Mr. SCHAPIRO. Yes, sir. The CHAIRMAN. On page 17 it indicates that 14 of the outstanding brokers of the Nation participated with you in offering that stock. There is Eastman Dillon, Union Securities & Co. There are Hornblower & Weeks, and Kidder, Peabody & Co. There is Lehman Bros. There is Merrill Lynch, Pierce, Fenner & Smith that is supposed to be the biggest of the big. And there is Francis I. du Pont, who is getting to be right big. I do not know how big, but he is operating right actively in Virginia at the present time. In other words, there you gave the public full information both about the 50 cents a share that you were going to get and what is behind what they were buying? Mr. SCHAPIRO. Yes, sir. The CHAIRMAN. And you think if it could be done on that basis, participated in by those outstanding investment houses, it could be done in other cases? Mr. SCHAPIRO. Yes, Senator Robertson, I do. The CHAIRMAN. Senator Williams has prepared some questions for me to ask you but I do not want to start on those until you have finished your statement. Mr. SCHAPIRO. I am ready for your questions, Mr. Chairman. The CHAIRMAN. Senator Williams has asked me to say you have for many years been giving a comparison of deposits, yields, profit margins, and net operating earnings of 40 or 50 commercial banks. These comparisons contain a great deal of information. Was it your thought and is it your thought that it would be helpful to investors to have more information from the banks that report, or is it your thought that you should have comparable information from a longer list of banks, or perhaps both? Mr. SCHAPIRO. Mr. Chairman, in recent years or surely since the war large banks of the country have competed with each other in disclosure of information, and as you can see from the statistics which are included in Bank Stock Quarterly a great deal of information is available. The June 1963 issue lists 45 major commercial banks and shows latest earnings, critical yields, profit margins, and other relevant data. (The statistical information faces this page.) Mr. SCHAPIRO. Our problem, that is, the problem of security analysts in the banking field, even when analyzing reports of the larger banks, lies not so much in the sufficiency or insufficiency of information as in the frequent inconsistencies and lack of uniform accounting procedures. We are struggling, Mr. Chairman, with loose terminology in the banking field, where a term means one thing in one bank and another thing in another bank, and it is therefore very difficult for analysts and consequently for investors to make valid comparisons. In response to Senator Williams' question, what is needed first is uniform and consistent reporting and standard terminology, and second, more banks reporting. The CHAIRMAN. Do you want more information from the banks on whom you now report, or do you want information from other banks, or do you want both? Mr. SCHAPIRO. We want both, the maximum information on a uniform basis from the maximum number of banks. The CHAIRMAN. Then you want information from banks that you do not now have? Mr. SCHAPIRO. That is right, Mr. Chairman. The CHAIRMAN. Would it be helpful to have information about these banks on a more directly comparable basis? For instance, in your March 1962 article you point out three ways a bank might account for income or profits resulting from the purchase of bonds at a discount. Is this kind of difference in accounting a major part of the problem? Mr. SCHAPIRO. It is a major part of the problem. Valid comparisons depend on comparable data. The article shows four different ways of accounting and reporting earnings resulting from identical transactions. In column A, with one way of accounting, a bank could show earnings of $2.93 a share, in column B $3.23 a share, in column C $3.19 a share, and in column D $3.49 a share. When these earnings are reported, come over in press releases and appear before the public, they become the basis for market valuations and comparisons. The CHAIRMAN. Now, let me ask you this question. Do you want the information on a comparable basis? Mr. SCHAPIRO. Yes. It is essential that we have the information on a comparable basis and a consistent basis. The CHAIRMAN. Now, Senator Williams' next question. I believe you have already answered this question-when you said that the difference in accounting is a major problem. Mr. SCHAPIRO. It is a major problem. The CHAIRMAN. All right. Let's go to the next question. The CHAIRMAN. Yes, sir. Senator BENNETT. You give us in your example four different systems. Do you have any recommendation to the committee or the SEC as to which of these four would be the easiest or the most desirable or the most reasonable? Someone has got to decide which system should be the uniform one. I am looking at page 11 of the March issue of Bank Stock Quarterly where your example is printed. As an analyst can you say to us A, B, C, or D would probably be the best? Mr. SCHAPIRO. I would have to choose B. Method B keeps the normal earning power of the bank in clear view. The earnings of $3,228,000 or $3.23 a share, as shown in line 5 on page 11, are free of the special tax saving, and reflect realistically the true yield basis on which the bank's investments were acquired. At stake here is the determination of the bread-and-butter income less the recurring operating expenses, and less, of course, applicable income taxes. This is primarily a problem for bank auditors and comptrollers. They are the people best qualified to spell out terminology and principles of uniform accounting. Senator BENNETT. Well, what you are saying to us then, Mr. Schapiro, is that this is a matter that is going to have to take some