I think it is important to state at the outset that I have approached the question with the conviction that the intention of both the Commission and the representatives of the industry is identical and is directed toward the formulation of a procedure which will accomplish the objectives of the act, namely, the regulation of the business of security distribution, to the best interests of the public, without unnecessarily interfering with the operation of such business.

I think it must be conceded that the sincerity of both groups is above question, and that the difference of opinion developed in the two reports with respect to the proposed changes to section 5 represents in each case the honest conviction of each party as to which type of procedure affords to the public the greatest protection and to the business the least disruption.

In fact, I was impressed in reading both reports by the possible doubt as to just who are assuming the leadership in striving for protection for the public. At times it almost appears as though the representatives were threatening to take the ball away from the Commission, through the application of their practical knowledge of the workings of the business, as opposed to the Commission's somewhat more technical approach.

From a reading of both reports it would appear that the Commission and the representatives might be generally in agreement with respect to most of the proposed amendments to section 5, with the exception of the timing of the receipt of the prospectus by a purchaser of a new issue of securities.

On this subject, however, there is a definite cleavage, and I am frank to say, from the viewpoint of a purely practical dealer, I am completely confused as to why it should exist.

The report of the representatives offers as a reason on page 87 that— The principal difficulty arises from the fact that the Commission has taken the position that it is necessary in any amendment to section 5 to make applicable to sales made after the effective date of a registration statement certain new restrictions and requirements, going beyond the provisions of the present act, and the representatives of the industry have not found it possible to concur in the imposition of these new requirements.

Now, it is my opinion that what is meant by this statement is rather that the representatives of the industry cannot agree, not so much because the new requirements may go beyond the provisions of the present act, but rather because such so-called new requirements are from a practical standpoint in the opinion of the representatives, simply not workable, are unnecessarily burdensome and do not accomplish any greater investor protection than the counter, and more workable, proposal they suggest. In this belief I heartily concur.

It is clearly the purpose of the Securities Act of 1933 to accomplish two main objectives:

First, the full and complete disclosure of all pertinent information concerning an issuer and its securities.

Second, to make this information available for public scrutiny during the waiting period and thereafter, so that it may be appraised by an enlightened public.

It seems to me that, practically speaking, all other requirements of the act are collateral to these two ambitions.

Obviously 8 years of experience have demonstrated the fact that a buyer, generally speaking, under the existing statute is not being ac

quainted with the facts during the 20-day period, and will not be so acquainted by a potential seller as a result of his disinclination to assume what he considers the risk of violating certain provisions of the act.

If, as everyone thinks, it was the intent of the Congress to permit the dissemination of information during the waiting period, both the proposal of the Commission and that of the representatives of the industry accomplish this; for there is no difference between their proposals as to what can be done during the waiting period.

Most certainly the distribution of a limited prospectus, which has been cleared by the Commission, would give the buyer, in a preliminary manner, the most important information concerning the issue, and would certainly permit him to establish in principle whether he was interested in looking at the issue further, by means of a general pros pectus, or whether he was not so interested.

It seems to me, therefore, that both proposals are well calculated to solve the difficulties which have prevented adequate dissemination of information to investors during the waiting period. It is only when we get to the question of what can be done after the waiting period is over, that there is any difference between the two proposals.

Even after the waiting period is over and the registration statement has become effective, it seems to me that there is not much real difference between the industry proposal and the Commission proposal during the first 7 days. The Commission thinks that the investor ought to have 24 hours in which to examine a prospectus before he enters into a contract to buy the security. The representatives of the industry say that the investor ought to be able to make a contract at once, but that he should have 24 hours after delivery of a prospectus in which to cancel his contract.

It is difficult for me to see that an investor is any more protected by having a prospectus in his hands for 24 hours before he can agree to buy than he is by being given 24 hours in which to cancel after he has agreed to buy and has received a prospectus. It is at least possible that a 24hour period for repentance is more valuable for an investor than possession of a prospectus, which he may not read, for 24 hours before he decides to buy. Moreover, in practice in many cases the industry proposal will give him 24 hours or so to gage the success of the distribution of the security and to determine whether the issue has gone successfully before he definitely makes up his mind.

