in good faith to protect the institutional buyers and their policy holders or depositors.

The registration mechanism set up in the Securities Act protects investors in two ways: First, by seeking to assure them adequate information in advance of purchase, and, secondly, by insuring that such information will be accurate, through the liabilities created by section 11 of the act. A great deal of time has been taken up in these hearings with the discussion of whether the present provisions of the Securities Act adequately insure that purchasers will receive the information filed under the act before they are irrevocably committed to make a purchase of securities. Every one has agreed that this is the sound purpose of the act, the informing of the investor before he buys. Now, we find that the Securities and Exchange Commission, as is stated on page 19 of their report, with the concurrence of the representatives of the securities industry, recommends that if the securities industry's proposal for adding section 2 (14) be adopted, provision be further made to permit not only preliminary negotiations between issuers and institutional investors but actual commitments by them prior to effective registration. What does this mean? The proposed section 4 (a) (7), appearing on pages 19-20 of the committee print, is a recognition of the fact that the institutional investor does not need the protection of the registration machinery of the Securities Act before making a direct purchase from an issuer. Under section 4 (a) (7) an exemption is provided which would allow institutional investors to become irrevocably bound to purchase even before the filing of a registration statement.

With respect to the further contention which has been advanced in support of the proposed section 2 (14), namely, that it would offer protection to policyholders and depositors, obviously that protection would be indirect, since it cannot be contemplated that an issuer would deliver prospectuses to all policyholders of an insurance company purchasing securities, nor would such policyholders have any individual rights of action under section 11 of the act. The protection they would receive would be that afforded them because of the information required to be given to the insurance company and the rights under section 11 granted to the insurance company. Regarding that information, however, it should again be noted that under the proposed section 4 (a) (7) a contract to buy a security could be made by an insurance company even before the issuer had filed a registration statement. In the normal case, the insurance company undoubtedly would be committed to purchase before the information required under the proposal was filed with the Securities and Exchange Commission. As for the additional protection which might be afforded through the liabilities created by section 11, I submit that it is unnecessary and that the additional expense and other burdens imposed upon the issuer would not be justified. The various State laws restrict insurance companies and banks to purchasing high-grade securities; such institutions have trained experts to investigate the purchases they make; the managements of such institutions stand in a

quasi-fiduciary relationship to their depositors and policyholders, and over a long period of years they have carefully administered their trust. In short, this proposed section 2 (14) would impose additional burdens upon issuers which cannot be justified by the argument that the section would afford necessary additional protection to policyholders and bank depositors.

I would like now to turn your attention briefly to the precise suggestion of the securities industry as set forth in the proposed section 2 (14) on pages 9 and 10 of the committee print. First of all let us take note of the fact that this is a most complex proposal. We learned, further, on last Friday that the proposal is to be further complicated by the addition of two more exceptions to the definition, making the new section one-half again as long as the material already contained in the committee print. As was true of the securities industry's proposals for modifying the act in connection with the provisions regulating the method of offering and selling securities, we regret that provisions are sought to be written into the law which will be so complex that only the technical expert can hope to understand and apply them.

On studying the complicated suggestions of the securities industry as embodied in the proposed section 2 (14), we find that the numerous exceptions are due to the fact that this is special legislation. We regard with deepest concern the possibility that a statute which embodies the high standards of the Securities Act of 1933 should be made the vehicle for legislating on behalf of special interests. We have found no reason for placing the $3,000,000 limitation in section 2 (14), except that presumably issues of smaller size are not worth the attention of the underwriting houses and do not warrant listing on the stock exchanges. The suggested new exception (d) which was offered at the hearing last Friday, and which is especially complicated, seems to be designed solely to ward off strenuous objection to the proposed new section 2 (14) on the part of commercial banks; but, we are unaware of any sound reason for distinguishing between a private sale of the type of security referred to in the proposed subdivision (d) made to a commercial bank, and such a sale made to any other institutional investor. This is particularly so in view of the fact that State laws relating to legal investments for insurance companies are generally much more restrictive than are the investment limitations on commercial banks.

Again, in subdivision (b) of the proposed section 2 (14) we find an exception for notes secured by an assignment of moneys due or to become due under a contract with the Government of the United States entered into for national-defense purposes. Apparently this is designed to forestall the criticism of the proposed section 2 (14) on the ground that it may hamper the flow of needed capital in defense industries. But the exception which is made is not adequate to assure that the enactment of the section will not impair the defense program. The exception is, in fact, so limited that its effect is misleading, for issuers today are constantly under the necessity of rais

ing capital for defense plant expansion although no Government contracts are pledged as security for the funds raised by sale of bonds or issuance of stock.

Let us take note also of the provision in section 2 (14) which would make that proposal inapplicable to an offering of "a single indivisible security" which is purchased for investment by a single institution. Naturally, this exception is desirable, but let us recognize that it means that institutional investors are to be supposedly protected by registration of marketable securities in those cases where several institutions together exercise their joint judgment as to the advisability of purchasing privately an issue of securities, but the more risky purchase by one institution alone of an unmarketable investment which will probably be frozen in its portfolio until maturity is not the subject of the proposal. We well understand why the securities industry would not attempt to bring under the Securities Act all investments by insurance companies, savings banks, and other institutions. But, this does again point out the fact that the proposed section 2 (14) is not designed for any real protection of investors, or even of policyholders or bank depositors.

