of totally unnecessary expense, although it would save the expense incident to a public distribution which I think is generally much greater than the Securities and Exchange expenses proper.

All of the advantages of speed, possible in these private deals, if they had to be subject to registration, and a registration statement had to be filed and approved, and the flexibility after the loan was made would certainly be lost, because if the maturity of instalments or interest rates were changed, certainly a new registration would be required. We certainly could not do as we did in the case of the Wisconsin Electric, extend the maturities for several years, without a new registration.

Now, I am conscious that the section Mr. Stewart proposed in behalf of the industry as a substitute for 2 (14), which would enable banks to make a considerable amount of term loans, is better from the bank's standpoint than section 2 (14) as originally proposed. It is still open, from the bank's point of view, to my first objection that it has got nothing at all to do with the protection of the public; that it does introduce by indirection the proposition that a bank requires regulation by the S. E. C. in that it must register some certain classes of banking transactions for the protection of the public, and introduces a new factor into the field of banking activities, banking supervision and control, which we object to for the reasons I have stated. Shutting off insurance companies and other long-term borrowers from the possibility of taking the longer maturities, because Mr. Stewart's proposed exemption applies only to banks-would absolutely cut out the speedy, flexible, and inexpensive term loans in certain cases where longer maturities are required by preventing the insurance companies taking the longer maturities and the banks taking the shorter maturities, and would work a lot of harm, in my opinion, to business.

The CHAIRMAN. Mr. Brown, how much time will you require to finish. Will you prefer to conclude now or wait and come back after lunch?

Mr. BROWN. I think I will require about another three-quarters or from a half to three-quarters of an hour, if the committee is willing to hear me, Mr. Chairman.

The CHAIRMAN. The committee will recess until 1:30.

(Thereupon, at 12:05 p. m., the committee took a recess until 1:30 p. m. of the same day.)

AFTERNOON SESSION

(The committee reassembled at 1:30 p. m., pursuant to the taking of a recess, Hon. Clarence F. Lea (chairman) presiding.) The CHAIRMAN. The committee will come to order, please. Mr. Brown, you may proceed.

STATEMENT OF EDWARD E. BROWN—Resumed

Mr. BROWN. Mr. Chairman just before the recess I had stated. that the proposed substitute offered by Mr. Stewart in place of the 2 (14) printed in the committee's memorandum and in the industries proposal, while less damaging to the banks than the original proposal, is still open to objections, that it is not pertinent and has nothing to do with the purpose of the act and that equally with the original proposal, that it would recognize the principle that the private in

vestment of their funds by banks was subject to some jurisdiction by the Securities and Exchange Commission even though private placement by others than banks was not so subject.

The effect of the proposed substitute on industry, business, and on banking would still be objectionable because it exempts only banks and would not exempt insurance companies and investment companies.

As I have explained in my testimony, a very considerable number of these term loans are made with banks taking the short maturities and insurance companies taking the longer maturities, and if the insurance companies were still prohibited from making such term loans and banks were allowed to, it would cut out a great many transactions.

There is another objection of a somewhat more technical nature that would restrict quite greatly the operations of banks under the proposed substitute even though no insurance company was involved.

It frequently happens that corporations have open mortgages with securities outstanding under them which permit the issue of a new series of bonds or notes having equal security with those already out. Banks sometimes buy such new series in their entirety in a private transaction and under the proposed amendment they would be prevented from doing that.

I might cite as an instance a large steel company, a customer of ours for almost 50 years now, which has been asked by the Government to increase its plant facilities, and if it does so, it will want to finance on a term of from 1 to 5 or 1 to 10 years. It has outstanding a bond issue secured by a mortgage deed of trust on the plant and it is quite possible in that case that such financing in the interest of the company should be made by issuing a new series of bonds in addition to those outstanding, running serially from 1 to 5 years or 1 to 6 or 7 years, and that they should be sold to a bank.

