ard manuals. The bill as proposed would bring interstate trading to a standstill until individual traders found out whether the data had been filed with the Federal Trade Commission or not. The bill as drawn would require dealers to go back to 1492 in this country or to the fourteenth century when the English Government defaulted to the Florentine bankers.

Although there may be some question as to the intention the framers of the bill, there is no doubt that it covers all presently outstanding securities. For example, a house engaged in the business of selling and buying securities could not, after the passage of the bill, continue that business until the securities it proposed to buy and sell had been registered with the Federal Trade Commission. This would mean the immediate swamping of the Commission with applications for registration, and would shut down all the security business, except where brokers are acting as agents for bona fide investors. In the case of many issues, including most foreign government issues, the practical difficulties in the way of complying with registration requirements would be almost insuperable.

(c) Definitions are vague or lacking in the bill. There is no definition of "promoter." There is no definition of what constitutes an "underwriting syndicate." There is no definition of what is meant by an "original issuer."

(d) That section of the act, section 9, granting any person a right or rescission against any fraudulent vendor or against any signer of a statement, in case of any false statement, and further giving such person a right to damages for the losses he has sustained by reason of the falsity, imposes new and stricter penalties. The parties defending such suit are deprived of the defenses of good faith and due care. Further, the burden is upon them to show that the plaintiff did not rely upon the statement. Under existing law the burden is upon the plaintiff to show that he did rely upon the false statement in question. In the second place, the plaintiff may rescind against the officers and directors of the issuing company even though he acquired his security after any number of intermediate sales. The right of rescission bears no relation whatever to the chain of ownership of the security from original seller to final purchaser, and preserves no rights in favor of any inermediate party in the chain against him or any prior seller. Finally, the section establishes what is in effect a double liability, the two sources of liability, rescission and damages, being legally unrelated to each other and not mutually exclusive or even coextensive.

(e) The most serious provisions of the law, aside from those requiring signature of statements by all directors and making directors personally liable, are those of section 6 authorizing the Commission to revoke the registration of any security. The grounds upon which registration may be revoked give the Commission practically dictatorial power over all businesses of the country.

It is provided in subdivision (f) of section 6 that the registration. may be revoked if it appears that the enterprise or business of the issuer, or the security, is not based upon sound principles and that the revocation is in the interest of public welfare.

It is also provided in subdivision (e) of section 6 that the registration may be revoked if the Commission finds that the affairs of the issuer are in unsound condition, and in subdivision (d), if the Commission

finds that it is not conducting its business in accordance with law. Any fraudulent representation in any circular or literature at any time in the past history of the corporation is apparently a ground for revocation under subdivision (c) of the same section, notwithstanding that the management may have entirely changed and that there can be no criticism of its present method of doing business. Any infraction of civil laws, no matter how innocent, might be made the basis of revocation on the ground that the corporation "is not conducting its business in accordance with law.'

True, an appeal is allowed to the Court of Appeals for the District of Columbia, but before such an appeal is heard and decided, the damage is done. No appeal is permitted to the United States Supreme Court, it being provided that the jurisdiction of the Court of Appeals for the District of Columbia shall be exclusive and its judgment and decrees shall be final.

Merely as a suggestion for the consideration of the committee, we wish to say that, perhaps, the purpose could be better accomplished by having the Federal Trade Commission license various dealers, who had filed full data as specified by the Commission, and who had satisfied the Commission as to their integrity, ability, and financial responsibility.

The books of a dealer would be open at all times to a representative of the Commission. If a dealer made false reports, or conducted his business improperly, his license would be revoked.

We do not think that the financial responsibility imposed upon directors of the issuer, is wise. It would be better to have the issuer fully responsible for all statements and subject to prosecution by the Department of Justice for fraud, with heavy penalties, of fine or imprisonment, or both.

In the case of foreign financing we would suggest that the Federal Reserve Board and the Secretary of the Treasury might first determine whether such financing is in the interest of trade and industry in this country, and that no dealer should make any negotiation for the purchase of such securities until after clearance was had.

