The CHAIRMAN. The next witness is Mr. Dennis E. Murphy, vice president of the Ohio Co.

If you have a long statement, please summarize it for us. The full text will be printed in the record.

STATEMENT OF DENNIS E. MURPHY, VICE PRESIDENT, THE OHIO CO.

Mr. MURPHY. Mr. Chairman and members of the committee, my name is Dennis E. Murphy. I am executive vice president of the Ohio Co. in Columbus, which is an investment banking firm engaged in the underwriting of securities. The Ohio Co. is a member of the Midwest Stock Exchange. I have with me today Mr. John W. Christianson, who is counsel for the Ohio Co.

I will make my comments as brief as possible, because I know you are in a hurry to conclude the hearings. I will read and summarize, as shown on page 13 of my statement, the points that I have made in the statement, and I would like to amplify them to a small degree where I think appropriate.

The CHAIRMAN. You may proceed.

Mr. MURPHY. Ohio is a State of many, many, small industries which will be or may be affected by this bill. Investment dealers form a financial lifeline between these small industries and the thousands of investors who furnish capital for Ohio's industry.

As an investment dealer we are not directly affected by this bill, but we feel a duty to oppose legislation which will impose unnecessary financial burdens on small companies, our clients, and possibly affect the soundness of their securities. Therefore, our position is that:

(1) In view of the excellent reporting job which corporations generally are now doing, not only in the interest of better public relations with their shareholders but in their own self-interest as well, there is no need for this legislation as was demonstrated by the study made by the SEC and referred to herein.

I would like to take a moment to discuss that study. This is not a new bill. The principle of it has been before the Congress since 1949, and when I appeared before a similar committee in 1957, I presented some figures or an analysis of the report of the SEC which it made in 1955 on Senate bill 2054, which was then before the committee, and I pointed out that that report of the SEC in our judgment disclosed almost perfect compliance of reporting of the companies which they studied, with one adjustment being made there which I thought was appropriate.

The Commission at that time decided that any corporation report which omitted the phrase, "sales or cost of sales not shown,” was an incomplete report. My point is that there are a number of small companies who, because of the keen competition which they face, are not in a position to reveal to their competitors their sales and cost of sales, because of the advantage which larger and more strong companies might take of that particular provision.

If that adjustment were made so that these companies could comply, there would be 96.6 percent compliance, and that, in my judgment, is good reporting anytime.

Secondly, the laws of most States provide for supplying the information to shareholders and make the books and records of corporations available at all reasonable times except for improper purposes.

I would like to comment on that briefly. Most of the States have laws governing the sales of new issues of new securities which adequately provide for the supplying of information which is available for shareholder examination.

In Ohio, for instance, the statutes specifically provide that every shareholder is entitled to receive annual reports and that all books of account and other records of operation are open to shareholders at all reasonable times, except for unreasonable and improper purposes.

As an example of the effort which is being made by industries out in our area to supply their shareholders with full and complete information regarding the companies, I have brought along with me some reports of Ohio companies which I would like to leave with the committee for their study, and I would like to point out that these companies are relatively small companies in Ohio, but these reports are as complete, as informative, and in as great detail, I think you will find, as any company, even, which is subject to the Securities and Exchange Act.

The CHAIRMAN. Those reports will be distributed among members of the committee, but we would prefer not to include them in the record. Mr. MURPHY. Thank you, sir. On this point of the States responsibility, at previous hearings of the committee in which I testified in 1957, I submitted to the committee at that time a leter which Edmond H. Savord, he chief of the division of securities of Ohio at that time had submitted to the counsel of the Banking and Currency Committee, at its request, asking him his opinion of the bill which was then before the committee. And I would just like to read two paragraphs from that letter for your information now. They are very short. Judge Savord said in part:

Thoughtful consideration of all of the provisions of Senate bill 2054 and their implications convinces that grave doubt presents itself as to the existence of any actual or imperative need which would demand the enactment of this legislation. ***

Practically without exception, every safeguard sought to be realized by the proposed legislation is assured by protective provisions of the corporation code of Ohio or rendered certain by proper and efficient enforcement of the regulations and penal provisions of the Ohio securities act.

The CHAIRMAN. I want to commend the State of Ohio in the way they are looking after the small investor. Unfortunately, that does not appear to be true in all the States of the Union.

Mr. MURPHY. A few years ago when I appeared before, we had made a check of all of the States throughout the United States, and practically all of them have laws which permit the stockholders to demand from their corporations the financial statements of the corporation, and they are required, under the laws of those States, to give it.

