Mr. SOUTH. But regardless of the regulations by the Commission, are you not of the opinion that you would have had difficulty in getting many if any of that particular issue? You did not get any as it was. If there had been no regulation at all by the Commission you would not have secured very many, because the eastern buyers knew of this issue in advance. They knew it was a good issue and they reached out and got it as soon as it was available; is that not true? Mr. HILLIARD. I cannot answer your question. I can tell you how many bonds we got several years ago. We got a very We got a very substantial amount, sir. Mr. SOUTH. Yes; I am speaking now of the issue of which you did not get any, because you said three eastern concerns bought them all; that is, the American Telephone & Telegraph. Was that your statement, that you did not get any of that issue although you would have liked to have had a part of it? Mr. HILLIARD. Yes, sir; but I think-I did not mean-I think we are getting on a subject which will probably be discussed later when it comes up under the provisions of the bill. What I was trying to point out was-I do not want to attempt to say why bonds were not available in the East to me-I was talking about bonds that were available which I was ready to sell and wanted to sell to the public that wanted them in Kentucky. Mr. SOUTH. Yes. Mr. HILLIARD. I do not like to talk about bonds I do not have. I am talking about bonds I did have. I want to be in a position to first inform that investor in Kentucky, and, secondly, to fill his order when the time comes. Do I make myself clear? Mr. SOUTH. Yes; I think so. Mr. BOREN. Mr. Chairman. The CHAIRMAN. Mr. Boren. Mr. BOREN. The point that Mr. Wadsworth brought out, as I understood it, is comparable to the problems of the United States Treasury, the problems which they face in connection with bond issues. They sometimes restrict the amount of bonds that any individual purchaser might buy. That is simply a recognition of the fact that securities of quality are sought after by particular groups of people and are being bought up by a limited number and an automatic condition of foreclosure exists on the general public. So they have laid down some restrictions. Now, as a practical matter, in your judgment, could there be anything arrived at that could regulate the flow of securities so that the small individual purchasers throughout the country at large would have an opportunity of purchasing equal to the large buyers in the financial centers? Mr. HILLIARD. Yes, sir; I think that is what is proposed here. That involves two things. That involves being able to inform that buyer and educating him; and, secondly, giving him practically the same chance, the same opportunity that others have. We fully realize Mr. BOREN (interposing). But if we permit the continued growth of this private offering of securities, are we not moving in exactly the opposite direction to that taken by the Treasury Department under the conditions I indicated? Mr. HILLIARD. The question of private offerings is one that is very large, and I think is going to come up, and I again would repeat that my testimony did not refer to bonds that were not available for public sale because privately placed. My testimony referred to bonds that were available publicly to meet potential demands, and I want to see them made available to the small centers just as well as the large. Mr. BOREN. I want to commend your statement, and we understood clearly the point that you had in mind; but it is my wish, and I am sure that it is Mr. Wadsworth's wish, to have your own individual opinion on this other problem over and above, and aside from the issue that you discussed here very comprehensively and very forcefully. Mr. HILLIARD. Now, expressing my own personal opinion- Mr. HILLIARD. May I answer his question? Mr. WADSWORTH. Yes. Mr. HILLIARD. Expressing my own personal opinion, I think anything that prevents the flow of good securities, quality securities, into the hands of the small investors is very harmful, indeed. The CHAIRMAN. Mr. Wadsworth. Mr. WADSWORTH. I may make this one observation, and I would like to have your comments as to whether it is correct or not, or reasonably correct in your judgment, based upon your experience and observations. My correspondence has been pretty voluminous and has been entirely with issuers. Mr. HILLIARD. Yes, sir. Mr. WADSWORTH. In endeavoring to ascertain whether or not the issuer as a class is having undue difficulty in floating new issues, and thus securing more capital for private industry. In that correspondence there is one universal complaint or practically universal. That is the terrific expense and delay incident to the registration of securities, and in a great many instances these correspondents of mine who are all issuers, have said to me, in effect, "Never again," or "Having done it or tried to do it, we gave it up." And "We went to private placement. It is so much more simple; takes so much less time." Mr. BOREN. What was the delay, Senator, could I ask? Mr. WADSWORTH. The delay, according to these people, is incident to the long negotiations and discussions with the Commission in connection with perfecting registration statements; expense and so forth. Mr. BOREN. Was not the delay item of greater importance in determining these attitudes than the expense end? Mr. WADSWORTH. I would not say so. The out-of-pocket expense in many cases, has been so heavy that the issuer said he would never try it again on that same basis and, he goes to private placement, or at least he says so. And, I am wondering what observations you have to make upon that, if you have encountered it. Mr. HILLIARD. Well, sir, I think there are two things. I think the subject of private placement will unquestionably come up later and be discussed by more informed people; and secondly, I am not enough of an originator to have much to do with issuers of securities. My dealings are very largely, sir, with smaller investors, and we may 74947-42-pt. 1--15 be called a small distributor if you want to put it that way; but our dealings are constantly with the investor. Mr. WADSWORTH. Not with the issuer? Mr. HILLIARD. Not with the issuer; no, sir. The