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The Corporation feels that a clause wholly exempting from the operations of the section direct placements with insured banks would adequately meet its objections. This would leave all noninsured banks subject to the requirements of the proposed section 2 (14) on the theory of there being necessity for protecting their depositors owing to the fact that depositors in these banks are not protected by Federal supervision or deposit insurance. Accordingly, the Corporation recommends the addition of the following clause at the end of paragraph 2 (14) as proposed. This will operate wholly to exempt from the section all placements with insured banks, whether by way of loan or issuance of securities, but would leave noninsured banks subject to the requirement of registration :

“The term public offering as used in this paragraph shall not be deemed to include securities of an issuer acquired only by one or more insured banks (as such term is defined in section 12B of the Federal Reserve Act, as amended), following negotiations directly conducted by the issuer with one or more of such insured banks."

The foregoing addition is clear and definite. Not only is the term “insured bank” precisely defined, but the Corporation maintains a published and publicly distributed list of insured banks available to any interested person at any time.

The Corporation wishes to express to the committee its appreciation for the opportunity afforded it of expressing its views upon this measure and will be glad to furnish such supplemental information as the committee may desire. Very truly yours,

LEO T. CROWLEY, Chairman.


Washington, November 12, 1941. Hon. CLARENCE F. LEA, Chairman, Committee on Interstate and Foreign Commerce, House of Representatives,

Washington, D. C. DEAR MR. LEA : This refers to your letter of November 5, 1941, enclosing a committee print containing certain proposals for amendments to the Securities Act of 1933. and the Securities Exchange Act of 1934 upon which hearings are now being held by your committee. You called attention to a new subdivision (14) which it is proposed would be added to section 2 of the Securities Act of 1933 and invited such report, if any, on this section as the Board thinks appropriate.

There is enclosed a copy of a joint statement which has been prepared by the three Federal bank supervisory agencies unanimously opposing the provisions of the proposed new subdivision (14) of section 2 of the Securities Act of 1933 insofar as it relates to banks subject to their supervision.

In preparing this joint statement it was felt appropriate for the three bank supervisory agencies to confine their discussion to the effect of the proposal on banks subject to their supervision, that is, national banks, State member banks, and insured nonmember banks. However, in addition to its bank supervisory functions, the Board has certain responsibilities in the field of credit and believes that it is appropriate for it to state that it is opposed to the new subdivision (14) regardless of the type of institutions to which it would apply, since it would serve no useful purpose and would place additional restrictions upon the extension of credit needed to finance commerce and industry. The Board believes that the reasons set out in the attached statement as to why the proposal is undesirable as to insured banks are substantially applicable in the case of other institutional investors which acquire securities or loans through direct negotiations with issuers.

Therefore, the Board recommends that the proposed new subdivision (14) be omitted entirely.

At an appropriate time the Board may have comments which it will wish to submit to your committee with respect to other proposals for amendments to section 17 (c) of the Securities Act of 1933, sections 7, 8, and 14 of the Securities Exchange Act of 1934, and possibly with respect to other proposals for amendments which are now before your committee. Very truly yours,

MARRINER S. ECCLES, Chairman. 74947—42-pt. 2



Washington, November 13, 1941.
Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D. C. MY DEAR MR. LEA: Reference is made to your letter of November 5, regarding the proposal to add to the Securities Act of 1933 a new section [2 (14) ) requiring the registration with the Securities Exchange Commission of some issues of securities which are now exempted from that requirement because they are not sold to the public but are purchased by banks and other institutional investors through private direct negotiations.

This proposed section would have a direct bearing upon the financing of business enterprises by banks and therefore is the subject of our concern.

In view of the similar interests of this office, as the supervisor of national banks, with that of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, as supervisors of State member banks of the Federal Reserve System and State nonmember insured banks, respectively, we have joined with those agencies in preparing a joint report, a copy of which is attached hereto, expressing our opposition to the proposal and the reasons therefor. Very truly yours,




The new section 2 (14) proposed to be added to the Securities Act of 1933 would require a borrowing or issuing corporation to file with the Securities and Exchange Commission registration statements covering certain loans obtained from, or issues of securities sold directly to, banks and other institutional investors. This amendment has been proposed by representatives of the securities business. It is neither recommended nor opposed by the Securities and Exchange Commission.

Insofar as the proposed amendment relates to banks, its avowed purpose is to protect depositors and presumably the banks themselves. It appears to be the hope of the representatives of the securities business that this amendment will impose sufficient restraints upon industry in financing directly with banks and other institutional investors to cause industry to finance to a greater extent through securities dealers as middlemen. If this result is achieved, it will cause unwarranted delay and expense in the financing of industry without any corresponding benefit to the public.

Therefore, the three Federal bank supervisory agencies, the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation unanimously oppose this proposal to the extent that it relates to banks subject to their supervision.

The proposed amendment would require registration with the Securities and Exchange Commission of a considerable portion of the securities which heretofore have not been required to be registered because they were not offered to the public but were purchased by banks and other institutional investors through direct negotiation with the issuers. Moreover, this requirement would apply also to certain types of loans because of the definition of "securities" contained in the Securities Act of 1933.

