inside a particular State, and this is particularly true of mining stocks.

Mr. COLEMAN. Yes.

Senator BENNETT. And stocks that relate to assets that lie within the borders of a State.

Mr. COLEMAN. Yes.

Senator BENNETT. And this bill would not get at them if they have less than 500 stockholders. I am talking now about the companies and not the broker-dealers.

Mr. COLEMAN. No; and that is one of the difficulties of the situation. I really feel that, in summary, the bill fundamentally will require reporting of companies that in most cases-not in all, obviously, but in most cases--are already filing annual reports, sending annual reports to their shareholders, that are meeting the basic standards of good investment information.

There are obviously exceptions but I do not feel that those exceptions would warrant such a sweeping proposal as we have before us in terms of time and money and expense.

The CHAIRMAN. Thank you.

Mr. COLEMAN. Thank you.

(The complete prepared statement of Mr. Coleman follows:)

STATEMENT OF RALPH P. COLEMAN, JR., PUBLISHER, OVER-THE-COUNTER

SECURITIES REVIEW

My name is Ralph P. Coleman, Jr., of Jenkintown, Pa., publisher and editorof Over-the-Counter Securities Review, a monthly magazine devoted to the overthe-counter securities market. In 1955, I had the privelege of testifying on a similar bill, S. 2054, before a congressional subcommittee chaired by former Senator Herbert Lehman. At the outset, 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 the proposals, and I am surethat 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 over-thecounter corporations have made giant strides-voluntarily and on their own— in providing stockholders and the financial community with meaningful, accuratereports 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.

Corporations are the creatures of individual States. The full disclosure requirements suggested by the SEC should be the province of the various States where the over-the-counter companies are incorporated, since there is no Federal law of incorporation. There is much talk and little action about "States rights." Investment industry representatives and legislators can make the concept of "States rights" work in an effective, economical manner by developing in the individual States full disclosure requirements for the publicly held companies incorporated therein, in much the same fashion as the SEC is attempting to do with its proposed legislation.

It is conceivable that the SEC could be challenged on legal grounds for extending its control to those over-the-counter companies, which in themselves have never offered securities for sale on an interstate basis. In such a case, a contesting corporation might very well be joined by a State jealous of its corporate

and legal prerogatives. It is perhaps significant to observe that even before the SEC had submitted its proposals to Congress that another official of the Federal Government-Comptroller of the Currency Saxon-was challenging the authority of the Commission to extend its regulations to over-the-counter bank stocks.

The SEC presently has authority over approximately 4,000 companies-2,500 listed companies and almost 1,500 over-the-counter 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. Has the SEC indicated just how much additional staff and funds would be required to service these newly controlled companies? Certainly more staff and money would be required by the Commission since it would, in effect, be virtually doubling the number of companies under its supervision.

How can the SEC be certain that there are only 4,000 companies with 500 or more stockholders in view of the fact that there are over 1.1 million active U.S. corporations that filed income tax returns in 1960-61? Simply because a company's stock is not listed in the NQB or NASD quote sheets is no guarantee that it has less than 500 stockholders. This is particularly true of companies which require employees to sell stock back to the company when they sever their connection with it.

Much support for the SEC proposals is based on the belief that "full disclosure" will help to "protect" the investor. Certainly, there should be considerable cause for reflection on this concept in the fact that one of the most flagrant and widespread cases of stock manipulation in the past decade took place in a company which was listed on an exchange and was subject to SEC full disclosure and reporting requirements. This victim of management machination was United Dye & Chemical Corp., formerly listed on the New York Stock Exchange.

In setting limits of 750 and 500 stockholders and $1 million in assets, the SEC excludes from its full disclosure concept of protection many of the very companies which have failed to furnish stockholders with reports and which have caused them the most grief, investmentwise in the last few years. These are the over-the-counter companies with less than 500 stockholders and less than $1 million in assets, often unflatteringly referred to as "junk" or "penny" stocks. It is precisely this type of company, on the low end of the quality spectrum in the over-the-counter market, which is often the violator of the principle of full disclosure to stockholders rather than the host of legitimate, reporting overthe-counter companies which would be affected by the SEC's proposals.

There is a distinct possibility that if a minimum stockholder limit is established above which SEC control is exercised, the managements of numerous overthe-counter companies with stockholder families in this general area will legally do all they can to reduce the number of shareholders below the SEC limit and thereby avoid SEC regulation. They could do this through stock offers to minority holders and/or grouping blocks of stock in the names of nominees. In either case, the effect would be to contract and concentrate stockownership— certainly a condition that neither the SEC, the Congress or the investment industry favors. And what about this practical question-is SEC regulation an onand-off affair in which a company may be regulated if the number of stockholders goes over 500 and then be free of regulation if number of shareholders subsequently falls below that magic figure?

