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positors of institutional investors. It would seem to be a departure from principle to enlarge the registration provisions of the Securities Act to modify the competitive position of different classes of investors. It would be an even greater departure to do so in the financial interest of underwriters and dealers.
THE PROPOSED AMENDMENT IS IN CONFLICT WITH THE EXPRESSED OBJECTIVES SET
FORTH BY THE REPRESENTATIVES OF THE SECURITIES INDUSTRY
On page III of their report they say:
In examining the existing laws and in putting forward suggestions for amendments thereto, the representatives of the industry have sought to facilitate the resumption of private investment and the flow of idle money into industry through the simplification of procedures and by the removal of those restrictive provisions, unnecessary for the protection of investors, which have impeded the exchanges and the private-capital market from functioning efficiently in the public interest.”
The proposed amendment, contrary to the principles enunciated in the above excerpt, would place an added impediment to the flow of idle money into industry by the complication of one established procedure to that end, namely, direct financing, and, by the imposition of further restrictive provisions unnecessary for the protection of investors, would tend to impede the private capital market from functioning efficiently in the public interest. The representatives of the securities industry propose this illogical extension of the restrictions of the Securities Act and inconsistently enough at the same time suggest that the title of the act be changed by the insertion of the phrase "with the least possible interference with honest business.”
The sale of securities to institutional investors, such as insurance companies, is in its nature a private transaction, involving simply the lending of money by such institutions to industry, ard the labeling in the proposed amendment of such transactions as “affected with a public interest” cannot change the inherently direct and private nature of the transaction itself. The late Mr. Justice Holmes characterized the use such phrases as "little more than a fiction intended to beautify what is disagreeable to the sufferers.”
It is true that the policyl.olders and depositors have an interest in the money invested; it is in the last analysis their money. They have, however, entrusted its investment to particular institutions. The r primary interest is in the quality of the investments made by such institutions. This interest is not subject to protection by the Securities Act which is not directed to the merit of securities registered thereunder. It is protected by the various State statutes regulating the investments and activities of sich institutions and providing for their examination and general supervision. The record of American insurance companies in recent years as brought out in the Temporary National Economic Committee investigation is evidence of how well the managements of insurance companies under the investment restrictions of State laws and the regulations of State insurance departments have in this respect protected the interest of policyholders. Certainly, the interest of policyholders would not be served by the departure in the case of the particular amendment here opposed from the general objective of the amendments as set forth by the representatives of the industry in the above-quoteil portion of their report.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT CONCUR IN THE PROPOSAL
OF THE SECURITIES INDUSTRY
It is significant that the Securities and Exchange Commission, in its report dated August. 7, 1941, after pointing out that there are considerations for and against the securities industry's proposal and reviewing such considerations, does not concur in the industry's proposal, but determines merely not to oppose it. The considerations outlined by the Commission as tending to favor the proposal do not suggest that the adoption of the proposal would remedy any existing evil, would tend to prevent fraud in the sale of securities, or otherwise tend to accomplish any underlying purpose of the Securities Act.
The Commission in its report (p. 44) says that "it may be that corporations acquiring securities in private transactions need, and should have made available to them, at least the information required by the statute, and that such information should be supplied under the sanctions of the liability provisions of the act.” The answer to this suggestion is that, though the absence of a registration statement would necessarily make inapplicable the liability provisions of section 11 of the Securities Act in respect of misrepresentations and omissions in the registration statement, institutional investors do obtain all pertinent information and it is supplied under the sanction of section 12 (2) of the Securities Act and under the sanction of the common law. The adequacy of the protection afforded to institutional investors by the common law under such circumstances is aptly illustrated by the case cited by the Commission in its report, Equitable Life Insurance Co. of Iowa, v. Halsey, Stuart & Co. (312 U. S. 410 1941)), which, independent of the Securities Act, held that a seller of securities is liable to a purchaser for fraudulent representations and omissions even though the purchaser makes no independent investigation. The information furnished to the purchaser of securities privately offered is obtained under circumstances of intimate direct contact with the issuer conductive to completeness and understanding, while the information contained in a formal registration statement is not responsive to the enquiries of the purchaser and is furnished without the advantage to the purchaser of any direct contact with the issuer. The Metropolitan's experience as a direct purchaser of securities over many years does not indicate that it needs an amendment of the Securities Act requiring registration of securities privately offered to it for investment and no advantage to be gained by such an amendment would offset the disadvantages of an amendment which, unnecessary for its protection, would tend to restrict and impede the free flow of its funds to industry.
