Would you want to say something, Mr. Foshay?

Senator WILLIAMS. I wish you would, Mr. Foshay.

Mr. FOSHAY. Senator, in my practice I have been fortunate enough to have had opportunity to represent and advise both the large and the small corporation, even the corporation down to the 300-shareholder level. I think, therefore, that I may be able to tell you something about this contrast to which Mr. Ames has referred, looking at it from the point of view of the corporate manager of the small versus the large corporation.

I can also remember back over the years the problems that even the large corporation had in adjusting itself to the requirements of sections 13, 14, and 16 of the 1934 act. These larger corporations, of course, had their accountants, their counsel, and their administrative staff people to whom they could refer this as one more task to perform. When I look ahead and see the same obligations imposed or to be imposed on several hundred smaller corporations, who, as Mr. Ames has said, may not be equipped or have the time or even the resources to retain and obtain the assistance of such talent, I shudder, slightly, to say the least.

Let us take them up one by one and just in brief try to sketch some of these problems as I see them.

Under section 13, the reports that the SEC requires to be filed differ both as to content and as to frequency with what you would find today in the smaller corporation, even the best managed small corporation. The small corporation may well send to its stockholders annual and semiannual financial reports that fully comply with the dictates of generally accepted accounting principles. In the main, for the reasons that have already been given, these reports are really adequate to keep existing stockholders informed and to equip financial security analysts with the tools which they need.

In contrast, the annual reporting forms, form 10-K, for example, of the Securities and Exchange Commission, goes into far more detail. One point that might be mentioned, to which Mr. Ames has already adverted, is the detail as to remuneration that individual officers and directors receive. As he has said, this is not, perhaps, a burdensome thing, but it, in many cases, can be a dangerous thing in a small company and a small community.

There are a number of other items. Various developments in the business have to be thought out and reported; various transactions must be described. One of the things mentioned here yesterday was a new requirement that all the material contracts and patents must be disclosed. Competitors might love to see the details of those things. A competitor, mind you, who might be so large that his contracts in the same area would not be material to him, but they might be vital to this smaller company. In other words, a one-product company is one thing when it comes to a material contract. General Electric or General Motors, which is in many lines, might have a comparable contract, but it would not be material, because in relation to the whole, it is insignificant.

The frequency of reports is another difference. As I have said, there is an annual report, and my discussion so far has been directed to that. In addition, the SEC requires to be reported monthly what might be called major or significant developments in a business. Now,

this is something which the small company would have to be educated on completely. The SEC has a rule which lists, I believe, about 12 items, any one of which occurring in a particular month will require a report to be filed by the 10th of the following month. The last such item in that report calls for anything else that is material to an investor.

Senator WILLIAMS. Does this form have a number?

Mr. FOSHAY. This is form 8-K. And it specifies various items. For example, if in any month the outstanding common stock or other security issue of a company is increased by 5 percent, I believe, then by the 10th of the following month that must be included in a report filed with the SEC. Now, I have cited that one because that is an easy one to apply. I was going on to one that is more difficult, requires more judgment, requires more advice, more watching, and that is the very general catchall at the end which says something to the effect that anything which is material to an investor should be reported.

In other words, to the smaller company it wouldn't be simply a case of the president saying to his treasurer or controller, "We have some more requirements here. You see that we comply with them." It opens up a whole new area with which he must be made familiar.

Now, in the proxy rules, going to the second group, which is section 14, many of these things that I have said would apply equally there. The proxy statement would have to have more material, more exercise of judgment, more advice from outside experts applied in its preparation than is now the case. In addition, I call your attention to the fact that much in the proxy rules is clearly directed to the problems of the large corporation and solely to the large corporation. I refer, of course, to the provisions that have to do with proxy fights, the rights and duties of someone who wants to unseat the management, what he must do. By and large, it could happen in the small corporation, but it is not so likely. It is not nearly so prevalent a problem. But I cite this merely to show that the proxy rules are really more designed to serve in the area of the large as opposed to the small corporation.

