PROPOSALS FOR AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934 WEDNESDAY, NOVEMBER 5, 1941 HOUSE OF REPRESENTATIVES, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D. C. The committee met, pursuant to adjournment, at 10 o'clock a. m. in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding. The CHAIRMAN. The committee will please come to order. STATEMENT OF BERNARD J. REIS, EXECUTIVE DIRECTOR, AMERI- Mr. REIS. Mr. Chairman, my name is Bernard J. Reis, executive director, American Investors Union. I am here in behalf of the American Investors Union, which is a nonprofit organization for the protection of the American investing public, which is incorporated under the laws of the State of New York. We strongly believe that our views on the proposed amendments to the securities acts which your committee is now considering are shared by hundreds of thousands of investors. They regard the securities legislation as an indispensable safeguard against the execesses of the 1920's when American investors lost $25,000,000 000 of their savings in worthless securities. It is our firm conviction, after a careful study of the report made by representatives of the securities industry, that the present safeguards provided in the law, which are far from adequate, would, for all practical purposes, be eliminated if the proposals of the industry were adopted. After all, the original intent and purpose of Congress in passing the securities legislation was to provide full and fair disclosure of facts about securities sold in interstate commerce or through the mails. All that the Securities and Exchange Commission can do under the present law is to see to it that adequate information concerning the issue of a security is included in the registration statement and contained in the prospectus given to a prospective buyer either before or at the time of a sale. Certainly, no one can object to an investor being given the opportunity to obtain and study the facts concerning any specific issue of securities before making a purchase. The burden of judgment is upon the individual investor, since the Commission cannot, under the law, declare that a specific registered issue is unsafe and a bad investment. And it must have been your experience, as it has been the experience of many members of our organization, that too many prospectuses conceal rather than reveal the most pertinent facts. I can cite many examples from personal experience of prospectuses of securities sold since 1933 in which the most vital information was so worded and so printed that only the expert few could really understand certain information that put the security into an entirely different light. Furthermore, loopholes were discovered in the admittedly inadequate provisions of the present law. For instance, under our interpretation of the original legislation, we understood that every investor would receive a prospectus before buying a registered security. Yet ways of getting around the law were found, such as the use of oral sales, so that the prospective buyer frequently did not see the prospectus until the actual delivery of the securities. Considering the limited purpose of the law-the dissemination of truthful information-we are shocked to find the representatives of the securities industry attempting to emasculate the law. If their revisions are adopted, investors will be buying, not on the basis of full information but after being subjected to terrific sales pressure before and after the effective registration of any security. For, gentlemen, I submit that the proposed changes in the method of offering and selling securities and the proposed changes in the dissemination of information prior to the effective date of a registration statement can only lead to the nullification of the original purposes of the securities acts. You have already heard from representatives of the industry about the necessity of sweeping revisions in the present law, because "the industry feels strongly and sincerely that the acts have gone so far as to make normal conduct of its business nearly impossible." You have been told that objections to their proposed amendments arise from "theoretical conceptions which bear no resemblance to the actual facts." We assert that such statements are entirely without basis of fact. The issue before you is the protection of the American investing public, and by that I mean not the 96 percent of the amount purchased by the informed who have been referred to by Mr. Stewart, but to the 4 percent purchased by persons, who are admittedly by Mr. Stewart's statement, the uninformed public. According to Mr. Stewart, there are approximately $10,000,000,000 of securities registered up to 1934. Four percent of that amount would be $400,000,000. What the American Investors Union is concerned with primarily is the protection of the purchasers of those $400,000,000 of securities. The amount may be much greater in the coming period of inflation; but if it has been $400,000,000 in the past, those are the people who really need the protection. As I said, the issue before you is the protection of the American investing public. That involves not only the theoretical class of all investors, not only the biggest investors, but the millions of small people who have put every penny of their savings in securities to bulwark their old age against want. They look to the law for at least a modicum of protection. If the law will not assist them, who will? In fact, representatives of the industry must agree to this proposition and have stated here that "we are as determined as you that the abuses and excesses of the past shall never return." But how can this need to protect small people be dovetailed with their proposals, proposals that must inevitably bring gains to the industry at the expense of small investors? All of the industry's proposals are based on the ancient rule of caveat emptor. We insist that the American investing public wholeheartedly supports the principle stated by President Roosevelt in his special message to Congress on March 29, 1933, when he said that in