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Senator ADAMS. That is only theoretical. In practice it is different. I come from a community in which we have just had a big building and loan association close up. It is the biggest institution that we have had in our community. They circulate all down through Senator Gore's country as well as in our State. They solicit subscriptions through the mails in that section and other places.

Senator REYNOLDS. Why should they be exempt?

Mr. JAMES. We do not know how we are going to operate in these serial States if this law is going to impose any such burden upon us. They issue two series a year.

Senator GORE. Well, would a proviso relating to serials accommodate that situation?

Mr. JAMES. Well, a good many of the others issue stock; they issue stock at any time, and you cannot tell. A building and loan association may have an authorized capital of $10,000,000 and may have only a paid-in capital of $1,000,000. And that conflicts.

Senator KEAN. Mr. Witness, would this affect your building and loan associations at all if you did not do an interstate business?

Mr. JAMES. Senator, we do not attempt to do an interstate business. But this happens. People move from one section to the other, and these associations of course send their little pamphlets by mail to their subscribers when new issues come out, and under this law we would be violating the law if we did that.

Senator KEAN. You would have to confine yourself to the State in which you were located.

Senator GORE. You do not have any way of estimating how many concerns will have to register statements with this Commission, do you?

Mr. JAMES. We believe that every one of the 11,000 associations have members in other States than the State in which the association is located.

Senator GORE. Those are the building and loan associations. But taken by and large, all the concerns that would have to register with this Commission, you have no way of estimating how many there are?

Mr. James. I have no way of estimating that, Senator Gore.

Senator GORE. What I am getting at is that I think it ought to pay its way. But I think the fee ought to be nominal.

Mr. JAMES. One of the Government men suggested to me that they could give us a fee on a certain issue, but we can never tell what our issue is going to be.

Senator BARKLEY. Who do you mean by “one of the Government men”?

Mr. James. We were talking with Mr. Miller and Mr. Butler, who drew the bill. We thought that they had made a mistake in putting us in.

Senator GORE. Who are Mr. Miller and Mr. Butler?

Mr. JAMES. Mr. Miller is with the Commerce Department. Mr. Butler is the attorney for the Commerce Department.

The CHAIRMAN. You feel that the building and loan associations would have to register under this?

Mr. James. That is their interpretation of the law; yes, sir.

The CHAIRMAN. And now you want to exempt them from these fees?

Mr. James. We think we ought to be exempted in section 11, but we are willing to stay in in sections 13 and 14, the fraud section and the other section. We believe it will put us out of business in a great many States if the law goes through as it is at present.

The CHAIRMAN. I see the point.

Mr. James. Mr. Chairman, I forgot one important thing in my statement, and that is this: A large number of associations in the United States are known as permanent associations. A man can come in at any time and subscribe for stock. In other words, Senator Gore could come in today and Senator Reynolds could come in tomorrow and they could subscribe for stock at any time. That is the permanent type. I only spoke of the serial type.

Now, it seems to me that it is a very serious thing for us as to what status that kind of subscription would have, whether each subscription would be a new issue, because our set-up is so different from any other financial corporation that it makes it difficult for us to fit into this picture.

I think your friend, George McKinnis down in Shawnee, Senator, runs a permanent association. You can subscribe one day and some one else can subscribe the next, and so on, and I do not know how you could work this law out to cover a situation of that kind without putting too great a burden upon the financial corporation.

The CHAIRMAN. All right, Mr. James. That concludes your statement?

Mr. James. Yes. The CHAIRMAN. You have a memorandum which you wish to place in the record?

Mr. JAMES. Yes.
The CHAIRMAN. It may be placed in the record at this point.

(Memorandum presented by Mr. James is printed in the record at this point in full as follows:) UNITED STATES BUILDING & LOAN LEAGUE,

April 1, 1933. C. CLINTON JAMES,

Chairman, Federal Legislative Committee, Washington, D. C. Memorandum re S. 875 and H.R. 4314, to amend section 11, see (f), page 4, 5. We note that in section 11, subsection (d), there is a definite intention to leave smaller mortgage credits outside the act. Ninety percent of our assets are in mortgages and it would therefore seem logical to deal with building and loan associations in such a manner that they carry on their activities uninterrupted by additional costs and reports.

this memo.

