regulations and by frequent periodic examinations which insure that banks live up to those laws and regulations.

To have Congress adopt the theory that a nonpublic sale to a bank of securities cannot be made without registration with the Securities and Exchange Commission when such a nonpublic sale can be made to another without registration, can only mean that Congress is not satisfied with the protection given banks by the established agencies charged with their supervision. Frankly, the banks do not want the Securities and Exchange Commission to get even a toe into the operation of their business, not because we dislike the Securities and Exchange Commission, but because we believe that banking should be regulated as at present by public bodies whose sole or main business is banking regulation and control.

My third objection is that the proposed amendment would seriously and injuriously affect the free flow of capital and work a great hardship on businesses, commercial, industrial, and utility, by depriving them of a more flexible, speedy, and less expensive method of financing than is possible through registered issues.

As to my first objection that section 2 (14) does not further and has nothing to do with the purpose of the act.

The act was passed in 1933, following a message of the President to Congress asking Congress to consider legislation to prevent fraud on the buying public in the sale of securities. It came as the result of the discovery in the depression following 1929, that many securities bought by the public were not what the purchasers had supposed them to be and that the prospectuses and circulars on which they were sold did not disclose material facts, and in many cases, had misrepresented material facts affecting their value. The title of the act is "To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sales thereof, and for other purposes."

It was not intended to cover loans or other extensions of credit no matter for what length of time the credit was extended, unless the element of a public offering was involved.

With regard to banks, I know of my own knowledge, because I came to Washington when the legislation was up, that certain banks, including the one with which I am connected, because of the allembracing definition of the word "security" contained in subsection (1) of section 2 of the act, discussed the matter informally both with the Comptroller's office and the Federal Reserve Board, we were told that the exemption in the draft of the legislation now contained in section 4, subsection (1), exempting "transactions by an issuer not involving any public offering" would obviously leave us free to deal with our customers as long as no public offering was involved.

Congress, early in the year 1933-the year the Securities Act was passed-passed the Banking Act of 1933.

It is unthinkable, as argued by Mr. Stewart, that Congress intended that extensions of credit by banks should be first registered with the Securities and Exchange Commission, if they had a maturity of more than 9 months, and it is equally obvious that if Congress had any such idea of requiring the registration of extension of credits of more than 9 months by banks, it would not have dealt with it in the Banking Act of 1933 passed about the same time.

Subsection (3) of section 3 referred to by Mr. Stewart in his testimony and from which he made the argument that it was the intention of Congress that any extension of bank credit of over 9 months should be subject to the regulation of the act, reads as follows:

Any note, draft, bill of exchange, or bankers' acceptance, which arise out of a current transaction or the proceeds of which have been or are to be used for current transactions and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace or any renewal thereof, the maturity of which is likewise limited.

And was not designed to cover either bank loans or extensions of credit.

Indeed, by the very terms of the exemption it would not cover a very large portion of the daily extensions of short-term credits made today and made before the passage of the act by all of the banks of the country.

It was designed to and does cover an entirely different set of transactions which do involve public offerings, namely, those of the commercial-paper brokers.

I do not know when commercial-paper brokers first came into being, but they were certainly active by the early nineties of the last century. Numerous firms were engaged in the business in 1933, and are still engaged in the business of offering short-term notes payable to bearer, or endorsed in blank, or short-term bankers' acceptances, of all sorts of business firms, individuals and corporations, many of them not very large. Their offerings are made daily to virtually every bank in the country and to others, having short-term money to invest, by means of circular letters and by personal solicitation.

A few large businesses, like the General Motors Acceptance Corporation and in times past, Swift & Co., offered their short-term notes direct by similar public offerings.

This method of distributing commercial paper by public offerings, mainly to banks, was, and is of very large proportions. It had become a part of our financial routine, it was of great convenience to borrowing businesses and afforded many banks the main means of investing a large portion of their funds.

The Federal Reserve Board was anxious to see that this means of the free flow of capital which involved public offerings and which was made by public solicitation, should not be disturbed, and they proposed subsection (3) of section 3. and Congress very properly adopted the suggestion of the Federal Reserve Board.

