the market place with substantial buy orders and thus to have occasioned a particular rise in the market price of the security. As I say, the Commission does not think this would be a correct interpretation of the section. In other words, the Commission feels that the dropping of the clause "at a price which was affected by such statement" would serve simply to clarify rather than to extend the liability imposed. The present language of the section, however, is so peculiar, and there is such a complete absence of judicial precedent on it, that the Commission cannot be sure how a court might interpret it. Since it might be so construed as to place a wellnigh impossible burden of proof on the plaintiff, the Commission simply wants to lock the barn door before and not after the horse is stolen. Even without the clause "at a price which was affected by such statement," the liability imposed is by no means stringent, since the plaintiff must prove in any event, first, that the statement was false; second, that the falsity was material; third, that he did not know that the statement was false; fourth, that he relied upon the statement; and fifth, that the damages sought to be recovered were caused by his reliance. That is a very substantial burden and the entire efficiacy of the section should not be clouded by the possibility that the plaintiff may be required to prove what is so difficult, if not impossible, to demonstrate by legal proof-that, of all the many factors which may have affected the market, the quotations for the security were affected by the particular misstatement relied upon. There is one further point. The representatives of the securities industry observe at page 265 of their report that the proposed deletion of the clause "at a price which was affected by such statement" from section 18 (a) of the Exchange Act would likewise change the civil liability provisions of the Public Utility Holding Company Act of 1935, since section 16 (a) of that act contains a cross-reference to the liability provisions of section 18 (a) of the Exchange Act. Our only answer to that is that we are not attempting to increase the liabilities under the Holding Company Act by devious innuendo. As I have stated, we do not think that our proposed change in section 18 (a) will impose any undue burdens on those responsible for false or misleading statements. We feel that the clause in question literally construed is as undesirable when carried over into the 1935 act as it is in the 1934 act, and if our proposal would serve to clarify its meaning in the 1934 act-as we think it will-so much the better for the 1935 act. I think, Mr. Chairman, that Mr. Paddock's questions have probably brought out just about all I had to say with respect to these proposals. Mr. WADSWORTH. Mr. Chairman. The CHAIRMAN. Mr. Wadsworth. Mr. WADSWORTH. Am I correct in my recollection of your testimony that the effect of this change is that the $2,000,000 limitation is removed and likewise the $1,000,000 limitation? Commissioner PURCELL. Yes, sir. Mr. WADSWORTH. And if it is removed thereafter it will be left to the discretion of the Commission. Commissioner PURCELL. That is correct. Mr. WADSWORTH. As to requiring these reports from corporations of any size. Commissioner PURCELL. I think it is stated the other way, sir. The Commission would be authorized to relieve corporations of reporting when it seems not in the public interest that they shall continue to do so, on the basis of the size of the outstanding issues and other considerations. Mr. WADSWORTH. But with those two limitations removed it would be the duty of, in the first instance, to file. Commissioner PURCELL. Yes, sir. Mr. WADSWORTH. Duty on all corporations. Mr. WADSWORTH. Those are the annual reports? Mr. WADSWORTH. And in order to be relieved of that burden they must apply to the Commission. Commissioner PURCELL. No, sir; they would not have to apply. We would have rules under this provision under which they would automatically be exempted from filing under certain conditions. You understand that those are companies having securities registered under the 1933 act and not listed and registered under the 1934 act. As to the latter group, of course, they are now subject to the reporting requirements of section 13 of the Exchange Act. Mr. WADSWORTH. You think it is practical for the Commission to draft such rules? Commissioner PURCELL. I think so, sir. Mr. WADSWORTH. And applicable to all, and make it perfectly clear to all classes of issuers who might come under this particular provision? Commissioner PURCELL. I think so; yes, sir. We have had a great deal of difficulty in interpretation of the particular standard presently contained in section 15 (d). As I have said, it was not too happily drafted in the first instance, and it has been very difficult to determine when a company really qualifies for that exemption. I think we can do it better under our own rules. Mr. WADSWORTH. That is all. The CHAIRMAN. Thank you, Mr. Purcell. STATEMENT OF NORMAN LOYALL MCLAREN, PRESIDENT, AMERI- The CHAIRMAN. You may proceed, Mr. McLaren. Mr. McLAREN. My name is Norman Loyall McLaren. I am president of the American Institute of Accountants and am appearing here in behalf of that organization. My address is San Francisco, Calif. We appear only in connection with one proposal by the Securities and Exchange Commission to amend the liability provisions of the act. This proposal will insert a new section 12 (d) in the Securities Act of 1933, and will amend section 18 (a) of the Securities Exchange Act of 1934. The American Institute of Accountants, which submits this statement, is the national professional organization of certified public accountants in the United States with a membership of 6,877, including the great majority of those who act as independent auditors for companies registered with the Securities and Exchange Commission. The institute has always taken a keen interest in the administration of the Securities Act and the Securities Exchange Act, and has cooperated in various ways with the Commission. The institute has been consulted on numerous occasions by the Commission and its staff with respect to rules and regulations and other matters related to accounting. Section 18 (a) of the Securities Exchange Act of 1934, now in effect, provides in part as follows: Any person who shall make or cause to be made any statement in any application, report, or document filed pursuant to this title or any rule or regulation thereunder * * which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person (not knowing that such statement was false or misleading) who, in reliance upon such statement, shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. A person seeking to enforce such liability may sue at law or in equity in any court of competent jurisdiction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit, and assess reasonable costs, including reasonable attorneys' fees, against other party litigant. It is proposed by the Securities and Exchange Commission that there shall be included in the Securities Act of 1933, as a new section 12 (d) thereof, a provision similar to section 18 (a) of the Securities Exchange Act of 1934 quoted above, but that there shall be eliminated from the section in each act the words "at a price which was affected by such statement," which words have been included since the 1934 act was passed 7 years ago. It appears that accountants would suffer most from the increased burden of liability which this amendment would create. Underwriters do not issue annual reports and are only academically interested in this matter. Issuers