Securities Act or the Securities Exchange Act, which require extensive investigation. The large number of these promotions and the rapidity with which they have increased has placed a most serious burden on the Commission's field enforcement personnel charged with the conduct of such investigations. Similar statements were made in the 22d and 24th annual reports of the Commission, and these problems have not disappeared. In other words, in those days and recent times we have been focusing in our annual reports upon the insurance industry and stock promotions in it. The assets and liabilities of insurance companies are often of an intangible nature and, despite the vigilance of many State insurance commissioners, opportunities do exist for manipulation of these assets and liabilities by insiders in a manner detrimental to the interests of investors. Testimony before a Senate subcommittee in 1960 concerning the operations in the insurance field of Lowell Birrell and Stuart Hopps presents striking examples. Finally, I note again, as I did in the answer to a question you earlier raised, Mr. Chairman, we have experience with insurance companies over a substantial period of years. Senator JAVITS. Are you going to move to another subject? Mr. CARY. I am, sir. May I say, Senator Javits, I am going to move to the insider trading provisions and an amendment dealing with market makers in relation not only to banks and insurance companies but across the board, to companies across the board. Senator JAVITS. If the Chair will allow me, there are two things I would like to ask you as to insurance companies. Can you give us any order of magnitude of the number of companies which would be affected? Mr. CARY. Yes, sir. With 500 shareholders or more, we estimate the number of insurance companies covered would be roughly 400. Senator JAVITS. And does that include or exclude the 110 who now report? Mr. CARY. Yes, it would include substantially all of them. Mr. CARY. That is correct. Senator JAVITS. Just as you gave us the figures on the number of stockholders and the market value of the stocks for banks, can you give us the same figures for insurance companies? Mr. CARY. We shall put it in the record, Senator Javits. I do not think we have that exact figure at the moment. Obviously, it is a very substantial magnitude. Senator JAVITS. The order of magnitude of the banks was tremendously impressive-1,600,000 shareholders and $22.6 billion. Mr. CARY. We shall supply that for the record. I do not think we can give the exact figure at this moment. (The requested information follows:) INSURANCE COMPANIES PRESENTLY SUBJECT TO THE REPORTING REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934 AND TO BE COVERED BY S. 1642 As of June 30, 1962, there were 150 insurance companies which were filing reports with the Securities and Exchange Commission under the Securities Exchange Act. These companies included: TABLE 1 1 21 Mutual company which registered $5,000,000,000 of debentures (1941). Total__ 1 1 150 12 of the 150 are listed on an exchange; the remaining 148 are subject to 15(d) of the Exchange Act. The special study has estimated that approximately 400 insurance companies have 500 or more shareholders and $1 million or more in assets, and thus will be subject to S. 1642. Pertinent information is available with respect to 309 companies meeting the standards of S. 1642 and this information is reflected in table 2. TABLE 2.-Companies with 500 or more shareholders and $1,000,000 or more in 2 Information obtained from the latest available form 10-K. 3 Does not include the market value of the outstanding shares of 12 companies for which quotations of securities prices were not available. These companies had 18,035 shareholders and $201,200,000 in assets, which are reflected in the table. 4 Information obtained from Moody's Bank and Finance Manual for 1963, Standard & Poor's "Daily News Report," and from replies to the Special Study OTC-4 questionnaire. Does not include the market value of the outstanding shares of 3 companies for which quotations of securities prices were not available. These companies had 2,224 shareholders and $19,300,000 in assets, which are reflected in the table. The difference between the 309 figure and the 400 estimated by the special study, undoubtedly represents companies which neither file reports with the Commission nor are reported in the financial manuals. A group of these companies did respond to the questionnaire of the special study; accordingly, the study's projection of the coverage of S. 1642 would reflect their inclusion. Senator JAVITS. You say that there is no analogy, in terms of the regulation which can be brought about, with the banks because there is no Federal regulatory agency, and I would assume the insurance companies would be the first to fight off such a proposal with all their power. Is there anything, therefore, to the possibility of delegating administration to the State regulatory agencies; in other words, to follow in some fashion-though it does seem to be a somewhat less clear road-the pattern which you propose to establish for the banks? Mr. CARY. It would be difficult, almost hopeless, I would think, because of the fact there you would have 50, with a high degree of disuniformity among themselves, Senator Javits. Whereas, with the banks, although there are three separate agencies, they nevertheless do cooperate. This is the first point. Secondly, as I have indicated in this material, we could give examples, chapter and verse, of an enormous number of stock promotions in this insurance area, which led us to believe that some kind of a generally uniform pattern of disclosure would be highly advisable. My colleague, Mr. Woodside, points out that 50 legislatures would have to act, and that would be a rather monumental task in itself. Senator JAVITS. Nonetheless, as you cannot find another route, suppose we just take the SEC route: you are satisfied that regulation is required to the extent of the reporting itself? Mr. CARY. That is correct, sir. Senator JAVITS. Would you also be receptive to any solution which the industry itself could come up with, if they could find a solution which conformed more to the pattern laid down in the banking field? For example, conceivably they might want to have selfregulation under your supervision, or something like that. I only suggest that because your reason for choosing the SEC receptacle is that you find no other that is practicable. Therefore, you are entirely receptive to any alternative which may be brought up if it can make an analogy with the banking field that is feasible and practical? Mr. CARY. Well, sir; I do not want to go too far, because we have to see it. It is hard to visualize any counterpart that you could have as we do with respect to banks. Therefore, under those circumstances, I just do not want to commit us in a sense because I cannot visualize it. In principle we would be very glad to sit down with the insurance industry. Senator JAVITS. May I say, following the excellent pattern of disclosure which has been made, that I have been, through a family trust, a stockholder in an insurance company which issues stock to the public, and I state that for the