We are sure that this committee will bear in mind the real purpose of the Securities Act of 1933, in giving consideration to the proposed section 2 (14) which has been presented by the securities industry. The act is a disclosure statute aimed to inform the individual investor before he exercises his own individual best judgment as to whether or not to buy a particular security. The proposed section 2 (14) has nothing to do with any such purpose. It is a regulatory provision-an attempt to control the channels by which capital flows to industry. We all know that there are two ways to regulate; one is the direct prohibition, the other is the indirect loading on of costs and expenses so as to accomplish a purpose by economic coercion. This provision is of the latter type. Let us not be misled about the concern of the securities industry for the policyholders of insurance companies or the depositors in banks. In fact, would these people not be astounded if they knew that this new champion had arisen to protect their interests?

On Wednesday of this week, Mr. Stewart, in his testimony, stated that in his opinion the first two real reasons why issuers place securities privately are (1) to avoid liability under section 11 of the Securities Act and (2) to avoid the making of the full disclosure which would be required by the act.

We have made a study of the issues which were privately placed in the year 1940 as reported in the Commercial and Financial Chronicle, to which I have already referred.

I have here a tabulation which summarizes our study. (The table referred to is as follows:)

TABLE III.-Analysis of 1940 private placements which would have been subject to proposed section 2 (14)

Issues of less than $3,000,000 principal amount or maturing in not in excess of 5 years..

16

59, 736,000

Balance of privately placed issues subject to provisions of sec. 2 (14).
Issues subject to sec. 2 (14) by issuers which had registered securities under the
Securities Act of 1933.

Issues subject to sec. 2 (14) by issuers which had registered under the Securities
Exchange Act of 1934

Issues subject to sec. 2 (14) by issuers which had registered under the Public
Utility Holding Company Act of 1935-

Issues subject to sec. 2 (14) by issuers which had registered under one or more of the foregoing acts..

Sources: Issues taken from Commercial and Financial Chronicle, vol. 152, pp. 177-178; checked against (1) Securities and Exchange Commission office index of registrations under Securities Act of 1933; (2) Securities Traded on Exchanges under the Securities Exchange Act, publication of the Securities and Exchange Commission, and (3) Registered Public Utility Holding Companies-Report of Public Utilities Division, Securities and Exchange Commission.

Mr. JONES. There were 134 issues in an aggregate principal amount of $792,636,000 placed by a total of 124 companies. But many of these issues would not have been subject to the registration requirements of the Securities Act under the proposed section 2 (14). There were 16 issues aggregating $59,736,000 by railroad companies, which are exempt from all of the registration requirements of the securities act. In addition, the issues which were placed privately in amounts under $3,000,000 or which had a maturity of not in excess of 5 years, and therefore would not have been within the scope of the proposed section 2 (14), aggregated 71 issues in an amount of $90 224,000. Possibly a few other issues would be eliminated by some of the other complicated exceptions to the proposed section 2 (14), but we have not attempted the analysis necessary to determine this fact. This leaves us, however, with a total of 47 issues, aggregating $642,676,000 which in the year 1940 would have been subject to registration as a result of the proposed section 2 (14). In regard to these we have undertaken to determine the extent to which the issuers of these securities had at some time registered either under the securities act of 1933 or the Securities Exchange act of 1934, or the Public Utility Holding Company Act of 1935.

We have found that issuers who had at some time registered under the securities act of 1933 accounted for 34 issues, aggregating $498,626,000 or 78 percent of the total amount of financing done privately which would have been subject to the registration requirements under the proposed section 2 (14). As to the 1934 act, we have found 31

sales, aggregating $493,376,000 or 77 percent-by issuers who had registered under the 1934 act. There were 12 issues, aggregating $137,376,000, by companies which were subject to the Public Utility Holding Company Act of 1935. Taking into account companies which had registered under one or more of the 1933, 1934, and 1935 acts, we have found 44 issues, aggregating $611,426,000, placed privately which would have been subject to the proposed registration requirements. This figure represents 94 percent of the number of issues and 97 percent of the aggregate principal amounts sold during the year 1940 which under the suggested amendment would be subject to registration. There were only 3 issues, aggregating $31,250,000, by companies not subject to at least one of the three acts.

The foregoing figures are significant in two respects. First, they demonstrate that for practically all the issuers who elected to place securities privately in 1940, their decision was not based on any evasion of the liability provisions of the Federal statutes. They had already accepted such responsibility under one or more of the acts. Secondly, and more important, the foregoing figures show that there is practically no basis for the assertion that there is a need for requiring registration of private placements in order to assure responsible public information regarding the issuing companies. For practically all of such companies such information is available in official documents filed with the Securities and Exchange Commission. Consequently, to require registration in the future for private placements by these companies will not even serve the purported purposes of the proponents of section 2 (14).

There can be no question but that sales to insurance companies and other institutional investors are going to continue. The total funds invested in stocks and bonds by the 49 legal reserve life-insurance companies in the United States have been increasing at the rate of more than $1,000,000,000 a year in each year since 1933. The exact figures, taken from the Proceedings of the Thirty-Fourth Annual Convention of the Association of Life Insurance Presidents, December 5 and 6, 1940, at page 84, shows the total bonds and stock held at December 31 by these companies, is shown in table IV which I now hand you.

(The table referred to is as follows:)

TABLE IV.-Total funds invested in stocks and bonds by the 49 legal reserve life insurance companies in the United States

Mr. JONES. With this tremendous demand for investments constantly entering the market, aside from reinvestments necessitated as securities already held in the portfolios mature or are redeemed, it is apparent that corporate securities of the best quality are going to be sought out and purchased by these institutions. Registration will not affect this situation, nor do the investment bankers intend that it should