the future the burden of telling the whole truth should be on the seller. To quote the President, "Let the seller also beware." Now, the practical upshot of the proposed amendments made by the industry, with regard to methods of offering and selling securities and the dissemination of information regarding those securities, is to permit the seller full freedom to bring heavy pressure upon the buyer, without the buyer having adequate or full information at his disposal. Take, for example, the question of opening up the whole period before the effective date of registering a security to sales offers based only on a limited prospectus. The investor will be urged to buy, although the information before him can in no way be construed as adequate. During this period, the Commission might conceivably find material misstatements or omissions in the original registration statement which would then have to be corrected. But the buyer would not be informed of these changes until he received a general prospectus. Significantly, the securities industry representatives emphasize that the final prospectus should not show every change in language or every deletion from the information contained in the original prospectus. With that we agree, but they go on to say, that is, the industry, "the industry understands that the Commission proposes to require no more than a summary statement of material differences." But, what if the differences are important-important enough, perhaps, to change the buyer's mind? How would a "summary statement" indicating the "differences" between the general prospectus and the limited prospectus which was used to sell the security enable the investor to reevaluate the purchase? It is our opinion that opening up the period before the effective date of registration to sales pressure through the mails and by oral means is a menace to investors, especially to small investors. In its report, the industry made the curious claim that the majority of the buyers with whom it deals are "highly intelligent and well-informed citizens." But if that were true, there would be no need for any securities legislation at all. The truth of the matter is that most investors, big and small alike, cannot possibly hope to make sound investment decisions unless they have, at least, the minimum protection of knowing the truth about a specific issue. That many small investors are sold on the basis of misleading information is probably not news. It is significant, however, that this year the Equitable Life Insurance Co. of Iowa charged, before the United States Supreme Court, that it was misled by a 74947-42-pt. 1——17 reputable bond house into buying certain bonds on the basis of incomplete and untrue statements. If such a large institutional investor, with all its paraphernalia of economic experts, statisticians, and students of investment problems, can be misled, what chance does the average investor have on the basis of an admittedly incomplete limited prospectus, especially when he is being subjected to verbal barrages laid down by some of the most effective salesmen in the country? We believe that opening up the period prior to the effective date of registration is a serious threat to the interests of investors. The threat will become more acute if even the insufficient protection asked for by the Commission is not established. We find it difficult to follow the reasoning of the securities industry representatives when they oppose the Commission's suggestion that prior to the closing of any sale, oral or written, a general prospectus should be in the hands of the buyer for at least 24 hours. There is nothing impractical in this procedure. If the security is an attractive one, the investor will be just as anxious to purchase after reading the prospectus as he was before. But what is important is that, if the security is an unattractive one, the investor may be dehypnotized after reading the general prospectus. The facts may enable him to shake off the persuasive influence of the salesman's appeal. And that, gentlemen, I submit is the core of the proposed changes made by the representatives of the securities industry in methods of offering and selling securities. They want the opportunity to offer to sell before the effective date of the registration statement. They want the opportunity to close the deal with the prospect, and then, and only then, will they furnish him with a general prospectus. This is certainly practical from the viewpoint of the industry. You sell the security and close the deal, and then you go through the rigamarole of sending a general prospectus to the buyer. At that psychological moment very few people will go to the trouble of reading a lengthy prospectus so that they can change their minds about a purchase that they believe has already been made. In fact, I would state almost categorically from my contacts with thousands of investors over the past 20 years that the general prospectus would never be read. The average purchaser would consider the deal closed and would consider it unnecessary to read the general prospectus since he would have the naive idea that after all it had been approved by the Commission. In other words, a very practical purpose would have been achieved by the industry and a very practical method would have been used in realizing this achievement. Of course, the spirit of the original purpose of the law would have been nullified. The investor would not be buying on the basis of full or adequate information-he would be buying after sales pressure on wholly inadequate information and, in most cases, without even looking at the general prospectus. And soon we would find ourselves back in the good old days when no investor was supposed to get an even break. We firmly believe that the protection of investors and savers is essential to the preservation of American democracy. It has been truly said: "Ours is a profit system, a system cherished by the great majority of Americans. If that system cannot be made to work well, then that majority, including as a major factor the numerous middle class who |