further study and there is no obvious answer? Mr. SCHAPIRO. There is no immediate answer. The banks of the country with the cooperation of the supervisory agencies should agree. Senator BENNETT. On a formula? Mr. SCHAPIRO. On uniformity. The investor wants reported earnings to reflect consistent and uniform accounting of the items of income, expenses, and related taxes. And, he wants to see a reconciliation of capital funds, and a reconcilation of reserves for loans and for securities. A year's earnings can then be compared with gains and losses for the period. Senator BENNETT. Thank you. The CHAIRMAN. Do you favor some special information for potential investors in bank stocks over and above what they would get from a normal corporation? Mr. SCHAPIRO. Stockholders of banks now get less than the information they receive from companies listed on the exchanges. The CHAIRMAN. Do you favor their getting as much? Senator BENNETT. The same amount? The CHAIRMAN. Or the same amount? Mr. SCHAPIRO. Mr. Chairman, in principle I do. I can see exceptions in the area of certain transactions with a bank which suggest that the disclosure required of a bank should differ from the requirements applicable to other corporations. A bank should not be required to disclose such information which would tend to deter customers from doing business with the bank, or discourage competent individuals from serving as directors of the bank. I believe that such information should remain confidential. The CHAIRMAN. So then you would like them to get more than they are now getting but not as much as the other companies give? Mr. SCHAPIRO. With respect to the point I raised, yes. The CHAIRMAN. There are certain transactions that ought to be confidential and you would not want those disclosed? You want more than you are now getting but not quite as much as other corporations give? Mr. SCHAPIRO. Yes, Mr. Chairman. The CHAIRMAN. Who should administer this new disclosure program? Mr. SCHAPIRO. Mr. Chairman, this is an area in which I am not an expert but I agree with the SEC when in its statement it recognizes the special status of banks. Banks are already closely supervised and should be spared having to cope with still another agency. I would like to see the present banking agencies monitor the bank stocks. The CHAIRMAN. Thank you. Senator Williams says there seems to be an agreement that the SEC's proposal should apply to big companies, including banks, but should not apply to little companies or little banks. Have you got any views on that point? Mr. SCHAPIRO. I do. There is a certain amount of minimum information which should be required of all banks. There are 13,000 banks insured by the FDIC. Every bank should be required at least to name the directors for whom a proxy is being solicited. I believe that every bank should provide financial information to its shareholders at least 20 days before their annual meeting, such information to contain comparative balance sheets and a consistent statement of earnings. The CHAIRMAN. Then I understand you favor it applying to all banks? Mr. SCHAPIRO. Yes; I do. The CHAIRMAN. Are there any other questions? Senator BENNETT. No. The CHAIRMAN. We thank you very much. (The article previously referred to follows:) [From Bank Stock Quarterly, March 1962 1] DON'T TELL THE STOCKHOLDERS Last year, with the 40-percent rise in quotations for shares of leading banks, many investors, institutional and individual, become shareholders of commercial banks for the first time. To some of them, it may have come as a surprise to learn that commercial banks are not required to report earnings to stockholders; that most bank managements solicit proxies for election of directors without identifying candidates for whom the proxies will be voted; and further, that their bank shares are excluded from the protective provisions of the Securities Act of 1933.2 COMPTROLLER MAY REQUIRE DISCLOSURE Of course, some banks distribute model annual reports as well as complete interim figures. But because there is no legal requirement for disclosure to stockholders, reports are generally not uniform, some are complete, others meager. This could all change soon. The Comptroller of the Currency, James J. Saxon, has indicated that his office may propose legislation to require disclosure to stockholders of national banks. Furthermore, there is a strong likelihood that the Securities and Exchange Commission may soon look into the lack of disclosure requirements for companies with unlisted shares, and these include commercial banks. Concern about the lack of disclosure to shareholders of companies with unlisted shares was expressed recently by Joseph L. Weiner, a lawyer who served last year as an advisor to the Securities and Exchange Commission. In a speech given in January before the Practicing Law Institute, Mr. Weiner asked: "Is there any excuse for the solicitation of proxies without even disclosing the names of directors for whom they are to be voted?" Noting the excellent record of the New York Stock Exchange in using its listing requirements to lift corporate standards with respect to stockholders, Mr. Weiner recommended similar listing requirements for unlisted shares. This could be accomplished, he said, through the National Association of Security Dealers whose members establish the market for unlisted securities. The association would establish certain standards and its members would be forbidden to trade the shares of corporations which do not meet these requirements. Such requirements, he said, "would also serve to indicate standards for underwriting since it would be a rare case where an offer to the public would be justified if the securities would not thereafter