Accordingly, the Board concludes that the reporting, proxy, and “insider trading" provisions of the 1934 act should be administered by the Commission in their application to banks as well as in their application to corporations generally and therefore recommends the deletion of section 3(e) of S. 1642. (If this recommendation is followed, it will be unnecessary for your committee to consider certain apparent shortcomings and difficulties in the wording of the proposed new subsec. (i) of sec. 12 of the 1934 act, which are enumerated in the enclosed memorandum.) Sincerely yours, Wм. MCC. MARTIN, Jr. COMMENTS ON PROPOSED SECTION 12 (i) OF SECURITIES EXCHANGE ACT OF 1934 (The comments in this memorandum are directed at possible defects in the wording of the proposed new subsec. (i) of sec. 12. The general merits of the proposal are discussed in the report of the Board of Governors to which this memorandum is attached.) 1. Extent to which SEC functions would be subject to delegation.-Under section 12(i), upon request by a Federal bank supervisory agency all "powers, functions, and duties of the Commission pursuant to the provisions of this title" (i.e., the Securities Exchange Act) would be delegated to the requesting agency "in respect of any securities issued by banks." The quoted language seems to permit excessively broad delegations. Under the 1934 act, the SEC performs numerous functions relating to securities, some of which obviously would be inappropriate for delegation to a bank supervisory agency. Perhaps a single example is sufficient to illustrate this. Section 15(c)(1) of the act forbids brokers and dealers to induce the purchase of securities in the over-the-counter market "by means of any manipulative, deceptive, or other fraudulent device or contrivance." The SEC is required to "define such devices or contrivances as are manipulative, deceptive, or otherwise fraudulent." The proposed section 12(i) apparently would provide for delegation of this day to a bank supervisory agency "in respect of any securities issued by banks." It is obvious that the SEC's functions in this involved and technical field should not be delegated to the FDIC, for example, with respect to fraudulent sales by dealers of stock of nonmember insured banks. It is believed that the underlying intent of section 12(i) is to provide for delegation of duties relating to reporting and proxies (and perhaps insider trading) with respect to bank stocks, to the extent that these matters would be brought within the purview of the 1934 act by the proposed amendments. Accordingly, it appears that the words "of this title" (p. 11, line 5) should be replaced by a reference to the particular sections of the 1934 act as to which it is concluded that delegation may be appropriate. Even within this limited area, consideration should be given to whether a reference to "sections 12, 13, 14, and 16," or the like, would not be too broad. It can be forcefully argued that delegation to the bank supervisory agency is appropriate, if at all, only with respect to the registration and reporting requirements of sections 12 and 13, and that some or all regulatory duties with respect to proxies (sec. 14) and insider trading (sec. 16) should remain with the SEC in any event. The administrative duties prescribed by those sections should be examined realistically, in order to determine whether the detrimental results of permitting delegation of the SEC's duties in those fields to bank supervisory agencies would not greatly outweigh the benefits, if any, that might result. Delegation would occur, of course, only upon request by a bank supervisory -agency. It may be hoped that delegation of inappropriate powers would not be requested, but the statute should not leave the door open for unwise and undesirable requests. 2. Delegation "in whole or in part."-Presumably, the provision that the SEC's functions in respect of bank stocks "shall be delegtaed in whole or in part" to one or more bank supervisory agencies was intended to permit a request to be made for delegation of duties in certain general areas and not in others, if the requesting agency considered this advisable. For example, a banking agency might request delegation of authority over the reporting of financial data, while leaving the administration of proxy requirements and insider-trading provisions, even with respect to banks, in the SEC. However, the expression "in whole or in part" is susceptible of a much broader interpretation. For example, these words might be construed to permit a banking agency to request delegation of the SEC's functions with respect to only a few of the largest banks (or smallest), identified either individually or by size or geographic categories. It is doubtful that delegation "in part" was intended to have this meannig or that it would be desirable; in any event, the ambiguities inherent in the existing language should be eliminated in order to affectuate the actual congressional policy and to avoid administrative conflicts and problems of interpretation and application. 3. Are delegations to be irreversible?—Section 12(i) would provide only that described functions of the SEC should be delegable to banking agencies upon request. No reference is made to possible return of those duties (or any of them) to the SEC. It is possible that a banking agency, after certain functions had been delegated to it, and exercised by it for some time, might decide that the benefits of the arrangement were outweighed by its detrimental features. In that event, it would seem desirable to permit the banking agency to return the functions to the SEC. If this reasoning is sound, section 12(i) should be amended to make clear that the banking agencies are authorized to return delegated powers to the SEC. 4. Jurisdictions of the respective bank supervisory agencies.