The proposed new amendment 2 (14) would not cover that situation. In the testimony given in support of 2 (14), the argument was made by Mr. Stewart that resales to the public are possible in cases of securities or term loans, issued without registration, although if an original sale to the public had been made it would have required registration.

Mr. Stewart very honestly stated in his testimony that such resales have been relatively few.

I think the present law, practice, and regulation of the Commission is such as to insure that such resales will continue to be relatively few.

If a resale is made within a year, the Commission, as I understand it, puts the burden of proof on the original purchaser to show that he bought for investment and not for resale.

It is a general practice in negotiating private sales of securities or making term loans for the issuing companies, or some one or more of the private purchasers, to require a statement from each buyer of the securities or party to the term loan that such buyer bought solely for investment and not for resale. There can be no objection to a nonpublic resale, as from one bank to another or to an insurance company, or to any private investor who could have bought direct without registration.

In the case of banks, banks are prohibited by the present banking statutes from engaging in the business of underwriting or distributing

securities, and one of the questions which a bank examiner must answer in connection with his report of every examination is, Has there been any evidence that the bank has violated this law? They check us up very closely to see that we do not.

We do not believe that, as regards banks, at least, there should be any prohibition on resale. As to banks, we have drops in depositssometimes we even have severe runs-and banks should be able to dispose of their assets in a time of need.

It is not likely that banks will find it necessary to resell publicly; certainly in normal times they never would, and probably in times of stress they would borrow from the Federal Reserve bank, but it might be that a resale to the public in some exceptional case might be necessary.

The Comptroller's regulation is applicable to both national and State member banks, and that means practically all of the large banks of the country, and requires that securities as distinguished from loans should be either parts of a publicly distributed issue or issues of a corporation which has other issues publicly distributed to such an extent and in such a manner as to make the issue unquestionably marketable.

This means in practice that adequate information about the issuing corporation would be available to anybody who might buy securities resold and it would be only in very rare cases where there would be a public sale by a bank, because of the change in its assets or deposit position.

The proponents of section 2 (14) have stressed the desirability of maintaining the investment-banking machinery.

The banks are anxious to see it maintained, but we agree with the comments of the Securities and Exchange Commission that the adoption of 2 (14) would not have much effect in giving business to the securities industry or the investment bankers. What we believe would happen is that it would prevent a great many transactions altogether, with a consequent resultant hardship and drop in business, and with very little benefit to the securities industry.

I think the causes of inability of the securities investment banking industry to meet the competition of the banks and insurance companies in the purchase of securities are much greater and more fundamental than any mere requirement of registration. Both insurance companies and banks have growing resources the investment of which are limited to high-grade loans and investments by law, and both insurance companies and banks must invest their funds, and invest. them in high-grade loans and investments only.

Private investors have the ability to buy equities, real estate, or the ability, if they prefer, to keep their money in cash.

Many private investors on account of tax policies, fear of the international situation, fear of domestic policies, whether or not those fears are justified, are utterly and entirely unwilling to buy high grade taxable bonds at prices insurance companies and banks will

pay.

The largest private placement which I know of is that of the American Telephone & Telegraph Co.'s issue, which was a fully regis

iered issue. It was sold at public auction. The insurance companies bought it away from the investment bankers. Certainly in that case, which largely affects the totals of the tables presented to the committee, registration had nothing to do with it.

Requirement of registration would not give investment bankers who are merchants in securities the ability to make commitments in advance which banks make.

In the issuance of new stocks, whether preferred or common, there is absolutely no competition with either banks or insurance companies. Yet there is very little business.

Mr. Stewart cited the case of the municipal bond market, where the investment banks do buy a large percentage of the issues as proof that where registration requirements were not in effect the industry could do business.

I think the committee and all of its members must know that municipal issues are exempt from personal surtaxes and that an individual owner of them receives benefits which insurance companies and banks do not receive in the way of tax savings.

