that under the company's plan the company would be entitled to sell shares without having it pass through the dealers. Commissioner Burke asked two questions of Mr. McDowell which I would like to read to you as well as the answers:

Commissioner BURKE. As I understand it, your principal objection to the application for exemption from competitive bidding is the belief on your part that the price is too high?

Mr. McDOWELL. Well, no, sir. Our principal objection is that the company is selling stock by untrained salesmen.

Commissioner BURKE. Then, even if the price were right you would think that that the application ought either to be denied or that a condition ought to be attached to the granting of the application which will prevent the company from selling it itself.

Mr. McDOWELL. We would; yes, sir; very definitely.

So, I think there cannot be any question but that the Louisville dealers were really interested in trying to eliminate competition on the part of the company, and price was at that time, at least a comparatively minor matter. And as I have explained, the price which the Louisville dealers thought was fair was very close to the price which the company put on the stock. There has been a lot of newspaper discussion since this case was decided by the Commission in which it appears that the Louisville dealers say they are opposed to the transaction because the price is too high. These newspaper stories did not mention at all what seemed to be the real basis of the dealers' opposition, namely, the desire to eliminate competition of the company. I am very glad to have this opportunity to set the record straight on this matter.

Your committee may also be interested to know that the dealers are apparently not of one mind in this matter. Four of the fourteen dealers in Louisville have signed selling agreements with the company as well as a number of firms cutside of Louisville, both in and out of Kentucky. We have been informed that more than half of the shares which the company has sold have been sold through dealers and less than half have been sold directly by the company. So the notion that you have the dealers lined up on one side and the company on the other simply does not hold water.

The question was asked last Wednesday whether sales by the company of its own stock are not similar to the old Cities Service direct sales in which the public lost such huge sums. I think it is pretty clear that there is no similarity between the two situations. As I understand it, the Cities Service sales were made in a manipulated market and the large losses sustained by investors were in large measure due to the fact that purchasers bought on the basis of manipulated and artificial prices. That, of course, was before the enactment of the Securities Act and the Securities Exchange Act. The anti-manipulation provisions of those Acts would make exceeding difficult, if not impossible, the employment of manipulated devices in connection with the sale of the Louisville stock.

I would like to say a word about the propriety of permitting the company to sell its own shares directly. Section 6 (c) of the Holding Company Act makes it unlawful for any registered holding company or subsidiary to sell registered holding company securities from house to house or to cause any officer or employee of a subsidiary of a registered holding company to sell securities of a registered holding

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company. Note that Congress imposed no obstacles whatsoever in the way of house to house sales or sales by employees of operating company securities. And, as you know, the Louisville Gas & Electric Co. is an operating company, not a holding company. It seems to me pretty plain that Congress intended to permit such sales of operating company securities, because it went to such great lengths to ban sales of registered holding company securities in that manner. I have no doubt one of the reasons that Congress drew this distinction was the very Cities Service situation which we have discussed; you probably all remember that Cities Service was a holding company, and the securities sold in the manipulated market were securities of a company which now would be a registered holding company.

The CHAIRMAN. If it is agreeable to you, then, we can discuss the other subjects later when we get to the proper topic.

Commissioner PURCELL. Yes, Mr. Chairman.

The CHAIRMAN. And in connection with the question of inserting matter in the record, I would like to call attention to the fact, which perhaps the witnesses are already aware of, that the committee permits the witnesses to extend or revise their remarks, within reason. The desire of the committee is that the record as finally published will reflect the best information and argument of the witnesses. So, you have great latitude in doing that.

Now, we have been here for 12 days and have completed the two first subjects, outside of the preliminary discussion.

I think it is fair to say to those who appear here that there is what I regard as a fine record. We have had constructive discussion that has been free from side issues and tangents, and the discussions have been of a constructive character, directed to the substance of what is proposed, and the method of segregating these discussions according to topics involved, should make it comparatively easy for the committee members to avail themselves of the record when the time comes finally for writing the bill which the committee may prepare after the hearings are over.

So, I compliment those who have appeared on the contributions they have made.

