MAJOR ADMINISTRATIVE PROCESS PROBLEMS (Securities and Exchange Commission) MONDAY, JUNE 22, 1959 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON LEGISLATIVE OVERSIGHT Washington, D.C. The special subcommittee met at 9:30 a.m., pursuant to adjournment, in room 1334, House Office Building, Hon. Walter Rogers presiding. Mr. ROGERS of Texas. The Legislative Oversight Subcommittee will come to order for a panel discussion of the four topics previously announced by the chairman, the Honorable Oren Harris. I think it would be the proper order this morning, in order to expedite the hearing, to have the members of the panel first identify themselves, commencing, Mr. Gadsby, with you. If you would, identify yourself for the record. Then those members who are here with you from the Commission should be identified. After that we will let those gentlemen on your left identify themselves and then those on your right. MEMBERS OF THE PANEL SECURITIES AND EXCHANGE COMMISSION REPRESENTATIVES: EDWARD N. GADSBY, CHAIRMAN; ROBERT N. HISLOP, HEARING EXAMINER; THOMAS G. MEEKER, GENERAL COUNSEL; AND BYRON D. WOODSIDE, DIRECTOR, DIVISION OF CORPORATION FINANCE PRACTICING ATTORNEYS: JEROME M. ALPER, WASHINGTON, D.C.; GEORGE A. BROWNELL, NEW YORK; RALPH H. DEMMLER, PITTSBURGH; DAVID S. HENKEL, NEW YORK; JULIAN M. MEER, DALLAS, TEX.; AND JAMES SHEEDY, CLEVELAND, OHIO INDUSTRY REPRESENTATIVES: VINCENT L. BRODERICK, GENERAL COUNSEL, NATIONAL ASSOCIATION OF INVESTMENT COMPANIES, NEW YORK; JAMES A. FARMER, A.T. & T., NEW YORK; EDWARD C. GRAY, EXECUTIVE VICE PRESIDENT, NEW YORK STOCK EXCHANGE, NEW YORK; EDWARD T. McCORMICK, PRESIDENT, AMERICAN STOCK EXCHANGE, NEW YORK; DORSEY RICHARDSON, PRESIDENT, THE ONE WILLIAM STREET FUND, INC., NEW YORK; AND JOSEPH E. WELCH, EXECUTIVE VICE PRESIDENT, WELLINGTON FUND, INC., PHILADELPHIA Mr. GADSBY. Very well, Mr. Chairman. My name is Edward N. Gadsby, of Massachusetts. I am Chairman of the Securities and Exchange Commission. I have with me, 45253-5928 on my right, Mr. Thomas G. Meeker, my General Counsel. I also have Mr. Byron Woodside, who was detained coming in, the Director of our Division of Corporation Finance, and Mr. Hislop, representing the hearing examiners. I also have other members of this staff here. I am alone as far as the Commission is concerned. Mr. ROGERS of Texas. Other members outside of those with you on the panel? Mr. GADSBY. Yes, sir. Mr. ROGERS of Texas. Beginning with you, Mr. Alper, if you will, identify yourself for the record. Mr. ALPER. My name is Jerome M. Alper. I am a practicing attorney in Washington, D.C. Mr. ROGERS of Texas. Please give your address. Mr. ALPER. Pennsylvania Building. It is Washington, D.C. Mr. BROWNELL. My name is George A. Brownell. I am a member of the New York bar. My office is at 15 Broad Street, New York City. Mr. DEMMLER. My name is Ralph H. Demmler. I am an attorney in Pittsburgh, Pa., with offices in the Union Trust Building. Mr. HENKEL. My name is David S. Henkel. I am an attorney in New York. My address is 48 Wall Street. Mr. MEER. I am Julian M. Meer. My address is Murphy-Hill, Dallas Building, Dallas, Tex. I am a practicing attorney in Dallas. Mr. SHEEDY. My name is H. James Sheedy. I am from Cleveland, Ohio, a practicing attorney. My address is Union Commerce Building, Cleveland, Ohio. Mr. ROGERS of Texas. Mr. Broderick? Mr. BRODERICK. My name is Vincent L. Broderick, general counsel for the National Association of Investment Companies, with offices at 61 Broadway, New York. Mr. FARMER. James A. Farmer, general attorney, American Telephone & Telegraph Co.; offices at 195 Broadway, New York. Mr. GRAY. I am Edward C. Gray, executive vice president of the New York Stock Exchange, 11 Wall Street, New York, N.Y. Mr. MCCORMICK. Edward T. McCormick, American Stock Exchange, 86 Trinity Place, New York. Mr. RICHARDSON. Dorsey Richardson, president of the One William Street Fund, 1 William Street, New York, N.Y. Mr. WELCH. Joseph E. Welch, executive vice president, Wellington Fund, 1630 Locust Street, in Philadelphia. Mr. ROGERS of Texas. Thank you, gentlemen. We are very happy to have you here this morning. I hope we can move along very speedily. If we do not conclude this morning, of course, we will try to carry on this afternoon. I do not know just exactly what the program will be, but we do hope to finish this today and remain on schedule. At this time I call attention to the fact that