Page images

to pay the return fixed, has occurred for a continuous immediately preceding period of five years, when issued by a person, corporation, or other entity having à total capital stock issued and outstanding not in excess of $100,000.

SEC. 12. That, except as hereinafter otherwise expressly provided, the provisions of this Act shall not apply to any of the following transactions:

(a) Judicial, executor's, administrator's, guardian's, or conservator's sale, or any sale by a receiver or trustee in insolvency or bankruptcy.

(b) Sales by or for the account of a pledge holder or mortgagee selling or offering for sale or delivery in the oridinary course of business and not for the purpose of avoiding the provisions of this Act, to liquidate a bona fide debt, a security pledged in good faith as collateral for such debt.

(c) 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 of 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.

(d) The distribution by a corporation, actively engaged in the business authorized by its charter, of securities to its stockholders or other securities holders exclusively, as a stock dividend or other distribution out of earnings or surplus; or the issuance of additional capital stock of a crrporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock; or the issuance of securities to the existing security holders or other existing creditors of a corporation in the process of a bona fide reorganization of such corporation made in good faith and not for the purpose of avoiding the provisions of this Act, either in exchange for the securities of such security holders or claims of such creditors or partly for cash and partly in exchange for the securities or claims of such security holders or creditors.

(e) Bonds or notes secured by mortgage upon real estate or tangible personal property where the entire mortgage together with all of the bonds or notes secured thereby in the original transaction are sold to not more than five purchasers in an equal number of sales.

(f) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion, entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under the law or was, when sold, exempt from the provisions of the law. Upon such conversion the par value of the security surrendered in such exchange, or if of no par value the price at which it was originally offered to the public, shall be deemed the price at which the securities issued and delivered in such exchange are sold.

(g) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof under the laws of any State, when no expense is incurred, or no commission, compensation, or remuneration is paid or required for or in connection with the subscription, sale, or other disposition of such securities.

SEC. 13. That it shall be unlawful for any person, firm, corporation, or other entity in any interstate sale, promotion, negotiation, advertisement, or distribution of any securities defined by this Act willfully to employ any device, scheme, or artifice to defraud or to obtain money or property by means of any false pretense, representation, or promise, or to engage in any transaction, practice, or course of business relating to the interstate purchase or sale of any securities which operates or would operate as a fraud upon the purchaser. Whenever it shall appear to the Commission, either upon complaint or otherwise, that the provisions of this section (13) have been or are about to be violated, it may, in its discretion, either require or permit such person, firm, corporation, association, or other entity to file with it a statement in writing, under oath, or otherwise, as to all the facts and circumstances concerning the subject matter which it believes to be in the public interest to investigate, and may investigate such facts. Whenever it shall appear to the Commission that the practices. investigated constitute a fraud or an attempt to defraud under the provisionsof this section (13) it shall transmit such evidence as may be available concerning the transaction or facts complained of to the Attorney General who may in his discretion bring an action either in the district court of the United States, for the district wherein the transmittal of the offer, announcement, advertising, or other communication complained of begins or in the district wherein such

[ocr errors]

offer, announcement, advertising, or other communication is received, to enjoin the continuance of such practices or transactions and/or institute the necessary criminal proceeding under section 17 of this Act. The exemptions contained in sections 11 and 12 of this Act shall not apply to the provisions of this section (13).

SEC. 14. That it shall be unlawful for any person, firm, corporation, association, or any other entity to carry or cause to be carried or transmitted in interstate commerce, by or with any means or instruments or agency of transportation or communication, any offer to sell or deliver, directly or indirectly, or to accept an offer to buy, through the use or medium of any book, magazine, newspaper, publication, circular, advertisement, or other printed, written, or spoken communication, when such book, magazine, newspaper, publication, circular, advertisement, or any printed, written, or other graphic, or any spoken communication is addressed or otherwise transmitted to any person at any place in any State or Territory of the United States or the District of Columbia, where at that time it is unlawful to sell, offer for sale, tender for sale or delivery, or to solicit subscriptions or orders for such security or securities. The exemptions contained in sections 11 and 12 of this Act shall not apply to the provisions of this section (14).

SEC. 15. (a) That the Commission shall have authority, from time to time, to make, amend, and rescind rules and regulations for the purpose of executing this Act. It shall have authority to prescribe forms upon which all statements to be filed as hereinbefore provided shall be made, and to require such further data or information as it may deem proper in the public interest to be included in the said statements. Such rules and regulations shall be effective upon publication in the manner which the Commission shall prescribe.

