I have referred. In the fall of 1940, the American Telephone & Telegraph Co. placed privately an issue of 30-year 234-percent debentures in the aggregate principal amount of $140,000,000. This very large issue amounted to almost 18 percent of the total amount of private financing reported by the Commercial and Financial Chronicle for the year 1940; so that, if it were eliminated, the relative amount of the issues privately placed in 1940 would have represented an even greater decline, percentage-wise, from the preceding year than the decrease set forth in the statement which I quoted a short while back from the Commercial and Financial Chronicle.

We are not contending that the practice of private placements is of inconsequential significance. Nor do we contend that there has not been a very substantial increase in this practice in recent years. But we do wish to emphasize first, that this type of financing has not been solely a product of the Securities Act of 1933; neither has it doubled and redoubled in volume in relation to total corporate financing in the past 3 or 4 years, as the tables submitted by Mr. Stewart would imply.

So much for statistics. Let us turn now to consider for a moment the reasons why issuers have resorted to private placements, not only since the enactment of the Securities Act of 1933, but long before it.

Some of the most cogent reasons why an issuing company may, on occasion, find it necessary to sell its securities privately are set forth in an opinion which was handed down by the Securities and Exchange Commission on October 31 of this year. This was In the Matter of Western New York Water Co., reported in Holding Company Act release No. 3104. The issuing company, a nonutility subsidiary of a registered public utility holding company, filed an application with the Securities and Exchange Commission for authority to issue and sell to the Northwestern Mutual Life Insurance Co. $3,000,000 principal amount of first mortgage sinking-fund bonds bearing 334-percent interest and due in 1966, and $1,400,000 principal amount of 334-percent sinking-fund notes due in 1956. The issuer requested an exemption from the competitive bidding requirements of rule U-50 promulgated by the Securities and Exchange Commission under the Public Utility Holding Company Act. The Commission granted this exemption and in doing so made the following statements as to why in this particular instance a private sale of the issuer's bonds and notes appeared to be appropriate. I quote from the Commission's opinion:

Rule U-50 became effective on May 7 of this year. The applicant commenced its negotiations with the Northwestern Mutual Life Insurance Co. early in

February. During the preceding year and one-half the applicant had on five separate occasions attempted negotiations regarding the refunding of its outstanding bonds and debentures, all of which attempts were unsuccessful. It was testified that two investment banking firms indicated that they did not believe new securities could be sold at prices satisfactory to the applicant and that an institutional purchaser with which various conversations were had "determined that the deal could not be set up to meet their investment standards."

The company is not large nor is it widely known. Furthermore, its present financial condition and past financial history are such that there is good reason to doubt whether investors would bid for these securities without making a more time-consuming and expensive investigation than would be warranted for an issue of this size. In our opinion the prices and interest rates of the proposed securities do not, under the circumstances, compare unfavorably with other issues marketed by water companies. According to the record no buyers other than Northwestern Mutual have evinced any interest in the new securities. Having carefully considered all the factors mentioned above, it is, in our opinion appropriate to grant applicant's request for exemption from competitive bidding.

The opinion of the Commission from which I have just read was unanimously adopted, except that Commissioner Purcell was absent and not participating.

You will note the reference made by the Commission to the timeconsuming and expensive investigation that would be required if the water company's securities should be put up for competitive bidding. These burdens would equally exist in the event of a public distribution undertaken through investment-banking channels by direct negotiation with underwriters.

Mr. Wadsworth has previously called the attention of the committee in the course of these hearings to the data submitted to him by the American Water Works & Electric Co. in regard to the substantial savings in costs which were effected by that company's subsidiaries in placing a large number of issues privately with institutional investors. There can be no question that the savings in cost to an issuer may be very great in a private financing transaction, entirely apart from the price at which the securities are sold or the amount of underwriting commissions or discounts involved.

In referring to the statistics submitted by Mr. Wadsworth in regard to private placements by subsidiaries of the American Water Works & Electric Co., Mr. Stewart on Wednesday of this week stated that in his opinion a number of these issues had been sold to institutional investors at less than advantageous prices than might have been obtained from investment bankers. He also said that in the case of at least one issue, the issuer had probably obtained an exceptionally high price.

We would never contend that issuers can always obtain a better price from institutional investors than they can obtain from investment bankers. Such contention would be as foolish as a claim that investment bankers can invariably pay a better net price to an issuer than can an institution. But we do say that issuers should be free and unhampered to seek the best market for their securities, whether the market be public or private. And we know that the high costs and expenses required for a public offering very often will make it more difficult for an issuer to obtain as good a net price from a public distribution through investment bankers as can be obtained from a private placement with institutional investors.