CHAIRMAN. Thank you. Mr. BOREN. Mr. Chairman, I would like to ask how you are going to treat direct sales to institutional investors, and who will appear on that. The CHAIRMAN. I do not know; there are a number of witnesses. Mr. BOREN. I would make the request that you notify us particularly when that is taken up. I for one am particularly interested in it. The CHAIRMAN. There is to be a rather lengthy discussion under No. 2. So, anyone who is interested can govern themselves accordingly. Mr. Scribner, about what length of time do you desire to occcupy. Mr. SCRIBNER. I can finish this in less than 10 minutes, sir. How much time it will take after that, I do not know. The CHAIRMAN. Very well, we might hear you then. (The opinion above referred to is as follows:) [For release in morning newspapers of Monday, August 19, 1935] SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 464 WASHINGTON The Securities and Exchange Commission today published an opinion of its general counsel, John J. Burns, as to the applicability of the Securities Act of 1933, as amended, to the publication by statistical services of bulletins or other circulars descriptive of securities for which registration statements have been filed. The opinion deals not only with the legality of the distribution of such bulletins by the services to their subscribers, but also with the circulation of such bulletins or other informative literature by underwriters or dealers. Briefly, the opinion recites that there would be no apparent violation of the Securities Act in the distribution by these services of such material to their subscribers in the normal course of business, and that underwriters and dealers may, subject to certain restrictions, further distribute this material to their customers. The opinion follows: "I understand that certain bulletins compiled by your company include, in summarized form, information concerning particular securities. This information is taken from your files and from the registration statements and prospectuses filed in respect of such securities under the Securities Act of 1933. Although these bulletins consist primarily of statements of facts they also contain your ratings of the securities involved, together with expressions of your opinion as to their investment value. It is proposed that these bulletins be circulated by your company to its subscribers and clients prior to the effective date of the registration statements for the securities which they describe, but subsequent to the filing of such statements. It is my further understanding that your subscribers may purchase these bulletins in any quantity desired. You inquire as to the effect of the Securities Act of 1933, as amended, upon the circulation of a preliminary bulletin by your company prior to the effective date of the registration statement covering the security described therein, and as to the legality of the use of the bulletin by your subscribers both prior and subsequent to registration becoming effective. "It is my understanding that your company receives no consideration, either directly or indirectly, from any issuer, underwriter, or dealer for describing the securities in your bulletins, and is in no way interested in the sale of the de scribed securities. Accordingly, it seems clear that the circulation by you of these bulletins, even though effected through the use of the mails or instrumentalities of interstate commerce, prior to the effective date of a registration statement covering the described security, does not constitute a violation of the Securities Act of 1933, as amended. It seems equally clear that the circulation by you of such bulletins would not be affected by section 17 (b) of the act, since that section is applicable only if the person circulating such literature describes the security in question for a consideration received from an issuer, underwriter, or dealer. "With respect to the use which underwriters or dealers (including banks) may make of such bulletins, I call your attention to Release No. 70 of the Federal Trade Commission, dated November 6, 1933, which reads in part as follows: "In response to inquiries concerning how far an underwriter may go in discussing and advertising a proposed new offering of securities prior to the effective date of a registration statement filed under the Securities Act, the Federal Trade Commission today makes public the following letter transmitted to an inquirer: * "You ask further, however, whether circulars, describing a security in the method in which a prospectus conforming to section 10 describes a security but clearly and unmistakably marked to indicate that they are informative only, negativing without equivocation either impliedly or expressly an intent to solicit offers to buy or to make an offer to sell, can be circulated with impunity during the waiting period by an issuer or an underwriter. You assume, as I assume, that both the letter and the spirit of these markings are strictly adhered to. Such conduct seems not only allowable but one that carries out the general purposes of the act. Prospective purchasers, whether they be dealers or the general public, should during this waiting period be educated up to the nature of an issue, which it is expected that they will shortly be asked to buy, always reminding them that no determination to buy is requested of them until the expiration of the waiting period. "Such a procedure hardly needs any expression from this Division to indicate that it is permissible under the act. The House report expressly states (pp. 12-13): "The bill, apart from section 16 (b) [now section 17 (b)], is not concerned with communications which merely describe a security. It is, therefore, possible for underwriters who wish to inform a selling group or dealers generally of the nature of a security that will be offered for sale after the effective date of the registration statement, to circulate among them full information respecting such a security. This could easily and effectively be done by circulating the offering circular itself, if clearly marked in such a manner as to indicate that no offers to buy should be sent or would be accepted until the effective date of the registration statement.' "I