The purpose of the Securities Act of 1933 was to protect investors, with a minimum of interference to business, by requiring disclosure of information concerning original issues of securities, which the average individual investor purchasing securities on the market could not otherwise obtain. The proposal to require registration of securities which are not being publicly distributed or sold on the market departs from this principle and would unnecessarily interfere with business. Furthermore, such a proposal is wholly inconsistent with the avowed purpose of the representatives of the securities business in presenting their recommendations to this committee, which was

to make it possible to transact business more efficiently without impairing the protection afforded to investors by the requirement of fair and adequate disclosure of information as to the character of securities offered or sold to the public


to facilitate the resumption of pri





* *

vate investment and the flow of idle money into industry through the simplification of procedures and by the removal of these restrictive provisions, unnecessary for the protection of investors, which have impeded the exchanges and the private capital market from functioning efficiently in the public interests.”

The proposed amendment would move in the opposite direction and create a restrictive provision unnecessary for the protection of investors."

Insofar as loans and securities of a type which would be affected by the amendment are concerned, our experience in the field of bank supervision satisfies us that federally supervised and insured banks obtain more complete information through direct negotiations with the issuer than they obtain in connection with purchases of publicly offered registered securities. Registration, therefore, would not increase the protection they now have in connection with these transactions. The banks are professional investors. They are in a position to demand and obtain all facts and disclosures necessary to enable them to appraise the value and soundness of any investment.

The character of the supervision to which these banks are subject provides further safeguards in the public interest against the improper conduct of their business. Lending and investing practices of federally supervised and insured banks are now circumscribed by the express provisions of Federal and State · banking laws and regulations. In addition, standards of sound practice which influence and guide such banks in making loans and security investments have been developed over many years through the process of examination and supervision by Federal bank supervisory agencies. These standards are fortified by the promulgation by the Comptroller of the Currency, pursuant to the express provision of an act of Congress, of a regulation carefully delineating the type of securities in which investments may be made by national banks and State member banks of the Federal Reserve System. The standards of quality laid down in this regulation are applied in examinations of all other insured banks by the Federal Deposit Insurance Corporation. Thus the whole investment policy of banks which are subject to Federal supervision is affected in a manner which is believed adequate to make unnecessary the type of protection which the proposed amendment would allegedly afford.

Of course, all of these factors which protect federally supervised banks also protect their depositors against losses resulting from the purchase of unsound investments by the banks. In addition, the depositors are protected by the cushion provided by the capital funds of the banks and by the insurance of their deposits by the Federal Deposit Insurance Corporation. As a consequence thereof and in view of all the improvements in the banking system effected by the Banking Acts of 1933 and 1935 few depositors of federally supervised and insured banks have suffered loss. The losses which have been sustained have amounted to less than 1 percent of the deposits in the insured banks which were closed or taken over for the protection of depositors. Therefore, the possibility of depositors suffering a loss as a result of unsound loans or investments made by the banks is remote and would not be further diminished by requiring registration of securities acquired by the banks through direct negotiations.

It has been suggested that the proposed amendment also will give additional protection to individual investors who may subsequently purchase from banks securities acquired by them directly from issuing companies. The redistribution of unregistered securit:es by banks can be only negligible since the Banking Act of 1933 prohibits banks of deposit from engaging in the business of underwriting or distributing securities.

We believe that business should be free to negotiate with banks for the form of credit best suited to its needs and that federally supervised banks should be limited in such transactions only by restrictions in banking laws and regulations and by the policies of the regularly constituted bank supervisory authorities. The proposed amendment, if adopted, would place unwarranted restrictions on banks' investments and loans and would merely retard and burden the financing of worthy enterprises and industries, a result which would be particularly unfortunate in this period of grave national emergency when every effort is being made to speed up the industrial machine.

The CHAIRMAN. Thank you, Mr. Brown.
Mr. Brown. Thank you.

The CHAIRMAN. The committee will stand adjourned until Tuesday morning at 10 o'clock.

(Thereupon, at 3 p. m., the committee adjourned to meet Tuesday November 18, 1941, at 10 a. m.)





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. Wiggins, you may proceed. STATEMENT OF A. L. M. WIGGINS, CHAIRMAN OF THE COMMITTEE


Mr. WIGGINS. Mr. Chairman, my name is A. L. M. Wiggins. I am president of the Bank of Hartsville, Hartsville, S. C. I appear this morning as chairman of the committee on Federal legislation, American Bankers Association.

This association, composed of 14,000 banks of deposit representing 96 percent of the banking resources of this country, desires to present to this committee through the testimony of three witnesses the viewpoint of commercial banking on the proposals now under consideration by this committee.

Our presentation today is limited to the proposal of the Investment Bankers Association and other groups in the securities industry known as section 2 (14). According to the report of the Securities and Exchange Commission to this committee this proposal does not have the approval of the Commission nor its disapproval. It comes as a proposal of the securities industry.

Stripped or verbiage and reduced to its real objective, the purpose of this proposal is to divert into the hands of investment dealers and underwriters part of the present flow of funds now secured by business and industry from banks and other institutions.

It is evidently the hope of the proponents of this proposal that if registration is required for these credits and advances, business and industry will then meet a larger part of their credit needs by issuing securities through underwriters as public offerings rather than by dealing directly with banks and other institutions.


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