do so. The only purpose of their proposed section 2 (14) is to attempt to force sales to institutional investors to pass through their hands.

In his testimony on Friday, November 7, Mr. Stewart, in speaking on behalf of the securities industry, quite frankly stated that the investment bankers hope that if registration should be compelled for the larger issues before they are placed privately with institutional investors, then the investment bankers may have an opportunity to take over a part of the business. We fully concur in the doubts expressed by the Securities and Exchange Commission on page 19 of its report to this committee dated August 7, 1941, that the proposal of the securities industry would materially affect competition between investment bankers and institutional investors. In our opinion, the only result of the proposed section 2 (14) would be to impose additional burdens, including expense, in connection with particular sales.

The investment bankers do not, and doubtless cannot, expect any substantial decrease in the admitted 85 percent of their sales of bond issues going to institutional investors. The real question is whether issuers are by statute to be burdened with added costs in making sales to institutions in order that the investment bankers may have an opportunity to inject themselves into the private flow of capital funds from institutions to industry.

The securities industry in its printed report, at page 33, attempts to justify its proposal by quotations from documents bearing upon the legislative background of the Securities Act of 1933. Mr. Stewart, in his testimony, also referred at some length to the legislative history of the present act. We are sure that this committee will not overlook the statement in the Securities and Exchange Commission report, at page 18, which states:

There is no indication in the legislative history of the Securities Act that the Congress gave consideration to the question whether registration should be required where the public's savings are invested in corporate securities by institutions of this character.

Not only do we believe that no justification for the proposed section 2 (14) is to be found in any of the legislative history of the Securities Act, but as I have already stated, it appears to us that the securities industry's proposal is in conflict with the whole purpose of the act. In his statement before this committee last Friday, Mr. Stewart went so far as to say that those who would oppose the proposal being made by the securities industry are in effect suggesting that they do not believe in the basic principles of the Securities Act. We must take emphatic exception to any such charge. We fully support and endorse the principles of the Securities Act as a disclosure statute for the protection of investors. But we do not believe that the attempted regulatory and punitive provisions of the securities industry's proposed section 2 (14) are in any way consistent with either the avowed purposes or the basic principles underlying the act. Not only is the proposal contrary to the principles of the Federal statute, but it runs counter to the practically uniform provisions of State securities laws which exempt private sales to banks and insurance companies from their requirements.

On behalf of issuers of securities, we submit that this proposal is a device and a subterfuge—a shocking attempt to misuse the high pur

poses of the Securities Act. We doubt that it will even accomplish the purpose for which its originators intended it. We hope that we have laid bare the speciousness of the arguments advanced in support of this proposal and we urge its rejection.

While we believe that punitive legislation is not the appropriate remedy for undue growth of private placements, we feel that we should go on and present for the consideration of this committee a possible alternative to the proposals emanating from the investment bankers, against the possibility that this committee may conclude that the bill which it reports out ought to contain some provision touching upon this problem. In such eventuality, we feel that the alternative proposal which we might suggest is more consistent with the basic principles of the Securities Act of 1933, and goes more directly to the heart of the private placement problem, than the suggestion which has been made by the securities industry.

Direct sales by issuing companies to institutional investors and other similar informed purchasers would probably never have attained the volume of popularity to which the statistics submitted by the securities industry bear witness had it not been for the active promotion of this type of financing by the investment bankers themselves. Without the basic statistical data at hand to permit an exhaustive analysis on our part, we are unable to furnish precise percentages, but from such information as we do have available we believe that close to 50 percent of the direct sales from issuing companies to institutional investors in recent years have been arranged by investment bankers themselves. Many of these instances are to be found reported in the Securities and Exchange Commission's proceedings under the Public Utility Holding Company Act of 1935 and many other instances have been reported in the financial papers, but many more of these instances are not made a matter of public record and the payment of so-called finder's fees to investment bankers in connection with private placements is kept a confidential matter. The spectacle is now presented of the securities industry appalled by fears that it has helped to create a Frankenstein. And so, to deal with this creature, the bankers now would seek to punish the issuing companies those who have furnished the raw materials which went into the creation of the supposed monster. We urge this committee to face frankly the issue presented by the securities industry's proposal for section 2 (14). The issue is very simple-whether the bankers should by statute be assured of a 12 to 22 percent commission on sales of high-grade bond issues, or whether they must continue to get along with a quarter or one-half of 1 percent finder's fee on the sale of these issues.