-Section 12(i) would provide for delegation of certain SEC functions relating to securities issued by banks "to the Federal banking regulatory agency or instrumentality which has jurisdiction to examine or supervise the business of such banks, upon the request of such agency or instrumentality." Presumably it is intended that the SEC's functions will be delegable to the Comptroller of the Currency in the case of national banks (and banks in the District of Columbia), to the Board of Governors of the Federal Reserve System in the case of State banks that are members of that System, and to the FDIC in the case of nonmember insured banks. The language of section 12(i) should be changed to express that intent specifically. The present language appears to be based upon the assumption that only one Federal banking regulatory agency has jurisdiction to examine or supervise the business of any specific bank. However, this is not the case. The Comptroller of the Currency "has jurisdiction to examine" national banks; the Federal Reserve "has jurisdiction to examine" all member banks (including national banks); and the FDIC "has jurisdiction to examine" all insured banks (including national banks). Consequently, there are three Federal banking regulatory agencies that have jurisdiction to examine national banks. (Similarly, State member banks of the Federal Reserve System are subject, under Federal law, to examination by two Federal regulatory agencies.) Although a "reasonable" interpretation, in this respect, of section 12(i) might prevail even if its language on this point were not changed, it seems obviously inadvisable to enact legislation that literally seems to contemplate overlapping jurisdiction by two or more banking agencies and could give rise to conflicting requests for delegation from such agencies. As a practical matter, it might actually occur that the Federal agency with "primary" jurisdiction over a certain class of banks might elect not to request delegation, in which event another agency with "secondary" jurisdiction might claim, with some plausibility, at least a residual privilege to request delegation, and might seek to exercise that privilege. To avoid the possibility of problems of these types, section 12 (i) should be redrafted to identify the bank supervisory agencies by name and to describe specifically the class or classes of banks as to which each should be regarded as having “jurisdiction" for this purpose. Hon. A. WILLIS ROBERSTON, FEDERAL DEPOSIT INSURANCE CORPORATION, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: You have requested the views and comments of this Corporation with respect to S. 1642, a bill "To 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, to provide for improved qualification and disciplinary procedures for registered brokers and dealers, and for other purposes." One of the sections of the bill which is of major importance to this Corporation is section 3(c), which would add a new subsection (g) to section 12 of the Securities Exchange Act of 1934, and would initially require every issuer of securities, including banks, engaged in interstate commerce, or in a business affecting interstate commerce, or whose securities are traded by use of the mails or other means of interstate commerce, and having total assets exceeding $1 million and which has a class of equity securities (other than exempted securities) held of record by 750 or more persons, to file with the Securities and Exchange Commission a registration statement with respect to such class of securities containing, in essence, the same information required in section 12(b) of the Securities Exchange Act of 1934 from an issuer making application to register a security on a national securities exchange. After 2 years, or for a longer period if the Commission so determines, the stockholder requirement would drop to 500 persons. Section 3 (e) of the bill would further amend section 12 of the Securities Exchange Act of 1934 so as to provide for the delegation of the responsibility for administering the provisions requiring such information to be reported from banks issuing such securities to the appropriate Federal banking regulatory authority, which in the case of insured State banks which are not members of the Federal Reserve System, would be the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation was created by the Congress in 1933 for the primary purpose of protecting depositors in insured banks. In accordance with deposit insurance law, all national banks chartered by the Comptroller of the Currency and all State-chartered banks that have become members of the Federal Reserve System are automatically insured by the Corporation upon receipt of proper certificates from those agencies. State-chartered banks not members of the Federal Reserve System may become insured by application to and approval by the Federal Deposit Insurance Corporation. While the Corporation in the performance of its duties as the insurer of bank deposits has the authority to examine any insured bank, as a matter of practice it examines only a regular and recurring basis the insured State-chartered banks not members of the Federal Reserve System (about 7,400 of the 13,400 insured banks), and relies upon the examination and related supervisory activities of the Comptroller of the Currency