SECURITIES ACT

TUESDAY, APRIL 4, 1933

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The committee met, pursuant to adjournment on yesterday, in room 301, Senate Office Building, Senator Duncan U. Fletcher, presiding.

Present: Senators Fletcher (chairman), Wagner, Barkley, Gore, Costigan, Reynolds, Byrnes, Adams, Norbeck, Townsend, Steiwer, Carey, and Kean.

The CHAIRMAN. The committee will resume its hearings on S. 875. Is Mr. Breed here this morning?

Mr. DEAN. Mr. Breed had to appear before the House committee this morning, Mr. Chairman.

The CHAIRMAN. He stated he wanted 5 minutes this morning.
Mr. DEAN. He asked me to carry on in his absence.

The CHAIRMAN. Then do you wish to be heard at this time?

Mr. DEAN. Yes; if you please.

The CHAIRMAN. The committee will now hear Mr. Dean on S. 875.

Please state your name, address, and occupation.

STATEMENT OF ARTHUR H. DEAN, 48 WALL STREET, NEW YORK CITY, ATTORNEY AT LAW

The CHAIRMAN. Whom do you represent now? speaking for?

Who are you

Mr. DEAN. I represent a large number of industrial and publicutility clients and investment bankers. I am appearing generally in their behalf, but am not appearing for any particular group or any particular client.

The CHAIRMAN. Have you examined this bill?

Mr. DEAN. Yes, sir.

The CHAIRMAN. State briefly what you wish to say about it.
Mr. DEAN. Very well.

The CHAIRMAN. Be as brief as you can for we must hurry along. Mr. DEAN. I have examined this bill with great detail due to the fact that we will be called upon to advise corporations whose securities would have to be qualified under it or advise investment bankers who may be purchasing securities.

We are in sympathy with the fact that the investor should have full and complete information. We are in sympathy with the President's message. This bill, however, will not accomplish, in our opinion, the President's message and will not afford adequate protection to the investor.

The bill seems to be a hopeless confusion of ill-assorted provisions lifted bodily out of the English Companies Act, the proposed Uniform Sales of Securites Act, and certain of the various blue sky laws.

Now, those various blue sky laws proceed on different theories. This bill seems to proceed on no one theory, and seems to be contradictory in several places. It will work a very great burden on the small business man because the preparing of the data required here will represent a very substantial portion of any loan. The bill applies to ordinary business transactions in interstate commerce even where the issuance of no securities is involved.

Senator ADAMS. Would you mind making that a little clearer? Mr. DEAN. Yes; I will be glad to make that clearer. The bill, for example, says that sending across State lines of any certificate of interest in an oil well, for instance, is interstate commerce and therefore regulated by this bill. That would prevent an oil company which is constantly buying certificates of interest in oil wells in Oklahoma and Texas from doing that sort of business unless full data with respect to the oil well were registered with the Federal Trade Commission. It would prevent an automobile dealer from sending in interstate commerce automobile paper to a financing committee for discount.

Senator ADAMS. The sponsors of the bill, those who drafted it, have met those contentions by referring us to that section relating to isolated transactions.

Mr. DEAN. That is an extremely narrow provision, and I do not believe that would cover anything except a very few transactions. That definition is:

Isolated transactions in which any security is sold, offered for sale, subscription, or delivery by the owner thereof, or by his representative solely for the owner's account, such sale or offer for sale, subscription, or delivery not being made in the course of repeated and successive transactions of a like character by such owner for the purpose of engaging in the purchase and sale of securities as a business, and such owner or representative not being the underwriter of such security.

Senator GORE. What section is that?

Mr. DEAN. It is section 12, subsection (c). If an automobile dealer is buying paper every day might he not be engaged in successive and repeated transactions?

Senator BYRNES. As a business, it says. Don't forget those three words.