be eligible for trading." In reply to possible critics, Mr. Weiner had this to say: "The focal point of the requirements of adequate protection of investors is the existence of public stockholders. A company which wishes its affairs to be private should remain private; if it has 'gone public' it must accept responsibilities to that public, not only at the time of sale but in the continuing relationship between them." Similarly, Alfred Berman, attorney, former member of the legal staff of the Securities and Exchange Commission, in an article appearing in the JulyAugust 1961 edition of the Financial Analysis Journal, called attention to the need for regulation of unlisted securities. Mr. Berman reviewed the bill intro 1 Published by M. A. Schapiro & Co., Inc., underwriters, brokers, and dealers in bank stocks, 1 Chase Manhattan Plaza, New York, N.Y. 2 The Securities Act of 1933 as amended. "Sec. 3(a). Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities (2) * ** any security issued or guaranteed by any national bank, or by any banking institution organized under the laws of any State or territory or the District of Columbia, the business of which is substantially confied to banking and is supervised by the State or territorial banking commission or similar official." duced by Senator Fulbright in 1955 and again, after some changes, in 1957. The bill was intended to fulfill the recommendations of the Senate Committee on Banking and Currency which said in its 1955 study of the stock market: "BLIND" PROXIES "The committee is of the view that as a general policy, it is in the public interest that companies whose stocks are traded in over the counter be required to comply with the same statutory provisions and the same rules and regulations as companies whose stocks are listed on national securities exchanges." After hearings were held on the Fulbright bill by a Senate subcommittee, it was revised and among the changes was the exclusion of banks and trust companies from its provisions. The Fulbright bill was never enacted, but there is a growing number who believe it should be reintroduced without the exemption for banks. Any stockholder who holds shares of several banks knows that there are few, even among the largest, whose proxy material meets the SEC standards for listed corporations. For example, most bank managements, when soliciting proxies for the election of directors, send "blind" proxies to stockholders-that is, proxy material which does not identify the management candidates proposed for election. An outstanding exception to this was the proxy material distributed last year by the Franklin National Bank of Long Island, which listed the names and affiliations of all management candidates, their holdings of Franklin National stock, either directly or through family ownership, and the salaries in the case of those officers who were standing for election as directors. In addition, fees paid to directors for legal and other professional services were reported. All this information appeared in the annual report as well. BANKERS RESIST DISCLOSURE It is no accident that, since the Securities Act of 1963, commercial banks have escaped every attempt to require disclosure to shareholders. Bankers have uniformly resisted such efforts. At the same time the Fulbright bill was shelved, the Financial Institutions Act of 1957 was being debated in Congress. Two men, William McChesney Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System, and James L. Robertson, his fellow Governor, recommended that banks be required by statute to publish earnings and dividend reports. In reply to this recommendation, the American Bankers Association told the lawmakers that earnings and dividend reports should be considered a confidential matter between the supervisory authorities and the individual bank and it should be made certain that the publication of such reports is not authorized. Unfortunately, it was this view that prevailed and not that of the two members of the Federal Reserve Board. However, the Financial Institutions Act did not pass. The argument most frequently used by bankers to beat down attempts to force disclosure to stockholders is that banks are already heavily regulated by State and Federal agencies. This is true, but this regulation is for the protection of the depositor, not the stockholder. A number of banks issue informative annual and quarterly reports to stockholders. But these reports have, in most instances, evolved over a period of time with new information being added whenever management decided it was time to tell the stockholders. In the absence of uniform standards, banks differ in the way they report to shareholders, both in terminology and in accounting procedures. Sometimes the same bank will vary its method of reporting from Hearings before a subcommittee of the Committee on Banking and Currency of the U.S. Senate, Feb. 12, 1957, p. 876. Gov. James L. Robertson, Federal Reserve Board: "* * I understand the Comptroller does not want the power to publish earnings and dividends reports. I differ from that because I think it is almost impossible for one to analyze the condition of a bank today on the published statement without seeing what the earnings statement is. "In the corporate field, if you are listed, you have to file a statement with the SEC of your earnings and dividends and expenses, and I see no reasons at all why banks should not be subjected to exactly the same thing. This requirement would not require the report to be published but would give us the power to require publication, and I think that is right and the Comptroller ought to have exactly the same power * * you should have uniformity." 20-226-63- -8 |