tect against embezzlement and which assure adequate reserves serve important objectives, but not the objective of informed investment. To hold otherwise would be to imply that, because of such regulation, bank securities are, without more, worthy investments.

We ask whether the investor should evaluate bank stocks himself or should it be done in Washington? We do not believe any bank regulatory agency would, or should, undertake to say that X bank stock is a better value than Y bank stock. Such a practice is paternalism-a philosophy wholly at odds with that chosen by Congress to protect investors, as distinguished from depositors.

The emphasis in the objectives of banking regulations is manifested in its financial reporting requirements. A key report in investment analysis, the income statement, is filed on a confidential basis with the banking authorities and, except at the option of a particular bank, is not available to the public. No attention is given to the protection of investors in proxy solicitations with the exception of certain efforts of the Comptroller of the Currency. Nor are there any restrictions with respect to insider trading.

The inadequacies of this reporting structure for the investor's purposes have been brought out by the special study. Its analysis revealed that the disclosure practices of banks fell far short of the standards imposed under sections 13, 14, and 16 of the Exchange Act.

In the category of banks that would be covered by S. 1642, the study's findings show that 10 percent did not send any financial information to their shareholders. Of those that did, 32 percent failed to include the most important document, a profit and loss statement. These findings are illustrative of the fact that uniformity of reporting to provide some basis for comparing bank stocks among themselves or with other stocks has been notably lacking.

Significant deficiencies, moreover, were also found in the proxy practices of banks. For example, in 88 percent of the solicitations that involved election of directors, the names of the nominees were not stated, and in 95 percent their experience was not given. In all cases management remuneration was not furnished.

There have been recent efforts on the part of the Comptroller of the Currency to provide by annual reporting and proxy rules some protection for bank investors. I might emphasize the point that was made a moment ago that his regulations would only apply with respect to national banks and would not cover all of the banks which we have here referred to.

These regulations fall considerably below those contemplated by the Exchange Act, although they constitute a welcome recognition by the Comptroller of the need for action in this area. I might further say that I am now referring to the Comptroller's regulations which have been promulgated in the last, as I recall, about 6 months. As the chairman has indicated, there was an announcement in the Wall Street Journal and the New York Times yesterday with respect to additional actions he is now going to take, but I cannot speak to those because I have not been informed about them. The regulations, as they presently stand, of the Comptroller fall considerably below those contemplated by the Exchange Act, although they constitute a welcome recognition by the Comptroller of the need

for action in this area. The regulations, for example, do not provide for review of proxy materials prior to their distribution, contain no general prohibition of the use of false or misleading information, and specifically deny the right of shareholders to secure relief against false or misleading solicitations. In addition, the Comptroller has no express authority to seek an injunction against the use of improper proxy material.

Thus, useful administrative practices, along the lines developed by the Commission, for assisting companies in transmitting properly prepared proxy materials, are not available-nor are effective administrative or private sanctions.

Other serious shortcomings are the failure to require that their annual reports be submitted to shareholders in time for annual meetings when they would be of most service; the failure to require information about the interests of officers or directors in material transactions or matters to be acted upon by shareholders; and the omission of any duty to disclose the experience of nominees for directorships. Of course, as I have said, the Comptroller's regulations do not provide any protection against insider trading. Furthermore, they are only applicable to some national banks and leave a large number of banks-national, member, insured, and Statein which there is substantial investor interest free from the responsibility to make necessary disclosures.

At this point, Mr. Chairman, I would like to refer once more to a point that has been made by you and Senator Javits bearing upon the announcement yesterday in the New York Times and the Wall Street Journal.

As you may know, there have been published in the newspapers a considerable number of statements by the Comptroller, one of which contains this statement in his release of June 5. He said there:

The disclosure requirements imposed by the bank regulatory agencies provide protection for investors at least equal in effectiveness to those imposed by the SEC.

That was as of June 5.