Senator BARKLEY. This refers to the business of sales of securities. Mr. DEAN. There are a number of decisions by State courts, and particularly the Court of Appeals of the State of New York, which hold that where a person is engaged in successive and repeated transactions he is engaged in that business.

Senator BARKLEY. But they do not hold any successive transactions as an incident to the main business as constituting such a situation, do they?

Mr. DEAN. Some decisions I believe go that far. And I believe this language unless qualified would cover such a situation.

Senator BYRNES. He takes paper in payment for an automobile? Mr. DEAN. Yes, sir.

Senator BYRNES. Does the court say if he is engaged in accepting successive paper he is engaged in banking transactions?

Mr. DEAN. Yes, sir. There is a decision in our court of appealsSenator BYRNES (interposing). I should like to see that decision. If they say if he is accepting continued and successive payments he is in the banking business I am surprised.

Senator CAREY. You refer to successive paper?

Mr. DEAN. Yes, sir. There are various State laws as to what constitutes engaging in the sale of securities, and as to what constitutes engaging in the banking business, and if you use language here which is also used in those State statutes

Senator BYRNES (interposing). Have you any State statute using such language?

Mr. DEAN. This particular language?

Senator BYRNES. Yes.

Mr. DEAN. I have not it available but can supply it.

Senator BYRNES. Well, supply it. I should like to see it. I should like to see anything that would justify an argument that this would constitute a prohibition against that kind of trading.

Mr. DEAN. I have prepared a detailed analysis of the bill, line for ine, and suggestions in connection with the bill. Unfortunately, it was garbled somewhat by the printer last night and I will not be able to submit it this morning as I had intended.

Senator GORE. Will you furnish it later?

Mr. DEAN. Yes; I will.

The CHAIRMAN. Then you may go ahead with your statement. Mr. DEAN. In our opinion this bill should not apply to outstanding securities. If it does apply to outstanding securities it would not be possible for all the information with respect to outstanding securities to be assembled and filed within 90 days after the passage of the bill. In case of large corporations being called upon to assemble this information, in some cases it would take months, if not years. This is especially true of corporations having investments in foreign countries.

Senator BARKLEY. Might I have that print of your analysis that you have in your hand?

Mr. DEAN. This was garbled somewhat by the printer, but I will furnish it later on. You may take it to refer to now if you wish. Senator BARKLEY. All right.

Mr. DEAN. We also feel that the requirement for filing under section 5 should be limited to original offers. If it is not limited to original offers it will practically stagnate the security markets inasmuch as no broker would dare to accept an offer coming from a different State unless he had an affidavit that it was an isolated transaction. He would have no means of knowing, when a customer sent him any securities for sale, whether or not that customer had been engaged with other brokers in successive and repeated transactions. It would also prevent a bank, or a savings bank, or insurance company, from liquidating its holdings. Just last week one of my clients was asked by a large insurance company which held some high-grade railroad and public-utility bonds, to engage in a secondary distribution of those securities. The most of them are listed under various stock exchanges, and all of them have been approved either by the Interstate Commerce Commission or the various State publicutility commissions. If all this information had to be filed each time those securities were again offered, it would mean that the infor

mation would be filed with the Federal Trade Commission many times daily and would prevent the legitimate business of the country. Senator BYRNES. What language in the bill are you objecting to along that line?

Mr. DEAN. Well, the bill says

Senator BYRNES (interposing). Do you say a man must cease to offer or accept for sale a security unless you have had it registered? Mr. DEAN. All right; I will tell you

Senator BYRNES (continuing). Well, the security is registered and it has been offered for sale through the mails. Now, what do you complain about in that situation?

Mr. DEAN. I will show you in detail what cannot be done. Senator CAREY. Didn't Mr. Thompson say on yesterday that this statement only had to be made once?

Senator BYRNES. That is just what I have in mind in propounding my question.

Mr. DEAN. Mr. Thompson said that, but the bill itself seems to provide differently.

