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persons, who would have the right, by statute, to have access to all books of account and other records and papers of the corporation, and to make extracts of the information found in such records. With such information in its hands. the committee could then report the results of their investigation, and the information secured, and make recommendations to the entire body of share holders. No board of directors or officers could long resist the demands of the stockholders if an adverse report was made by the investigating committee.

At this point you might ask how the results of an appointment of a special examining or investigating committee by free stockholders would differ from the auditors appointed by the directors and officers. Well, the difference would be as great as the difference between day and night. The auditors who are appointed by those to whom they owe some allegiance-to wit, the directors or officershave no friendly interest in the welfare of the stockholders, and their only duty, as they see it, is to do a little work as directed by the officers and directors, and to protect the officials who have made it possible for them to collect substantial fees. Their examination, in many cases, is merely perfunctory and consists of comparing the books of account with the report that has been previously prepared by the management for submission to the stockholders. Their certification to the stockholders, as explained above, means practically nothing, and never reveals excessive salaries or bonus payments, "inside" deals by which the directors and officers improperly profit at the expense of the stockholders, nepotism, or any other of the hundred-and-one ways of mulcting stockholders more or less painlessly.

On the other hand, a stockholders' committee of two or three persons experienced in the theory and practice of accounting and auditing, appointed by a small number of stockholders who are actively working to protect and advance the interests of all stockholders, with the time and authority to properly audit the books of account, investigate various "inside" or questionable transactions. interrogate the officers and directors on all matters pertaining to the company, with no feelings of allegiance to the officers and directors, and with only one motive the protection and advancement of the interests of all the stockholders— could and would be able to force the officers and directors to conduct the business solely in the interests of the shareholders. Such committees would, in fact, be able to say to officers and directors: "Conduct this business honestly and fairly. and produce reasonable profits, or get out." And they would be able to enforce their demands because no management would be able to hold office if a committee reported to all the stockholders that the officers were incompetent or dishonest. or were not faithfully representing the stockholders in the fullest sense of that word.

If my suggestions are given serious consideration by your committee, and if you should recommend to Congress the enactment into laws of any of those suggestions, there will probably be loud wails of protest from the big private banking houses and other houses of origination, and by certain corporation direc tors and officers. May I remind you that strong protests were made by many private banking houses, securities dealers, and corporation officials when the proposed Securities Act of 1933 and the Securities Exchange Act of 1934 came before Congress in those years, but it has been clearly shown since that time that those acts have been highly beneficial to America's small stockholders, and that they were not as objectionable as the private bankers, stock-promoting houses. securities dealers, the stock exchanges and the corporation officials claimed they would be.

There are a number of private banking and stock-promoting houses and securities dealers, and many corporation directors and officers, who can be properly clas sified as predatory pirates of finance or pillaging buccaneers of industry, and it is hoped that Congress will enact laws that will enable small stockholders to blast those malefactors of great wealth out of the financial and commercial scene. I am quite certain express the views and opinions of many millions of small American investors who feel that they are not getting a square deal from the directors and officers of many corporations. The failure of those officials to discharge their obligations to stockholders, and their failure to live up to plain oldfashioned standards of honesty and fair dealing, are as much a menace to stockholders as are the thieves who crack safes or the robbers who hold up pedestrians and relieve them of their cash. In fact, they are an even greater menace, because the dishonesty and failures of corporation managers are hidden in such a way that the stockholders are not aware that they have been defrauded or deceived until it is too late to help themselves or to save the companies in which their funds have been invested.

But if Congress will enact laws that will give small stockholders the right of access to lists of fellow-stockholders, and the right of access to the books of account and other records of the companies we own, we can and will be able to wage a successful war against those officers and directors who are faithless to their trust, and whose incompetence and dishonesty has been clearly established by competent investigating and examining committees.

Very respectfully yours,

R. T. ALLCUTT.

THE AMERICAN BANKERS ASSOCIATION,
Washington, D. C., December 3, 1941.

In re Proposed section 17 (c).
Hon. CLARENCE F. LEA,

Chairman, Interstate and Foreign Commerce Committee,

House of Representatives, Washington, D. C. DEAR MR. LEA: The American Bankers Association, representing 14,000 banks in the United States, requests that this letter in opposition to certain aspects of the proposed amendment to section 17 (c) of the Securities Act be included in the record of the hearings before your committee.

The proposed new section 17 (c) makes it unlawful for any issuer, by use of the mails to send to its stockholders a report containing any statement which is false or misleading with respect to a material fact.

Although banks are exempt under section 3 of the Securities Act as the issuer of a security, apparently the proposed new section 17 (c), through its failure to exempt banks, would apply to reports sent by a bank to its stockholders, including a statement of condition.

