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which is a much shorter distance, and the cost to the litigant would be reduced.

Mr. HOLTZOFF. From the outlying sections of the ninth circuit, say, in Montana, it is quite a long trip to San Francisco.

Senator McAdoo. But not as long as to Washington.

Mr. HOLTZOFF. No; not as long as to Washington. But there are many points in some of the circuits, in the ninth and tenth, and I think in the eighth and the sixth, where the journey from outlying points in the circuit are perhaps less in the matter of mileage, but actually would not present any less difficulty than coming here.

Senator Adams. The tenth circuit is not quite a fair example. That happens to be a rather compact circuit and they meet in several different places.

Mr. HOLTZOFF. The eighth circuit, I think, is a large one, and they meet in St. Louis and in St. Paul. But some points in that circuit are a long ways from the places of the sitting of the court.

Senator ADAMS. Really, travel is not as difficult out in the West now as it used to be.

Mr. HOLTZOFF. And then, of course, the economy of administration comes in. It is cheaper to have the Government lawyers appear here.

Senator Adams. That is true from the standpoint of Government lawyers, but we are thinking of the other fellow.

Senator McAdoo. We are thinking of the poor devils who are in trouble.

Mr. HOLTZOFF. Well, I just wanted to present those considerations,

Senator CostiGAN (presiding). You present the recommendation in behalf of the Attorney General, do you?

Mr. HOLTZOFF. Yes, sir.
Senator COSTIGAN (presiding). Very well.

We thank you. (Thereupon Mr. Holtzoff left the committee table.)

Senator COSTIGAN (presiding). Mr. Butler, please come up to the committee table, and give your name, address, and official connection to the committee reporter.



Mr. BUTLER. Mr. Chairman and gentlemen of the committee, before proceeding with the remarks that I have planned to make, it would perhaps be well to refer to the testimony that was given this morning, while it is still recent. The first witness

Senator COSTIGAN (interposing). Mr. MacLean?

Mr. BUTLER. Yes. He referred to securities that are outstanding at the present time. There has been a unanimous agreement on that point, and the bill with the amendments that I have to submit this morning includes an amendment exempting securities that are outstanding on the date of the approval of this act, with the exception of securities of companies that have not been going concerns for at least one year immediately preceding the date on which they are offered for sale.

Senator ADAMS. When you say "by unanimous agreement”, whom do you refer to?

Mr. BUTLER. I mean a unanimous agreement among the proponents of the bill.

Senator COSTIGAN. Are the views which you express here the views of Mr. Huston Thompson?

Mr. BUTLER. Yes, sir.
Senator COSTIGAN. And of anyone else?

Mr. BUTLER. Of all of us who have been interested in the framing of this bill.

Senator CostiGAN. Very well. You may proceed.

Mr. BUTLER. Mr. Creigh, the second witness, spoke of commercial paper. In connection with short-term commercial paper, the Federal Reserve Board proposes an amendment to the definition of securities which will exempt commercial_paper maturing within 9 months that is eligible for discount with Federal Reserve banks.

Senator ADAMS. Their definition was practically that of the statutes in reference to paper eligible for discount in Federal Reserve banks. I heard it read.

Mr. BUTLER. Yes, sir. That suggestion also is accepted with the unanimous approval of the proponents of this bill and will no doubt receive the consideration of the two committees.

There was also a discussion by Mr. Creigh concerning the inconvenience or embarrassment that would be caused by the revocation clause, section 6 of the bill, particularly for fraud. The Securities Act of the State of Illinois provides as follows:

The Secretary of State shall also have the power at any time after 5 days' notice to the seller of securities, when insolvency exists or when in the opinion of the Secretary of State the future sale of such securities would work or tend to work a fraud upon purchasers thereof, to suspend or cancel the permission to sell those securities.

I just wanted to mention that in passing. Mr. Creigh seemed to be under the impression that revocation under this bill could be ordered in event that any salesman handling a security had or was about to commit fraud. The bill is not so drawn. Revocation in the case of domestic securities relates only to the fraud of the issuer and not to the fraud of anyone else connected with the transaction, such as a dealer or a salesman.

I just wished to make those remarks in connection with the testimony which has been given here this morning.

The CHAIRMAN. The chairman would like to say that more complaints or criticisms or objections have come to me respecting those two features of the bill than to any other. And, first, as to the liability of directors. Mr. BUTLER. Yes, sir.

The CHAIRMAN. Pretty universally that matter is criticized. And then as to revocation. Those are the two main features, it seems to me, in the bill that are objectionable.