The Commission in its report (p. 45) also says:
“Registration would also enable securities analysts and the statistical services which collect and disseminate corporate information to ascertain the facts concerning securities privately placed and their issuing corporations. The availability of this information would condition the markets for such securities in the event of their subsequent resale. By shedding more light on the portfolios of institutional investors, this information would also prove of value to the public which places its savings with such institutions."
This statement seeins to overlook the fact that information as to direct placements is generally available to the public. For the details of security issues the statistical services publishing manuals, it is believed, depend largely on information voluntarily furnished by the issuing corporations and a check in the current manuals of several hundred private placements indicates that the information reported on private placements and the corporations making private placements is as complete as that reported on registered issues and their issuing corporations. Except to surrender for cancelation, the Metropolitan has never disposed of any securities privately purchased. It is believed that no substantial percentage of securities privately purchased has been sold by institutional investors, and there now appears to be no real likelihood that any substantial percentage will ever be sold, but should resales occur there will be no dearth of available information. The imposition of the additional burdens and restrictions which would flow from the adoption of the industry's proposal extending the registration requirements would clearly not be justified as a means of making publicly available in another form information otherwise readily available.
In the light of these considerations, it is submitted that the proposal of the securities industry in respect of the registration of direct placements should be rejected. Respectfully submitted.
CHURCHILL RODGERS, Assistant General Counsel, Metropolitan Life Insurance Co. OCTOBER 30, 1941.
The CHAIRMAN. At this point, we will place in the record a letter from the Prudential Insurance Co. of America.
THE PRUDENTIAL INSURANCE CO. OF AMERICA,
NEWARK, N. J., November 5, 1941. The Honorable CLARENCE F. LEA, Chairman, House of Representatives Committee on Interstate and Foreign Commerce,
Washington, D. C. DEAR SIR: We have examined the proposals for the amendment of the Securities Act of 1933 now being considered by your committee, and in particular the proposal to redefine “public offering" so as to include direct sales to institutional investors. In view of the fact that the proposed amendment has been drafted in language which in practical effect confines its application to direct sales to insurance companies, we have felt that some comment from us would be appropriate.
Consideration of the arguments advanced in support of the suggestion that such sales are “affected with a public interest,” has led us to the conclusion that none of them has any cogency, and that the sole purpose and reason for the amendment is that described on page 45 of the Securities and Exchange Commission report as follows:
“Representatives of the securities industry have stated that investment bankers and dealers have lost a considerable portion of their business because of the fact that direct sales to institutional investors have not been required to be registered. The proposal would impose the same statutory requirements as apply in the case of sales to the public."
The arguments by which a public interest is sought to be added to the private interest of the security industry so as to justify action by Congress fall under three general heads. The information to be obtained by requiring registration is necessary, it is alléged
(1) For the protection of the institutional investor;
(2), For the protection of the individual policyholder or depositor of the institutional investor; and
(3) To enable securities analysts to furnish information to the general public.