1. Building and loan associations commend and approve the objectives of the Federal Securities Act and assume that desire is to so construct the legislation and carry on its administration as to cure serious defects, frauds and the like in the origination and distribution of securities.

2. In building and loan we just don't know anything about syndicates or bonds or originating houses, underwriters or investment bankers, mergers or street certificates and the like.

3. There are 11,442 building and loan associations in the United States. They have 11,338,000 members, nearly 10,000,000 of which are investors, the balance being borrowers. The funds collected by the associations are loaned almost exclusively on small homes and the associations constitute the principal source of home mortgage money in the country. Average loan slightly in excess of $3,000.

4. Associations receive their funds, in the main, on shares of stock. Average member account, $700. It is essentially a thrift activity and it is a nonspeculative activity, which has an unusually fine record as regards losses to members.

6. Building and loan associations are more like insurance companies and savings banks, as far as this legislation is concerned. Although primarily local institutions, they usually have some shareholders who have moved to other States, just the same as a savings bank in New York or Massachusetts is apt to have some scattered depositors over the country. Many of these associations are located near the border line of the various States and sell their shares in contiguous States where the association happens to be located near the border line.

7. The over 3,000 associations in Pennsylvania and over 1,500 associations in New Jersey issue new series of stock, some quarterly and some semiannually, and notices of these new series are sent to their subscribing stockholders. Under the act as drawn, they cannot do this without filling out the burdensome reports, paying the fees and having all of their printed literature and the like encumbered with the type of facts and information that are necessary in a foreign bond or national security issue.

8. There would be great difficulty in determining one hundredth of 1 percent of the aggregate par value”, installment shares particularly.

9. On page 19 of the mimeographed pamphlet entitled “A Study of the Economic and Legal Aspects of the Proposed Federal Securities Act”, the following statement is made as to classification of securities under the State laws: “Ordinarily, these enactments classify securities according to their inherent qualities and transactions according to their character. In some States securities are divided into two classes only, 'speculative' and ‘nonspeculative', with an exemption in favor of the nonspeculative issues and a requirement that speculative securities comply with prescribed regulations." Building and loan associations are nonspeculative and should receive the same treatment of exemption in this act as they have received in the State laws.

10. Exemptions: In the same mimeographed pamphlet on page 20, under “exemptions”, appears the following:“These various exemptions are, naturally, included in blue sky laws for the purpose of leaving the channels of legitimate business as free as practicable from unwarranted obstruction by statutes intended only to regulate or prevent speculative and fraudulent transactions. It would serve no useful purpose here to list the various exemptions made in the 43 States but those most usually occurring are found in the Michigan law and may be summarized as follows:

“Securities: *

" (f) Issues of banks under State or Federal control and of building and loan associations organized under the laws of the State."

11. We approve vigorously and are quite willing to be subject to section 13, which is the "fraud" section, as we understand it, and section 14, which protects any State from activities not permitted within State A, but permitted in State B.

12. The cost of administering the provisions of this act has been estimated at $100,000 per annum. If the associations of Pennsylvania, New Jersey, Ohio, and Illinois, which have 6,508 associations, were required to comply with this act, their registration fee would amount to $325,400 besides the one hundredth of 1 percent on each new issue of stock.

We therefore petition that section 11 be amended by adding the following language:

"(f) Any security issued by a building and loan association, savings and loan association, cooperative bank, and homestead association operated under the laws and subject to the examination, supervision, and control of any State of the United States or any insular possession or the District of Columbia.'

Looking at section 8 of this act which covers the advertising feature, a building and loan association advertising in its local newspaper that is sold in other States, would violate the provisions of this act.

The CHAIRMAN. Colonel Carter, whom we asked yesterday to appear, is here.

We will hear him next.



The CHAIRMAN. Will you state your name, address, and occupation?

Mr. CARTER. My name is Col. A. H. Carter. Address 15 Broad Street, New York. I am the president of the New York State Society of Certified Public Accountants.

If I may, Mr. Chairman and gentlemen of the committee, I would like to read this short statement, and then go back and in detail discuss any of the points.

The CHAIRMAN. That will be all right.