Mr. BUTLER. I realize that an attack is being made on those two features of the bill, and shall discuss them more in detail a little later,

if I may

Senator GORE. Might I ask you a question right there?
Mr. BUTLER. Yes, sir.

Senator GORE. Is the bill that you are discussing now patterned pretty much after the Illinois statute that you have quoted?

Mr. BUTLER. No, sir. I mentioned the Illinois statute because the gentleman who was testifying was from Illinois.

Senator GORE. Well, that act in Illinois seems to have failed of its purpose.

Mr. BUTLER. That is true of the laws of most of the States, Senator Gore, because a State is unable to control transactions in interstate


Senator GORE. Yes, but even as to intrastate transactions. Take the Insull securities issued in Illinois I suppose, which was one of the most colossal frauds apparently in the United States. And yet it was not interdicted or forbidden or prevented by this Illinois statute.

Mr. BUTLER. That appears to have been the case; yes, sir; and I shall discuss that in greater detail in discussing the State laws and their ineffectiveness at times.

Senator GORE. Yes.

Mr. BUTLER. With the committee's permission I should like at this point to request that a study prepared in the Department of Commerce be inserted in the record as an appendix. It was the study on which this bill was drafted. It was prepared before the outline of the bill was drawn and summarizes briefly the economic necessity for such legislation, classifies the State laws, and then reviews the decisions, chiefly Supreme Court decisions, on which the constitutionality of the proposed bill is based.

Senator GORE. Do you have extra copies?
Mr. BUTLER. Yes, sir; I have.
Senator GORE. Let me have one, please.

The CHAIRMAN. Without objection, that will be incorporated in the record as an appendix to the hearing.

(The study presented by Mr. Butler, entitled "A Study of the Economic and Legal Aspects of the Proposed Federal Securities Act Prepared in the Department of Commerce," appears in full at the end of these hearings.)

Mr. BUTLER. The committee has heard for several days past a rather comprehensive discussion of most of the important features of the bill, but there has been a great deal of misapprehension in the testimony of some of the witnesses, due perhaps to an unfamiliarity with the provisions of the bill itself, and at times the discussions have gone rather far afield.

I can perhaps best serve this committee, if I can serve at all, by attempting at this time to restate the fundamental issues and to attempt to explain some of the confusion that has arisen.

The issues, as I see them or rather the subjects of discussion-may be classified into three divisions: First, existing legislation concerning security sales; second, Federal legislation that has been proposed heretofore; and third, the bill we are discussing at present.

I have been rather startled at times to hear comments of some of the witnesses concerning State laws, when the obvious facts concerning State legislation is all collected here in a single conveniently arranged volume that may be obtained at nearly any law library.

Senator GORE. Entitled what, a collection of blue sky laws, or something?

Mr. BUTLER. Stocks and Bonds Law Service by the Commerce Clearing House.

Senator GORE. Oh, yes.

Mr. BUTLER. A loose-leaf volume that is kept up to date by that clearing house.

On four different occasions I have heard four different witnesses say that none of the States permit or authorize revocation on grounds similar to those contained in this bill.

They referred to subsections (e) and (f) formerly in this bill which authorized revocation of registration if the affairs of the issuer were in unsound business condition or not based upon sound business principles. As a matter of fact, I have here a list of 22 States

Senator ADAMS (interposing). Mr. Butler, the real question we have is as to whether this law that is here proposed contains certain features, rather than what is in the State law, is it not? That is, the State law might have one thing or might not have it. It would not necessarily determine what this legislation ought to be.

Mr. BUTLER. I did not make that statement in support of the Federal bill.

Senator Adams. Because you have already said to us the State laws have been ineffective, and it occurs to me an argument based on the State laws, if they are ineffective, is not very helpful to us.

Mr. BUTLER. I did not make that statement as an argument in favor of the Federal law, but as an example of some of the inaccuracies that have gone into this record.

Senator ADAMS. That is customary.

The CHAIRMAN. I think it would be very well to give us the number of States that have that sort of law.

Mr. BUTLER. In that connection I should like to submit a list of 22 States, with extracts from their legislation, in which their power of revocation is based on anything from ill repute to business principles that jeopardize the interests of stockholders, and including 10 States. that use exactly the same language that is used in the Federal bill.

Senator GORE. Could you state or approximate the number of instances where the power of revocation has been exercised and what consequences followed?

Mr. BUTLER. I cannot state that; no. I am not familiar with that feature of the legislation; that is, the practical application of it. I have not followed it up.

The CHAIRMAN. Do you wish to insert that in the record, that list?
Mr. BUTLER. Yes, sir. I would like to.
The CHAIRMAN. Without objection, it will be inserted in the record.