(b) For the purpose of all investigations which, in the opinion of the Commission, are necessary and proper for the enforcement of this act, the Commission and officer or officers designated by it are empowered to subpena witnesses, examine them under oath and require the production of any books, papers, or other documents which the Commission deems relevant or material to the inquiry.

SEC. 16. That the District Courts of the United States, the District Courts of Alaska, Hawaii, Puerto Rico, Canal Zone, and the Virgin Islands, and the Supreme Court of the District of Columbia, shall have jurisdiction of offenses and violations under this Act and under the rules and regulations promulgated by the Commission in respect_thereto; and of all suits in equity and actions at law brought under this Act. Judgments and decrees so rendered shall be subject to review as provided in sections 128 and 240 of the Judicial Code, as amended (U.S.C., title 28, secs. 225 and 345).

Any of the said courts hereinbefore named in this section, within the jurisdiction of which an investigation or inquiry of the Commission is carried on may, in case of contumacy, or refusal to obey a subpena issued to any corporation, or other person, issue an order requiring such corporation or other person to appear before the Commission, or to produce documentary evidence, if so ordered, or to give evidence touching the matter in question; and any failure to obey such order of the court may be punished by such court as a contempt thereof.

Upon application of the Attorney General of the United States, at the request of the Commission, the said courts shall have jurisdiction to issue writs of mandamus commanding any person or corporation to comply with the provisions of this Act or any order of the Commission made in pursuance thereof.

Sec. 17. That whoever shall willfully violate any of the provisions of this Act, or the rules and regulations promulgated by the Commission pursuant thereto, shall upon conviction be fined not more than $5,000, imprisoned not more than five years, or both, and any officer, director, or agent or any corporation who knowingly participates in such violation shall be punished by a like fine and imprisonment, or both.

SEC. 18. That the necessary appropriations for the purpose of carrying out the provisions of this Act are hereby authorized. All moneys derived from the fees imposed by the provisions of this Act shall be paid into the Treasury to the credit of miscellaneous receipts.

Sec. 19. That if any provision of this Act, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Act, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby.

SEC. 20. That this Act shall take effect ninety days after its approval.

The CHAIRMAN. The committee this morning will hear the persons called upon who may be able to attend. I understand that some of the proponents of the measure, those who prepared it or attended to preparing the measure, are this morning before the House Committee on Interstate and Foreign Commerce which is considering a companion measure, and cannot be present here today. They, of course, cannot be in two places at once. I should like, if the committee will decide, for us to go as far as we can today with those who are present, and then continue tomorrow so as to have before us those who are supposed to be fairly posted in regard to the measure.

I might add that an attorney of New York City telephoned me last night stating that he represented, I think, the Investment Bankers Association of America, that he had to be before the House committee this morning and could not be before our committee for that reason, and that he would like to go on tomorrow if we could hear him, or on Monday, just as may be the pleasure of the committee.

I think perhaps we might go on this morning, and continue the hearing tomorrow as I am quite sure we cannot conclude today. That being the situation, what is the pleasure of the committee?

Senator NORBECK. If that is the best we can do let us hear those who are present this morning.

The CHAIRMAN. With that understanding we will go as far as we can today, and continue the hearings tomorrow. Now, there are some persons present who wish to be heard at this time. First we will hear Mr. Arthur R. Tucker, representing the Controllers’ Institute of America.

Mr. Tucker, will you come to the committee table and take a seat opposite the committee reporter, stating your name, business, and address?



Mr. TUCKER. Mr. Chairman and gentlemen of the committee: I appear as an executive officer of the Controllers' Institute of America. The CHAIRMAN. First give your full name, business, and address.

Mr. TUCKER. My name is Arthur R. Tucker. My address is No. 1 East Forty-second Street, New York City.

Senator NORBECK. And you represent the Controllers' Institute of America?

Mr. TUCKER. Yes, sir. I want to say first of all that I am here to express the approval and endorsement by the Controllers' Institute of America of this measure, and to suggest one slight amendment.

Senator COUZENS. We would first like to know what the Controllers' Institute of America is.

Mr. TUCKER. The Controllers' Institute of America is composed of controllers of business concerns and corporations. Its membership is exclusive, being limited to controllers. The controllers who are members of the institute are connected with corporations having upward of $17,000,000,000 of assets, of which they are virtually custodians.