Finally, section 16 (b), as you well recall, when the 1934 act was in process of its formulation, the objective that was sought to be achieved in section 16 (b) was to prevent the improper use of inside information for the profit of the insider. And as the legislative process went on, it became more and more clear that this was something that would be very difficult to write, something very difficult to apply on those general terms. It would require too much a delving into the subjective intent or the state of mind of the person involved. So to meet the problem, the draftsmen and the Congress decided on what has become familiarly known as the "meat-ax" approach, and that is that any purchase and sale within 6 months is deemed to involve the use of inside information and that is the end of it.

Now, if I may say so, the courts have transformed the meat-ax approach into the "piledriver" approach and have added to the legislative setup decisions which have created a maze of problems even for the large corporation. And again I shudder to think of the small corporation, the hundreds of directors of small corporations who now would have to be educated on the mysteries in the maze of 16 (b).

So with that I conclude with the repetition of the position taken by the Investment Bankers Association that we think that the objectives

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of this legislation can be achieved with far less expense and burden to the small company and to the Government by putting the figure somewhat higher than the 750 and thereby reducing the number of companies.

Senator WILLIAMS. Permit me to state a hypothetical situation. I would like you to assume a company that has 500 shareholders and a million dollars in assets. Assume further that it is a company of not great complexity, perhaps a one- or two-product company. I want to get some idea of the expense to this company in meeting the reportin requirements in terms of accounting, counsel, and so forth. This is a small company, the kind that probably never would find its way to Sullivan & Cromwell in New York. Will you give me some range? Country law firm and city law firm?

Mr. FOSHAY. Sullivan & Cromwell is fortunate to have 500 stockholder clients. We welcome them.

I would find it very difficult to put the price tag on that, Senator, but just as a very broad guesstimate, I would say that you would have to take into account the additional accounting fees that would be required, the additional legal fees and also the additional expense within the corporation. Initially, of course, the expense would be greater than it would as time went on, because there would be a process of education which would ultimately get it as close to the routine basis you might find in the large corporation as possible. But I think that whatever the total cost of this area of its activities to a small corporation might be today, you could easily multiply that by 3 to come to what it would be under these additional requirements. Now, that is a guesstimate. It might come down to twice that much as time goes on, but it would be significantly higher. I don't think there is any question about that.

Senator WILLIAMS. As I understand it, your suggestion for those companies which have fewer than a thousand shareholders and more than 300, is to require that a simplified report be made available to shareholders; is that right?

Mr. AMES. That is correct, as determined by the Securities and Exchange Commission.

Senator WILLIAMS. Yes, but not a report to the SEC.

Mr. AMES. That the report should be audited and go directly to their stockholders.

Senator WILLIAMS. What would be the objection to filing also with the SEC for administrative purposes a simplified report?

Mr. AMES. I think the burden of that number of reports is large. It puts a burden on the Securities and Exchange Commission, which is not necessary. If these reports are in a form which the SEC approve and if they are by law required to go to all stockholders, anything that went wrong in that area, I think, would be brought out by the natural procedures of the law, instigated by stockholders who found things wrong. It is better to have all this information available to the stockholder without superimposing an unnecessary filing and supervising function on the Securities and Exchange Commission. Senator WILLIAMS. Of course, the SEC would still have its responsibility to insure compliance. As a practical matter, how would the Commission be able to insure compliance if they didn't have a copy on file?

Mr. FOSHAY. May I speak to that? Our contention is that it would not be necessary to have an administrative agency insure compliance. We think that if the law supplemented by SEC regulation requires that these smaller companies send a balance sheet and a profit-andloss statement prepared in accordance with generally accepted accounting practice and certified by independent public accountants, the corporations around the country will comply with that. Now, if some sanction is needed, there could be, as we have suggested, put into the law some teeth that would apply criminal or civil penalties of some kind and perhaps give the SEC the injunctive power to go after the recalcitrant small company if there should be one. But I think our principal reliance is that if the law requires this, the number that will not comply would be very, very small and insignificant, and certainly this factor would be outweighed by the lightened burden that would result to the SEC.

Senator WILLIAMS. We are most indebted to you gentlemen for a great deal of help in this matter.

We now recess until 10 o'clock tomorrow. Thank you again.

(Whereupon, at 12:10 p.m., the hearing was recessed, to reconvene at 10 a.m., Thursday, June 20, 1963.)