Mr. SOUTH. Mr. Stewart, I would imagine, however, that they do have to furnish considerable data. I do not know in what form, but I cannot imagine an insurance company purchasing an issue of securities without having been furnished with a complete breakdown, and you know to what extent that is true, I suppose. Mr. STEWART. I am sure that it is completely true, Mr. South, that the issuing corporation does supply the purchasing company with a great mass of information. As I said a moment ago, I think it probable in general practice that the insurance company does require the issuer to make monthly reports of the progress of their affairs but it is one thing to do that on a voluntary basis, M. South, and it is another thing to do it through the public disclosure method of the Securities Act, and subject to the liabilities which the Securities Act places upon such statements. Mr. SOUTH. To what extent does this liability to which you have frequently referred operate and apply, as a practical matter in these transactions? Mr. STEWART. Well, Mr. South Mr. SOUTH (continuing). They have to be on guard. Mr. STEWART. We can say this to you, that we know of many instances in which issuers have absolutely refused to go through the registration requirements of the act and submit themselves to the liabilities of section 11, so long as there was any way of avoiding doing that. Mr. SOUTH. To what extent, if at all, has the industry which you represent and the Commission been able to agree upon changes that would tend to better that situation? Mr. STEWART. Well, we have submitted this proposal which is in the print as proposed section 2 (14). Mr. SOUTH. Has the Commission agreed to any part of it? Mr. STEWART. The Commission says that it does not oppose it. Whether that can be construed as agreeing or not Mr. SOUTH. That answers my question. Mr. STEWART. I think they must state their own position. Mr. SOUTH. Surely. Mr. STEWART. You were not asking about liability changes? Mr. STEWART. I beg your pardon. I am sorry. I was thinking merely about 2 (14). Two (14) would, of course, bring the section 11 liabilities in, would make them apply to any issue registered with the Commission. We have not made any basic change; we are not proposing any change in section 11 which changes it basically in any way. The Commission and ourselves are in agreement as to the few minor changes which are proposed to be made in section 11: but we are not suggesting any lessening of liabilities. Mr. SOUTH. As I understand your position then, you are approaching it from the standpoint, not of relieving the issuer of any present liability, but of making similar liabilities attach where they are sold without going through the formality of registration, and so forth. Mr. STEWART. That is true, Mr. South. After a great deal of consideration of section 11 liabilities, we came to the conclusion that they were not improper or unreasonable liabilities to place upon an issuer. Therefore, we did not come here with any suggestion that those liability provisions be changed in any fundamental respect. Mr. SOUTH. That answers my query. Thank you. Mr. STEWART. Nevertheless, while we hold that view about them, I think it is only fair to say that such a view is not universally held and that issuers do consider these liabilities real factors in the situation. Whether the avoidance of underwriters' fees or commissions represents a saving to the corporate issuer is, as I say, open to question. It seems, however, to be a well-estblished fact that when the general market as represented by dealers in investment securities has been on an equal footing under the law with the insurance companies in purchasing new securities from issuers, the general market as represented by the securities dealers has, with few exceptions, obtained the business. As to this, it need only be observed that issues of State and municipal bonds are, in most States, required by law to be put up for competitive bids. The insurance companies as well as the dealers have always been free to enter bids for these issues, but the insurance companies have not often proved to be the highest bidder. New issues of "municipal" securities are being sold every day by the States, counties, cities, and towns of the United States, and almost always the highest bid is entered by a syndicate of dealers or dealer banks. The dealers, of course, expect to make a profit on the resale of such securities, and if they did not generally succeed in doing so, would obviously not be able long to remain in business. Nevertheless, the insurance companies have seldom competed successfully against the general market in bidding for new issues of municipal bonds. Why then should it be supposed that in buying issues of corporate securities directly from corporations, the insurance companies will or do pay a price which is so much better than the price which the issuer could expect to receive from the general market through underwriters or dealers that the realized price in such direct transactions will or does represent a real "saving" so far as the issuer is concerned? On the contrary, it would seem that the issuer who seeks to avoid liability and disclosure through the direct sale of securities to a limited number of purchasers must, under existing conditions, work in a limited market in which the purchasers are the ones who fix the price, and the advantage in such circumstances would appear to lie with the purchasers. It is at variance with economic theory and experience to suppose that buyers will pay a price which is really advantageous to a seller who must either accept their price or submit himself to the troubles and liabilities he is seeking to avoid. Comparison of the prices at which various corporate issues have in the past few years been sold directly to insurance companies and other institutions, with the prices of somewhat similar issues, prevailing in the general market at the time of such sales, suggests that it is at least questionable whether the corporations which have sold issues directly to such institutions have obtained as favorable a price. as they might have received had they approached the general market through the regular underwriting channels afforded by the investment banking business. The following examples are of interest in this respect: The New England Telephone & Telegraph Co., on January 30, 1938, sold an issue of $20,000,000 first mortgage 314 percent bonds, due 1968, directly to seven insurance companies at a price of 100 percent or an indicated yield to the purchasers of 3.25 percent to maturity. The following list shows the price prevailing at that time in the general market for three approximately comparable telephone issues: The market price of the above-mentioned issues as of the date on which the New England Telephone & Telegraph 314's were sold to the