The purpose of the bill as we read it is for the protection of the investor, and also for the dealer. Both should be protected from unscrupulous so-called dealers. And it would be better if such dealers should not be in a position to obtain the semblance of goodness or decency because of a license and then go to the public and represent that they had that authority behind them. If they were subject to pains and penalties, such as a heavy fine and imprisonment, that would deter them. A man of financial worth would not take the responsibility as set forth in this proposed bill. The crook would be willing to do so. He is the man who would be willing to take that responsibility. He would put his property in another name, and there could be no recovery.

Finally, we are very happy that this committee is considering this bill, and hope that it can be modified so that it will accomplish its purpose.

I thank you.

Senator CoSTIGAN (presiding). Any further questions by members of the committee? [A pause, without response.] Anything further, Mr. MacLean?

Mr. MACLEAN. No.

Senator CoSTIGAN. We thank you.

Senator KEAN. Might I ask a few more questions, Mr. Chairman? Senator COSTIGAN (presiding). Certainly, Senator Kean.

Senator KEAN. Mr. MacLean, did you notice in this bill that, practically speaking, municipalities are not taken care of at all?

Mr. MACLEAN. Yes, sir.

Senator KEAN. Have you any suggestions on that line?
Mr. MACLEAN. What kind of suggestions?

Senator KEAN. That they should be included in the bill?
Mr. MACLEAN. Yes; if this can be legally done.
Senator KEAN. Why not?

Doesn't the public need to be protected

from municipals as well as all other securities? Mr. MACLEAN. That is true.

Senator KEAN. Therefore you would favor their being included in the bill, wouldn't you?

Mr. MACLEAN. As I think upon it, yes.

Senator KEAN. What do you think ought to be required of a municipality to be included in this bill?

Mr. MACLEAN. The same fundamental principles that should be included before a corporation issue is sent out.

Senator KEAN. Why?

Mr. MACLEAN. First, is the expenditure wise? Is it necessary? Is it a good thing, as we call it? Second, has the borrowing municipality the ability to pay? And, third, have all the legalities been complied with?

Senator CoSTIGAN (presiding). Have there been any notable instances of misrepresentation with respect to municipal securities? Mr. MCLEAN. There have been some, our experience has shown. Senator ADAMS. Was the misrepresentation made by the municipality?

Mr. MCLEAN. Yes. I have one or two cases in mind where the misrepresentation was as to assessed value, and the ability of the town to levy sufficient taxes to pay the services of the issue. Those cases are rare, however.

Senator KEAN. There are a good many bonds that you have floated, aren't there, at the present time, that are in default? Mr. MCLEAN. There are some; yes, sir.

Senator KEAN. And that is true of the most of the issuing houses, isn't it?

Mr. MCLEAN. I rather think so.

Senator KEAN. Therefore, you have floated bonds that you might have been a little more careful about.

Mr. McLEAN. I think the issues to which you refer might fall into two classes: First, where there was an error of judgment as to the trend of the industry, as to the existing usefulness. Second, where the industry itself, due to economic conditions, has completely changed. In that regard I would give you as an illustration the electric short lines, the interurbans, as we call them.

Sentor KEAN. Now, you have testified that if you buy a municipal. bond at 90 and you sell it at 90% you would make no profit whatever Mr. McLEAN. That is true in general; yes, sir.

Senator KEAN. That that would just get you out even.

Mr. MACLEAN. Yes, sir.

Senator KEAN. That is the general custom, isn't it?

Mr. MACLEAN. I believe so.

Senator KEAN. That other houses have to load purchases with at least three quarters of 1 percent in the case of municipals in order to get out even.

Mr. MACLEAN. I think that is a fair statement, as a general statement.

Senator KEAN. And in regard to other bonds you testified it would be 1% percent.

Mr. MACLEAN. Yes; or possibly 2 percent.

Senator KEAN. Or 2 percent.

Mr. MACLEAN. Yes, sir.

Senator KEAN. That you have to load an issue 2 percent to come out even, before you make any profit at all.

Mr. MACLEAN. Yes, sir.

MEMORANDUM

APRIL 7, 1933.