In our opinion, there is no necessity whatever for added protection to any institution large enough and strong enough to participate in a direct purchase, as such an institution is capable of securing, and does secure, all the necessary information by its own efforts. The Prudential customarily makes, in connection with such transactions, a study more searching than that required by the Securities Act, and in most cases supplements the information received by a physical inspection and check by its own representatives. Further, we are certain the study made by this company is at least equal to that made by underwriting houses. We believe that other institutions to a greater or less degree follow the same procedure, and in any event satisfy themselves on all significant points covered by a registration statement. The Securities and Exchange Commission report cites Equitable Life Insurance Co. of Iowa v. Halsey, Stuart & Co. (61 S. Ct. 623) as indicating that institutional investors can be deceived, and it is, of course, true that they can be if the issuer or seller is willing to go far enough in his fraud; but the significance of that case lies not in the fact of successful deception, but that the seller had to resort to fraudulent misrepresentation to accomplish it, and that the investor was able to protect itself by imposing liability upon the seller for the fraud. A registration statement or liability under the Securities Act could have done no more,
The suggestion that a registration statement with respect to each investment by an insurance company is necessary for the protection of an individual policyholder, or would even be of value to him, is without substance. The policyholder has no voice in the selection of individual investments—that is a function of management acting under the regulation and supervision of State authorities. His only interest is in the general quality of the whole portfolio, and even if it were physically possible for him to examine a registration statement for each investment of his company, he would be no wiser on that point, for the Securities and Exchange Commission itself has constantly emphasized that the existence of an effective registration statement has no relation to the quality of the investment.
As to the desirability of having information concerning direct loans available to statistical services, there is little to say. The services have apparently been able to get substantially all the information they needed on this subject upto now, and the theoretical possibility that they might be inconvenienced in the future appears to afford but thin justification for imposing heavy expense on the borrower.
The proposal is in reality merely a simple demand on the part of the investment banking industry that Congress limit the competition which they must meet, and we submit that your committee should view it in that light. We do not propose to argue the economic aspects of that competition, but we do point out that direct loans have afforded industry a simple, speedy, and satisfactory method of obtaining necessary capital on sound bases, and that the real sufferers from the proposed amendment would be not the insurance companies (on whom the effect would be, as the Commission has reported, immaterial) but on the
borrowers, who would be subjected to a heavy burden and unnecessary expense without any compensating advantages whatsoever.
In conclusion, it should be noted that the Securities and Exchange Commis. sion has neither sponsored nor recommended the proposed amendment. Respectfully,
THE PRUDENTIAL INSURANCE Co. OF AMERICA, By CARROL M. SHANKS,
Vice President and General Solicitor.
STATEMENT OF FRANCIS C. BROWN, GENERAL COUNSEL, FEDERAL
DEPOSIT INSURANCE CORPORATION, WASHINGTON, D. C.
Mr. Brown. Mr. Chairman, my name is Francis C. Brown. I am counsel for the Federal Deposit Insurance Corporation.
The committee kindly asked the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency, the three Federal bank supervisory agencies for reports on the provisions of the bill under discussion.
In view of the fact that we found that request was made of all three agencies, we consulted among ourselves regarding the matter and have prepared a joint statement representing the views of the three Federal bank supervisory agencies, copy of which I have given to Mr. Layton and which I believe are in your hands. These statements have been separately transmitted by each of the three agencies, and I have here the letters from the Chairman of the Federal Deposit Insurance Corporation; the Chairman of the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency. I would like to have these letters, together with this statement made a part of the record.
The CHAIRMAN. Very well, they will be included. (The letters and the joint report above referred to are as follows:)
FEDERAL DEPOSIT INSURANCE CORPORATION,
Washingtor, November 13, 1941. The Honorable CLARENCE F. LEA, Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D. C. MY DEAR CONGRESSMAN: We wish to acknowledge your letter of November 5, 1941, calling our attention to section 2 (14) of the committee print showing proposed changes in the Securities Act of 1933 and the Securities Exchange Act of 1934 and requesting us to make such report as we may think appropriate as to this section.
In response to your request we are pleased to enclose herewith a statement outlining the views and this Corporation in opposition to the proposed new section 2 (14). This statement also represents the views of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System. These three Federal bank supervisory agencies have prepared this joint statement regarding the measure because of the unanimity of their opinion on the subject and because the committee requested a report upon the proposal from each of them.
