SEC LEGISLATION, 1963

TUESDAY, JUNE 18, 1963

U.S. SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON SECURITIES,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:02 a.m., Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding. Present: Senators Williams, Robertson, Neuberger, McIntyre, and Javits.

Senators WILLIAMS. The subcommittee will come to order.

We all know the securities industry is a major element in the Nation's financial and economic system. By providing markets through which new and expanding businesses may obtain necessary financing, the securities industry is indispensable to our national growth.

For example, during the 5-year period 1958-62, corporations in the United States raised over $35 billion for plant, equipment, and working capital by issuing stocks and bonds.

Securities form an important part of ownership in American enterprise. On December 31, 1961, holdings of corporate securities by individuals amounted to about $450 billion, holdings by life insurance companies and pension funds came to about $93 billion, and holdings by personal trust funds were about $57 billion. On December 31, 1962, the market value of shares available for trading on stock exchanges came to almost $375 billion, and trading on the exchanges during 1962 alone amounted to more than $50 billion.

The securities industry is one of the important financial mechanisms through which the economy of the United States grows and develops. Its size and importance to our Nation's business, commerce, and financial structure clearly require that the securities industry be protected against abuses and misconduct which might be harmful both to our economic system and to the general public.

It is because of the vital importance of the securities industry to our monetary, financial, and economic systems that the Federal Government has found it necessary to regulate this segment of our economy. Public Law 87-196, which was signed by the President on September 5, 1961, authorized and directed the Securities and Exchange Commission to conduct a study and investigation of the adequacy, for the protection of investors, of national securities exchanges and national securities associations. On April 3, 1963, the Commission submitted to Congress the first installment of its report.

Today we are holding hearings on S. 1642, a bill introduced on June 4 by the distinguished chairman of the Banking and Currency

Committee at the request of the Securities and Exchange Commission. This bill represents the legislative program of the SEC for this session and is based in large measure upon the findings in the first installment of the special study report.

In particular, the bill would amend the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, to extend disclosure requirements to the issuers of additional publicly traded securities and to provide for improved qualification and disciplinary procedures for registered brokers and dealers.

The hearings are scheduled to extend through Monday, June 24. During this period the subcommittee will receive testimony from representatives of Government and industry as well as from certain individuals testifying on their own behalf.

Without objection, I would like to insert in the appendix of the record material furnished by the Securities and Exchange Commission, including the SEC's letter of transmittal with an accompanying summary of the bill, a justification of the bill, which was prepared at the request of the committee and contains statements on proposed amendments to certain sections, a technical statement, and a comparative print showing the changes in existing law which would be made by the bill. I would also like to include a copy of the bill and each of the statutes which the bill would amend.

(The material referred to begins on p. 308.)

Senator WILLIAMS. The first witness this morning will be the Honorable William L. Cary, Chairman of the Securities and Exchange Commission.

Mr. Cary, I see, is accompanied by other members of the Commission and by members of the Commission's staff. I am sure he will want to introduce his fellow Commissioners and colleagues.

Before calling upon him, however, I would like to take this opportunity to congratulate him and the Commission, and, particularly, Mr. Milton H. Cohen, the Director of the Study, on the judicious manner in which this broad study of the securities industry has been conducted.

It is now incumbent upon the Commission to justify before the Congress the legislative proposals which it has submitted for our

consideration.

Senator Javits?

Senator JAVITS. Mr. Chairman, I, too, wish to join the chairman in congratulations to the Chairman of the Commission and to his colleagues and to Milton H. Cohen, the Director of the Study; Ralph Saul, the Associate Director; Richard Paul, Chief Counsel; Sidney Robbins, Chief Economist; and Herbert Schick, the Assistant Director; and the many members of the staff in the special market study. I am happy to see here our former colleague, the Senator from Delaware, Mr. Frear, who is now a member of the Commission.

The Chairman and I have worked very harmoniously in other matters, and I have little doubt that we will work harmoniously in this. That is also true of my good friend, the distinguished chairman of the subcommittee.

Mr. Chairman, coming from the city in which the primary securities market of the country is located, I am perhaps better able than most to testify to the fine receptivity of the financial community to the work

which has been done. It is rare that such comprehensive work has been carried on with such an apparent feeling that, whether there are disagreements or not, certainly every effort has been made to minimize them, and I appreciate the importance of that in terms of what we are able to do in the way of legislation.

I like, especially, the statement of the Chairman of the SEC in his letter of April 3 accompanying the special study report, and I quote:

*** the report makes very clear that important problems do exist, grave abuses do occur, and additional controls and improvements are much needed ***. The functions of this report and of any changes proposed are to strengthen the mechanisms facilitating the free flow of capital into the markets and to raise the standards of investor protection, thus preserving and enhancing the level of investor confidence.

Now, Mr. Chairman, the purpose of my making this statement today is twofold:

One, to emphasize what I believe is the appreciation of the whole financial community for the way the special study was handled, which I express based upon my experience with it.

Second, to make clear the frame of reference in which I, as one member of this subcommittee, will consider the report and the recommendations.

That frame of reference is this: The highest priority, in my view, in the private economy must be given to the necessity for facilitating the free flow of capital so that it can run into promising business ventures and enable energetic and imaginative private enterprises to change their ideas into products and services.

In examining our need for prudent regulation, we must always be alert to the fact that the need for capital mobility must be fulfilled so that we may have a dynamic and adequate capital market and, therefore, a dynamic private enterprise system.

Also I wish to say, in that connection, that I am not afraid of speculation. General Motors and General Electric and Ford Motor were once speculations. And who are we to judge what is and is not a speculation? In our economy that is up to the buyer, who must always beware but who has the right to use his money as he chooses. This is critically important.

