STATEMENT OF RALPH P. COLEMAN, JR., PUBLISHER AND EDITOR OF OVER-THE-COUNTER SECURITIES REVIEW

Mr. COLEMAN. My name is Ralph P. Coleman, Jr., of Jenkintown, Pa. I am publisher and editor of Over-the-Counter Securities Review, a monthly magazine devoted to the over-the-counter securities market. I have testified twice before in regard to these various bills which have been before the Congress.

I would like to state that I am in general agreement with a number of proposals made by the SEC in regard to strengthening the ethical and financial standards of the securities industry. I feel that there is considerable merit in many of these proposals, and I am sure that this subcommittee will view them in this light.

As a financial publisher for the last 12 years, I have had an intimate interest in seeing over-the-counter companies provide full information to their stockholders. And, going back to 1951, I believe I can safely say that most OTC corporations have made giant stridesvoluntarily and on their own-in providing stockholders and the financial community with meaningful, accurate reports on their operations and finances.

Because of this fact and the succeeding reasons which I will discuss I must state my opposition to the SEC's proposals to bring several thousand additional over-the-counter companies under its regulatory purview.

I am not in agreement with the methods the SEC has proposed for accomplishing full disclosure, although philosophically I am in favor of the objectives of full disclosure.

On balance, I feel that the additional time, expense, and administrative and legal difficulties inherent in the Commission's proposals outweigh any advantages that could flow from these proposals.

The SEC presently has authority over approximately 4,000 companies 2,500 listed companies and almost 1,500 OTC companies which have issued new securities. The new proposals submitted by the SEC would bring an additional minimum of 3,600 over-the-counter companies and perhaps over 4,000 companies under its control.

The CHAIRMAN. Off the record.

(Remarks off the record.)

Mr. COLEMAN. The first point I make is that incorporation is a Staterather than a Federal function. Now, I say why not let the States where the companies are incorporated enforce full disclosure rules

therein?

I believe this is in keeping with States rights principles, and we talk much about States rights. This would appear to me to be an opportunity to exercise this in a very effective and economical fashion.

Now, the SEC's proposal would double the number of companies under SEC supervision. Now, have there been any figures as to what additional budget would be required to service these additional companies in terms of money and manpower?

I understand a figure of $600,000 had been estimated by the SEC. That would be about $150 per company per year.

I might point out that in bringing these companies in that the over-the-counter companies will be time consuming and expense consuming, because this is the first time they have filed under these various rules and regulations.

I submit that it is quite possible that the expense might be considerably above that amount.

I believe that the Commission is to be congratulated in the fact that it had contacted the NASD, the various other groups, the Association of Stock Exchanges, and the Investment Bankers Association. However, I understand there was no attempt made to contact executives of over-the-counter corporations who would be most affected by this legislation.

I believe this is a very important point. These people who are the most affected by it should at least have the opportunity to consult with the SEC about the regulations that would be required of them.

Now, the arbitrary minimum of 500 stockholders and $1 million in assets will not bring under SEC supervision most of the “junk” and "penny" stocks which are part and parcel of the over-the-counter market and which have caused the most grief to stockholders and which have most often violated the concept of full disclosure.

We have made companies, and the SEC knows these companies as well as I do if not better, that because of their size would not be under the SEC purview, and these are precisely the companies that cause the difficulties in regard to full disclosure. And because of the large number of them it is impractical.

In the United States in 1961 over 1.1 million corporations filed Federal income tax returns. Now, how can the SEC be sure only 4,000 would be subject to its regulation? And that is an indication of the vast scope of the over-the-counter market.

I think there is cause for reflection in the fact that one of the biggest cases of stock manipulation and investor loss in the past decade was a company listed on the New York Stock Exchange, United Dye & Chemical Corp., which was subject to SEC full disclosure require

ments.

I think in considering this bill we must remember that some companies with approximately 750 or 500 stockholders might very well try to freeze the number of stockholders in the company at a figure below the minimum in order to avoid SEC regulation. This would result in contraction and concentration of stock ownership which is hardly a healthy trend.