and the Federal Reserve banks to cover the national banks and the State-chartered banks which are members of the Federal Reserve System respectively. In carrying out the continuous examination and supervision of banks Federal and State banking supervisory authorities indirectly, and without additional cost to these agencies, afford a protection to bank shareholders. If it is determined that additional disclosure requirements be desirable it is our position that the regulations should be developed by the Federal banking regulatory authorities. In his "Administrative Law Treatise," volume 1, section 404, Kenneth C. Davis (a recognized authority on administrative law) says: "Probably the outstanding example in the Federal Government of regulation of an entire industry through methods of supervision, and almost entirely without formal adjudication, is the regulation of national banks. The regulation of banking may be more intensive than the regulation of any other industry, and it is the oldest system of economic regulation. The system may be one of the most successful, if not the most successful. The regulation extends to all major steps in the establishment and development of a national bank, including not only entry into the business, changes in status, consolidations, reorganizations, but also the most intensive supervision of operations through regular examination of banks. "The substantive systems of regulation by such nonbanking agencies as the ICC, FPC, and FCC are much the same as one portion of the system of regulation by the banking agencies, the portion having to do with the requirement of licenses and approvals. The major substantive difference in the systems of regulation in that the banking agencies have and the nonbanking agencies lack the power of close supervision of day to day operations." [Italic supplied.] While the Corporation's supervising activities are oriented in the direction of depositor protection, such supervision provides incidental and indirect, but nonetheless substantial, benefits to bank shareholders. Federal legislation as embodied in the Securities Act of 1933 and the Securities Exchange Act of 1934 is chiefly concerned with the disclosure of information concerning securities to the end that investors may have a sound basis for intelligent decisions and receive a measure of protection against securities fraud. In addi tion to reporting, this legislation is also concerned with proxy matters and trading by so-called insiders. Thus, the objectives of the legislation and the means for their accomplishment differ fundamentally from the insurance of deposits in banks. Moreover, the banking supervisory activities of the Corporation, particularly the confidential aspects thereof such as bank examinations and reports, would not serve the reporting and disclosure purposes of Federal securities legislation. There are also to be considered the obstacles which public disclosure requirements could place in the way of supervisory efforts to obtain additional capital in banks which are undercapitalized either because of growth, imprudent loan activities, or losses through defalcations. In such cases, recapitalization is oftentimes involuntary and the bank and the depositors' funds could be jeopardized by unlimited disclosure requirements. Unlike other private corporations, the assets of banks are acquired almost entirely from the funds supplied by depositors rather than holders of equity securities in the banks. In fact the national average shows that approximately 92 percent of the assets of banks are purchased with depositors' funds, while the holders of the equity securities of the banks have supplied funds for only 8 percent of the assets. Thus, the legal position of bank shareholders is contra to that of the depositors, and to that of this Corporation which insures their deposits. The primary responsibility of the Corporation is protection of bank depositors, and the deposit insurance fund, and therefore the Corporation has a major interest in assuring that disclosure requirements are consistent with the maintenance of depositors' confidence and the integrity of the deposit insurance fund. To administer the Federal securities laws the Congress created the Securities and Exchange Commission in 1933. The funds needed to defray the cost of administering such securities laws are provided by regular congressional appropriations. The proposed amendment to the Securities Exchange Act of 1934 could require the Federal Deposit Insurance Corporation to engage in a line of activity that is totally foreign to the stated purposes of deposit insurance law. Expenditures of Corporation funds, derived from assessments paid by insured banks and from income from its investments, to support activities on behalf of investors as contemplated by the proposed amendment, would, in our opinion, be of questionable legality. When the Federal Deposit Insurance Corporation was established, the Congress provided a permanent insurance fund to be augmented by the residue of assessments after payment of insurance losses and operating expenses for the protection of depositors in insured banks. This fund is a fiduciary trust held by the Corporation for depositor protection and it is not available for other purposes. The views expressed herein should in nowise be taken as a reflection upon the performance of the Securities and Exchange Commission, which has demonstrated over the past 30 years that it has developed a highly skilled staff and a high degree of competence in the technical aspects of securities law and trading practices