Now, we may have some apprehensions as to the future course of this hearing. We have had 12 days of hearings and covered these two topics. It is true that the topics covered probably require more discussion than the remaining topics. They certainly are relatively of greater importance than most of the topics remaining; but it seems very desirable, if we are going to get legislation at this Congress, that this hearing should be completed and the record be printed by the early days of the new year, and so I feel an apprehension about that situation in the future.

Under the liberal privileges of extending remarks in the record. I think it would be wise if those appearing here would avail themselves of that privilege, particularly when it relates to a less important problem that is going to be discussed, and also as it relates to detailed discussions in reference to the more important problem. By using the privilege that the committee has extended, you can greatly expedite these hearings and at the same time it would detract nothing from the record that would be available to those who are interested and to the members of the committee themselves, and I can assure you that in dealing with this record, in preparing a bill, the committee

will resort to the record. They will necessarily have to do that. The committee in executive session will pass upon each of the proposals made here before the committee. We will resort to the record for aid in deciding and informing ourselves as to what is going to be done.

I like to have a witness use his own judgment as to how he presents his case. He can always perhaps operate to best advantage when he pursues his own methods; but I realize our situation and the necessity of limiting time so far as possible.

So, without any desire to place an arbitrary limit on the presentation of evidence, I hope that all of the witnesses will cooperate, appreciating the situation, and try to cooperate with the committee with a view of bringing the hearings to a conclusion as rapidly as is consistent with a proper presentation of the case.

BEGINNING ITEM NO. 3 ON AGENDA FOR ADMENDMENTS TO SECURITIES ACT OF 1933

STATEMENT OF ARTHUR G. DAVIS, FIELD SECRETARY, INVESTMENT BANKERS ASSOCIATION OF AMERICA, CHICAGO, ILL.

The CHAIRMAN. Mr. Davis, I believe, is the next witness on topic 3 of the program.

Mr. DAVIS. Mr. Chairman, it is my privilege to start the discussion on a new topic.

The CHAIRMAN. Yes.

Mr. DAVIS. My name is Arthur G. Davis; my address is 33 South Clark Street, Chicago; I am field secretary of the Investment Bankers Association of America, and it is in that capacity, as well as to bring cut certain suggestions and information based on my personal experiences, that I appear here today.

It is my purpose to discuss the proposed amendment to the Securities Act of 1933, which is very briefly discussed on pages 73 to 75 of our report and designated as section 4 (b) of the committee print at page 22.

For better than 20 years I have been in almost daily contact with the movement of securities regulation-that is, governmental regulation of the sale and distribution of securities. For more than 4 years, beginning in the fall of 1919, I was a member of the Securities Department of Illinois, which was charged, under the supervision of the secretary of state, with the administration and enforcement of the then Illinois securities law. Then, for something more than 3 years I was managing director of the investors' protective bureau, which operated under the auspices of the Chicago Association of Commerce, and was supported, financially and otherwise, by the Association of Commerce, by the leading commercial and investment bankers of the city, the stock exchange, board of trade, and every one of the metropolitan newspapers of the city. The purpose of the bureau was to forestall and clean up the fraudulent practices then attached to the securities business in and around Chicago. And now, for 15 years, I have been field secretary of the Investment Bankers Association of America, assigned primarily to the problems of securities regulation. In this latter capacity I have tried to take a helpful part in the effort to bring

about improvements in effectiveness and workability of the several State "blue sky" laws, and toward unifying the practices under those laws as much as possible in the interest of reducing the deterrents and delays to the minimum consistent with efficient and effective administration.

At this point I want to stress the fact that beginning 22 years prior to the enactment of the Securities Act of 1933 this country, through the States, employed State securities laws, frequently referred to as "blue sky" laws, in an earnest endeavor to eradicate fraud and deceit from securities transactions. And, make no mistake about it, a very great deal had been accomplished through the State laws prior to 1933 and the enactment of the Federal act.

During that period of 22 years much experimentation was carried on by the different States, and from year to year the laws generally were progressively improved upon as experience indicated, until, barring one loophole, a reasonably workable and efficient set of laws had been brought into existence and into efficient administration.