I think in that connection that we must give full consideration to that aspect of it and also to consider if a company, say, has 750 stockholders and it drops below that figure whether they are then not subject to SEC regulation. I have not seen it spelled out in the regulations as to whether they are then under the regulations or not. And, finally, the SEC has made its proposals to Congress without having the benefit of all of the material on the over-the-counter market developed by the Cohen special study group.

It would seem to me that Congress having authorized the expenditure of $1 million for a study of the stock market is entitled to see all of the relevant material about the over-the-counter market developed by that study before being asked to pass legislation which would have a sweeping effect on that market.

Specifically, I am concerned that chapter VII, which deals exclusively with the over-the-counter market, has not been published. Mr. Milton H. Cohen, director of the special study, stated in a talk before the Practicing Law Institute in New York that his chapter discusses the over-the-counter markets, their wholesale and retail components, the quotation systems, and present controls over all of them.

Surely it is not the essence of logic to ask the Congress to pass legislation about the over-the-counter market without having before it the conclusions reached in this vital segment of the study which is concerned exclusively with the subject of the SEC's proposals.

Chapter VIII, Mr. Cohen states, is concerned with the various interrelationships among trading markets, including patterns of distribution among exchange and over-the-counter trading in listed securities. This interrelationship is particularly vital in Mr. Cohen's view as is emphasized in his statement that originally he did not perceive just how closely the various subjects in the stock market study were interwoven in an endless web.

I submit that because we do not have this important chapter VII which deals exclusively with the over-the-counter market that consideration be given to reconsidering this bill after the receipt of that material and its consumption not only by the Congress but by the investment industry.

The CHAIRMAN. Did you read in the morning paper the bills the President asked us to give priority to over this SEC bill?

Mr. COLEMAN. Yes.

The CHAIRMAN. Well, that will take a little while, will it not?
Mr. COLEMAN. I believe so.

The CHAIRMAN. I expect this chapter of the Cohen report will be available before we finish here.

Mr. COLEMAN. I believe that that would be most helpful.

The CHAIRMAN. It is entirely possible, yes.

Mr. COLEMAN. SEC's proposals at least to the public have been made without having the benefit of that particular chapter and the succeeding chapter which also discusses the over-the-counter market.

The CHAIRMAN. Now, you make reference to the fact that the biggest flimflam of an over-the-counter company had to make disclosure to the SEC.

Senator BENNETT. A listed company?

The CHAIRMAN. A listed company, yes.

Mr. COLEMAN. Yes.

The CHAIRMAN. You are arguing then that because the law will sometimes be violated, we should not have any law? Is that your position?

Mr. COLEMAN. I would only indicate that under the circumstances that there are investors who believe that simply because a stock is listed on an exchange that that will prevent any management manipulation. And I think there is a certain false sense of security that occurs under that condition.

The CHAIRMAN. Do you not think that the more times SEC discloses flimflams, the more likely investors will be to look before they leap? Mr. COLEMAN. Well, yes I think that that is certainly true, but I do not believe that this bill before us would particularly accomplish that aim. In other words, I feel that if management is so minded it can circumvent these things.

The CHAIRMAN. Well, is trading over the counter in these stocks that are not listed on the big exchange interstate commerce?

Mr. COLEMAN. The SEC takes that view that it is.

The CHAIRMAN. All right. Then if it is interstate commerce, you raise the point of States' rights. Of course, I am a little tender on that issue. But if it is interstate commerce the Constitution says that the Government can regulate interstate commerce.

Mr. COLEMAN. I said that it was the SEC that took that view. I am not at all sure that that is the case where a company has never issued stock to the public.

The CHAIRMAN. Let me remind you that the Supreme Court has gone far beyond anything the SEC ever dreamed of in the subject of interstate commerce. And on yesterday we even heard the proposal that if a man in Virginia has a restaurant and serves a man from Boston bread made out of flour milled in Minneapolis, he is not only in interstate commerce but the Federal Government can regulate who he serves. Now, the SEC has not gone quite that far, have they? Mr. COLEMAN. No. But I think that is an example

The CHAIRMAN. We do not need to worry about a definition of interstate commerce, because the Court is going to make it cover anything they want.