concur fully with the opinion expressed by the Federal Trade Commission in Release No. 70, and believe that the principles which are embodied therein are determinative in considering the use which may be made of your bulletins by those of your subscribers who are underwriters or dealers. Although that opinion was primarily concerned with the circulation of information by underwriters to dealers, the views therein expressed seem equally applicable to any information based on the registration statement filed with the Commission, even though furnished by issuers, underwriters, or dealers to potential investors since the legality of the submission of preliminary information under section 5 is dependent upon whether or not it is used in connection with, or it itself constitutes, an 'offer to sell,' as that term is defined in the act. Consequently, it is immaterial whether the bulletin is sent to dealers or potential investors. However, as is pointed out in the release, the making of any attempts to dispose of a security or to solicit offers to buy a security fall within the prohibition of section 5 of the act during the 20-day period preceding the effective date of registration, as well as prior to the filing of the registration statement. Accordingly, any circulation by underwriters or dealers of a bulletin descriptive of a particular security, which is in furtherance of an offering of such security for sale prior to the effective date of registration, or of a solicitation during that period of an offer to buy the security, would fall within the prohibitions of section 5 of the act. "On the other hand, even though your subscribers transmit these bulletins to their clientele through the mails or interstate commerce, such transmittal is not a violation of the act if the subscriber does not in fact use the bulletins as selling literature. Whether or not a subscriber is using a bulletin as selling literature is, of course, a question of fact in each case as to which no generalization can be made. The intent with which the bulletins are used, as determined from all surrounding circumstances, would control the legality of circulation thereof by underwriters or dealers. "If an underwriter or dealer were to supplement a bulletin with selling literature or with a recommendation to the recipient as to the desirability of purchase, or were to attempt to obtain from the recipient some indication of interest, however tentative, in purchasing the described security, such action, in my opinion, would almost conclusively establish that the bulletin was being used in an attempt to dispose of or to solicit an order for the purchase of the security. "In this connection I call your attention to the problem created by the insertion in the bulletins of your ratings of the described securities and of your opinion as to their investment value. And has been pointed out above, an underwriter or dealer who circulates with a bulletin or other purely descriptive matter his recommendation as to the desirability of the investor's purchase of the security would in all probability be held to have offered the security for sale. In my opinion, the insertion of such material by the statistical service creates a substantial risk that underwriters or dealers, in circulating the bulletins, would, where such opinion material is favorable, be held to have violated the act through their participation in a recommendation of the security for purchase. "The legality of the circulation of a bulletin subsequent to the effective date of registration would be governed by those provisions of the act which forbid the transmission through the mails or interstate commerce of selling literature unless such literature is a prospectus meeting the requirements of the act or is accompanied or has been preceded by such a prospectus. Whether a bulletin constitutes selling literature would, as has been pointed out above, depend in large measure on the use to which it is put. If it were used by underwriters or dealers as selling literature, its circulation would be lawful only if it were accompanied or preceded by a copy of a prospectus meeting the requirements of the act." The General Counsel of the Commission supplemented his opinion with a suggestion that, in order to prevent any unwitting misuse by underwriters or dealers of bulletins such as those under consideration, it would be advisable to print on all bulletins a statement calling the attention of dealers to the effect of pertinent sections of the Securities Act. A statement such as the following was suggested: "Attention of underwriters and dealers is called to the fact that no attempt or offer to dispose of this security, or to solicit an offer to buy this security, may lawfully be made through the use of any agency of interstate commerce, or of the mails, until a registration statement covering this security has become effective. "In connection with any such attempt or offer to dispose of this security, or to soicit an offer to buy this security, even though made after registration is effective, this bulletin may lawfully be used in underwriters or dealers only if accompanied or preceded by a prospectus meeting the requirements of the Federal Securities Act." STATEMENT OF JOSEPH W. SCRIBNER, PITTSBURGH, PA. Mr. SCRIBNER. Mr. Chairman, I am Joseph M. Scribner, a general partner in the investment banking and stock exchange firm of Singer, Deane & Scribner, of Pittsburgh, Pa. I have been continuously engaged in the security business since 1919 and have been a partner in my present firm since 1927. We are still small dealers, despite our best efforts to the contrary. I have gone over the report of the Securities and Exchange Commission, dated August 7, 1941, and the report of the representatives of the investment banking industry and stock exchanges, dated July 30, 1941, dealing with proposals for amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934. I have asked permission to appear here today in order to make a statement with respect to a portion of that report which deals with a subject in which I am vitally concerned and with which I am familiar from an operating standpoint, namely, the proposed revisions to section 5 of the act of 1933, as amended. |