I think it is merely necessary to state the proposition-that Congress intended when it passed the act of 1933 to require registration of all extensions of credit by banks running more than 9 months—if I could understand Mr. Stewart's testimony, he did argue that that was the intention of Congress, even where no public offering was involved-is so ridiculous as really not to require further discussion; but the argument having been made I think it should be refuted. Mr. REECE. Mr. Chairman.

The CHAIRMAN. Mr. Reece.

Mr. REECE. I do not think it is necessary to take the time of the committee to answer ridiculous statements which have been made.

Mr. BROWN. Well, the committee listened to the statement for some hours. I have not taken as much time for refutation.

Mr. REECE. But, if the statements are palpably ridiculous, the committee ought to be able to exercise discretion and to recognize it. Mr. BROWN. I will not discuss that subject further.

My second objection to section 2 (14) is that it introduces by indirection in the definition of a public offering as meaning, in addítion to an offering to the public, any offering affected with a public interest, and then going on to define, "offering affected with a public interest" as "any offering not otherwise an offering to the public in an amount in excess of $3,000,000 if the securities are sold in whole or in part to any person which holds itself out as regularly received funds. from investors, policyholders, or depositors, and which invests its funds in substantial part in securities." The theory is that depositors in banks, policyholders of insurance companies, and investors in investment company securities, require, and should be given the protection of the Securities and Exchange Commission in the investment of their funds in private transactions involving no public sales through requiring the registration of such investment, although nonpublic sales to other classes of investors are to continue to be exempt from registration.

Insofar as 2 (14) relates to banks, the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, in their joint statement filed with the committee, of which I assume each member has received a copy, stated very positively that the registration of loans and securities of the type affected by the proposed regulation would not increase the protection that banks now have in connection with such transactions, and they give their reason for that statement.

I do not want to take up the time of the committee by elaborating the concisely stated reasons of the Federal agencies charged by Congress with bank supervision and regulation as set forth in their

statement.

But I do want to point out that today, as the report on the administrative procedure made about a year and a half ago by the Attorney General's Office on Federal Administrative Agencies stated, banks are regulated, supervised, and examined to a much greater extent and in much greater detail than any other industry or class of business.

All banks are regularly supervised and examined by one or more Federal agencies, and State banks by State authorities as well. Banks do not object to the principle of close regulation, supervision, and examination. We sometimes object to particular regulations or particular supervisors or particular findings in examinations. That is natural. But, the banks do want the regulation, supervision, and examination done by agencies whose primary duties are concerned with banks.

To date Congress has followed that policy and because it has, banks have been able to survive.

To adopt 2 (14) would depart from that policy by requiring banks, solely because they received deposits, to have registered with the Securities and Exchange Commission certain extensions of credit which do not involve any public offering.

Our objection to this, as I stated earlier, is not because we dislike the Securities and Exchange Commission as such; but because the adoption of 2 (14) either in its printed form or in the modified form

as proposed by Mr. Stewart, would mean that Congress accepted the principle that banks require the protection of a body whose primary function is not the regulations of banks, and would give that body some control, even if slight and indirect, over what we believe are purely banking transactions.

As to the third objection to 2 (14), that it would materially and injuriously affect the free flow of capital and work a great hardship on businesses, by depriving them of a more flexible, speedy, and less expensive method of financing than is possible through registered issues, I would like to give you a short outline based on my own observation of the development of term loans and of private sales of securities to banks, as I have observed them, and then give you a number of examples of term loans, from my own experience, which I think are both characteristic and illustrative, and which will show why term loans in many cases are preferable to public financing through registered issues.

Prior to the passage of the Securities Act of 1933, banks made relatively few term loans; that is, loans with a maturity of over a year, evidenced by notes payable directly to them.