When an issuer employs a professional securities dealer to obtain a purchaser for the issuer's bonds or other securities, there is more of an element of a public offering involved than in the case where an issuing company goes directly to a substantial source of funds to provide immediate financing by private negotiation. When the professional is employed, even though under strict orders that the professional must not solicit more than a limited number of purchasers for the company's securities, lest the transaction attain a character which under the present statute would be deemed by the Securities and Exchange Commission to constitute a public offering, there is in

fact a new element injected. It may then be argued that the transaction is not merely a private negotiation between the issuer and the institution or foundation which may be prepared to furnish funds. To use the colloquial expression, the securities are being "hocked about."

If this committee concludes legislation should be written into the Securities Act of 1933 to deal with the private placement problem we urge that it direct its attention to the one element which does have possible semblance to a public offering. We suggest that, in place of the long and complicated provisions which have been proposed by the securities industry as section 2 (14) of the act, a simple statutory definition be incorporated in the act defining the term "public offering" to include any sale of a security to any person by an issuer or an associate which involves the payment, directly or indirectly, of any commission or remuneration to a dealer.

In this connection, it would be well to recall that the statute in section 2 (12) already defines the term "dealer" as meaning any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.

This suggestion, which we would submit as an alternative to the securities industry's proposed section 2 (14), already has a counterpart in the present provisions of section 3 (a) (9) of the Securities Act (committee print, p. 14). The securities industry and the Commission have proposed transferring this provision to section 4 of the act, where it would appear as section 4 (a) (9) (committee print, p. 20), but its substance would be substantially unchanged. The provision, as so transferred, would exempt from the registration requirements of the Securities Act, and I quote the text of the proposed new section:

Any offer or sale, or any act incident to any offer or sale, of a security by an issuer exclusively in exchange with its existing security holders only, where no commission or other remuneration is paid or given directly or indirectly for solciting such exchange.

Thus, the proposal which we have made with regard to sales of securities to institutional or other investors would be placed on a parity with the provisions of the act governing exchanges by issuers with their existing security holders, where the exemption is dependent upon the absence of any payment, directly or indirectly, of any commission or remuneration to a professional for his services.

We do not affirmatively urge our alternative proposal as desirable legislation, for we believe that the private placement problem can, at least for the present, be dealt with most appropriately by remedying the burdens of the registration procedure which have influenced many issuers, and in many cases upon the advice of investment bankers, to resort to private placement. But we do urge upon this committee, if it should conclude that legislation going beyond a simplification of the registration process is necessary in regard to the private-placement problem, then that the suggestion which we offer be adopted. It is an alternative, equally effective, far more simple, and far more consistent with the basic principles of the Securities Act of 1933 than the proposal which has been put forward by the securities industry.

Gentlemen, may I ask that those tables that I did not read be incorporated in the record?

The CHAIRMAN. They will be.

Mr. JONES. Thank you.

(The tables referred to are printed in the record as indicated above.)

Mr. YOUNGDAHL. Mr. Chairman.

The CHAIRMAN. Mr. Youngdahl.

Mr. YOUNGDAHL. How many issues have been registered under the Securities Act of 1933 by the members you represent?

Mr. JONES. My personal representation, or the National Association of Manufacturers?

Mr. YOUNGDAHL. The people whom you represent.

Mr. JONES. The National Association of Manufacturers— I have no answer to that question at hand.