The one loophole which was an insurmountable handicap to fraud prevention through the State laws was the field left open to crooks through the instrumentalities of interstate commerce and the use of the mails. There was no Federal law to regulate securities transactions, and the staff of post-office inspectors provided was wholly inadequate for effective prosecution of securities frauds perpetrated through the use of the mails. Happily, we now have the Securities Act of 1933, the postal-fraud laws have been clarified and strengthened, and through the Securities and Exchange Commission and otherwise there is provided a much enlarged force of investigators. It is interesting to note that in substantially all the Securities and Exchange Commission releases announcing the return of a grand-jury indictment for violation of the fraud sections of the Securities Act of 1933 there is joined a count charging violation of the mail-fraud statutes, thus indicating that these laws are relied upon-and we think aptly 30-as equally effective in securities-fraud prevention as are the fraud sections of the Securities Act of 1933 itself.

In this connection it is also interesting to note from the Sixth Annual Report of the Securities and Exchange Commission, table II, page 296, there were pending during the fiscal year ended June 30, 1940– and may I interpolate to say that I selected 1940 somewhat at random, with the particular reason or feeling, however, that that year in all probability would be a typical single year during the activities of the Securities and Exchange Commission-indictments, in the preparation of which the Commission took part, to the number of 159. Of these, according to this report, 40 were for violation of the mail-fraud statutes, 25 were for violations of the fraud sections of the Securities Act of 1933, 81 for violations of both the mail-fraud statutes and the fraud sections of the 1933 act, and 13 for violation of the Securities Exchange Act of 1934 and other offenses not connected with fraud in the sale of securities. From these figures it is observed that during that year there were pending 15 more indictments for violation of the mail-fraud statutes than for violations of the Securities Act. This significantly indicates that during that period the mail-fraud statutes which exist without respect to the Securities Act were relied upon in 82.9 percent of the securities-fraud indictments, and exclusively so in 27 percent

of the cases. The fraud sections of the Securities Act were exclusively relied upon in only 17 percent of the cases.

Along with the good effects of the Securities Act of 1933, of which a major effect has been that of forestalling and eradicating interstate frauds in securities transactions through the use of the mails, the telephone, and the telegraph, there also came certain inevitable deterrent effects.

There can be no question that the registration requirements have been deterrents to new financing, and that the deterrent effects have been especially great in the case of smaller issues. I don't want to try to discuss in detail all the reasons for this deterrent effect. You have heard some discussion of the costs of registration and there is no doubt that registration does increase costs to an appreciable extent, and that this cost has some deterrent effect, especially in the case of small issuers. It is not only the amount of the cost--the amount may not always be unreasonable in comparison with the amount of the proceeds-but there is the fact that the issuer, particularly the small issuer, doesn't know whether the securities ever will be sold. He must incur the expense of registration without being assured of receipt of the proceeds and many small issuers cannot or will not take that risk. In addition to cost, and perhaps of more importance, are the delays, the burden on the staff of the issuer, and the fear of undue liabilities.

The Securities Act of 1933 presently contains the following provision:

SEC. 3. (a) Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities:

(b) The Commission may from time to time by its rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class of securities to the securities exempted as provided in this section, if it finds that the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering; but no issue of securities shall be exempted under this subsection where the aggregate amount at which such issue is offered to the public exceeds $100,000.

It is now proposed (report at pp. 73 to 75, committee print at p. 22) that in lieu of the above-quoted provision there be enacted the following:

SEC. 4. (b) The Commission, by rules or regulations, to such extent and subject to such terms and conditions as may be prescribed therein, may exempt any of the following transactions from the provisions of section 5, if it finds, having due regard for the nature of the issuer or of the offering, or the small amount involved, and for the public interest and the protection of investors, that registration is not necessary;

(1) Any offer or sale, or any act incident to any offer or sale, of a security which is part of an offering not in excess of $300,000.

Mr. YOUNGDAHL. Mr. Chairman.

The CHAIRMAN. Mr. Youngdahl.

Mr. YOUNGDAHL. Mr. Davis, you heard the testimony of Commissioner Purcell a few moments ago in connection with the costs attributable to registration of the issues submitted by Mr. Wadsworth. Mr. DAVIS. I did.

Mr. YOUNGDAHL. As I understand his testimony, the average cost would be one-tenth of 1 percent or $1 per $1,000 attributable to registration. Is that your understanding.