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Mr. ECKER. I do not think so. If, as distinguished from ordinary market fluctuations, the fundamental value of the security were threatened, I think we would endeavor to sell it the same as under similar circumstances we would sell any other security in discharging our responsibility in taking care of the funds that are entrusted to us.

The CHAIRMAN. Perhaps I misunderstood your first answer. I understood you to say that you never sold.

Mr. ECKER. Generally speaking, we do not sell and as far as the private placements we have made, I do not recall any private placement we have sold.

The CHAIRMAN. You hold the securities until maturity and then you cash them; is that the procedure?

Mr. ECKER. Generally speaking; yes, sir. We are long-term investors. We buy purely for investment. It does happen that we sell general market securities from time to time, but it is rare.

Mr. WADSWORTH. Mr. Chairman.
The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. You have made some purchases on the open market?

Mr. ECKER. In the open market?
Mr. WadsWORTH. Yes.

Mr. ECKER. Oh, yes. You mean on the open market of new issues sold publicly or those traded in over the counter, or which?

Mr. WADSWORTH. Either or both.

Mr. ECKER. Yes. Of course, as a matter of fact, the over-thecounter market is much more limited today than it formerly was; but we endeavor to purchase all of the good securities that are offered to us up to our requirements, naturally.

Mr. REECE. Mr. Chairman-
The CHAIRMAN. Mr. Reece.

Mr. REECE. Would adopting a provision requiring registration of all securities prevent private purchases?

Mr. ECKER. I do not think it would. It might reduce them; but I think we are compromising with principle when we restrict a proper exemption in the act. We are saying that no longer in many cases can an individual who wants to borrow money—the individual being a corporation for example—come to a willing lender and negotiate a trade without the necessity of registration.

Mr. REECE. Would it substantially increase the cost of purchases!

Mr. ECKER. It would to the extent of the registration costs. Those. of course, vary considerably, depending upon the company.

The CHAIRMAN. You may proceed.

Mr. ECKER. There was one other portion of the testimony the other day that I would just like to refer to a bit.

Mr. Stewart apparently, from reading the record, as I was not here, but apparently, took quite some time and some pains in setting forth the price at which issuers had sold their securities privately and then setting forth against that the current market of securities which were deemed to be of comparable value, and the inference drawn from this comparison seemed to be that the issuers had sold their bonds two to four points below what they ought to have gotten for them.

Now, I appreciate the compliment which Mr. Stewart has paid to the insurance companies' ability to purchase securities attractively; but that just is not so.

The two or three points that did not seem to me to have been made clear were these: In the first place, in most of these instances the private placement purchaser is in direct competition with the investment banker. This is an alternative method of sale, and the issuer certainly is not going to sell securities to us at any substantial discount below what he can get from other sources. In the second place, the market at which one can sell an issue of $5,000,000, shall we say, or $30,000,000, or some such figure, is not the same as the market in which 5 or 10 bonds are traded. In other words, no investment banker that I have ever seen would expect to offer a $30,000,000 issue at the same price as the current market which is being traded in for 5 or 10 bonds.

Now, there might be some rare exceptions, but generally speaking, that is so.

The bonds are offered to the public at a lower price. You can see why that would be true. The price which one can obtain for any commodity is fixed by the amount of that commodity that is for sale. You have got-well, there is no need going into that. That is perfectly understood, I am sure.

Another factor that was not too clear in the illustrations, so far as I could see from reading the transcript, was whether or not due allowance was made for the cost to the issuer. That is, the investment-banker spread which he must have for public distribution, and the cost of registration, and so forth.

Now, what the issuer is interested in is the net price that he receives. Whether he receives it from the investment banker or from the ultimate consumer, that is the figure in which he is interested. That figure was not disclosed. The statement showed the net price that the insurance company had paid; but there was no disclosure of the price that the investment banker would have given the issuer.

Generally speaking, what we attempt to do is to arrive at a price which is higher than the net price that the issuer would receive if sold publicly, and still it is lower than the price at which we, the ultimate consumers, would have to purchase the bonds if they were sold publicly.

Now, in conclusion, gentlemen, I would like to make this suggestion: That we do not believe that this is a matter which requires legislation at all. We believe that the Securities Act as it now stands is proper in that regard.

This is a matter which the investment bankers can and should work out themselves. I think in part they have been unrealistic in considering conditions. The large insurance companies are large investors, but on numerous public issues, for example, taking our own case in point, it has not been possible for us to buy of the new issues as many securities as we held of the old bonds which were being refunded thereby. At least not at the issue price, not withstanding the fact that in some cases we bought from one-hundred-and-eightyodd dealers in lots of five and ten thousand. It seems to me that there is a solution to this whole difficulty that they are facing when they recognize and endeavor to supply those needs. The insurance companies have cash for investment, and naturally under those circumstances, when an issuer comes in and says that he would like to do a private placement, why, we are not going to say, "Why, we can't talk to you about that. Go down and see the investment bankers." We have money to lend. But, this matter can be worked out within the structure of the act just as it stands today.