Mr. YOUNGDAHL. Then, could you name a few of the issues that have been registered by the people whom you represent?

Mr. JONES. Mr. Youngdahl, in answer to that question, it is a matter of record as to what issuers have filed under the act.

Mr. YOUNGDAHL. I agree to that. If you do not know now, would it be possible to get the answer in the record at a later date?

Mr. JONES. I would prefer to refer to this pamphlet here which gives a list of the officers and directors of the committees of the National Association of Manufacturers and the corporations with which they are associated. I do not think that I would like to name them without their permission.

Mr. YOUNGDAHL. If it is a matter of record with the Commission, open to the public, why would it not be all right to include the names of these issuers here?

Mr. JONES. Well, I will attempt to submit that information for the record, if we can prepare it. I think we can probably do that. I cannot answer offhand.

Mr. YOUNGDAHL. If possible, I would like to see that information in the record.

Mr. JONES. Yes, sir.

The CHAIRMAN. Thank you, Mr. Jones.

Mr. JONES. Thank you.

STATEMENT OF F. W. ECKER, VICE PRESIDENT, METROPOLITAN LIFE INSURANCE CO., NEW YORK, N. Y.

The CHAIRMAN. Mr. Ecker, we will be glad to hear you.

Mr. ECKER. Mr. Chairman, my name is F. W. Ecker, vice president, Metropolitan Life Insurance Co.

Mr. Chairman, inasmuch as the Metropolitan Life has on numerous occasions purchased bonds directly from issuers with or without the intermediate office of the investment bankers, we appreciate this opportunity of coming down here and explaining to the committee our position.

We feel also that in the interest of the 29,000,000 policyholders in our company we should do this, that there might be questions as to our point of view which the committee might care to inquire about,

and that, if so, it might be helpful if we were here ourselves rather than relying on others to present our views.

I do not desire to be repetitious. A good deal of what has been said by the last two witnesses, although I did not know what they were going to testify to, I would endorse absolutely; but if I may take the time I would like, without reading any prepared statement, to review very briefly our views on this subject.

In the first place, it has been our opinion that the Securities Act was written with the basic idea of protecting the uninformed investor; and that his protection was brought about through the disclosure which is required in registration.

There was in the act, and is in the act today, an exemption which seems to us entirely appropriate, which provides that where an issuer is selling securities directly to an investor and consequently no public offering is involved, the securities need not be registered.

Institutional investors, of course, as has been testified to, are informed buyers. They make very exhaustive investigations of the securities which they purchase, and as you will readily recognize there are tremendous advantages in being able to sit down with the corporate officers of an issuer and to discuss their problems in contrast with attempting to get a full picture from formal registration documents.

In addition, of course, we have the advantage of being able to have our own people go to the issuer and see the operations of its plants, its organization, and talk to its personnel. All of those factors are important.

I think you may rest assured that the institutional purchasers in direct sales are qualified to and do make a thorough and complete investigation in the interest of the policyholders whom they rep

resent.

The proposal here of the Investment Bankers' Association to restrict this right of an issuer to deal directly with the purchaser seems to us to be aimed at a basic right which has been part of the law of this country ever since it was formed. Always the borrower has had the opportunity of direct negotiation with the lender.

It is unthinkable that the freedom which is permitted in making bank loans, for instance, should be altered so that an individual or a corporation representative should not have the right to negotiate directly with a banker regarding the terms of a loan.

These private placements which have been discussed are really of the same character, the only difference being that in most instances investment institutions such as the insurance companies lend for a longer term than do the commercial banks; but even that is not always so. The insurance companies do lend on short term as well. Throughout the history of security legislation in this country, I am informed, practically always it has been true that exemptions have been permitted for this type of direct negotiation.

I trust it has been made clear that this direct-sale method is really an alternative of the public distribution method and the point is that the issuer should be given freedom to use whichever method best suits its needs and requirements at the time. There are advantages in both types of security placement.

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