The Securities and Exchange Commission in its report to your committee expressed

doubts that the proposal of the securities industry would materially affect competition by the investment bankers and institutional investors. * *

*

Aside from such considerations, however, we respectfully submit that the answer to the important question as to which method of financing private enterprise better suits the national economy should not be predicated on a false definition of public offering unrelated to the avowed purpose of the Securities Act or reached on the basis of an incomplete presentation of the issues in an atmosphere confused by dispute over extraneous considerations.

We would like to point out that the proposal contained in section 2 (14) does not contribute to the avowed purpose of the Securities Act of 1933 which is to provide full and fair disclosure of the character of securities sold to the public and to prevent frauds in the sale thereof. Nor is it consistent with the main objective of the securities industry as contained in other proposals before this committee, which is to facilitate the flow of capital. The proposal in section 2 (14) is in the opposite direction.

The essence of the position of the commercial bankers on section 2 (14) and on certain other proposals on which we desire to be heard later on, is that the commercial banking business is now effectively regulated and supervised by numerous Federal and State agencies by means of a vast body of laws and regulations that have been developed through long experience, and that it is neither necessary nor desirable for the protection of bank depositors that an additional Federal agency should be given authority over investments of banks.

Banks of deposit are chartered by State and Federal Governments, operate under innumerable banking laws, rules, and regulations, and are examined with most minute investigation twice a year for the purpose of determining compliance with laws, soundness of capital structure, legality and quality of loans and investments, and character of management.

As evidence of the comprehensive and complex supervision under which commercial banks operate I present this chart which was prepared for publication under the direction of the Board of Governors of the Federal Reserve System.

From this chart, you will see that the Federal Government supervision of one kind or another is exercised over the banks, four types of supervision of the banks: By the Treasury Department; by the Federal Reserve; by the Comptroller of the Currency; and by the Federal Deposit Insurance Corporation, to some extent, and some ways by the Reconstruction Finance Corporation, and in addition to that in the case of the State banks, through the State supervisory authorities of the 48 States.

I wish, Mr. Chairman, if I may, to have this chart inserted in the record.

The CHAIRMAN. Very well.

(The chart referred to appears on following page.)

investments, in our opinion would be an unwise public policy. banks through legislation requiring unnecessary registration of its icing of sound credit needs of business and industry by commercial the changing needs. To slow up or to divert or to hamper the servmachinery that is direct, quickly available, and flexible in meeting loans to industry and business and industry by means of credit Banking has expanded its service in the credit field through term

tion in the defense effort far in advance of defense credit demands. mercial banks were mobilized and placed in a readiness to serve posigovernment in the history of banking. The credit facilities of comthe highest degree of service to the economy of this Nation and to agree that the commercial banking system today is functioning with commercial banking system at the present time. I believe we will Mr. WIGGINS. Now, may I say a word about the functioning of the

We present witnesses well qualified to discuss in detail the effect of the proposal contained in section 2 (14). Upon the conclusion of their testimony, I would like to submit a brief summary of the position of the American Bankers Association with respect to that proposal.

Mr. Chairman, I would like to present to the committee Mr. Edward E. Brown, president of the First National Bank of Chicago, and president of the Advisory Council of the Federal Reserve System. Mr. REECE. Mr. Chairman.

The CHAIRMAN. Mr. Reece would like to ask a question.

Mr. REECE. There are some 14,000 members of the association, I believe?

Mr. WIGGINS. Yes, sir.

Mr. REECE. How many of the 14,000 banks would you estimate participate in the purchase of private issues?

Mr. WIGGINS. That would be, of course, most difficult to estimate, because whereas many of these issues are large, a great many of them are participated in by smaller banks.

In my own very small banking institution, we have taken a small piece of certain issues that originate in our part of the country and large institutions have taken the larger volume of it.

So, it would be relatively-it would be almost a pure guess to say to what extent banks generally have shared in that sort of participation.

Mr. REECE. Have you observed any tendency of the larger and more seasoned issues which are handled privately being taken by a small group of very large investors and thereby reducing the opportunity of the smaller investors of participating in them?

Mr. WIGGINS. Well, naturally, there have been some cases in which that has happened; yes.

Mr. REECE. As I recall, one other witness raised that as a consideration in favor of registration; so that when a more seasoned security was offered, that it would be available to the smaller institutions and the smaller banks and the smaller trusts.

Mr. WIGGINS. Of course, Mr. Reece, if I may interrupt there, I would like to say that as a country banker, and small banker, it is my profound conviction that when you speak of seasoned securities, meaning for the most part the longer term issues, that no small bank has any business taking any part of that type of security in its portfolio at all. I do not think the small bank has any business in putting its money into that sort of thing.

Mr. REECE. I think I agree with you as to that; but that would not apply to the same degree to the small trusts, and certain other types of small investors.

In discussing this problem it would seem that you have discussed it from the standpoint of the banks.