record. It does not influence my judgment in any way that they should be subject to these provisions, and I will be the first to vote for them. I make that very clear, because I do feel from my knowledge that there is a different pattern among different companies, and I certainly do think that is a very appropriate subject for study-there is no question about that—and is one of the things you did, and should have, addressed yourself to. There may be no other practical approach than the one you have mentioned, and from what you say I cannot see one, but I just wanted to leave the door open because there might be something from the industry. If they can come up with a better scheme which is analogous to the banking scheme that is practical and feasible, we certainly would listen to it. Mr. FREAR. Mr. Chairman, in answer to the Senator's inquiry, I think the Chairman of the Commission has demonstrated that he is most willing to work and cooperate with the industries, and I am sure that there would be no exception in the insurance industry. Senator JAVITS. I thank my colleague. I am sure that is so, but I just wanted to spell it out. Mr. CARY. Of course, the insurance industry has a certain traditional sensitivity against Federal regulation. But I would say that we do not regard this bill as regulation in the traditional sense. It is, to some extent, but this is really disclosure-point 1. Point 2, we are already involved with the insurance industry 110 companies are reporting. As a consequence it is not a giant step. It is just sort of an across-the-board approach. That is really all it is. Senator JAVITS. When we get your figures you might also add the figures for the number of stockholders and the market value of the securities which you already are receiving reports on—that is, the 110 so that it includes both what you have now and what will be added assuming that this bill passes. I thank you very much. Senator NEUBERGER. Mr. Cary, I listened to what you said about sensitivity. I do not think we are concerned with their sensitivity. Suppose one of them goes bust? Would you not feel we had a responsibility for the investors? Why should we worry about their sensitivity? I am only worried about the people who have invested, and then, it seems to me, the Government and SEC have a responsibility. Mr. CARY. I agree with that, Senator Neuberger. I was merely stating perhaps the philosophical basis on which the insurance industry approaches this kind of a question. Indeed, I have attempted to sit down with people in each of the industries involved here with which we are concerned. I have talked with the NAM, the U.S. Chamber of Commerce, representatives from the securities industry, the banking industry, and I did talk as recently as yesterday with persons representing the Life Insurance Association. They pointed this sensitivity up. But our focus, as you indicated, is protection of investors. In that connection, this is something that has become a matter of Federal policy; I think it should of necessity apply across the board to all the industries. Senator NEUBERGER. Because it seems to me you hardly ever read about insurance companies going broke, but they do go broke. We had one just recently go broke in Oregon, an 80-year-old established company that had a sudden drain on its resources. I believe people are brought up to think that the insurance companies are more or less immune to financial crises and they are great investments, but nevertheless they can go broke just the same under unusual circumstances. Mr. CARY. Not only do they go broke, but you also sometimes see what we call marriages of one type or another, which is just a bailout. We have had experiences of that. I talked particularly with our regional administrator in Atlanta and he has pointed out instances in which there has been a forced merger, you might say, of one company with another in order to save it. Senator JAVITS. Will the Senator yield? I think a distinction must be made. When she says "go broke"-which of course every investor understands, and I can sympathize with your right to warn him about that-there is a difference between the investor losing his investment and the policyholder finding a default upon performance of the policy. The Chairman will correct me if I am wrong, but I think it is quite unusual, quite rare, that it has been found impossible to have policy responsibilities taken over by another company. Senator NEUBERGER. Not in Oregon. Senator JAVITS. I think what the Senator points out is critically important, but I do think there is some distinction between the securityholder losing his equity and default on the conditions of a policy. I have myself had a policy on the Pacific coast where the company got in trouble, and it was taken over on a somewhat reduced basis by other insurance companies. The principle the Senator states is obviously right. The investor is at just as great a risk in terms of what he ought to know about his investment, whether it is an insurance company or chainstore. It has to be operated, and it can be improvident, it can be destroyed from the inside, and so on. Mr. CARY. Of course, that is the very function of the insurance superintendent, basically, to protect those policyholders. We are moving into another area which really is not covered by their functions; namely, the protection of the investor. We believe that investors in insurance company stocks should be protected just as investors in other stocks. Senator JAVITS. You help me make my point clear. That was the very point I was trying to make. The thrust of the present protection is to the policyholder, and you pointed that out quite properly. I was just trying to pinpoint that. Mr. CARY. Mr. Chairman, if I may proceed I would like now to move on to a provision which relates to all of the securities, and that is the insider trading provisions. We have thus far focused on the extreme importance of extending basic disclosure principles to the over-the-counter market. All prior proposals by the Commission to equalize protections between markets have included as a necessary ingredient safeguards against. insider trading abuses provided by section 16 of the Exchange Act. This necessity still prevails; accordingly, S. 1642 would make section 16 apply to the same over-the-counter companies to be covered by the reporting and proxy requirements. The Commission's experience in administering the securities laws has confirmed the need for this protection in the over-the-counter market. The analysis of the special study supports this experience. The absence of disclosure in that market, the difficulties of preventing insider trading misconduct through traditional enforcement procedures, and the important extent to which insiders control over-thecounter companies these factors create conditions conducive to insider speculation on the basis of information not available to the public. The extension of section 16 should have as sound a prophylactic effect as it has had in the exchange markets. These provisions, of course, do not prevent an insider from investing in his company's stock. He may buy or sell as much as and whenever he pleases, with the important exception that because of |