Mr. PADDOCK. Mr. Chairman.
The CHAIRMAN. Mr. Paddock.

Mr. PADDOCK. Mr. Ecker, we have had, during the hearings, quite a good deal of testimony supporting the idea that the provisions of law regarding new offers are unnecessarily strict. You represent probably the largest investor in America today. Would you care to comment on that, giving your opinion on any of the current provisions of the Securities Act, and whether you have any suggestions for changes from the investors point of view ?

Mr. ECKER. Well, I have not prepared myself.
Mr. PADDOCK. I appreciate that.
Mr. ECKER. For that question at this time.

Mr. PADDOCK. But, when we have an expert witness, we like to hear him.

Mr. ECKER. There is a tremendous amount of detailed information required in registration and it may be that that could be reduced somewhat. It is a very technical question, though, and I would not like to give an answer without giving very careful thought and study to it. I prefer not to.

Mr. PADDOCK. Do you care to comment on the restrictions on methods of offering, methods of selling?

Mr. ECKER. Well, in what connection?

Mr. PADDOCK. All of the processes by which information must be given to every investor.

Mr. ECKER. Of course, the whole purpose of the Securities Act is that full disclosure to the buyer shall be made in advance of his purchase. Of course, one of the difficulties of this whole operation is that we are attempting to do by law things which to a certain extent must be done by morals. I would rather deal with an investment banker in whom I had confidence than rely on all of the prospectuses in the world.

Mr. PADDOCK. Do you get a good many different prospectuses on new issues?

Mr. ECKER. Oh, yes. No; not different ones on the same issue. We get prospectuses on all new issues publicly offered to us. Fortunately I do not have to read them all myself.

Thank you, Mr. Chairman. Mr. YOUNGDAHL. Mr. Chairman. The CHAIRMAN. Mr. Youngdahl. Mr. YOUNGDAHL. Inasmuch as you are interested in many thousands of policyholders, and the matter I refer to is of interest to many hundreds of small investors and small dealers—would you like to comment on the suggestion that the exemption from registration should be raised from $100,000 to $500,000 or even higher ?

The present law exempts issues of $100,000! The suggestion has been made that we increase that exemption.

Mr. ECKER. Yes; I think that might well be increased somewhat. I think offhand-again I have not given a study to that—but I think that might well be increased. Registration is pretty expensive in the case of small issues.

Mr. WADSWORTH. In that connection, according to my best recollection the amendment to the Interstate Commerce Act which brought under the jurisdiction of the Interstate Commerce Commission the Motor Vehicle Transportation System gave the Interstate Commerce Commission certain regulatory powers over their capitalization, as they have over railroads.

Mr. ECKER. In reorganization of railroads, you are speaking of, Mr. Wadsworth?

Mr. WADSWORTH. Oh, no.
Mr. ECKER. In the issuance of securities?

Mr. WADSWORTH. Yes; that bill contains a provision to the effect that motor-vehicle corporations having not more than $500,000 of capital, as I recollect, shall not be subject to their regulation.

Mr. ECKER. I am not familiar with that.

Mr. WADSWORTH. I think that is a fact. So, Mr. Youngdahl's question would have some light thrown upon it by examining that particular law where we placed the exemption at $500,000.

Mr. YOUNGDAHL. That is, in connection with this case.
Mr. WADSWORTH. Yes.
The CHAIRMAN. Thank you, Mr. Ecker.
Mr. ECKER. Thank you.

Mr. Chairman, may I present the following memorandum from Mr. Rodgers, assistant general counsel of the Metropolitan Life Insurance Co., instead of reading it?

The CHAIRMAN. Yes.
(The memorandum referred to is as follows :)

MEMORANDUM COMMENTING OF THE SECURITIES INDUSTRY PROPOSAL AFFECTING

PRIVATE PLACEMENTS

Representatives of the securities industry in their report dated July 30, 1941, which has been filed with the House Committee on Interstate and Foreign Commerce, propose that the Securities Act of 1933 be amended to require, subject to certain exceptions, registration of securities sold to institutional investors such as insurance companies (see p. xII and pp. 31 and 33 of such report). It is submitted that the adoption of the industry's proposal by Congress would conflict with the underlying principle of the Securities Act, would constitute an unjustified interference with normal business transactions, and would not be in the public interest.