It has not been my thought that in the advancement of this proposal that it was advanced for the purpose of throwing additional supervision on the banks, although it may have that effect indirectly; but that the proposal arises out of the question of regulating the issues of securities. I agree, I think, with you, that if there is a justification for it, it rests upon the regulation of the issuance of securities and the relationship that the exemption of certain types of issues has on the securities business in general, and I would rather

like for some of the bankers to discuss it from that angle during the course of the presentation of your testimony.

Mr. WIGGINS. Of course, Mr. Reece, our position is that this whole proposal is predicated on a false premise; that is to say, that it is predicated on the premise that protection is needed for depositors. That is so stated in section 2 (14), and whereas, no regulation of banks as such is contemplated under this provision, the proviso does regulate to the extent of requiring registration of certain types of investments that the banks may make.

Now, we maintain that the types of investments that banks may make are so thoroughly regulated at the present time and even many issues that might be registered under this proposal if it were law, even if there were many issues that are not now registered that would be registered, that does not necessarily mean that the banks could make the investments or the loans, because they must comply with present banking laws.

So that our approach is that it is not a question so much of who is going to make the money out of securities or investments, or the distribution of securities, as it is a question of whether or not in the necessity for protecting depositors, and we take the position that it is not.

Mr. REECE. But, if the exemption of this type of issues, affects the flow of securities generally, then would it be a proper subject to

deal with here?

Mr. WIGGINS. Well, if a proposal would facilitate the flow of capital, of course it would appear to be desirable; but this proposal attempts to divert what is now the free flow of capital into particular channels, in particular cases, and instead of facilitating it, it attempts to divert and to a considerable extent, as will be developed by cur further witnesses, slow up.

I think most of these points will be quite well covered by these gentlemen who will follow me, if I may anticipate a little bit. The CHAIRMAN. All right, Mr. Wiggins; we thank you.

Mr. WIGGINS. Thank you.

The CHAIRMAN. Mr. Brown.

STATEMENT OF EDWARD E. BROWN, PRESIDENT OF THE FIRST NATIONAL BANK OF CHICAGO, AND PRESIDENT OF THE ADVISORY COUNCIL OF THE FEDERAL RESERVE SYSTEM

Mr. BROWN. Mr. Chairman and gentlemen of the committee: My name is Edward E. Brown. I am president of the First National Bank of Chicago. I also happen to be president of the Advisory Council of the Federal Reserve System, a statutory body of 12 members, representing the 12 Federal Reserve banks, and appointed by the 12 Federal Reserve banks.

I am appearing here at the request of the American Bankers Association as a witness on the proposed new amendment, section 2, subsection (14), which I will call 2 (14).

The bank of which I am president, made some term loans, that is, loans maturing in over a year, and bought a great many securities by direct negotiation for our own investment account before the Securities Act was passed.

Since the passage of the act we have bought a few million dollars of what the public would generally regard as corporate securities, by direct negotiation, for our own account, and have continued to make term loans.

I think that the committee should realize that in the testimony of Mr. Stewart and Mr. Bollard, and in all of the charts and tables presented to your committee by the Investment Bankers Association showing the extent of private placements, term loans, as the bankers call them, are included with what the average layman would regard as securities, under the title of securities on the charts.

In our own case, every security, without exception, listed in the compilation filed by Mr. Stewart as having been sold to us in private placement and included in his charts as private sales of securities, was a term loan carried on our loan ledgers and in such form that it could not possibly be sold to the public.

Looking over Mr. Stewart's list in case after case of other so-called securities listed as being sold to banks and insurance companies in cases with which I happen to be familiar, I know them to be term loans in a form that could not possibly be sold to the public.

After the passage of the Securities Act we were one of the early banks to develop the term-loan business, and since its passage we have made over $350,000,000 of such loans of which $200,000,000 or more have been paid and we have now outstanding on our books and on our loan ledgers about $140,000,000 of such loans.

Incidentally, of that $140,000,000 now outstanding, only about $20,000,000 have maturities of over 5 years.

I mention these figures to show that I have some knowledge of the business.

Incidentally, we have sold no unregistered securities or term loans issued since the passage of the act, to the public or through any broker or stock exchange.

We have sold portions of a few term loans after their issuance to other banks at their request, but the total amount of such sales was very small; certainly less than $1,000,000 in perhaps a dozen isolated transactions over a period of 7 years. I have never heard of other banks selling any term loans or unregistered securities to the public, and if there have been any such sales, they must have been few and far between.

My objections to the proposed subsection 2 (14) are: First, it does not further and has nothing to do with the purpose of the act or with the remedying the evils the act is designed to correct.

Second, it introduces, by indirection in its definition, that a sale of securities to a bank, an insurance company, or an investment_company, is affected with a public interest and is a public sale; the theory that the depositors of banks, policyholders of insurance companies, or investors in investment-company securities, require and should be given the protection of the Securities and Exchange Commission by requiring the registration of securities they buy or to time loans they make. Nonpublic sale to other classes of purchasers are to continue to be exempt from registration.

I submit there is no justification for thus singling out these three groups of purchasers, that in the case of banks, especially their depositors, are adequately protected by Federal and State laws and