The point that I would like to leave with the committee at this particular time is that the extension of Federal power for the regulation of small companies on the State level where information is already available, where adequate regulatory supervision is already provided, and where there is no substantial market interest outside the State, would seem to be an unnecessary and inadvisable invasion of the States rights to regulate the securities industry within its

own borders and would impose an uncalled-for burden upon the companies subject to such regulation, as well as upon the SEC.

The CHAIRMAN. All right, you recommend that small companies. be exempt from Federal control. What is small?

Mr. MURPHY. Well, my recommendation, as will be found in the summary and in my testimony is that on the basis of our experience and knowledge of the reporting and other practices of companies which would be affected by the proposed legislation and in the light of our analysis of that SEC report which I referred to a while ago, we earnestly urge that the bill be amended to exempt companies with assets in the range of $15 to $20 million and shareholders of 1,500 to 2,000.

The CHAIRMAN. Fifteen to twenty million dollars in assets and 1,500 shareholders, they are little ones, then, which ought not to be regulated?

Mr. MURPHY. That is our opinion.

The CHAIRMAN. Thank you very much.

(The complete statement of Mr. Murphy is as follows:)

STATEMENT OF DENNIS E. MURPHY, EXECUTIVE VICE PRESIDENT, THE OHIO Co., COLUMBUS, OHIO

I am

Mr. Chairman, my name is Dennis E. Murphy of Columbus, Ohio. executive vice president of the Ohio Co. of Columbus, Ohio, an investment banking firm engaged in the underwriting of securities on the national and local levels. I am also president of Investment Dealers of Ohio, Inc., an association of some 65 investment firms with home offices in Ohio; but it is in my capacity as a officer of the Ohio Co. that I am appearing before this committee. The Ohio Co. is a member of the Midwest Stock Exchange. My testimony will be directed primarily to the proposed amendment of sections 12 and 13 of the Securities Exchange Act.

This is the fourth appearance of a representative of our firm before a subcommittee of the Committee on Banking and Currency of the U.S. Senate relating to matters contained in S. 1642. Mr. Boles the president of the Ohio Co., appeared before a committee and testified in opposition to S. 2408 introduced by Senator Frear and S. 2045 introduced by Senator Fulbright. In 1957, I appeared before the subcommittee then headed by the Honorable Frank J. Lausche to renew the objections which we had to S. 2408 and S. 2054 as being equally applicable to S. 1168 then before the committee.

While the detailed provisions of S. 1642 reflect some modifications, the principal objective is substantially the same as the earlier bills; namely, to regulate the unlisted securities market by requiring corporations and others meeting certain specified standards to file financial statements with the Securities and Exchange Commission and to comply with the rules and regulation of the Commission in other respects.

My purpose in asking to appear before the committee today is to reaffirm the position expressed before similar committees in earlier years. We have very serious reservations about the wisdom of extending the registration and reporting provisions of the Securities Exchange Act of 1934 to companies with net assets of $1 million or more and 750 shareholders of "a class of equity security." We feel it is unnecessary from a practical standpoint, and would be unduly burdensome to the many thousands of small businesses throughout the United States. In addition, we feel that it would impose such a tremendous burden upon the Securities and Exchange Commission that it would be unable to process the many thousands of reports that would come to its office without substantially increasing its staff and imposing substantial additional financial burdens upon the investment industry and the taxpayers.

I assume that the testimony which was given before the other committees when S. 2054 and S. 1168 were under consideration will be available to the members of the committee for consideration and study in connection with its consideration of S. 1642. Therefore I will not repeat in detail the objections previously expressed to the provisions of S. 2054 and 1168. However, I

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would like to bring to the attention of the committee the fact that S. 1168, asit was originally introduced provided that issuers whose assets exceeded $2 million and which had 750 or more equity shareholders and had any issue of debt security of $1 million or more outstanding would be brought under the registration provisions of the Securities Exchange Act of 1934 and would be required to file such reports with the Commission as might be required by section 13 of that act.

After extensive hearings and consideration of the testimony presented, the committee amended S. 1168 so that it would apply only to issuers whose assets exceed $10 million and had 1,000 or more holders of "its equity securities." In report No. 700, the committee stated that "by increasing the assets test figure from $2 to $10 million, the committee is of the opinion that it has removed all serious chance that the bill might possibly hurt small business enterprises." While this amendment did not fully satisfy our views, we felt that it was a substantial step in the right direction and would remove the burdensome provisions of the bill from a large number of small corporations which would have been most seriously hurt under the previous provisions of the bill.