I might add that we are interested in this measure because controllers as a class are the ones most intimately affected by this proposed act. As the principal accounting officers of corporations they will be the ones charged with the responsibility of preparing balance sheets and financial reports called for under this measure. In other words, the signatures of the principal executive officers and directors of corporations will be attached only after the controller has prepared the statement. It seems logical, therefore, to mention the controller in the measure; and to use also the phrase "principal accounting officer", so that corporations or companies which do not have an officer bearing the title of controller, or which combine that office with some other, may be covered. It is suggested, therefore, that in section 4, where provision is made for the filing of financial statements, the language be changed by inserting one phraseSenator MCADOO (interposing). On what line? The CHAIRMAN. Yes; and on what page? Mr. TUCKER. I have not the measure before me, I am sorry to say. Senator BARKLEY. There is one on the table now that you can use.

The CHAIRMAN. It is on page 6 of the bill, I believe. Refer to it there and tell the committee what you have to suggest.

Mr. TUCKER. It is to be found on page 6, section 4, line 13. [Reading:] signed by the issuer or issuers, its or their principal executive officer or officers, the principal financial officer or officers.

Then we propose that you put in there "the controller or”.
Senator STEIWER (interposing). Put in where?

Mr. TUCKER. After the word “officers", or after the words "the principal financial officer or officers." Right in there.

Senator McAdoo. At line 15 you suggest that we insert after the word “officers” what?

Mr. TUCKER. I suggest that you insert there the words “the controller or the principal accounting officer."

The CHAIRMAN. Wouldn't that be covered by the language just above that point?

Mr. TUCKER. No, I think not. The financial officer is not necessarily the controller.

The CHAIRMAN. And you suggest that we put in what?

Mr. Tucker. That you insert after the word "officers” on line 15 these words, “the controller or the principal accounting officer."

The CHAIRMAN. All right. We now have that suggestion. You may proceed.

Mr. TUCKER. I would suggest also, following that, these words, “or the person performing the duties of controller."

That would make it all-inclusive.

The CHAIRMAN. Very well. We have that suggestion. You may go on with your statement.

Mr. Tucker. The law, in the opinion of controllers, will be worth no more and no less than the accounting standards on which the balance sheets required by the measure are based.

Senator Carey. Does this measure provide for any outside audit? I mean any audit besides such as may be made by officers of a company?

Mr. TUCKER. I think it does. Unfortunately, accounting is not an exact science, and there are many problems in the higher realms of

[ocr errors]

accounting on which the opinions of the highest authorities are at variance. It is essential, therefore

Senator COSTIGAN (interposing). Have you in mind that the controller shall be a certified public accountant?

Mr. TUCKER. No, sir.
Senator COSTIGAN. All right. I just wanted to get your idea.

The CHAIRMAN. You may go ahead with your statement, Mr. Tucker.

Mr. TUCKER. It is essential, therefore, that responsibility for the accurate ascertainment and proper presentation of the financial facts underlying an issue of securities be placed on a class of men who are technicians, and who will disclose the principles on which they have worked in deciding some of the questions which have an important bearing on determination of the real value of a company's assets.

The Controllers Institute some time ago took a stand for observance of the highest ethical standards in corporate accounting practice in the preparation of reports of financial and operating conditions of corporations, to their directors, stockholders, and other parties at interest, in such manner that all concerned may know the actual conditions insofar as such reports may assist in the determination thereof.

The Controllers Institute of America will be glad to be of assistance to the Federal Trade Commission in drafting the regulations under which this measure will be administered.

The CHAIRMAN. Is that the only amendment that you have to suggest?

Mr. TUCKER. Yes, sir. Except that in the same section, where the same language should be made to apply to foreign securities. It is repeated below there in the same phraseology. It speaks of the principal executive officer, the principal financial officer, and so on. I would suggest that the same change should be made there.

The CHAIRMAN. What do you think of the provisions of this bill as to foreign securities?

Mr. TUCKER. I think they should be effective insofar as responsibility can be placed on persons in this country who are undertaking the responsibility of marketing such securities.

The CHAIRMAN. Do you think the bill goes far enough in that regard, or does it go too far, or what have you to say about that?

Mr. TUCKER. I should say that I think it just about covers the ground, sir. The source of the information on which the real value of foreign securities can be determined, of course, is abroad, and the men who in this country will prepare the necessary balance sheets and financial reports will have to determine that matter, and will have to rely on their agents abroad to give them the exact information. In other words, they will have to go back to the controller of the foreign company in order to get that information. Now, the responsibility according to this measure as I understand it is placed on the American agent who is marketing the security.

Senator BARKLEY. That does not apply to securities issued by a foreign government or any subdivision of a foreign government, does it?

Mr. TUCKER. No; and it is pretty hard to determine the value of a security issued by a foreign government.

Senator BARKLEY. But you do think it covers all private securities of a foreign nature?

« PreviousContinue »