SECURITIES Act Subsections (e) and (f) of section 11 (p. 13) which authorized the Commission to revoke registration of a security issue if it should appear that the affairs of the issuer were in an unsound condition or not, based upon sound business principles, were subjected to considerable questioning during the hearing before both committees and four stated that similar provisions do not exist in State legislation.

An examination of State legislation shows that these statements are inaccurate and that there is nothing novel in extending to the appropriate administrative officer or commission the power to revoke registration or permits for the causes shown, provided always that the revocation order is subject to proper judicial review, a provision for which has been included in the proposed Federal securities bill. There is attached a memorandum containing excerpts from the securities laws of 22 States showing that the administrative units in those States have the same or broader powers of revocation than those proposed by the Federal bill. Ten of these States use provisions almost identical with the proposed Federal act and were, no doubt, the basis for the language employed in the Uniform Sales of Securities Act. Thirteen go still further and authorize revocation on the ground of “bad business repute" or that the business is conducted in such a manner as to jeopardize the financial interests of stockholders or investors. These provisions are found in both the "prior approval" and "permissive" types of registration.

The proposed Federal bill is definitely of the "permissive" type, for it is believed undesirable to require the Federal Government to approve a security in advance. It would be incongruous, however, to permit securities to be advertised as registered with the Federal Government when it is known that they are unsound and to leave the Commission powerless to revoke the registration. While it would be extremely undesirable to require that the Government approve securities in advance, there would be no great danger in empowering it, for sufficient cause shown, to declare certain securities undesirable by revoking their registration.


(C.C.H. refers to the loose-leaf service of the Commerce Clearing House) Alabama (C.C.H., vol. II, par. 7076G).-- The permit (of the dealer) may be revoked by the commission at any time if it finds that the issuer is not solvent or that his organization and methods and plans of doing business are pot fair, just, and equitable.

California (C.C.H., vol. II, par. 7038B).—The commissioner may revoke permit if he finds that the applicant's proposed plan of business is unfair, unjust, or inequitable.

Florida (C.C.H., vol. II, par. 7082).—The commission may revoke registration of security if issuer is (5) of bad business repute; (7) its affairs are in an unsound condition; (8) that the enterprise of business of the issuer or the security is not based upon sound business principles.

Georgia (C.C.H., vol. II, par. 7089-7093).—Dealer's permit may be revoked if he is of bad business repute.

Indiana (C.C.H., vol. II, par. 7078).--Commission may revoke registration of security if issuer is (5) of bad business repute; (7) that its affairs are in an unsound condition.

Iowa (C.C.H., vol. II, pars. 7087-7100).--Secretary of state may revoke registration of security if it is found that the issuer is (5) of bad business repute; (7) that its affairs are in an unsound condition; (8) that the enterprise or business of the issuer is not based upon sound business principles.

Kansas (C.C.H., vol. II, par. 7073).—Charter board may revoke registration of securities if it is found that (6) the enterprise or business is against public policy; (8) that the business is not conducted upon sound business principles.

Kentucky (C.C.H., vol. II, par. 7074).—Commissioner may revoke registration of security if it is found that the issuer is of (5) bad business repute; (8) that the enterprise or business of the issuer is not based upon sound business principles.

Louisiana (C.C.H., vol. II, par. 7007).—Commissioner may revoke dealer's permit "for cause."

Maine (C.C.H., vol. II, pars. 7017–7024).—Commissioner may revoke dealer's permit “for proper cause.

Minnesota (C.C.H., vol. II, par. 7049).—Commission may revoke the registration of a security "for good cause appearing to the Commission."

Montana (C.C.H., vol. II, par. 7036).—Commission may revoke permits to investment company whenever it shall appear that it is conducting its business in an unsafe, inequitable, or unauthorized manner or is jeopardizing the interests of its stockholders or the investors in stocks, bonds, or other securities.

New Hampshire (C.C.H. vol. II, par. 7027).—The commission may prohibit the sale of securities if they are of "such a character that there is serious financial danger to the purchaser in buying them.”

North Dakota (C.C.H., vol. II, pars. 7005–7006).—Commission may revoke permit to sell securities for (5) "lack of adequate proof sufficient to satisfy the commission of the soundness of the venture or enterprise or prospective success thereof''; (6) “that in the judgment of the commission the prospect of future earnings is too uncertain

Oklahoma (C.C.H., vol. II, par. 7111).—Commission may revoke dealer's permit if it shall find that he (4) has demonstrated his unworthiness.

Oregon (C.C.H., vol. II, par. 7051).—Commission may revoke permit if it finds that “issuer is of such security or securities is insolvent or is conducting his or its business in such manner as to jeopardize the interests of creditors or investors."

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