In submitting this report the Federal Deposit Insurance Corporation wishes to point out a few pertinent facts regarding its position in the field of bank supervision. The Corporation was created by the act of Congress of June 16, 1933, known as the Banking Act of 1933. Since January 1, 1934, it has insured the deposits of most of the banks of the country. In the interval since that date and October 31, 1934, there have been some bank closings. In that interval 364 insured banks, with deposits of $450,000,000, have gone into liquidation, voluntary or involuntary, with deposits being paid with funds provided by this Corporation. Over 1,000,000 depositors have been thus provided for through the operations of the Corporation, during this period. Depositors' losses in these banks over and above the monetary protection afforded depositors through the medium of the Federal Deposit Insurance Corporation's operations have
amounted to approximately $3,000,000, or less than 1 percent of the total deposits involved.
In the United States today there are 14,900 operating banks, with deposits of more than $78,000,000,000, of which 13,485, with deposits of more than $67,000,000,000, are presently examined by the three Federal banking agencies and are insured by this Corporation. This group is comprised of national banks which are examined and supervised by the Office of the Comptroller of the Currency; State banks members of the Federal Reserve System, which are examined and supervised by the Board of Governors of the Federal Reserve System; and other insured State banks which are examined and supervised by this Corporation. As stated above, the Federal Deposit Insurance Corporation insures the deposits in all of the federally supervised banks. It also has certain broad supervisory functions with respect to all insured banks consisting principally of the right to terminate the insured status of any bank for unsound practices or violations of law. The insured banks have more than 50,000,000 depositors.
While the three Federal bank supervisory agencies, as supervisory and examining agencies, each has vital concern in any legislation which will affect banking practices, this Corporation, as the insurer of the Nation's depositors, is particularly concerned with the protection and relief of despositors, and with the soundness of assets acquired by banks.
'As set out in the joint statement enclosed herewith, the Corporation is satisfied that the degree of protection now afforded depositors in federally supervised and insured banks has been demonstrated to be adequate as the result of, (1) the type of infomation, which most banks presently procure in connection with their extensions of credit, (2) the character of supervision provided by the Federal bank supervisory agencies, (3) the cushion provided by the capital of the banks, and (4) the over-all deposit insurance protection accorded their depositors by the Federal Deposit Insurance Corporation. It is the opinion of this Corporation that the declared purpose of the proposed section 2 (14) of protecting depositors is largely a make-weight argument.
In the report of the House Committee on Interstate and Foreign Commerce to the Seventy-third Congiess on the original bill, which later became the Securities Act of 1933, specific recognition was given to the adequacy of the information obtained by bankers in connection with private financing operations. The committee's statement (on p. 4 of its report) is as follows:
"The type of information required to be (lisclosed (i. e., in a registration statement) is of a character comparable to that demanded by competent bankers from their borrowers, and has been worked out in the light of these and other requirements."
The same report of this committee further clearly shows that the Securities Act of 1933 (unlike the Securities Exchange Act of 1934 and subsequent regulatory measures, administration of which is vested in the Securities and Exchange Commission) was not designed to apply to ordinary redistribution of outstanding securities not effected through an underwriter or to any offering which did not involve the necessity of public protection.
Thus, on pages 5 and 7 of the report, the following statements appear:
(P. 5) “It (i. e., the bill) does not affect the ordinary redistribution of securities unless such redistribution takes on the characteristics of a new offering by reason of the control of the issuer possessed by those responsible for the offering. It carefully exempts from its application certain types of securities and security transactions where there is no practical need for its application, or where the public benefits are too remote.”
Again : (P.7),
the bill does not affect transactions beyond the need of public protection in order to prevent recurrences of demonstrated abuses.”
It is our opinion that the amendment (suggested in the testimony of Mr. R. McLean Stewart) to the proposed sec. 2 (14), as submitted in the comparative print, does not meet the objections (as set forth in the joint statement) arising from the extension of this section to insured banks, for the following reasons among others :
(1) The amendment is ambiguous and leaves subject to uncertainty the precise character of the transactions which would be exempted from registration;
(2) The reasons which require exemption in the case of notes evidencing bank loans are equally applicable to financing by directly placed security issues. In view of the fact that the Banking Act of 1933 prohibits banks of deposit from engaging in the business of underwriting or distributing securities, protection of purchasers from banks is not a real issue.