in business fields other than banking. If the administration of Federal securities legislation is extended by Congress to bank securities undoubtedly the Securities Exchange Commission could do as well in administering such legislation as any outside agency other than the Federal banking supervisory agencies themselves. The present wording of section 3 (e) of the bill, in the opinion of the Corporation, would create a large measure of uncertainty concerning the extent to which the powers, functions, and duties of the Securities and Exchange Commission, under title I of the Securities Exchange Act of 1934, might be delegated to one or more of the Federal banking regulatory agencies in respect to securities issued by banks. The section merely provides that these powers, functions, and duties "shall be delegated in whole or in part." Considerable doubt would also be generated as to the form or nature of the request for such delegation, which must originate in the Federal banking regulatory agencies. Section 3 (e) is also silent with respect to the authority which would make the actual delegation of the powers, functions, and duties of the Commission to the Federal banking regulatory agencies. We understand from public announcements, that the Comptroller of the Currency will strongly oppose any conditions affecting national bank issues which may be included in S. 1642. We have also been informed, from other sources, that the Board of Governors of the Federal Reserve System believes that these powers, functions, and duties should be placed and remain in the Securities and Exchange Commission. We are immediately concerned with the confusion which could result from two possible separate and different sets of disclosure rules and procedures, one applicable to national banks and the other applicable to State banks which are members of the Federal Reserve System. Further complications or confusion could result if this Corporation requested a partial delegation of authority with respect to securities issued by insured State nonmember banks which could result in there being still another set of disclosure rules and procedures applicable to such banks. Nevertheless, the Corporation would interpose no objection to full and proper disclosures by banks similar in purpose to those applicable to other corporations under the Federal securities laws. It is our recommendation, however, if Congress should enact S. 1642, that the statute itself should specifically place the powers, functions, and duties with respect to public disclosures in connection with bank securities issuers in the appropriate Federal banking supervisory authority, rather than in the Securities and Exchange Commission with authority in that Commission to delegate such powers, functions, and duties in whole or in part to such agencies. We would like to call attention to the fact that there are approximately 500 noninsured banks in the United States, including large private banks, which are not subject to any supervision by a Federal banking authority. Since the proposed amendment provides that the appropriate Federal banking regulatory authority shall perform the powers and duties of the Securities and Exchange Commission with respect to any security issued by a bank, the question of which Government agency shall be responsible for administering reporting requirements relating to noninsured banks is left open to question in the proposed amendment. In the light of the foregoing, the existing involved disclosure requirements of the securities acts and the proposal to subject banks to the related burden and expense are viewed by this Corporation, at this time, as unnecessary and not in the public interest, particularly so since there are no indications of any abuse in connection with bank stock flotations. Should present conditions or future conditions offer legitimate reason for further public disclosure with respect to issuers of bank securities the specific nature of such disclosure requirements should be determined by and their administration placed in the Federal banking regulatory agencies. Accordingly, the Corporation does not favor the enactment of S. 1642 as presently drafted. The references above do not include the entire contents of S. 1624. From our position we would interpose no objections to the other provisions of the bill. We have been advised by the Bureau of the Budget that it has no objection from the standpoint of the administration's program to the submission of this report. Sincerely yours, ERLE COCKE, Sr., Chairman. Senator WILLIAMS. Our next witness will be Mr. W. C. Ridgway, Jr., president of the Association of Casualty & Surety Companies. Is Mr. Ridgway with us this morning? STATEMENT OF WILLIAM C. RIDGWAY, JR., ON BEHALF OF ASSOCIATION OF CASUALTY & SURETY COMPANIES AND NATIONAL BOARD OF FIRE UNDERWRITERS, NEW YORK CITY Mr. RIDGWAY. Yes, sir. Senator WILLIAMS. Good morning. We welcome you to the hearings of the subcommittee and appreciate your being here. We have your statement. You may proceed as you wish, Mr. Ridgway. Mr. RIDGWAY. Mr. Chairman, members of the committee, my name is William C. Ridgway, Jr., and I live in Short Hills, N.J. I am chairman of the board and chief executive officer of the Crum & Forster group of insurance companies, whose home office is 110 William Street, New York City. I appear before you today, however, as president of the Association of Casualty & Surety Companies. This statement is also made on behalf of the National Board of Fire Underwriters. Both of these organizations are located in New York City. The Association |