Now, the facts of the matter are that he announced yesterday, if the Wall Street Journal and New York Times are correct, that there are additional disclosure requirements which he is now going to promulgate. Secondly, if he has promulgated some and if he is going to promulgate more, it would seem to assume on his part that some disclosure is necessary. Now, if some disclosure is necessary, it is only pursuant to his regulations vis-à-vis national banks.

It would seem to me logically, almost unerringly, to follow that the same kind of approach on his own premises should apply to the banks subject to the Federal Reserve Board and the FDIC. Therefore, I would maintain that the actions which the Comptroller has taken demonstrate that disclosure requirements imposed by bank regulatory agencies do not provide protection for investors; indeed, he is now providing additional protection for investors in respect of national banks. And it seems to me that he just pushes toward the conclusion that this protection is necessary with respect to the others.

Senator WILLIAMS. I think that after we analyze the syllogism we will find it holds water.

Mr. CARY. I hope there are no holes in it.

The regulations of the Comptroller have been adopted pursuant to this general authority to require special reports. There is, of course, no established congressional expression of policy as to their content and form and consequently no assurance of their endurance. Furthermore, to the extent that these regulations already provide protection equivalent to that provided by the exchange act, there would appear to be little cause for objection to their express congressional approval in a statute providing for their administration by appropriate banking authorities.

For these reasons the Commission strongly recommends that investors in bank stocks be given the basic protections afforded by S. 1642-protections to be administered by the proper banking authorities, if they so request.

H. DISCLOSURE WITH RESPECT TO INSURANCE SECURITIES TRADED ON THE OVER-THE-COUNTER MARKET

Mr. Chairman, now I would like to turn from banks to the question of the insurance company securities.

The special study gave special attention to stock insurance companies because of the claim that existing State regulation makes superfluous the application of the disclosure protections contemplated by S. 1642. It did not examine mutual companies and these are not subject to the bill. In other words, many of the very large insurance companies, which are mutual, are not covered in this bill. Senator JAVITS. Now, Mr. Chairman, would you stop there a minute?

Mr. CARY. Yes.

Senator JAVITS. They are not covered because you conceive of your role to be with securities which the public owns? It is a fact, however, that the public has an enormous interest in these companies, in that every policyholder is tantamount to being a stockholder. He votes. He has an equity interest in whatever the mutual company has. That is correct, is it not?

Mr. CARY. Both points are correct, sir. But, as you have indicated, the basic reason we did not feel they should be covered is that they are not securities, as you say, and they are not traded in. This is the area in which we are involved.

Senator JAVITS. But you do not by that assertion rule out the possibility of examining the end results of your report so that if, for example, there were serious abuses among mutual companies, you would not rule out the fact the Federal Government might give some attention to that question?

Mr. CARY. Certainly not. The Federal Government should. That obviously is not ruled out. It is just simply our focus was not in that direction.

Senator JAVITS. I hasten to add that there is no such evidence, no such public feeling whatever, as far as I know. The great mutual companies like those that we well know certainly rate the statement I have just made. There is no feeling that anything they are doing would require any such concern from the Federal Government. But I wanted the record to be clear that you were not making a

finding of exclusion. You certainly are making no finding of

inclusion.

Mr. CARY. That is correct, sir. Purely a question of focus.

Senator JAVITS. Right.

Mr. CARY. The report of the special study found these stock companies were an important part of the over-the-counter market in accounting for approximately 5 percent of the domestic issues traded. Accordingly, unless persuasive reasons exist to the contrary, there would appear to be no justification for depriving investors in insurance companies of those benefits afforded investors in other over-the-counter securities. The Commission believes that no such justification exists.

Existing regulation of insurance companies, which rests almost exclusively in the hands of the States, is designed primarily for the safeguarding of policyholders and is an inadequate substitute for the investor protections provided by S. 1642.

May I go out of the statement for a moment to point out that, as in the case of banks, there is some kind of supervision by agencies, but these are not Federal agencies. These are State agencies. And there is a very substantial variance among the State agencies with respect to the form of the control and regulation that they exercise.