Mr. CARTER. At the outset I wish to state that my sympathies are with the general principles of the proposed bill known as the Federal Securities Act. I also wish to have it understood that I would advocate that, if possible, the proposed bill be changed so as to afford even greater protection to the investor than it now contemplates.

The purpose of this bill is well understood as intended to protect the investor from unscrupulous issuers, but not to penalize the many thoroughly honest houses of issue, corporations, and businesses whose issues have been sold with absolute honesty and on the highest plane of business ethics. I am sure that you do not intend that this legislation shall injure a single honest issuer of securities but rather will throw the dishonest issuer out of business.

When this bill was made public considerable favorable attention was attracted to the statement that it was designed to emphasize the principle of caveat venditor as much as caveat emptor.

As the bill now reads it places upon the Federal Trade Commission the responsibility of determining many questions surrounding the issuance of securities. By its present terms, it imposes highly technical responsibilities upon the Commission as to accounting principles, their proper application and their clear expression in financial statements.

Furthermore, it imposes upon the Commission the responsibility of detecting the unscrupulous issuers who may attempt to veil the true picture of their enterprise. Thus the burden of proof would be placed upon the Commission rather than upon the issuer to develop full and reliable information.

To avoid this I suggest that lines 21, 22, and 23 of subsection 4-A under section 5 on page 8 be amended to read as follows-I would substitute this: “issuers income, expenses, fixed charges, and analysis of surplus for the three years”-instead of one—"or if in actual business for less than three years,” for the period they had been in business.

The Chairman. I did not quite get that. You said page 8?
Mr. CARTER. Page 8, lines 21, 22, and 23, Senator.
The CHAIRMAN. “Statement of the amount of issuers income."

Mr. CARTER. I am adding to that requirement that you have there "and analysis of surplus," and instead of requiring the income statement to be for one year, make it for three years. The reason for that is that it is most difficult to judge the average earning capacity of any company by studying an income and surplus statement for just one year. You might have a situation where the income statement would show a profit of a half a million dollars this year. It might have shown a loss of a million dollars last year. At present prospectuses accompanying the issuance of securities generally give such statements for 3 years or more.

We have had that in this country for a number of years.

Senator GORE. It has not done much good, then, has it?

Senator REYNOLDS. In other words, your suggestion is designed to not be of injury to reliable companies who have been operating honestly and profitably?

Mr. CARTER. That is right.

The cardinal importance of this income account for the period that I mentioned is explained by the fact that the value of a business today or any day is dependent mainly upon its earning capacity, and you cannot judge an earning capacity accurately by one year's earning.

Senator GORE. You mean it ought to be the test.

Mr. CARTER. At the end of subsection 4-A of section 5 on page 8 I would suggest that the following be added after the words "actual business":

The accounts pertaining to such balance sheet, statement of income and surplus shall have been examined by an independent accountant and his report shall present his certificate wherein he shall express his opinion as to the correctness of the assets, liabilities, reserves, capital and surplus as of the balance sheet date and also the income statement for the period indicated.

That is, 3 years.

Senator BARKLEY. How much more and additional employment would that give to certified accountants?

Mr. CARTER. Eighty-five percent of the companies that are listed on the exchanges in New York today are examined.

Senator REYNOLDS. Do you think it proper to insert in there that these independent public accountants should be privileged to state their opinion as to the value of securities or the condition of the company?

Mr. ČARTER. We are unable to express an opinion as to the value of securities. I think the impression generally prevails that one who reads a balance sheet and an income statement regards the figures in such a statement as a defensible definitely ascertainable fact, whereas, as a matter of fact in reality it can only be an opinion based upon certain accounting assumptions which must be applied to the opinion of some individual as to values.

Senator REYNOLDS. Do you think they should be permitted to express their opinion about them?

Mr. CARTER. Yes.
Senator REYNOLDS. Will not the figures themselves show?

Mr. CARTER. The figures will not necessarily show. It depends upon how the accounts are treated. For instance, you might have an item capitalized that should be charged against income.

Senator BARKLEY. Do you think that the Federal Trade Commission's records or these reports ought to be encumbered by the bookkeeping processes by which accountants would arrive at an opinion as to the value of a stock?

Mr. CARTER. I do not see how the Federal Trade Commission can properly discharge its duty by merely accepting a statement that has not been independently examined and certified to by an accountant.

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