THE ADOPTION OF THE INDUSTRY'S PROPOSAL WOULD CONFLICT WITH THE UNDERLYING

PRINCIPLE OF THE SECURITIES ACT

The Securities Act was designed to protect uninformed investors from fraud in the public distribution of securities. In the report of the House Committee on Interstate and Foreign Commerce recommending the passage of the bill, its necessity was ascribed to a complete abandonment by some underwriters and dealers in securities of standards of fair, honest, and prudent dealing. It was pointed out that the proposed bill did not affect transactions beyond the need for public protection in order to prevent the recourrence of demonstrated abuses and that consequently private financing was exempted. The report of the Senate Committee on Banking and Currency recommending the passage of the bill conclusively shows that the purpose of the bill was to prevent exploitation of the uninformed public and that alleged fraudulent practices in the distribution of securities were deemed to necessitate its enactment. The first release of the Federal Trade Commission, which was initially entrusted with the administration of the act, similarly defines the basic policy of the act. A supporting study prepared by the Department of Commerce and submitted to the hearing of the Com

smittee on Interstate and Foreign Commerce considering the bill set forth a history of securities legislation in the United States showing that regulatory securities acts in this country have uniformly exempted private transactions, including purchases for investment by banks, investment companies, and insurance colupanies, on the ground that their regulation was unnecessary to effect the policy behind the acts and would be undesirable as an impediment to honest business. The necessity for protecting uninformed investors from dishonest and fraudulent exploitation permeates the legislative history of the Securities Act and is certainly its underlying principle.

Advocates of the proposed amendment do not allege that institutional purchasers of securities are uninformed or have been or are likely to be the victims of misrepresentation, dishonesty, or fraud in purchasing securities from issuers. The direct nature of such transactions precludes the possibility that the institutional purchasers involved will be the victims of fraudulent practices on the part of underwriters or dealers or that the evils so frequently accompanying highpressure selling of securities to the public need as to such transactions be guarded against by legislation. Clearly, therefore, the principle underlying the Securities Act would not be served by the adoption of the industry's proposal.

THE PUBLIC INTEREST IS NOT THE BASIS FOR THE INDUSTRY'S PROPOSAL

In the words of the representatives of the securities industry the basis for their plea for this illogical extension of the restrictions of the Securities Act is that the practice of direct placements “has done great injury to underwriters and dealers and has deprived the smaller investors and the smaller institutions throughout the country of the opportunity of acquiring any part of many attractive new corporate investments.” They seek an extension of the restrictions of the Securities Act in order to improve the competitive position of underwriters, dealers, and certain classes of investors at the expense of industry needing financing and of institutional investors ready and willing to advance the funds industry requires. It is submitted that such a use of the Securities Act for the avowed purpose of restraining competition would not only be a departure from the underlying principle of that act but would constitute an unjustified interference with normal business transactions by adding an impediment to the simple, economical, age-old operation of direct bargaining between borrower and lender.

IT IS IN THE PUBLIC INTEREST THAT THE DIRECT FINANCING OF INDUSTRY BY THE

PRIVATE PURCHASE OF SECURITIES SHOULD REMAIN UNRESTRICTED BY LEGISLATION PROPOSED BY AND IN THE INTEREST OF ANY SPECIAL GROUP

Private financing of the type under discussion is simply a means by which institutions make loans directly to industry without the intervention of underwriters. It is a method of financing which is alternative to public financing and at times to be preferred, particularly since it permits of firm commitments and speedy closings. That the opportunity for direct financing should not be impeded by unnecessary restrictions is particularly important to industry at this time when quick direct financing may facilitate defense work.

Direct financing is inherently simple, natural, and economical. Underwriting commissions and registration costs are eliminated, and many other expenses normally present in public financing are either eliminated or greatly reduced. Issuers share in the economies effected, and enjoy great facility in effecting modifications and readjustments in contrast with the difficult, expensive, and time-consuming technique of attempting to secure unanimous consent of the scattered holders of securities publicly distributed. Direct financing by bringing issuer and ultimate investor in direct contact brings about more satisfactory relations between issuer and ity holder, and, by helping to keep usefully invested the savings of the people, benefits millions of policyholders and depositors, serves industry, and thus promotes the public interest.

Direct financing does not unjustifiably injure investment bankers but represents direct and legitimate competition. It is true that the investment bankers' function as distributors of securities is not required in such transactions and, therefore, since no service of this nature is performed, no compensation is warranted. They may, however, and frequently do, act as broker bringing issuer and purchaser together and for this service they are appropriately compensated.

In any case, it clear that the proposed extension of registration requirements would be at the expense of industry and of the policyholders and de

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