NEED FOR PROPOSED LEGISLATION

A careful reading of the testimony on the other bills would indicate that the proponents of that legislation proceeded largely on the assumption that the only corporations which make full and complete reports to their shareholders are those which have securities listed on a national exchange or which have securities registered with the SEC. Many witnesses at the previous hearings testified regarding the remarkable job which most of the corporations with unregistered or unlisted securities outstanding were then doing in making reports to their shareholders and pointed to the progressively enlightened public relations attitude which had characterized business management in recent years.

Everyone is agreed that investors are entitled to full and complete informa-. tion about the companies in which their funds are invested and I share that view. It seems to me, however, that all of these bills are or have been based on the assumption that investors in unlisted securities are denied information about their investments, whereas in the great majority of cases, they are furnished full and complete information.

To support this statement I would like to call to the attention of the committee the "Report of the Securities and Exchange Commission on S. 2054. to the Committee on Banking and Currency" relating to an evaluation or reports to stockholders of 1,161 corporations which the Commission studied at that time. The report discloses the degree of compliance with the Commissions's accounting standards of 580 reports by companies subject to Commission regulation and 581 reports to stockholders by companies not subject to Commission regulation. The table in substance is as follows:

While the percentage of companies substantially complying with the Commission's accounting procedures was higher for companies subject to regulation than for those not subject to regulation, it is interesting to note that in the caegory of "minor deficiencies," the companies subject to regulation had 40.9 percent of minor deficiencies as compared with 34.8 percent of the companies. not reporting.

Now let us look at the "materially deficient" reporting by the two classes of corporations. It would appear from the Commission's table that the companies required to report were doing a better job-the deficiency here being only 3.4 percent as compared with 17.9 percent for the companies not so reporting. But how does this deficiency come about?

The outstanding material deficiency is listed in the SEC report as being "sales and/or cost of sales not shown." Now, it is possible and even likely that this "deficiency" in these reports was, in many instances, intentional because the management did not want to reveal its sales or profit margins to its competitors and did not disclose these facts for reasons which they considered to be in the best interest of their shareholders.

Reports to shareholders in many instances are prepared not only for stockholders' use but also for submission to suppliers, customers, credit rating agencies and the like. Thus, management may feel it would be harmful to disclose to the public generally information which it might be entirely willing to disclose to shareholders. That is a responsibility that management must assume, and it alone should decide whether the submission of such data would adversely affect the company's competitive position.

Competition under our economic system is keen. Many of the small companies are in competition with much larger companies with greater capital, widespread, or even nationwide organizations, large sales departments and technical personnel. They can't hope to compete with the giants in their field in research, management, or financial resources. They must guard carefully, therefore, the things which it would be to the advantage of their competitors, particularly their large competitors, to know about their company. Cost of sales could be of tremendous advantage to a competitor. In such instances it is not, I submit, "in the interest of the public" to disclose such informationin fact, it might be detrimental to the best interests of the company and its shareholders whom the management has the first duty to protect.

This raises he question, whose interest is paramount in such cases-the interests of the company and its shareholders, or the interest of the "public" which has no investment in the company?

We do not advocate the withholding of such information from shareholders, but there are occasions when management may be justified in withholding information from those not entitled to have it. The SEC report does not indicate the size of the companies which failed to supply "sales" information, but it is reasonable to assume that the list includes a number of small companies. Absence of this type of information, while not complying with SEC accounting practices is not a serious or vital omission insofar as the shareholders are concerned.

More important, it seems to me, is the protection of these small companies from their big competitors. Many States have recognized the danger inherent in the public distribution of such information by providing corporations and their shareholders protection against disclosure of such information for unreasonable and improper purposes. At the same time practically every State recognizes and enforces the right of shareholders to be furnished with information concerning their companies and to examine their books and records for proper purposes.

It is not unreasonable, in my judgment, to classify such reports, i.e., reports where the only omission is information as to sales and cost of sales, as satisfactory. If these reports, therefore, were included with the other two classifications in the SEC report, the Commission's study would indicate that the total number of companies making satisfactory reports to stockholders was 96.6 percent-an eminently impressive record.

I think that, on the whole, the SEC report demonstrates conclusively the lack of any urgent need for this legislation.

REPORTS AT THE STATE LEVEL

Most States have laws governing the sale of new issues of securities which adequately provide for the supplying of information which is available for shareholder examination. In Ohio, for instance, the statutes explicitly provide that every shareholder is entitled to receive annual reports and that all books of account and other records of operations are open to shareholders at all reasonable times except for unreasonable and improper purposes.

As an example of the effort being made by Ohio industry to keep its shareholders and others informed about its business, I have brought along with me copies of the annual reports of several Ohio companies which are doing an