can escape responsibility by proving reliance on statements by experts. Appraisers, engineers, and accountants are most affected, but because of the nature of their statements accountants are likely to find themselves those most frequently in jeopardy. As it is proposed to shift from the Securities Exchange Act to the Securities Act the provision with respect to filing annual reports, it seems reasonable to include some provision similar to section 18 (a) of the Securities Exchange Act in order to impose civil liabilities for false statements in such reports. There appears to be no objection to the inclusion of some such provision if it follows the present language of section 18 (a) of the Exchange Act. However, the Commission urges, over the objection of the securities industry, that there be eliminated from section 18 (a), and from the similar provision to be included in the Securities Act, the words "at a price which was affected by such statement," so as to eliminate the necessity for the plaintiff to prove that the price at which he bought or sold a security in reliance on a statement filed with the Commission, later found to be false or misleading in a material respect, was affected by such statement. The American Institute of Accountants opposed the elimination of the words "at a price which was affected by such statement" from the provision to be contained in either act. Under the statute as now worded a plaintiff may recover damages if he establishes that 1. The defendant made or caused to be made a statement in an application, report, or document filed pursuant to the act or any rule or regulation thereunder, which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact; 2. The plaintiff did not know that the statement was false or misleading; 3. The plaintiff, in reliance upon such statement, purchased or sold a security at a price which was affected by such statement; unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false. The damages recoverable are those "caused by such reliance." It is submitted that this statute already imposes a heavy liability upon accountants and other persons making statements. It is particularly onerous in that it places the burden of proof on the accountant to prove that he acted in good faith and had no knowledge that such statement was false. At common law the burden of proof is generally on the plaintiff to show that he has been injured by the wrongful act of a defendant, and to show that he has sustained damage therefrom. But here, by statute, the defendant is already required to prove in a material respect that he was not at fault. The American Institute of Accountants respectfully submits that the liability provisions of the statute, already heavy, should not be made more onerous by the removal of the reasonable requirement that a plaintiff who claims damages because of a statement made by an accountant must show that he purchased or sold the security in question at a price which was affected by such statement. Section 18 of the Securities Exchange Act of 1934 is a remedial statute, which was intended to compensate an injured person for damages. sustained and was not intended to be a penal statute for the purpose of penalizing an accountant or other party who may have violated the act. The statute provided for a liability "for damages caused by such reliance." The title of the section is "Liability for Misleading Statements" as distinguished from "Penalties" which is the title of an entirely distinct section 32. Any phrases, therefore, such as "at a price which was affected by such statement," which tend to make the liability commensurate with the actual damages sustained by a plaintiff, should be retained in the section. The provision "at a price which was affected by such statement" was contained in the original Senate and House bills which were introduced simultaneously as H. R. 9323 and S. 3420 of the Seventy-third Congress, second session, and which with some amendments, but not on this point, eventually were enacted as the Securities Exchange Act of 1934. The passage of these bills was advocated by Mr. Landis, who was then a member of the Federal Trade Commission and who subsequently became the Chairman of the Securities and Exchange Commission. The original Securities Act of 1933 had contained provisions in regard to liability which were widely criticized. The justice of some of this criticism was recognized, and section 18 (a) of the Securities Exchange Act of 1934, together with certain amendments to the liability provisions of the Securities Act of 1933, which were also contained in the act of 1934, represented the mature opinion of the advocates of the legislation, some of whom were also charged with its enforcement, as to the nature and extent of the civil liability which should be imposed. Now, after months of negotiation between representatives of the Securities and Exchange Commission and the securities industry, and over the objection of the latter, the elimination of the words, "at a price which was affected by such statement," has been suggested. In the report of the Commission accompanying the suggested change no instance is given of any actual case where the presence of these words has resulted in any hardship or injustice. On page 14 of its report dated August 7, 1941, accompanying its proposals for the amendment to the acts, the Commission gives three arguments for its advocacy of the proposed amendments under discussion, all of which can readily be answered: 1. The Commission suggests that: The plaintiff must in any event prove that he relied upon the untruth or omission and that his damage resulted from such reliance. The correctness of this statement depends on what is meant by the word "damage." The fact is that the removal of the words "at a price which was affected by such statement" might make it possible for a plaintiff to establish a statutory damage where no actual damage existed. Thus an investor might buy stock at $100 in reliance on a statement filed pursuant to the act. By reason of depression, war, or other extraneous circumstances the security might fall to $50 and be sold at that price. However, a material error might exist in the statement. The fall in price would not have been caused by this error. Perhaps the error might not have been discovered until after the stock was sold. The loss of $50 would not be caused by the error. Neither the purchase price nor the sale price would be affected by the error. But if the words "at a price which was affected by such statement" are removed from the statute, it would seem that the remaining language would give the plaintiff a statutory claim, since he purchased the security in reliance upon the statement and his loss was caused partly at least by such reliance. 2. The Commission states that it considers: * that it is unreasonable to impose the difficult, if not impossible, additional burden that he [the investor] prove that the price of the security was in fact influenced by the specific untruth or omission. Certainly this burden is not impossible. In cases in which an untruth or omission is of a serious nature, its discovery almost surely will have a discernible effect upon the market prices of the securities of the company concerned. For example, the discovery of substantial errors in the financial statements included in annual reports of McKesson & Robbins, Inc., was immediately followed by a drop in the prices of securities of that company. Whether the burden would be difficult or not depends entirely upon the facts in each case. If the plaintiff is unable to convince a court and jury that the price at which he bought |