Therefore, it is a somewhat different problem in that respect, of course, than it is with respect to the banks where, for all practical purposes, there are three Federal agencies involved, all of which would cover practically all the banks with which we are here concerned.

Senator WILLIAMS. Does SEC jurisdiction at present extend in any degree to insurance companies?

Mr. CARY. Yes, sir. I think I might go to that point. It is at the bottom of page 25 of my statement. I think I can elaborate on that if I may.

We point out that it should be emphasized that securities issued by insurance companies are not now exempt from either the Securities Act or the Exchange Act. As of December 31, 1961, a total of 110 insurance companies were filing reports with the Commission.

Therefore, we have had considerable experience in dealing with the problems which insurance companies encounter in complying with the reporting requirements of the Exchange Act, and we have, in fact, made appropriate modifications to meet their particular needs. Investors in some insurance companies, therefore, are already receiving partial protection.

In other words, if any insurance company goes public, a registration statement would have to be filed. Moreover, if the class of securities offered and outstanding was more than $2 million, the company would be subject to our section 15(d) reporting requirements. So the idea of having some jurisdiction over insurance companies is not new. We have experience in this area.

If I may go back then to my statement, where I was at the end of page 22, again it should be emphasized that the bill is intended to foster publication of reliable financial and business data so as to allow investors to exercise a rational judgment and thereby to promote an informed distribution of capital among companies and indus

tries. The thrust of insurance regulation is to protect policyholders' claims against a company and accordingly lays stress upon the adequacy of its reserves and upon compliance in its investments with specified standards. Consistent with those aims, information in the required reports is directed to the solvency of a company and not to its usefulness for making investment decisions. For example, annual statements do not require information as to the business experience of officers and directors, their remuneration, or their holdings of securities or options. Accounting methods do not in all instances follow generally accepted accounting principles and practices. Of course, none of the insider trading protections of section 16 are provided.

The special study's examination of the reporting practices of insurance companies confirms their weaknesses from the viewpoint of the investor. In the category of companies in the study survey that would be covered under S. 1642, 12 percent failed to furnish any financial information and 50 percent failed to supply an income statement. Proxy soliciting practices were even more inadequate. Eight percent of the companies responding did not transmit any proxy material to shareholders. When shareholders were furnished materials, the information provided was almost always greatly inadequate by Commission standards. The serious weaknesses in this area were noted in a 1960 report by a group of financial analysts, within the National Federation of Financial Analysts Societies:

It is our conclusion that annual reports [to stockholders] of the life insurance industry are the poorest of any major industry in the United States. There may well have been improvements since that date; the findings of the study seem to indicate they are modest ones.

The desirability of publishing and disseminating financial information about a company, of course, rests firmly on the desirability of informed investor judgment. However, the absence of this information is also conducive to fraudulent practices and overreaching-which have occurred in recent years with an undesirable frequency in insurance company promotions.

The insurance company business has grown rapidly in the last decade. During the 10-year period from 1951-61, the number of life insurance companies in the United States has more than doubled, from 659 to 1,457, with a high concentration of this growth in the South and Southwest. This is obtained from the Life Insurance Fact Book prepared by the industry. Many of the new insurance companies which emerged during this period were inevitably promotional to some degree and their operations presented problems of investor protection. In its 23d annual report (1957) this Commission, describing its most pressing enforcement problems, included this

statement:

Recent economic conditions have been relatively favorable for the sale of promotional stocks of new ventures, particularly in fields in which the securities of established enterprises have shown marked gains. For example, many new insurance and financial ventures have been promoted, particularly in the south central, southwestern, and southeastern parts of the country, and their securities have been distributed either through registration or regulation A, or more commonly, in reliance upon the intrastate exemption. Many of these issues and the sales techniques employed in their distribution appear to involve abuses and possible violations of the antifraud and other provisions of the

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