Senator BYRNES. Let us see the language of which you complain. Mr. DEAN. Section 2, subsection (c), on page 2, defines what shall be a sale.

Senator BYRNES. What line?

Mr. DEAN. Page 2, line 17, defines what would be a sale. Section 3, on page 5, states:

That until there shall have been registered with the Commission the statement hereinafter referred to

And that refers to section 5

in accordance with the terms and conditions provided by this act and by the rules and regulations promulgated pursuant thereto, it shall be unlawful.

That means it shall be illegal for any person either to sell or accept for sale or to buy a security in interstate commerce. Supposing that this bill were to apply to outstanding securities, and a corporation stated: "We are not interested in filing the information required by section 5, we are not going to do any additional financing, and we, as directors, do not see why we should undertake this liability. Therefore, we are not going to file that information." Then no one could sell a single security until that information was filed. It would absolutely paralyze the present security markets, and it would freeze practically every investment going through interstate com

merce.

Senator BYRNES. Your complaint is directed to the prohibition to outstanding securities.

Mr. DEAN. It is also directed

Senator BYRNES (interposing). You heard Mr. Thompson say for the group drafting the bill, that although the language did apply to outstanding securities they thought it might well be amended. He rather approved the suggestion that it be amended, and that it apply so far as outstanding securities are concerned, only to those authorized but not issued. In other words, if hereafter certain securities were issued, which had theretofore been authorized but not issued, it should apply to them but to nothing else. That was his statement. Senator CAREY. He offered this amendment, therefore, in line 7: Or if such registration has been revoked as hereinafter provided.

The CHAIRMAN. Does that proposed amendment fit the objection you make?

Mr. DEAN. I would have to go through the entire bill, because there are other provisions in the bill which seem to me to be in conflict with that amendment.

Senator BYRNES. Show us those provisions.

Senator BARKLEY. If the bill is amended so as not to apply to outstanding securities it will be amended all the way through.

Mr. DEAN. Yes; but I mean as to that particular amendment.
The CHAIRMAN. You may go ahead with your statement.

Mr. DEAN. Section 5 requires that there shall be filed, in brief, the name of the issuer, the names and addresses of the promoters; and I might state right there that in connection with a corporation organized in 1881 I do not see how that could be done. So it ought to be made clear that that only applies to a new corporation to be formed. The purposes of incorporation

Senator BYRNES (interposing). Wait a minute. The names and addresses of directors.

Mr. DEAN. Of the promoters.

Senator BYRNES. Yes.

Mr. DEAN. It does not say in the case of a corporation to be organized. It says the names and addresses of the promoters. In the case of the United States Steel Corporation that would require going back to 1901 and finding out who promoted it, which is an absolute impossibility.

Senator BARKLEY. If the bill is amended so as not to apply to outstanding securities, and merely provides that it may apply to any securities authorized but that have not been issued, it would then apply to promoters of the new issue. It ought to apply to them, I take it.

Mr. DEAN. The word "promoters" should be defined in this bill as it is in the English Companies Act, as people sponsoring a new corporation.

Senator BARKLEY. It might not be a new corporation. Take the United States Steel Corporation, and we will say it proposes to authorize a new issue of stock, and an entirely new set of men are in charge of it. In that case the board of directors would be the promoters.

Mr. DEAN. Yes; they would do the filing, but technically speaking they would not be promoters in connection with the issue. Unless you are using the name "promoters

Senator BARKLEY. There might be someone connected with the sale of it who would be promoting the sale.

Mr. DEAN. Then you should name the investment banker or the broker buying the stock.

Senator WAGNER. Has the word "promoter" been given any judicial interpretation at all? Or does it rely upon definitions in statutes? Mr. DEAN. It relies pretty generally upon common usage, but there are definitions in some. I could not define a promoter now.

Senator BARKLEY. What is the English definition of the word "promoter"?

Mr. DEAN. Could I give you that later, and now go on with my statement?

Senator BARKLEY. Yes.

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