CONTENTS Starkweather, John K., Investment Bankers Association, New York.. Stewart, R. McLean, Investment Bankers Association, New York.... 781, 805, 833, 842, 865, 887, 917 McLaren, Norman Loyall, American Institute of Accountants, San Jones, Frayser, National Association of Manufacturers, New York.. Page, Robert G., Investment Bankers Association, New York... Latimer, Hon. Murray W., Chairman, Railroad Retirement Board. Fletcher, R. V., Association of American Railroads, Washington, D. Cass, C. D., American Transit Association, Washington, D. C.... Goldstein, Meyer M., National Association of Life Underwriters, New Durig, Stanley W., Comptrollers' Institute of America, New York.... Sturtevant, Richard D., Jewel Tea Co., Barrington, Ill. -- Amberg, Harold V., American Bankers Association, Chicago, Ill. - Putney, William B., 3d, Commerce and Industry Association of New York, Inc., New York City. Communications submitted from- 976 991 1006 Salomon Bros. and Hutzler, New York City. 733 Minnesota Society of Certified Public Accountants, Minneapolis, 823 George L. Harrison, New York City.. 842 Joint statement by representatives of Investment Bankers Associa- Joint statement by the Securities and Exchange Commission, the Hon. George A. Paddock, copy of speech delivered by. Memorandum by Harold V. Amberg-. Resolution adopted by the Congress of American Industry, December Notice of and order for hearing by the Securities and Exchange Com- mission in the matter of Mississippi Power Co., The Commonwealth Notice of and order for hearing by the Securities and Exchange Com- mission in the matter of Gulf Power Co., The Commonwealth and Proposed amendment as sec. 3 (a) (1).. 908 Employee welfare plans, proposed amendment relative to---- 940 PROPOSED AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934 CONTINUATION OF TUESDAY, NOVEMBER 25, 1941 BEGINNING ITEM NO. 4 ON AGENDA FOR AMENDMENTS TO SECURITIES ACT OF 1933 STATEMENT OF JOHN K. STARKWEATHER, NEW YORK, N. Y. PROPOSALS TO AMEND DEFINITION OF "UNDERWRITER" The CHAIRMAN. We have a witness on the next topic. Mr. STARKWEATHER. I believe I am the first witness on that subject, Mr. Chairman. The CHAIRMAN. We will be pleased to hear from you now, Mr. Starkweather. Mr. STARKWEATHER. Mr. Chairman and gentlemen of the committee: My name is John K. Starkweather. I am a partner of Starkweather & Co., 111 Broadway, New York City. I am also vice president of the Investment Bankers Association and chairman of its Federal legislative committee. I am appearing before you today on behalf of that association. Before starting the statement on the next subject, I should like to make one remark in connection with the table presented by Mr. Purcell, if I may, Mr. Chairman. That is, there is one thing that astonishes me about this table more than anything else, and that is the fact that in the 3-year period-and I assume that this includes all of the common-stock issues which were floated during that period, because it obviously would not be proper to select particular casesbut in that 3-year period only 178 companies, or 178 issues, have been made an average of but 60 a year-of issues up to $1,000,000. It is amazing to me, and it indicates to me two things, which are, first, no national economy can be healthy when there are but 60 small companies a year in a country of 120,000,000 or 130,000,000 people who want to raise any money, and it indicates another thing to me, and that is that there must be something in what all of the witnesses who have been before you have said; there must be something in the securities procedure in addition to the economic conditions which produce such a very small amount of financing of this type. [Since this statement was made, I have been informed by the Securities and Exchange Commission that its compiliation of 178 cases was not complete and that the actual total for the 3 years was 335 issues. In my opinion this does not alter the situation much as it still means only that on the average only two small companies per State of the Union per year have entered the public market for funds by means of the registration method.] You will note from the agenda that the next subject is divided into three parts. The first two are sections 2 (11) (b) (4) and 2 (11) (b) (5). Certain amendments have been suggested to section 2 (11) of the 1933 act which are important. New subsections 2 (11) (a) and 2 (11) (b) are proposed to define the term "underwriter" more clearly than is done in the present law and to provide for certain exceptions to those who shall be included within this definition. The new subsection (a) and the first three paragraphs of the new subsection (b) are highly technical in character and are designed to clarify rather than to greatly change the law. The Securities and Exchange Commission and the securities industry are in agreement on these changes. In view of their technical character, however, one of my associates will later in these hearings discuss them in order that the record may be clear. The new paragraphs four and five under section 2 (11) (b), however, are of great importance, and should be carefully analyzed. I should like at this time to discuss the first of these, namely, paragraph 4, appearing on page 8 of the committee print. PERSONS NOT SELLING TO THE PUBLIC Subsection (b) excepts from the definition of the term "underwriter" various classes of persons. The Securities Commission is urging the adoption of subsection 4, which would, in effect, permit the Commission to exempt from inclusion as underwriters, with all their attendant duties and liabilities, persons who do not buy with a view to a public offering, or sell for an issuer in connection with a public offering, if it finds that "having due regard for the public interest and the protection of investors their exclusion as underwriters is not inconsistent with the purposes of this title." In order to clarify what the result of the adoption of this subsection would mean, I would like to discuss briefly the function and duties of underwriters as they are known in this country. In general, corporations desiring to raise funds through either bond or stock issues, approach security houses whom they regard as experts in their line, with a view to securing advice as to the type of issue best adapted to the market, and probable prices which can be secured, and general assistance in the setting up of their financing. It has been the custom in this country, assuming that a satisfactory arrangement has been made, for the group of houses thus approached by the company to agree to form what is known as an underwriting group. When registration with the Securities and Exchange Commission is complete this group will, in effect, insure to the company the sale of their issue. In practical operation the group purchases from the corporation the issue in question and offers it to the public, usually through a much larger group of dealers who may not participate in the original purchase from the issuers, but who are allowed a reasonable commission for placing the securities with their clients. By handling the financing in this way the corporation is relieved, as soon as the contract is signed, of any further risk of market change and is assured of receiving its funds at an agreed upon time and place. Underwriters in this country do not ordinarily purchase issues from corporations with a view to permanent investment themselves, but on the contrary they buy them at such a price as in their opinion will enable them to market the securities with the public within a relatively |