insurance companies, suggests that the New England Co. may have received a price which was anywhere from 234 points to 4 points under the indicated market value of the securities at the time. It is only by referring to prices for comparable issues in the market that one can arrive at a price which is a reasonable price for a new issue of securities. Yet, gentlemen, you may be told, or will be told, probably, that this telephone company in selling these bonds to the insurance companies made a real saving. It will be claimed, as it has been claimed, that they "saved" the commission which otherwise would have been paid to the underwriters. Actually they could probably have provided for or paid a full point and a half or two point spread on the issue and still have been some two points better off than they were by selling the securities directly to the insurance companies. Surely then they must have had some reason for doing this. We assert that the reason was to avoid registration under the Securities Act. The American Smelting & Refining Co., on August 23, 1935, sold to the Metropolitan Life Insurance Co., Prudential Insurance Co. of America, New York Life Insurance Co., Equitable Life Assurance Society, and Mutual Life Insurance Co., $25,000,000 of first mortgage and first lien 4 percent bonds due 1950. According to published information, the company received a price of 100 percent and accrued interest. This investment therefore affords a yield of 4 percent to maturity to the purchasers. The prices prevailing in the general market at the time of this sale, for other issues of similar investment quality and of approximately the same maturity, are indicated by the following examples: These examples-and it would be possible to find many otherswould suggest that the American Smelting & Refining issue was sold to the above-mentioned insurance companies at a price some 21⁄2 points or more below its market value, as indicated by the prices then prevailing in the general market for comparable issues. On June 11, 1937, Socony Vacuum Oil Co. sold an issue of $75,000.000 of 314-percent debentures due 1955 to several insurance companies, receiving a price from such purchasers of 98 percent. At this price the purchasers would receive a yield on their investment of 3.40 percent to maturity. At the time when this sale was made prices prevailing in the general market for various comparable securities were as follows: The above examples would suggest that in making a direct sale of its securities to the insurance companies, Socony Vacuum Oil Co. received a price considerably below the price which might have been obtained from the general market. It will be noted that Socony Vacuum Oil 32's, due 1950, were then quoted at 1041⁄2 to yield only 3.09 percent to maturity, the yield on this issue being thirty-one one-hundredths of 1 percent lower than the yield which evidently was obtained by the insurance companies who purchased the $75,000,000 issue on June 11, 1937. Even if it be assumed that Socony Vacuum Oil Co.'s credit was at the time worth no more than a 3.15 percent basis to maturity, the yield then afforded by the Standard Oil Co. 3's due 1961, it follows that the new issue of Socony Vacuum 314's was underpriced to the extent of 33% points at least, since a 3.15-percent basis for the new issue of 314's would have produced a dollar price of 101.37 as compared with the price of 98 percent received by the corporation from the insurance companies. New York and Queens Electric Light & Power Co., on August 8, 1938, sold directly to three insurance companies an issue of $10,000,000 first and consolidated mortagage 314's, due 1938, receiving a price from these purchasers of 101 percent. At this price the investment would afford a yield of 3.20 percent to maturity to the purchasers. On the day when the sale of the bonds was made to the insurance companies the 312 percent bonds of New York and Queens Electric Light & Power Co. outstanding in the hands of the public were quoted in the general market at a price of 108 to 10812. The yield to maturity afforded by this investment at 108-bid price as of August 8, 1938would be 3.08 percent. It is apparent then that the price received by the company from the three insurance companies was some 3 points under the market valuation of the outstanding securities of the company, since on a basis affording approximately a 3.06 percent yield to maturity the 30-year 314's due 1968 would have produced a dollar price of about 103.90 per cent. An issue of $15,000,000 Detroit Edison Co. 31's due 1966 was sold to five insurance companies on August 21, 1938. Detroit Edison Co. received a price of 106 percent. At this price the investment afforded a return to the purchasers of 3.175 percent to maturity. As of the date when this sale was made the Detroit Edison Co. had outstanding in the hands of the public another issue of 32 percent bonds due 1966, of identical maturity and equally secured with the issue sold to the insurance companies. The issue outstanding with the public was then quoted in the market at 1087/%, at which price it afforded a yield to maturity of 3.03 percent. Using this market quotation as the basis of value, it appears that the insurance companies purchased the new bonds from the Detroit Edison Co. at a price exactly 27% points under the then current market value of the bonds. Perhaps the most outstanding example of this, however, is provided by the sale on November 27, 1940, of $140,000,000 American Telephone & Telegraph Co. 234 percent 30-year debentures to a group of 14 insurance companies at a price of 9812, to yield approximately 2.75 percent. The three largest purchasers of these debentures were Prudential Insurance Co. of America, $50,000,000; New York Life Insurance Co.. $30,000,000 and the Travelers Insurance Co., $10,000,000. The New York Times states on November 28, 1940 that: In determining which insurance companies should participate in the deal, American Telephone & Telegraph Co. executives decided that no institution which had an interlocking directorship situation with respect to the Bell System would be permitted to participate. For this reason such large insurance companies as the Metropolitan Life Insurance Co. and the Equitable Life Assurance Society did not appear on the list. As of the date of sale of the $140,000,000 of debentures the prevailing market prices indicated yields to maturity of other comparable issues as follows: On the basis of the price prevailing in the market at the time for other comparable issues, it should have been possible for American Telephone & Telegraph Co. to have sold the $140,000,000 issue by means of a public offering at a price of around 10212, to yield about 2.62 percent. It would seem, therefore, that the price at which this issue was sold to the insurance companies represented a price about |