I think it is generally agreed that the majority of corporations which will come under SEC surveillance as the result of this proposed legislation are, in the main, much smaller and less affluent corporations than the larger, listed corporations which presently constitute the bulk of companies under SEC control. I would like to know if there are any hard "facts and figures" as to the amount of time, effort, and money that would be required by the typical overthe-counter company to comply with the new rules and regulations which the SEC is promulgating. It seems to me that it would be very worthwhile for the SEC to confer with a panel of executives of representative over-the-counter corporations that would be subject to this bill, tell them exactly what is expected from them in the way of filings and forms and have these executives develop estimates of just how much additional time and money it would take for these companies to comply with SEC reporting requirements.

In his transmittal letter to Congress SEC Chairman William L. Cary stated "I should also like to acknowledge the substantial and beneficial cooperation offered the Commission by representatives of the securities industry in connection with our legislative proposals." I believe the SEC is to be congratulated in

developing this liaison with the industry in evolving its legislative proposals. This is the type of joint cooperation which goes a long way in avoiding misunderstandings at a later date. However, I understand that the Commission did not contact the chief executives of the organizations who would be most affected by its full disclosure proposals-the heads of the over-the-counter corporations whose firms would be subject to SEC rules and regulations if this legislation is passed. Certainly, these gentlemen have a much more pertinent interest in these proposals than, for example, officers of national exchanges who would not be directly affected by these proposals and who, quite frankly, would probably be the beneficiaries through additional listings of OTC companies should these laws come into being.

As legislators, the members of this subcommittee have a solemn and continuing duty to support new and important legislation only after diligent consideration. The SEC states that many of the proposals it makes are based wholly or partly on the $1 million Special Stock Market Study authorized by Congress. At the present time, several vital chapters of this study have not been completed. One of these chapters deals with the over-the-counter market. If the SEC has relied so much on the stock market study, I am at a loss to understand why it has submitted its proposals for regulating the OTC market without having the full benefit of all the material on the OTC market which has been developed by the study group. Certainly it is conceivable that there is something of significance about the OTC market which will be disclosed in the chapter on this subject which has not yet been published. I think it only fair that the members of the subcommittee, the SEC, the investment industry, and the investing public have the benefit of all of the material to be published by the Cohen stock market study group before making a final judgment on these vital matters which will affect such a large segment of the U.S. investment and business community in the years ahead.

As a final thought, I would suggest that the committee very carefully consider the proposed legislation that would require all brokers or dealers registered with the Commission to become members of a registered securities association. While I can see the practical reasons for this proposal I would ask this question : Does this legislation mean, in effect, that the Federal Government, through its laws, is applying the concept of the "closed shop" to the securities industry, making it requisite that an individual join a particular group before he can engage in the securities business? Is not this possibility an abridgement of a basic freedom of the individual to practice in a profession as the result of Government fiat which effectively bars him from entering that profession?

Regarding the proposed legislation on OTC companies I would summarize my ideas as follows:

(1) Incorporation is a State rather than a Federal function. Why not let the States where the companies are incorporated enforce full disclosure rules on publicly held OTC companies incorporated therein?

(2) The OTC proposal would double the number of companies under SEC supervision. What would be the additional budget required to service these additional companies in terms of money and manpower?

(3) Although security dealers and NYSE was consulted on new bill, there was no attempt made to contact executives of OTC companies who would be most affected by legislation.

(4) Arbitrary minimum of 750 stockholders (500 later on) and $1 million in assets won't bring under SEC supervision most of the "junk" and "penny" stocks which have caused the most grief to stockholders and which have most often violated the concept of full disclosure.

(5) There is pause for reflection in the fact that one of the biggest cases of stock manipulation and investor loss in the past decade was in a NYSE listed company-United Dye & Chemical Corp.-subject to SEC "full disclosure" requirements.

(6) 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-hardly a healthy trend.

(7) SEC has made its proposals to Congress without having benefit of all material on OTC market developed by Cohen special study group. One important chapter on over-the-counter market has not yet been published.

Thank you very much for the opportunity of testifying and for your cooperation in listening to my remarks.

The CHAIRMAN. The next witness is Mr. Dennis E. Murphy, vice president of the Ohio Co.

If you have a long statement, please summarize it for us. The full text will be printed in the record.

STATEMENT OF DENNIS E. MURPHY, VICE PRESIDENT, THE OHIO CO.