there has previously been offered for the record a list of the names and addresses of all of the panelists who, in response to the invitation of the Special Subcommittee on Legislative Oversight, will attend and participate in our discussion meetings. This list, together with the "Revised Outline of Proposed Panel Discussion," containing a schedule of the meetings, which was sent to each of the panelists, will be reproduced at the end of the printed record for ready reference purposes. Before any statements are made, without objection, the record will reflect at this time the memorandum in response to the letter dated June 4, 1959, from the Honorable Oren Harris, chairman of the Committee on Interstate and Foreign Commerce, the Special Subcommittee on Legislative Oversight, House of Representatives, under date of June 19, 1959, from the Securities and Exchange Commission, together with attachments, and with the organizational chart. That will be included in the record. (The material referred to follows:) SECURITIES AND EXCHANGE COMMISSION Memorandum in response to the letter dated June 4, 1959, from the Honorable Oren Harris, chairman of the Committee on Interstate and Foreign Commerce and the special Subcommittee on Legislative Oversight, House of Representatives. MEMBERS OF THE COMMISSION The Commission is composed of 5 members, not more than 3 of whom may be members of the same political party. They are appointed by the President, with the advice and consent of the Senate, for 5-year terms, the terms being staggered so that one expires on June 5 of each year. Pursuant to Reorganization Plan 10 of 1950, the Chairman is designated by the President. The members of the Commission are: Attachment A shows the average employment in the Commission as well as the budget estimates of the Commission, the recommendations of the President, the appropriation actions of the House of Representatives, the Senate and the House-Senate conferees and the appropriations for the fiscal years 1949 through 1959, and the actions to date for fiscal 1960. TOTAL NUMBER OF HEARING EXAMINERS The Commission has five authorized hearing examiner positions. Three positions are filled by hearing examiners on the Commission's staff, one position is filled by the full-time reimbursable loan of a hearing examiner from the National Labor Relations Board, and one position is vacant. It is planned to fill the vacancy, which was established in the third quarter of the current fiscal year, as soon as the Civil Service Commission acts on the Commission's recommendation for reallocating its hearing examiner positions from GS-14 to GS-15. WORKLOAD In recent years there has been a continuing and unparalleled surge of interest and activity in the Nation's securities markets. This upward trend has been accompanied by an increasing workload under all major Commission programs. Attachments B, C, and D state the workload of the Divisions of Corporation Finance, Trading and Exchanges and Corporate Regulation for the fiscal years 1957 and 1958, together with a comparison for the 10-month periods ending April 30, 1958, and April 30, 1959. These attachments include statistics on the work performed by the Commission's 17 regional and branch offices in conjunction with the appropriate division's in the headquarters office. Attachment E shows the number and rate of disposition of administrative proceedings, by category, pending at the beginning of the year, opened and closed during the year, and pending at the end of the year for fiscal 1957, 1958 and 1959. (The figures for 1959 reflect actual workload to June 16 and projections to June 30.) Several charts have been prepared which depict graphically some of the increases in the Commission's workload and some of the revisions in workload estimates made necessary by the increase in activity in the capital markets. Chart 1, for example, shows the number of securities investigations opened and closed in fiscal years 1956, 1957, 1958 and the first 10 months of fiscal 1959, together with the Commission's estimates for the entire 1959 fiscal year and for 1960. These investigative cases are of two types: preliminary investigations and docketed cases. A preliminary investigation is one of limited scope and may be based upon a complaint, a broker-dealer inspection, or some other proceeding. If the preliminary investigation indicates that a violation has occured the matter