In the case of the more desirable municipal issues, those that sell at the best prices, it is simply impossible for banks to exist on the rate of return which individuals subject to surtax are willing to take and banks simply do not buy those issues and do not bid for them, except in rare cases, for the investment of their own funds.

The banks have every sympathy with any and all possible feasible means of lessening the expense and delays entailed by the Securities and Exchange Act. If some method even could be found which, without opening the door to fraud, would exempt certain classes of securities, senior securities of large companies which had filed annual statements and annual reports over a number of years from requirements of registration, I for one should be glad to see it adopted; but the proposal contained in 2 (14) would not, in my opinion, help the industry, except in or to an immaterial extent, and it would, for the reasons I have pointed out, put a tremendous hardship on industry and commerce.

A good deal has been said here about the unfairness to the small investor, small bank, and small insurance company, who is cut out by private placements, of the opportunity of participating in new security issues. For the very same reasons that cause me to believe that the adoption of the proposed 2 (14) would not materially benefit the securities industry, it would not materially benefit the small investor, whether he was an individual, banker, or insurance company. I do not believe there would be any materially larger supply of such securities available in the investment banker's hands to supply his demands.

In answer to Mr. Youngdahl's question, I indicated that it was very common for small banks to participate in the original making of term loans of large amounts. It is done in a great many cases, and I know that in our own case we have probably 100 or more such participations.

I think the loss of the opportunity for these participations by the small banks would more than offset any possible gain which the

small bank could get in being able to buy a larger share in the big issues of securities, by the adoption of the proposed section 2 (14).

In conclusion, I would suggest that 2 (14) be left out altogether. It might be desirable to amend section 2 (1) of the act defining securities so as to expressly exclude a term loan not capable of resale, no matter by whom it was bought, whether by a bank or insurance company.

For the reasons I have stated, the substitute amendment 2 (14), I think, is practically just as objectionable as the original proposal.

We think that any theoretical danger that exists of public resale of private placements is not a practical danger and that no legislation which would prohibit such resales is desirable or necessary; but certainly if there is any prohibition against public resales of private placements, it should be a prohibition which would attach to public resales of private placements by anyone, any purchaser, who bought at a nonpublic sale, whether it be a bank, insurance company, university, or any other class of investor.

I would be glad to answer any questions, Mr. Chairman. The CHAIRMAN. I think you have covered the subject quite clearly. We thank you, Mr. Brown.

Mr. BROWN. Thank you.

The CHAIRMAN. Mr. Love.

STATEMENT OF EDWARD L. LOVE, VICE PRESIDENT OF THE CHASE. · NATIONAL BANK OF THE CITY OF NEW YORK, REPRESENTING THE AMERICAN BANKERS ASSOCIATION

Mr. Love. Mr. Chairman, my name is Edward L. Love. I am a vice president of the Chase National Bank, of the city of New York, and am here today at the request of the American Bankers Association to testify regarding the proposed section 2 (14).

The institution which I represent is opposed to section 2 (14) and squarely takes issue with the statement made here several days ago by Mr. Stewart, representing the Investment Bankers Association, to the effect that anyone who opposes section 2 (14) does not believe in the principles of the Securities Act regarding the full disclosure of information to the public investor. We are entirely in sympathy with the objectives of the Securities Act of 1933. We are also in sympathy with every effort of your committee to facilitate the flow of private capital into industry "with the least possible interference with honest business." We believe that insofar as section 2 (14) affects the commercial banking business it has nothing to do with the principles underlying the existing Securities Act, that is, truth in the sale of securities and the prevention of fraud. On the contrary, section 2 (14) seeks to expand the Securities Act by bringing in new and unrelated theories, and while we believe that the investment bankers perform a function which is essential to our national economy, we submit that they are using these theories to meet a problem which is peculiar to their own business, and in a way which may unwarrantedly burden commercial banks and their customers.

Section 2 (14) does not clarify any of the existing provisions of the Securities Act; for instance the term "public offering" is still obscure after 8 years of experience under the act. On the other hand through the use of the new phrase "offering affected with a