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Now, addressing myself generally to the question of the recommended amendment to the Securities Act to require registration of a great many issues which do not presently need to be registered when privately placed: I have only a few comments to make in order that the position of the Commission with respect to private placements may be clear.

Ås is stated in the Commission's report to this committee on the proposed amendments dated August 7, 1941, the Commission does not propose, but does not oppose the enactment of the proposed_section 2 (14). The proponents of the proposed amendment have, I think, made it perfectly clear that they hope the amendment will discourage the private placement of corporate securities.

The Commission, after giving a good deal of thought to the subject, has come to the conclusion that the proposed section 2 (14), if enacted, will not have any material effect upon either the volume of private financing or upon the competitive position of the investment banker. We have concluded that the necessity for registering securities proposed to be publicly offered under the Securities Act is unimportant as a motivating factor in the private placement;

Our conclusions in this respect are based on several considerations. Private financing, rather than dating from the Securities Act, as the impression was left at one time here, was employed for many years prior to the enactment of the statute, and is employed today to a large extent by railroad issuers whose securities need not be registered under the act.

The proponents of the amendment have gone to great lengths to have you infer that the cost of registration is so high that issuers employ the private transaction to avoid these costs. Our analysis of the cost question shows that the total cost of flotation of all bond issues registered under the Securities Act in the year 1939 was $2.60 for each $100 face value. Of this $2.60, $2, or more than 77 percent of the total, represents compensation to underwriters.

Of the remaining 60 cents, only 17 cents was reasonably attributable to registration, and our experience indicates that such an allowance is very liberal. We, therefore, think it is reasonable to conclude that if an issuer is interested in economy, he will effect that economy by eliminating the investment banker rather than by eliminating such subsidiary considerations as to the cost of registration. In other words, it seems clear that issuers are generally less concerned with circumventing the Securities Act than with circumventing the investment banker.

In our considered judgment, the fundamental cause of the substantial growth in private placements in recent years is that the insurance companies and banks have been faced on the one hand with constantly expanding assets which must be invested, and, on the other hand, by a constantly contracting field of available investment media. Suitable investments in railroads and real estate mortgages have been hard to find.

The private placement, in addition to effecting a saving to both issuer and institutional purchaser through the elimination of expense of public distribution, possesses certain inherent conveniences and advantages to both borrower and lender. An insurance company which is purchasing for investment is, practically speaking, disinterested in market swings and can, therefore, conclusively agree to

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purchase an issue of securities subject only to a verification of the representations made by the issuer concerning its business and affairs.

The investment banker, whose work of public distribution is inevitably bound to market receptivity, must defer the making of a firm commitment until the last possible moment. A refunding operation in the case of a private transaction can be effectuated by simple supplemental indenture because of the limited number of holders. This, of course, cannot be done in the case of an issue which has been offered to the general public.

I find I must also differ with some of the statements made to the committee yesterday by representatives of the American Bankers Association. They have asserted that section 2 (14) would subject banks to the supervision of the Commission.

Whatever may be said as to the merits or demerits of the proposal, it seems clear to me that the proposal does not involve supervision of banks by the Securities and Exchange Commission.

In the first place, it is to be noted that the exemptions contained in section 2 (14) make it very clear that the section would not apply to the general run of what are commonly known as bank loans or credits as distinguished from securities.

Secondly, the registration process operates upon the seller, not the buyer. And, in the situations which are opposed under the proposal the banks are buyers and not sellers and no registration or anything else would be required of them in that position.

Finally, it is our opinion that the registration provisions of the Securities Act are not the cause of private placements, and it is our further opinion that imposing the registration provisions on private placements will not stop them, not alone.

Now, Mr. Chairman, I have prepared some additional material which concerns itself with some of the statements made in the course of the testimony here. It is largely of a statistical nature and it is somewhat lengthy. I should be very glad to go ahead with it at this point. However, if the committee would rather that it be placed in the record as a part of my remarks, I should like to save the committee as much time as possible.

The CHAIRMAN. I believe it will be satisfactory to the committee to place it in the record. We are facing the necessity of trying to keep these hearings within reasonable limits, if possible. The future wel. fare of the legislation depends upon getting these hearings through within a reasonable time. So I think it will be well to place anything of that type in the record.