What we want to do is to have fair conditions, clear and honorable securities marketing channels, complete disclosure, full fiduciary responsibility on the part of insiders, but we certainly do not want to stifle the great competitive process and speculative process which have made America so vital and so strong.

Finally, Mr. Chairman, we have to be very careful to utilize to the full the self-regulatory mechanisms, if we are convinced that they can be run properly, of the industry itself. I am very pleased to see in this report a very great emphasis upon the utilization of that machinery.

So, I think we are on a constructive path, and I hope very much that we will keep clearly in mind that we are dealing with the very lifeblood of a free society, that, if anything, we want to encourage an enormous expansion in the ownership of securities, which represents the ownership of productive means, not only by executives but also by white-collar workers and blue-collar workers, and that the way to en

courage that is to keep the game clean but not to eliminate the game. Thank you, Mr. Chairman.

Senator WILLIAMS. We appreciate that very much, Senator Javits. The distinguished chairman of the full committee, Senator Robertson, is with us today. Mr. Chairman.

Senator ROBERTSON. I want to say to the chairman of the subcommittee that having introduced S. 1642, by request, I fully endorse the statement that he has made concerning the importance of this subject. I also want to affirm the praise that he gave the investigation. I frankly cannot recall any investigation of a comparable nature and size which has been so favorably received.

In fact, the only criticism I have heard comes from the Comptroller of the Currency, who criticized the proposal that banks should be included with other corporations insofar as certain reporting requirements are concerned.

But after he made this original criticism, I read that he proposes to do something similar himself, that he recognizes the necessity for disclosure, but would rather keep it within the banking family, so to speak.

I also endorse the proposal of the distinguished Senator from New York about the free flow of capital.

But I remember that when I came out of the Army in World War I, there were several salesmen operating in my home county who were selling stock in some mines. The mines were that in name only. Maybe there was a hole in the ground. I do not know. But the salesmen guaranteed a return of 25 percent and held out the hope that it might reach 100 percent.

Well, as you know, our farmers made more money during World War I than they had ever made before. They had some extra cash and the high return looked mighty good.

These salesmen would get the farmer's notes. They would go down to the bank and get the bank to call the farmer up: "Did you sign that note?"

"Yes."

"Is it all right for us to discount it?" "Oh, yes."

The notes would be discounted up to 25 percent for cash. The farmers lost their shirts; the stock was absolutely worthless.

Now, that was a free flow of capital, but capital went from the pockets of our farmers into the pockets of the stock flimflammers. And that is one phase of the free flow of capital that we hope to prevent.

I think it is the object of this Commission to tighten up on some of these phases where the free flow of capital might end up in the wrong pockets.

I want to commend the Commission for the study, and I am sure that, in due course of time, we will have legislation on this subject.

Senator WILLIAMS. Thank you, Mr. Chairman.

Mr. Chairman, would you like to introduce your colleagues? I think it would be well to have the record show the Commissioners and members of the staff who are with us today.

STATEMENT OF HON. WILLIAM L. CARY, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY BYRON D. WOODSIDE, COMMISSIONER; J. ALLEN FREAR, JR., COMMISSIONER; MANUEL F. COHEN, COMMISSIONER; JACK WHITNEY II, COMMISSIONER; PHILIP A. LOOMIS, DIRECTOR, DIVISION OF TRADING AND EXCHANGES; MILTON H. COHEN, DIRECTOR, SPECIAL STUDY OF THE SECURITIES MARKETS

Mr. CARY. Thank you, Mr. Chairman. I would like very much to introduce my colleagues and members of the staff. On my left is my colleague, Commissioner Byron Woodside; next to him is Commissioner Manuel Cohen; next to him is Commissioner Jack Whitney; at the end is, as you well know, your former colleague, Commissioner and former Senator Allen Frear. On my right is the Director of our Trading and Exchanges Division, Philip Loomis; beyond him, as you know, as mentioned already, is the Director of our Special Study of the Securities Markets, Milton H. Cohen.

We have come in considerable force this morning because of the importance of this legislation to us and, we believe, to the securities. industry.

We would like to mention that in the back of the room we have our Chief Accountant, Andrew Barr; the Director of our Division of Corporation Finance, Edmund Worthy; our Associate General Counsel, Walter North; and my executive assistant, Arthur Fleischer, Jr. There have been a number of others who have assisted us manfully in this, and some of them are also present.

Senator WILLIAMS. We are certainly looking forward to reviewing this major legislative proposal with you.

Mr. CARY. Thank you, sir.

Senator Williams. We are prepared to give you as much time as

necessary.

Mr. FREAR. Mr. Chairman, before the Chairman starts, I would like to say he has omitted one of the most important spectators here today, and that is Mrs. Cary.

Mr. CARY. May I suggest that, in connection with the prepared statement which I have, Mr. Chairman, I would like to discuss it in this order and in this manner:

First of all, I would like to take up part I, which really extends to the first 15 pages of my prepared statement and deals exclusively with the general problem of reporting and disclosure with respect to securities that are presently unlisted, over the counter.

Then, in that connection, I would like to take up the question separately of the banks, because that issue has been raised, and also the insurance companies, because that has been a separate matter of discussion.

I would like, then, to take up the miscellaneous provisions of the first area of this bill, which run from roughly pages 26 to 33.

Finally, after I have completed that discussion, I would then take up what we consider as part II, dealing primarily with the qualifications of persons entering the business and which extends from page 33 or 34 to the end of the prepared statement.