After the first 7 days there is a real difference between the two proposals. The Commission thinks that in all cases the investor should continue to have a prospectus in his hands 24 hours before he makes a contract. The industry proposed that after the first 7-day period has elapsed, and after it is apparent how the issue is being received, both as to distribution and to fairness of price, the investor should be permitted to make a contract to purchase, with the stipulation that the prospectus should be delivered to him 24 hours prior to the time he is asked to make payment, in order that he may have an opportunity to verify the accuracy of the representations made to him or the omission of pertinent information. It is interesting to note that this proposal of the representatives goes even further than the present law in its effort to protect the investor, inasmuch as the present statute authorizes the presentation of the securities, accompanied by a demand

for payment and the prospectus, which is certainly not as protective a measure as is proposed by the representatives of the industry.

Now, because I have been in the security business for over 20 years, and because I am intimately acquainted with a number of the leaders of such business and certain of the representatives in disagreement with the Commission, it is my belief that the proposals of the representatives do not spring from any dark and devious plan born from a desire to circumvent the Commission's motives of protection.

I believe it is because the representatives have applied the practical test of workability to the proposed changes. I know that by the Commission's plan the industry as a whole will be subjected to a regulation which will be extremely difficult in practice and will work unnecessary hardship and expense on security dealers throughout the country. I am convinced that in practice the suggestion of the representatives will afford equal protection to the proposal of the Commission, which brings me to the conclusion that the division of thought represents purely an opinion concerning a practical problem rather than a technical one. It is my opinion, if I may apologetically say so, that the Commission is permitting language and law to stand between them and practical thinking. I believe that they are attaching too much importance to the prospectus and assume that it is of far more value to investors than it really is.

If an ordinary man with no mechanical experience and knowledge proposes to buy a piece of machinery, he may adopt one of two methods: He may write to several manufacturers and request catalogs concerning their product, and as a result of his perusal determine which he shall buy, or he may go to someone who is familiar with machinery, by virtue of experience, and request advice.

Obviously, there are dangers in both methods, in that, by the first, the recipient of the catalog describing machinery, with which he is not familiar, generally does not know much more about it after he has carefully examined the detail than he did before; and, by the second method, it is quite possible he may get poor advice.

It seems to me it is impossible to legislate out of existence the danger to the machinery buyer under either method. Now, whether it is recognized or not, the fact remains, in my opinion, that a prospectus occupies the position in the average investor's mind quite similar to that of the machinery catalog in the hands of the average professional man; and, although the Commission may require the purchaser to receive the prospectus, it is again my opinion it does him very little good unless he is a sophisticated buyer or a financial man trained to understand the meaning and import of the language and figures. On the other hand, if the buyer is a man experienced in finance, he is, in all probability, a rather sophisticated gentleman who has demonstrated his ability to take care of himself.

I can only put it down to the conviction on the part of the Commission that the proposal of the representatives will permit greater freedom to unscrupulous distributors and to their further desire to remove all suggestion of so-called high-pressure tactics being applied to the buyer.

May I ask if there is anyone left who believes that investors will really be afforded protection from unscrupulous persons by any legisla tion which may be enacted? May I also ask if it is still possible to be

lieve that so-called high-pressure salesmanship will be completely eliminated by the delivery of a prospectus 24 hours prior to a sale so long as men are dependent upon profits from the distribution of securities to earn a livelihood? By this I do not mean that the Commission's enforcement policy has not accomplished a great deal toward the elimination of fraud or that it should not continue its efforts, which Mr. Purcell told you about the first 2 days of these hearings.

On the other hand, it does not require a very specialized experience to appreciate the enormous difficulties that will be imposed on the distributing machinery of the country by the imposition of the Commission's proposals.

As an example, my firm maintains a sales department of 10 or 12 men. I think it is a reasonable statement that on the average highgrade bond issue these salesmen contact approximately 200 prospects. If I understand the Commission's proposal correctly, it would be necessary in many cases for my firm to mail approximately 200 final prospectuses to these prospects. Our experience indicates perhaps 20 will effect a transaction and the remaining 180 will say "no." It is our experience that it costs about 19 cents to mail the average prospectus not counting the time and additional help which might be necessary. Obviously, we will be forced to considerable expense in meeting the Commission's requirements.