Not only is the saving in expense an important factor for an issuer in sometimes making a private placement of securities, but another important factor is the flexibility which attends the negotiations directly between the issuing company and an institutional purchaser. Much has been said on behalf of the securities industry in regard to the importance of requiring registration under the Securities Act of private placements in order to assure the purchasing institution of complete information in regard to the purchaser. We are here as representatives of issuing companies and I feel no hesitation in stating that it has been the experience of issuers that institutional purchasers of securities in private transactions make a most thorough and exhaustive investigation. In many respects their investigations are more searching than would be required for the preparation of a registration statement under the Securities Act of 1933. The important saving in time, labor, and expense for an issuer in a private placement arises, however, from the greater flexibility which attends the private negotiations. By necessity, the Securities and Exchange Commission can establish rules and forms only for general classes of companies. The Commission is unable, nor would it be appropriate for it, to make special rules for special cases. As a consequence, we believe that the institutional investor in a particular case dealing directly with the issuing company obtains more pertinent facts, and far less irrelevant facts, than must necessarily be produced for a Securities Act registration.

Despite the advantages to an issuing company in a particular instance of making a private placement of an issue of securities, we fully recognize that this practice of private placements can be carried to excess, and that in the long run an excessive amount of this type of financing may be detrimental to issuers and investors as well as to the securities industry. To the extent that the Securities Act of 1933 has contributed to an acceleration of a trend toward an excessive amount of private placements, we fully agree that a remedy is called for. But, in our considered judgment, the proposed section 2 (14) of the Securities Act is not the correct approach to the problem of private sales. The burdens accompanying a registration under the Securities Act have unquestionably been among the important reasons contributing toward the recent development of a large volume of private placements. These burdens involve the elements of time, effort, and expense which heretofore and today are required by the registration procedure. The perfectly obvious answer is to alleviate those burdens rather than to expand the field of their application.

The CHAIRMAN. At this time I think it will be desirable for the committee to recess until 1:30. So, the committee will recess until 1:30 this afternoon.

(Thereupon, at 11:55 a. m., the committee took a recess until 1:30 p. m. of the same day.)

AFTER RECESS

(The committee reassembled, pursuant to the taking of a recess, at 1:30 p.m., Hon. Clarence F. Lea (chairman) presiding.) The CHAIRMAN. The committee will come to order.

You may proceed, Mr. Jones.

STATEMENT OF FRAYSER JONES, REPRESENTING THE NATIONAL ASSOCIATION OF MANUFACTURERS-Resumed

Mr. JONES. Mr. Chairman, last week when I appeared before this committee I expressed our disappointment, from the issuers' point of view, at the inadequacy of the approach on the part of the securities industry toward the simplification of the registration procedure. I pointed out that, except for companies listed on the stock exchanges, and some others, the suggested amendments for simplifying the registration procedure would be a backward step from the new forms recently issued by the Securities and Exchange Commission.

In connection with the first matter which was on this committee's agenda we saw that the stock exchanges would like to see additional burdens imposed on companies which are not listed on their exchanges and therefore not registered under the Securities Exchange Act of 1934. Now, in connection with this second matter on the committee's agenda, the investment bankers would like to add burdens to companies which would sell their securities otherwise than through the distribution machinery of the underwriting houses. Naturally, from the standpoint of the issuing companies, we feel that these approaches to the problems presented by the practical workings of the Securities Act of 1933 are of a negative character. They are not of the constructive type which we would have hoped for from representatives of the securities industry. Last Friday, Mr. Stewart took exception to the statement that the present proposals had been evolved without direct participation of any organized representation on behalf of issuers. However, we must respectfully emphasize that this is a fact, and we feel that the proposed section 2 (14) is a particular example of the securities industry's relegating the interests of the issuer to a distinctly secondary position.

We feel that the proposal for registration of private sales cannot be supported on the basis of any real benefits to anyone. The proposal is in its essence a purely negative, in fact a punitive, suggestion. The argument has been made that institutional investors are the reservoirs of the savings of the country, and that in effect they are merely investing the savings of millions of individuals. The Securities Act is designed primarily to protect the individual investor. Representatives of the securities industry in these hearings have made a great point of the fact that over 85 percent in amount of the sales of securities in recent years have gone to expert investors, primarily institutional investors. A few days ago, when the representatives of the securities industry were arguing for modifications of the provisions of the act dealing with the method of offering and selling securities, they stressed the point that it was unnecessary that the act attempt to protect the professional buyers of securities. They emphasized the large statistical staffs, manned by trained experts, which do the buying for institutions. This is all very true and it is no less true that these staffs of professional buyers are particularly careful and exhaustive in making their analysis when their institution is buying an issue privately in direct negotiations with the issuer. This is indeed the fact because the institutional investor must be particularly careful, since it buys to keep rather than to sell. We must, therefore, raise the issue as to whether the present proposal is made