Our position is that there is neither need nor is it desirable for banks to be brought under this provision of the Securities and Exchange Act for the reasons that: (1) Present laws covering fraud and misrepresentation by banks fully protect bank stockholders and the public: (2) banks are fully and adequately supervised and regulated by State and Federal supervisory authorities; and (3) there is nothing to be gained except confusion, duplication, and mutiplicity of unnecessary regulations by placing banks under section 17 (c) and thereby bringing them under the authority of the Securities and Exchange Commission. If any further authority were needed on the part of government to regulate the publication of bank statements or reports of banks to stockholders, that authority should be given to the established banking supervisory agencies of Government. However, no additional authority is needed because it is fully covered by existing law.

The Securities and Exchange Commission has given partial recognition that this is the case by presenting to your committee a modification of their amendment to exclude national banks and State banks insured by the Federal Deposit Insurance Corporation which are subject to section 5209 of the United States Revised Statutes. This modification, however, would not exclude from the proposed section 17 (c) over 800 small State banks throughout the country which are not insured by the Federal Deposit Insurance Corporation and which, therefore, are not subject to section 5209 of the Revised Statutes. These 800 or more banks are, however, subject to similar restraints against false and misleading statements under the laws of the States in which they operate.

Unless all banks are excluded from the application of the proposed section 17 (c), supervisory and visatorial powers over banks would be conferred upon the Commission in connection with matters now supervised by governmental banking agencies especially designated for that purpose. For example, the Commission in order to enforce the provisions of the proposed section 17 (c) would have authority under section 19 (a) to make rules and regulations and prescribe forms in connection therewith to carry out the purposes of the proposed section; under section 19 (b) to conduct investigations, to subpena witnesses, and require the production of books, papers, and other documents; and under section 20 (b) to institute actions in the United States courts to enjoin violations of the proposed section. Under such circumstances it would seem unwise to confer upon the Securities and Exchange Commission such power where it is unnecessary and unrelated to the purposes of the Securities Act.

The proposed section 17 (c) in its broader aspects, even beyond its application to banks, appears to be a further extension of the authority originally

conferred upon the Securities and Exchange Commission by the Securities Act of 1933, which was to protect the public in the purchase of original issues of securities by requiring disclosure of information concerning such issues. The proposed section 17 (c) is applicable to reports, whether made before or after the original issuance of the security. Furthermore, it is applicable not only to any report or communication, irrespective of its nature or substance, but also to any issuer whether or not its securities are required to be registered: whether or not they are listed on any national securities exchange, or whether or not any response is to be expected from the recipient of the communication.

Under section 3 (a) (2) of the Securities Act of 1933 Congress has recognized the principle that all banks, both State and National, should be exempt from the Securities Act by exempting securities issued or guaranteed by any bank organized under the laws of any State or Territory and supervised by the State or Territorial banking authority, as well as any national bank. If Congress is to follow the policy indicated by section 3 (a) (2) it would seem proper to exempt all banks from the provisions of section 17 (c) rather than to limit such exemption to insured banks only.

In conclusion we urge that all banks, both State and national, and whether or not subject to section 5209 of the United States Revised Statutes, be excluded from the application of the proposed section 17 (c).

Yours very truly,

A. L. M. WIGGINS, Chairman, Committee on Federal Legislation.

SUPPLEMENTAL STATEMENT OF HON. GANSON PURCELL OF SECURITIES AND EXCHANGE

COMMISSION

At several places in my earlier testimony I referred to the trustees of em ployees' plans as being issuers under the Securities Act. Congressman Paddock and others have commented upon my statements to various of the witnesses. In order to clear up the record I should like to correct my previous statement. It is much more accurate to state that it is the trust itself, rather than the trustees, which is the issuer under the Securities Act of 1933. As a consequence the trustees would not be liable as issuers although their liability would be com. parable to that of directors.

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DOCUMENT

INTERSTATE AND FOREIGN COMMERCE

HOUSE OF REPRESENTATIVES

SEVENTY-SEVENTH CONGRESS

FIRST SESSION

ON A

COMPARATIVE PRINT SHOWING PROPOSED CHANGES

IN THE SECURITIES ACT OF 1933 AND THE
SECURITIES EXCHANGE ACT OF 1934

AND

H. R. 4344, H. R. 5065, and H. R. 5832

BILLS RELATING TO PROPOSED AMENDMENTS

TO THE SECURITIES ACT OF 1933 AND TO
SECURITIES EXCHANGE ACT OF 1934

PART IV

JANUARY 20 TO 23, 1942

(Part VI Contains Complete Index)

Printed for the use of the Committee on Interstate and Foreign Commerce

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