Commissioner PURCELL. As to private placements, the Commission's position with respect to the proposal made by representatives of the securities industry, that security issues proposed for private placement be registered, has been stated in its report of August 7, 1941. As the report states, the Commission does not oppose the proposal. This statement of the Commission's position and the fact that the staff of the Commission aided the representatives of the securities industry in drafting the proposed amendment does not mean that the Commission is seeking this amendment.

As you doubtless know, for many years the public press and financial magazines have commented upon the increasing volume of direct sales of securities to institutional purchasers, many alleging that the Securities Act of 1933 was primarily responsible for this development. The

Commission, of course, has been aware of the growth of private placements.

At the outset I wish to make it clear that I would not take up the time of the committee merely to show that the act has not been responsible for the private placement problem. The point is that if, as I am convinced, the act has not been so responsible, it follows that requiring private placements to be registered would not solve the problem. Accordingly, it is my purpose to explain to the committee the reasons which impel the Commission to the conclusion that requiring registration will by no means put a material brake upon private placements.

In the interest of making certain that the committee in its consideration of the private-placement question, introduced by Mr. Stewart, will have the full benefit of the Commission's study on the subject, I should like to lay before you some facts which Mr. Stewart neglected to mention, without which the subject cannot be seen in its true perspective. Í shall also discuss a few of his conclusions which, it seems to me, were arrived at without benefit of adequate foundation.

Mr. Stewart, in his original testimony, let it be inferred that private placements were not effected prior to 1934. Yesterday he admitted that his chart, designated table A, was incorrect in showing no private or direct financing in 1933. As he pointed out, part 10A of the hearings before the Temporary National Economic Committee, at page 129, lists bonds purchased privately from issuers for each of the years 1932 to 1938, inclusive, by the 26 largest legal reserve life insurance companies. The table shows that these 26 companies alone purchased $33,300,000 of bonds privately in 1932 and $16,788,000 in 1933. These amounts, while not large, were nonetheless 7.5 percent and 5.5 percent, respectively, of total corporate bond financing in those years, and they represented 24.5 and 7 percent, respectively, of total bond purchases by the 26 insurance companies in those years. Figures do not appear to be available respecting the amount of direct placements which may have been purchased by all the other life-insurance or fire-insurance companies during this period, or of relatively short-term bank loans with which Mr. McClintock's compilation of direct purchases is so liberally sprinkled.

There seems to be practically no statistical information on private placements prior to 1932. However, executives of a number of lifeinsurance companies have told representatives of the Commission on various occasions that the private placement is by no means a novelty, putting in its appearance coincident with the passage of the Securities Act. You will recall that Mr. Ecker of the Metropolitan Life Insurance Co. also made the same statement in these hearings. As you know, the Armstrong investigation in 1906 rang down the curtain on life-insurance company participation in underwriting syndicates which, prior to that time, had been a relatively common practice. The revisions in insurance company law precipitated by the investigation did not, however, preclude the life-insurance companies from purchasing security issues for investment and it appears that in a good many instances subsequent to 1907, and prior to 1933, the insurance companies did in fact purchase securities in substantial blocks directly from issuers. One executive called to mind offhand some 20 direct purchases made by his company between 1914 and 1932, totaling upward of $100,000,000.

The main issue raised by the investment bankers, however, involves the substantial growth of the private placement in the last several years. I think there can be little doubts that this situation is the result of a combination of economic factors rather than legislation. The Commission is satisfied that the Securities Act of 1933 is at the most no more than an accessory consideration, of minor importance, and consequently that requiring registration would not cure the situation.

The life-insurance companies, which represent the most important single market for senior high grade corporate securities, have been under a constantly increasing pressure to invest surplus cash in the last 8 years. Assets of the 26 largest companies alone increased from $18,000,000,000 in 1933 to $24,300,000,000 in 1938, or 35 percent:

In the face of this increasingly insistent pressure to invest these institutions have been confronted with a constantly narrowing field of investing media. The decline in investments by the 49 legal reserve life-insurance companies in mortgages and real estate from 45 percent of total admitted assets in 1927 to 25 percent in 1940 indicates the scale on which these companies have revised their investment views in light of their experiences with mortgages. Investments in railroad bonds have declined in the same period from 20 to 10 percent. The difficulties which faced the railroads are well known to this committee. Of considerable significance is the fact that in the same period the investments of these companies in public-utility bonds have doubled and their investments in industrial securities generally have more than quadrupled. The effect of this shift in interest in the direction of public-utility and industrial bonds cannot be overemphasized in the consideration of this problem, especially in view of the fact that according to one of the leading securities rating agencies, the amounts of outstanding corporate bonds in the four highest investment grades declined from $25,600,000,000 in January 1932 to $14,500,000,000 on June 1, 1939, the latter figure not including approximately $2,500,000,000 which the agency. had not rated because privately placed and lacking in public interest. You, of course, understand that the insurance companies practically confine themselves, or are confined by legislation, to securities of these grades. It may be safely assumed that a very substantial percentage of the high-grade bonds outstanding on June 1, 1939, were already in institutional portfolios and therefore not available in the public markets.

Other witnesses have had occasion to question the total figures on private placements contained in Mr. Stewart's table A which purported to show the volume of direct purchases in each of the years 1933 to 1940, inclusive, taken from Mr. McClintock's compilation of direct purchases. (Copies of the foregoing were distributed to the committee.)

I also was surprised at the figure arrived at for the year 1940, $1,556,190,000, which is almost twice as large as any figure I had seen before on the total of private financing in 1940. On checking through the list for 1940, the interesting discovery was made that the total of over one and one-half billion dollars includes approximately $822,000,000 in 1- to 10-year bank loans, practically all of them serial notes, and an additional $60,000,000 of serial notes, some of the maturities of which run from less than 10 years to only a little beyond 10 years. This accounts for 62 percent of the number of issues and 53 percent of the amount on Mr. McClintock's compilation. I doubt that even Mr. Stewart would contend that securities of this type with their relatively low yields were ever generally offered to investors or ever generally marketed through investment bankers. Mr. McClintock's tentative list for 1941 at September 3, 1941, total $1,038,000,000 of alleged private placements. I find that this total includes more than $431,000,000 of 1- to 10-year bank loans and an additional $52,000,000 of serial-note issues running from something under 10 years to slightly more than 10 years. This accounts for 57 percent of the number of issues and 47 percent of the total amount. Incidentally, the two figures I gave you concerning 1940 and to September 3, 1941, will give the committee some idea of the extent to which the commercial banks—and practically all of these so-called private placements in the amount of almost $1,250,000,000 were in fact taken by banks—have gone into industrial short-term financing in late years.

I have no desire to burden the record with statistics, but I know of no way of bringing home to you the more pertinent aspects of this question without citing a few. Since 1932 slightly less than 87 percent of all corporate financing has consisted of bonds with a face value in the 1933-40 period of $14,806,000,000. Seventy-four percent of all these bonds were issued for refunding purposes. From these figures you can readily appreciate how little senior financing has represented new capital to corporate enterprise. Bondholders, as you know, have in general no preemptive rights when a refunding operation takes place. The bonds they hold are called for redemption, and even when the refunding issue is publicly offered through investment bankers, the bondholder has no assurance that he will be able to replace his lost investment. Naturally, when the refunding issue is privately placed practically all the investors in the called issue must look elsewhere for investment media.

Insofar as individual investors are concerned, it is doubtful whether most of them have been seriously bothered by this situation in recent years. Apparently the individual investor tends to lose interest when yields approach or fall below the level of the return on United States defense bonds. As you are aware, yields on securities of institutional quality, which constitute a very high percentage of the securities privately placed, are at present well within the area of competition with these United States defense bonds.

The smaller insurance companies—those which normally invest no more than $25,000 to $40,000 in a single issue-have informed representatives of the Commission that while the private placement in which few insurance companies of this size normally participate has created a reinvestment problem for them on many occasions, they are not greatly concerned for the reason that they are able to secure a replacement in the open market or can finance a local situation not involving too large a commitment.

Mr. Stewart, in his testimony on the subject, argued that issues privately placed evidence a desire to circumvent the Securities Act, which, if continued, will seriously impair the underwriting business of this country as presently constituted. I cannot subscribe to this view from any angle.

We feel impelled to question whether the investment bankers can seriously contend that they could have made a contribution in any way

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