In connection with the expense of distributing securities at retail by an investment banker, it should be borne in mind that the business is not a brokerage business. When a broker executes an order, he is through, and therefore can do business on a narrower margin. An investment banker has a continuing liability and expense which remains until the maturity of the issue. He has a responsibility to his customer to keep acquainted with the condition of the utility, or industry, or municipality whose bonds he has put out. In case trouble arises, he must give time and thought to working out the situation in the interest of the security holder. He also undertakes to do numerous things for the customer, such as collecting coupons without charge. All of this means that the investment banker must maintain an organization, the expense of which is not inconsiderable, in order to discharge his duty to his clients.

Senator KEAN. That is all that I have to ask.

(Thereupon Mr. MacLean left the committee table.)

Senator CoSTIGAN (presiding). Mr. Creigh, please come around to the committee table and take a seat opposite the committee reporter. Give us your name, address, and business.

STATEMENT OF THOMAS CREIGH, GENERAL ATTORNEY CUDAHY PACKING CO., CHICAGO, ILL.

Mr. CREIGH. My name is Thomas Creigh. I am general attorney of the Cudahy Packing Co., Chicago. Having been with them something like 30 years I have had a good many business experiences, I think. I happened to be in the room the other day, when Mr. Breed was making his statement before the committee and

Senator CoSTIGAN (interposing). It has been suggested to the committee that you had some recommendations to make in regard to the provisions of the bill now under consideration.

Mr. CREIGH. Of course, I do not know what suggestions have been made to the committee, but my angle of it is at a very small point. Possibly it has been covered already. Now, just for the high spots.

The word "security" is defined here in such a way as it would take in a personal note, we will say, of any merchant. If, for instance, we may take the packing companies, and in our ordinary business with a butcher we should happen to have a butcher who is insolvent, or about to become so, and a series of notes of a little reorganization should be made and issued to pay creditors, under the law, if this

bill were enacted into law, all of them would be covered and a permit would have to be secured.

Now, I have not the slightest idea that you intended to cover such matters, down to the individual.

Senator ADAMS. I think the disposition was to exempt even what was known as commercial paper.

Mr. CREIGH. I was going to start out with the undoubted feeling that you must except what we will call commercial dealings, such as a little reorganization. Then to take my company as an example. It is a very large borrower of money at times, with a very substantial credit rating, with commercial brokers and banks handling many of our items. Of course, I should think that the routine business ought not to be within this bill. We are not promoters of stocks, bonds, or anything like that. It is just ordinary commercial dealings.

The bill itself as drawn, and as is proper, and it was drawn I suppose at least with the assistance of my very good friend, Huston Thompson, is broad enough to be quite a target for these things; but its fundamental purpose is the protection of the public, the investor, and that is something which is necessary. I know nothing of the details of the work of the promoter or of the seller of stocks and bonds and other securities to the public. But from the standpoint of the legitimate, old-time, well-established business, I did have some thought that we probably ought not to be within the terms of the bill. I do not mean our company alone, but all other such institutions. The bill seems to relate largely to what I think is the major difficulty, and I think it is the hardest to apply, the protection of securities to be offered to the public.

Senator ADAMS. You would recognize the propriety, would you not, of the fraud sections being made applicable even to commercial paper? In other words, you have in Chicago, as you know, note brokers. That is one of the centers of note brokers of the country.

Mr. CREIGH. Yes, sir. And they are very valuable at times. Senator ADAMS. Yes; I understand that they are very essential. And if one of those note brokers, some intermediary, should misuse these things, misuse the mails, I take it you would concede it would be proper to provide for prosecution of them, even though you do not think he should be required to make a registration of those securities. Mr. CREIGH. So far as the note broker is concerned I do not know anything about his business and I won't attempt to discuss it.

Senator ADAMS. And those securities go out through note brokers? Mr. CREIGH. Yes, sir. But as to registration of note brokers and making certain provisions in this bill as regard note brokers' business practices, that is his side of the matter. But as I read the bill, rather superficially I confess, if an issuer of securities should, perhaps five years after having floated a bond issue, have done something that is held to be fraudulent or a deceptive practice, then the investing public holding those securities is penalized upon the cessation of ability to sell that perfectly good paper. And that is the point at which I wish to make a major suggestion to you; and that is the point where I thought when Mr. Breed was here, some members of the committee and Mr. Breed were rather far apart in understanding each other.

To illustrate: Under the Federal Trade Commission Act, for example, and under the Packers and Stockyards Act, there are provisions that will prevent unfair trade practices. That leads, through