Mr. MURPHY. Mr. Chairman and members of the committee, my name is Dennis E. Murphy. I am executive vice president of the Ohio Co. in Columbus, which is an investment banking firm engaged in the underwriting of securities. The Ohio Co. is a member of the Midwest Stock Exchange. I have with me today Mr. John W. Christianson, who is counsel for the Ohio Co.

I will make my comments as brief as possible, because I know you are in a hurry to conclude the hearings. I will read and summarize, as shown on page 13 of my statement, the points that I have made in the statement, and I would like to amplify them to a small degree where I think appropriate.

The CHAIRMAN. You may proceed.

Mr. MURPHY. Ohio is a State of many, many, small industries which will be or may be affected by this bill. Investment dealers. form a financial lifeline between these small industries and the thousands of investors who furnish capital for Ohio's industry.

As an investment dealer we are not directly affected by this bill, but we feel a duty to oppose legislation which will impose unnecessary financial burdens on small companies, our clients, and possibly affect the soundness of their securities. Therefore, our position is that:

(1) In view of the excellent reporting job which corporations generally are now doing, not only in the interest of better public relations with their shareholders but in their own self-interest as well, there is no need for this legislation as was demonstrated by the study made by the SEC and referred to herein.

I would like to take a moment to discuss that study. This is not a new bill. The principle of it has been before the Congress_since 1949, and when I appeared before a similar committee in 1957, I presented some figures or an analysis of the report of the SEC which it made in 1955 on Senate bill 2054, which was then before the committee, and I pointed out that that report of the SEC in our judgment disclosed almost perfect compliance of reporting of the companies which they studied, with one adjustment being made there which I thought was appropriate.

The Commission at that time decided that any corporation report which omitted the phrase, "sales or cost of sales not shown," was an incomplete report. My point is that there are a number of small companies who, because of the keen competition which they face, are not in a position to reveal to their competitors their sales and cost of sales, because of the advantage which larger and more strong companies might take of that particular provision.

If that adjustment were made so that these companies could comply, there would be 96.6 percent compliance, and that, in my judgment, is good reporting anytime.

Secondly, the laws of most States provide for supplying the information to shareholders and make the books and records of corporations available at all reasonable times except for improper purposes.

I would like to comment on that briefly. Most of the States have laws governing the sales of new issues of new securities which adequately provide for the supplying of information which is available for shareholder examination.

In Ohio, for instance, the statutes specifically provide that every shareholder is entitled to receive annual reports and that all books of account and other records of operation are open to shareholders at all reasonable times, except for unreasonable and improper purposes.

As an example of the effort which is being made by industries out in our area to supply their shareholders with full and complete information regarding the companies, I have brought along with me some reports of Ohio companies which I would like to leave with the committee for their study, and I would like to point out that these companies are relatively small companies in Ohio, but these reports are as complete, as informative, and in as great detail, I think you will find, as any company, even, which is subject to the Securities and Exchange Act.

The CHAIRMAN. Those reports will be distributed among members of the committee, but we would prefer not to include them in the record. Mr. MURPHY. Thank you, sir. On this point of the States responsibility, at previous hearings of the committee in which I testified in 1957, I submitted to the committee at that time a leter which Edmond H. Savord, he chief of the division of securities of Ohio at that time had submitted to the counsel of the Banking and Currency Committee, at its request, asking him his opinion of the bill which was then before the committee. And I would just like to read two paragraphs from that letter for your information now. They are very short. Judge Savord said in part:

Thoughtful consideration of all of the provisions of Senate bill 2054 and their implications convinces that grave doubt presents itself as to the existence of any actual or imperative need which would demand the enactment of this legislation. ***

Practically without exception, every safeguard sought to be realized by the proposed legislation is assured by protective provisions of the corporation code of Ohio or rendered certain by proper and efficient enforcement of the regulations and penal provisions of the Ohio securities act.

The CHAIRMAN. I want to commend the State of Ohio in the way they are looking after the small investor. Unfortunately, that does not appear to be true in all the States of the Union.

Mr. MURPHY. A few years ago when I appeared before, we had made a check of all of the States throughout the United States, and practically all of them have laws which permit the stockholders to demand from their corporations the financial statements of the corporation, and they are required, under the laws of those States, to give it.

The point that I would like to leave with the committee at this particular time is that the extension of Federal power for the regulation of small companies on the State level where information is already available, where adequate regulatory supervision is already provided, and where there is no substantial market interest outside the State, would seem to be an unnecessary and inadvisable invasion of the States rights to regulate the securities industry within its