However, this example fades into insignificance when the principle is applied to the distribution of an equity issue, purchased in comparatively small amounts by individuals, where each salesman may call on 50 or more prospective individual buyers.

I would ask you to visualize the problem of the average investment house being required to mail five or six hundred prospectuses to prospects, 24 hours before its salesmen commence active solicitation of the sale.

It is difficult to believe that such a procedure will increase the efficiency of the business and the smooth flow of capital to industry.

Moreover, gentlemen, the problem might well be faced squarely and I am so bold as to predict that in the event of the enactment of the Commission's proposal, it will result, from a practical standpoint, in honest men being forced by law to resort to subterfuge. There can be slight doubt as to the accuracy of this prediction when the 8-year history of the 20-day waiting period is reviewed. I do not believe you will find any honest intelligent person in the security business who will not agree with my statement that the requirement of the Commission will not be lived up to in practice.

The CHAIRMAN. Mr. Scribner, we thank you.

Mr. SCRIBNER. Thank you.

The CHAIRMAN. The committee will stand adjourned until 1.30 p. m. The next witness will be Mr. Dickson of R. S. Dickson & Co., of Charlotte, N. C., followed by Mr. Putney, speaking for the Wadsworth bill and its provisions.

(Thereupon, at 12:11 p. m., the committee took a recess until 1:30 p. m., of the same day.)

AFTERNOON SESSION

(The committee reassembled, pursuant to the taking of the recess, at 1:30 p. m., Hon. Clarence F. Lea (chairman) presiding.)

The CHAIRMAN. The committee will come to order. Mr. Dickson.

STATEMENT OF RUSH S. DICKSON, PRESIDENT OF R. S. DICKSON & CO., INC., CHARLOTTE, N. C.

Mr. DICKSON. Mr. Chairman, my name is Rush S. Dickson. I am president of R. S. Dickson & Co., Inc., underwriters and dealers in securities. My firm was established in 1919. I have thus observed the securities business in operation prior to the "blue sky" laws in my section, and prior to the Securities Act of 1933, and I have also had an opportunity to observe it under the operation of the act.

I am a member of the securities act committee of the Investment Bankers Association. My address is seventh floor, Wilder Building, Charlotte, N. C.

I come before you, I feel, as a representative of the "country dealer" and in behalf of the "little fellow" among investors to bring you some insight into the problems facing the financing industry outside the metropolitan centers. I am of the opinion that the framers of the Securities Act were thinking more in terms of Wall Street and La Salle Street than the great geographical expanse of most of the 46 other States involved. The investor far from Wall Street, and the dealer supplying his needs, have a great many problems in common with metropolitan investment bankers, but they probably have even more problems that are different from those of the securities distributor in the large city. While our company maintains offices in New York and Chicago, these are principally for distribution to professional and institutional buyers and dealers, and for purchasing securities for redistribution in our retail area, which is largely confined to the Carolinas and Virginia, where we maintain four offices and several times that many field representatives.

First, I want to talk about the operation of the provisions of section 5 preventing offers of securities during the "waiting period"— before a registration statement has become effective.

The theory of the present act reasons that information should be made freely available to investors during the "waiting period," and 20 days prior to the effective date of the registration statement. Representatives of the industry generally endorse that theory. However, despite the generally recognized purpose of the "waiting period," another provision of the act has been in conflict with that theory of the act. In practice, the securities dealer has not only been prohibited from soliciting an offer to buy the securities which were in registration, but-and this is a curious thing-he has been prohibited from placing useful information in the hands of the large majority, numerically, of prospective buyers. It appears to me, therefore, that the purpose of the act and its actual enforcement have been working at cross purposes from the very beginning.

This section 5 has constituted one of the major difficulties that has confronted the securities dealer in carrying on his business under the Securities Act of 1933, and it works far greater hardships on the small country underwriter and dealer than it does on the large metropolitan securities dealer. In addition to this, section 5 imposes greater handicaps on the millions of small individual investors than it does on the few hundred institutional buyers. In short, this section creates several times the hardships for the several thousand small dealers in the country and their estimated 5,000,000 or more small individual investors than it does on the 50 or so metropolitan