is converted to a docketed case, which is more formal, complex and timeconsuming. As indicated in chart I, the Commission originally estimated that 570 and 675 investigations would be closed during fiscal 1959 and 1960, respectively. In place of the 1959 estimate of 570 closed investigations, the present reduced objective is 455. The reason for this is a pronounced tendency for the proportion of docketed cases to increase. The upward trend in the number of these complicated and time-consuming investigations during the past 18 months has given the Commission considerable concern. Specifically, 75 percent of all investigations opened for the 10 months ending April 30, 1959, represented full-scale investigations as compared to 64 percent during the 10-month period ending April 30, 1958. For 1960, the original objective of closing 675 investigations has been lowered to 525. This adjustment has been made necessary by the reduction of the Commission's budget estimates in the independent offices appropriation bill for 1960 as passed by the House of Representatives. This reduction would cancel 55 positions, 17 of which the Commission had hoped to allocate to securities investigations. On the other hand, there is little doubt that the upward trend in investigations opened will continue in fiscal 1960. Chart II shows the number of criminal cases developed by the Commission, and the number of defendants involved, for the fiscal years 1951 through 1958 and for the first 10 months of fiscal 1959. During this 10-month period, 40 criminal cases, involving approximately 190 defendants, have been referred to the Department of Justice. These 10-month figures represent about the same number of cases and defendants that the Commission referred to the Department of Justice during the 1957 and 1958 fiscal years combined. Chart III shows the number of administrative proceedings to deny or revoke registration of brokers and dealers during fiscal years 1952 through 1958, together with the estimates for 1959 and 1960. For the first 10 months of fiscal 1959, 87 such administrative proceedings were instituted by the Commission and the original estimates of 90 for the entire 1959 fiscal year and for fiscal 1960 have been revised to 100 for each year. Chart IV shows the number of injunctive actions instituted by the Commission during the fiscal years 1951 through 1958 and during the first 10 months of fiscal 1959. From July 1, 1958, through April 30, 1959, 48 civil injunctive actions, involving 306 individual defendants, were authorized by the Commission. This total of 306 defendants represents about the same number of defendants involved in injunctive actions instituted during the 5-year period ending June 30, 1955. Chart V shows the composite picture of the Commission's workload incident to registration statements filed during the fiscal years 1951 through 1958 and the original and revised estimates for 1959 and 1960. The original estimate of 985 registration statements for fiscal 1959 has been increased to 1,100. It is estimated that 1,200 registration statements will be filed in 1960. As indicated in chart VI, the investment company industry has experienced a dramatic growth in recent years. For example, at the close of fiscal 1954 there were 387 registered investment companies as compared to 453 at the close of fiscal 1958. During the first 10 months of fiscal 1959, an additional 59 companies have been registered. The estimated market value of assets of registered investment companies increased from $8.7 billion to $17 billion between July 1954 and July 1958, representing an increase of almost 100 percent in 4 years. The National Association of Investment Companies estimates that there were approximately 4,100,000 shareholder accounts in member investment companies as of March 31, 1959, an increase of approximately 1 million accounts in 21 months. Chart VII shows the corporate reorganization workload under chapter X of the Bankruptcy Act for the fiscal years 1951 through 1958 and the original and revised estimates for fiscal years 1959 and 1960. It is expected that such matters will increase by 10 to 15 percent in 1960. These reorganization proceedings involve intricate legal and financial studies before the staff can make suitable recommendations to the Commission. The proceedings themselves are extremely complicated and technical and often require several years to complete. |