Mr. COLEMAN. Yes, I think that is the difficulty of it.

The CHAIRMAN. All right. Now, there is one point that disturbs me, and we will ask the SEC to look into it. You make the point that they could exempt too many people from the proposed disclosure requirements.

Mr. COLEMAN. Yes.

The CHAIRMAN. Well, have you any recommendations as to how far they would go in this respect?

Mr. COLEMAN. I think it is the numbers game that has been played since 1949. We have had it at 750, 500, 300 minimum, up to 1,000 which was recommended yesterday by the NASD and the Investment Bankers Association. I think that is one of the great difficulties of this bill.

It seems like a minor point, but I feel that really in a sense that these corporations are all creatures of the individual States. They are incorporated. These States far better than the SEC know about these companies, have the legal power to require of them stockholder lists, to indicate how many stockholders they have. And I feel that this could be a definite element, a definite aspect where the States could operate most effectively and most legally.

I feel that that is the case. Because it has been estimated there are 50,000 over-the-counter companies, which is approximately 12 times as many companies as the SEC presently regulates.

Now, to bring all of them under the SEC's jurisdiction would be I believe administratively impossible. Expensewise its cost would far outweigh the benefits that could flow from it. But I think that the various States could possibly handle this on an individual basis in view of the fact that

The CHAIRMAN. What State agency normally handles them? Who handles them in New York?

Mr. COLEMAN. I am not familiar with all the States. I think it would be the corporation commissions. I think most States have

that or the secretary of state-the agency which would basically have the power of incorporation, whatever that would be in the State. It would undoubtedly vary from State to State.

The CHAIRMAN. In Virginia that would be the State corporation

commission.

Mr. COLEMAN. Yes, that is right. I believe that if we could strengthen these various units that much would be achieved. Many of these companies are local, these over-the-counter companies. For example, the Commonwealth Natural Gas Corp.

The CHAIRMAN. In Virginia the State corporation commission issues charters but they do not examine anybody. They do have a division of State banking which examines but that is different.

Mr. COLEMAN. I believe that much work could be done along these lines, because so many of these over-the-counter companies are local in nature. Take the Commonwealth Natural Gas Corp. in Richmond or Miller and Rhoads' department store, Thalhimer's, various companies like that, which are basically Virginia institutions. And in that respect I believe that the States are best equipped to deal with reports from the corporations in those States.

The CHAIRMAN. Well, the 750 figure was, I understand, reached by the Commission on the ground that companies with smaller numbers of stockholders would generally be of only local importance, and if the States wanted to regulate them they could. If the States did not regulate these small, local corporations, the investors would just have to take their chances. But with big corporations abuses could have wide national results, in many States and to many people.

Any further questions?

Senator BENNETT. I just want to make one observation. I come from a State which produced uranium, and we were in the middle of the uranium boom which was full of penny and junk stocks, to use your phrase.

It seems to me that most of the people who attempted to sell those stocks were very careful to keep their sale inside the State limits so that they would not become subject to SEC regulation under any circumstance.

And is that not still possible under this bill, under these proposals, at least for the very small companies with less than 750 to 500 stockholders of $1 million in assets. Of course broker-dealers using the mails would now be subject to the law in any event.

When you say that there is not sufficient regulation of penny stocks and junk stocks, is this not created by the fact that the people who sell these stocks are very careful to keep them out of interstate commerce and keep them subject to State regulation rather than national regulation?

Mr. COLEMAN. I would not necessarily say so. There was a large number of new issues that came out in 1961 and early 1962 that were either full registrations with the SEC or with what is commonly referred to as the "Reg A" or regulation A, less than $300,000, and being subject to SEC, I presume, they were considered to be interstate rather than intrastate.

Senator BENNETT. I am sure there are many of those, but there are still in my opinion many more stocks that are offered for sale only