We, and other banks, did consistently make some where it was apparent from the nature of the borrower's business, that he could not repay in less than a year but where he could repay serially over 2 or 3 years to give you an illustration, after the proration of oil production came into effect in 1931, banks generally made loans to oil operators and producers maturing serially up to 3 years, secured by mortgages on their oil leases, and assignment of their oil runs.

Generally, however, prior to the passage of the Securities Act in 1933, banks would take the borrower's 6-month note with a promise to renew it in whole or in part for further successive periods.

Many capital expenditures for plants; for extensions of businesses for purchase of controlling interest in businesses; were financed by such 6-month loans with renewals promised in advance.

Prior to 1933, however, most banks of considerable size had bond departments, either alone or in connection with others; these bond departments negotiated bond issues with the bank's customers, underwrote bond issues, and distributed securities to the public.

In our own case we were one of the largest originators, underwriters, and distributors of industrial issues in Chicago. Most of our origination was from our own banking customers. We had the practice, and I know other banks had the practice, where an issue was serial of withdrawing part or all of the first five maturities from sale and putting them in our own investment portfolio to hold to maturity. Occasionally, we went beyond 5 years, up to 10 years.

In case of a smaller issue maturing in 5 years, we not infrequently kept the entire issue for investment. It was private negotiation; private placement of a security issue for investment in every sense.

Our bank happened to have a large volume of savings deposits and we desired to carry a very considerable portfolio of relatively short maturities.

In 1933, two things happened: The banking act of that year was passed, which prohibited banks from underwriting and distributing securities, although that provision did not go into effect until a year or two later. More important, it provided that the Federal Reserve banks would loan its member banks on any sound asset. That meant

a long-term loan could be availed of to raise money in case of necessity or pressure on a bank, where, prior to that time, a bank could only rediscount paper having a short maturity or borrow on Government bonds.

The Security Act was also passed in 1933, and until the amendments of 1934 were adopted, virtually no large corporation would issue securities, because of the liability sections of the act, and very few investment banking houses would buy or distribute new securities. The result was a very serious situation so far as the national economy was concerned. Unless corporations had large amounts of free funds, capital improvements had to be postponed even though they were desirable. In some cases where they were absolutely necessary they were financed by short-term loans from banks, which was an unsatisfactory method of financing.

It was then that the demand for term loans came. The borrower knew that he could not repay in a year, but wanted the bank to loan him money repayable over the term of years. A few banks agreed to make such loans. We were one of them. For 2 or 3 years not more than a dozen banks in the country were willing, as a matter of policy, to make such loans. We were one of them. We expanded the business, and believed it to be good banking business; the credits were excellent, and the rates were fair.

This new method of financing attracted the attention of the administration, which was much concerned with seeing that capital flowed to industry and through the Federal Reserve Board and of its members; through the Reconstruction Finance Corporation; numerous addresses by Jesse Jones; through the Department of Commerce; by other Federal agencies; banks were urged to finance industry by making longterm loans maturing over a period of years.

In my own case, I know that Mr. Jones, then Chairman of the Reconstruction Finance Corporation, asked me to prepare an article on the technique of making such loans, and have it published in Banking, the journal of the American Bankers Association, because it was desirable to speed the flow of credit, and I did so.

Congress approved this policy of banks making long-term loans, by passing in 1935, the Banking Act, which adopted as a permanent policy the proviso, or the provision that Federal Reserve banks could lend on any sound asset, to member banks.

The Comptroller of the Currency and the Federal Reserve Board gave instructions to bank examiners not to criticize loans if they were good, because they ran over a term of years.

The term loans developed with the banks first and later the insurance companies came in the field. In a great many cases it was found that combinations could be made and term loans were made in which the bank would take the earlier maturities, up to 5 years, perhaps up to 6 or 7, and in some cases up to 10, and the insurance companies would take the later maturities. It is a very common practice to have joint bank and insurance company loans. They are loans carried by the banks in their loan portfolios. The insurance companies get them in a form that could not possibly be sold to the public.

It was a slow job educating the borrowers to the alternative of public financing represented by borrowing on term loans. As they got into it they found it possessed many advantages over the old method of