In summary, the present bill is similar to a number of previous proposals of the SEC, extending over 17 years, which would have subjected insurance companies to the provisions of the 1934 Exchange Act. These proposals have consistently failed, and on the last two occasions, in 1955 and in 1957, the committee has expressly extempted insurance companies. We believe the committee's prior actions in extempting insurance companies were proper and correct, and we believe S. 1642 should similarly be amended to exempt insurance companies. State regulation and supervision of life insurance companies is complete We take the position that it is neither necessary nor desirable to subject life insurance companies to SEC regulation for the reason that the several States already fully supervise and regulate the insurance business. For more than 75 years prior to 1944, the U.S. Supreme Court consistently ruled that insurance was not commerce and therefore was subject to State rather than Federal regulation. When the Supreme Court reversed that long-standing doctrine, Congress quickly enacted legislation restoring the States to the position they had previously occupied. As a result of this long history, each of the States has over the years built up a comprehensive regulatory system for this business, a system considerably more protective than the regulation established for other businesses. Moreover, all of the information obtained by the States is treated as public information and is open to anyone who wants to see it. In fact, it probably is fair to say that no other business operates under so great a volume of State regulatory law, and in no other regulatory field have the States performed a more impressive public service. State supervision of insurance was unqualifiedly endorsed by the 79th Congress when it provided in Public Law 15: "Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest * * *. "The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business." There is no need for additional financial reporting S. 1642 would require that stock life insurance corporations, along with other business corporations, file financial reports and management information with the Commission. These reports would to a substantial extent duplicate information already on file in the State insurance department of every State in which a life insurance company does business. The adequacy and completeness of these reports to the States is well recognized. They are prepared on standard blanks approved by the National Association of Insurance Commissioners, are uniform for all States, and conform to the highest standards of insurance accounting. In addition, each company is usually examined at least once every 3 years by a corps of examiners representing the States in which the company does business. These examinations are conducted under uniform procedures prescribed by the National Association of Insurance Commissioners. More frequent examinations may be made if closer vigilance seems desirable. These examinations are so thorough that in the case of a large company the study may take as long as a year and a half. The examiners explore the financial affairs of the company, its practices, corporate procedures, and management. The results of the examinations are recorded in a report which details the findings and sets forth conclusions with respect to all phases of the company's operations. Both the company's annual report and the report of its examination are public documents on file in each State in which the company is licensed, and are available for inspection by anyone interested in the company. We respectfully submit that the insurance companies should not be put to the expense and inconvenience of unnecessary and duplicative regulation. The requirement of dealing with another Government agency which is not thoroughly acquainted with insurance accounting and practices would undoubtedly repre sent a significant cost item. The confusion that would result from reporting to both the States and the Federal Government, with different reporting requirements would likewise be costly. The SEC also would incur additional expense. It is estimated that over $25 million is now being spent annually by the States to supervise insurance. We believe that the Federal Government should not spend additional public funds, particularly under present circumstances, for a service which is already provided by the States. Life insurance accounting requirements are unique In a long-term business like life insurance, there is the inevitable risk that actual results may not conform—and, in fact, they seldom do with the assumptions in regard to mortality, expenses, and investment return, upon which projected liabilities for the performance of contracts far in the future are based. In the case of any particular company, actual mortality experience may vary from year to year in very marked degree. Expense estimates which also enter into premium calculations are obviously fallible and are radically affected by changing economic conditions. The assumptions of interest returns on the investment of reserves for decades in the future are patently not subject to precise calculation and are affected by wide swings dependent not only upon the state of the economy but also upon governmental fiscal policy. It follows that the results in any given year, as shown by a life insurance company's annual statement, are so much the product of estimates of future liabilities based on probabilities that the results themselves are essentially estimates instead of actualities. The States have recognized this difference between the life insurance business and other businesses, and have prescribed methods of accounting for the life insurance business which take into consideration the various assumptions necessary to the conduct of that long-term business. These methods of accounting are rigidly established by State law and, among other things, specifically provide for the minimum valuation of life insurance and other reserves, taking into account mortality and morbidity assumptions, as well as expense and interest factors. The methods of accounting so prescribed differ in material respects from all other methods. To require the companies to report to the SEC on the basis of a different type of accounting would necessarily be burdensome to the companies. It would also be confusing to the stockholders because of the different results which would be obtained by virtue of the two systems of accounting. Additionally, the system of accounting imposed by SEC would necessarily cast doubt upon the system followed in the annual statements, a system which has been developed by the States over a period of more than 100 years. It is not necessary to look beyond the Internal Revenue Code of 1954 to see that the uniqueness of the life insurance business required the Congress there to provide separate provisions applying only to life insurance companies. The taxation provided for life insurance companies specifically recognizes the rules and accounting procedures prescribed by State law. This was made clear by the floor debate in the House of Representatives on the Life Insurance Company Income Tax Act of 1959 (Public Law 86–69), an excerpt of which follows: "Mr. SIMPSON of Pennsylvania. * * * "There is a matter of great importance on which I am sure the gentleman from Arkansas (Mr. Mills), the chairman, holds an opinion which coincides with mine; namely, that the committee has no intention of placing jurisdiction of the management of insurance company reserves within the hands or powers of the Commissioner of Internal Revenue. Specifically, I refer to section 806 of the bill before us. This section of the bill relates to a change of basis in computing reserves. I ask whether it is intended that permission to change the basis requires approval of the Secretary of the Treasury or his delegate as provided by section 446 (e) of the code? "Mr. MILLS. Certainly, it is not the intention of the chairman that that be required. I think I can speak without fear of contradiction and say it is not the intention of the committee. We are trying to preserve as best we can in this bill the management of this industry in the hands of the State regulatory agencies and not to change in any way that situation so as to turn over to the Commissioner of Internal Revenue, the Secretary of the Treasury, or anyone else in Washington the regulatory authority.1 Additional regulation of proxies and insider trading is not necessary The insurance business is so completely regulated by the States that there is little opportunity for the management of a company to take any action that would be detrimental to stockholders. While it is true that the State laws are designed in large part to protect policyholders, many of these laws also protect the interests of the stockholders. For example, the laws of a typical State specify the conditions under which an insurance company may be incorporated, its stock sold, the proceeds of such sale invested, the procedure for increasing its capital stock, the procedure for consolidation or merger with another insurance company, the deposit of a part of its capital with the State insurance commis 1 Congressional Record, Feb. 18, 1959, p. 2346. sioner, the securities eligible for the investment of its capital and surplus, the payment of dividends to stockholders, and the content of its annual statement. Manifestly, regulations of this kind protect stockholders as well as policyholders. Consequently there is no need for regulation of proxies or insider trading at the Federal level. The examinations conducted by the State insurance departments are not confined to financial affairs, but deal with every type of corporate activity. All information concerning proxy practices is available to the examiners and any irregularities can be easily and quickly corrected. Moreover, every company seeks to avoid conduct detrimental to the interest of any policyholder or stockholder which might be made the subject of an adverse examination report. With respect to insider trading, the periodic examinations conducted by the State insurance departments are broad enough to uncover any such practices and bring about corrective action. In addition, the National Association of Insurance Commissioners in recent years has included on the annual statement form a question as to whether the company has a program for disclosing conflicts of interest on the part of its directors, officers, and key personnel. Thus it would seem clear that there is no need for superimposing Federal regulation in this area. The report of the Securities and Exchange Commission is not persuasive The Commission's conclusion that the insurance companies studied do not currently follow SEC regulations by no means suggests that they are not adequately regulated or that their reporting and proxy procedures are insufficient. There are always more ways than one to accomplish a desired result. The fact that two approaches may differ does not indicate that one is better than the other. While the States do not presently require some of the details deemed advisable by the SEC, the States in many other respects require much greater detail and more thorough examination of the practices of the companies. It may well be argued that thorough study and examination by State officials who are expert in the insurance business provides greater protection to the public than the dissemination of details to stockholders not as well equipped to understand the information. We respectfully submit, therefore, that the Commission's study provides no justification for duplicative regulation of the insurance companies, with all of its attendant burdens and expenses, as well as possible conflicts between State and Federal authorities. Moreover, it should be pointed out that the State insurance departments are continually reexamining their procedures in an effort to determine whether any changes are necessary. In line with this policy, the National Association of Insurance Commissioners at its annual meeting held during the week of June 17, 1963, took cognizance of the SEC report and appointed a committee to study the matter and to make a report together with recommendations at the next meeting of the association in December 1963. Proposed amendment For the above reasons, it is respectfully recommended that S. 1642 be amended, as in the past, to exclude all life insurance companies which are subject to State supervision. To accomplish that purpose, we propose the following language to be inserted following line 8 on page 9 of the bill: "(F) any security issued by an insurance corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or territory of the United States or the District of Columbia." We understand that the other branches of the insurance business take the same position with respect to this bill. LANDIS, FELDMEN, REILLY & AKERS, Senator HARRISON A. WILLIAMS, Jr., MY DEAR SENATOR WILLIAMS: I am addressing this letter to you in your capacity as chairman of the Subcommittee on Securities of the Senate Com mittee on Banking and Currency and, on my part, as chairman of the board and general counsel of the Association of Mutual Fund Plan Sponsors, Inc. The specific matter as to which the association wishes to place itself upon record is to indicate its support of section 6(a) of S. 1642, which amends section 15(a) of the Securities Exchange Act, to require brokers or dealers to be members of a securities association which is registered pursuant to section 15 (a) of the Securities Exchange Act, a section that is popularly known as the Maloney Act. The Association of Mutual Fund Plan Sponsors, Inc., is an association that has been in existence for some 6 or 7 years and today represents the major portion of the mutual fund industry engaged in the sale of contractual plans. The commitments on the plans that they have presently outstanding is in the neighborhood of $4 billion. Our association concerns itself with the specific problems presented by this phase of the industry and to that end has adopted a code of ethics to impose upon its members standards with reference to the sale of these contractual plans and to the activities generally of their members in sponsoring and underwriting these plans. Its members, for example, by agreement have adopted the salutary rule, in my opinion, requiring the repayment in full of any payments made by a planholder within 30 days after he may have committed himself to a plan. Repayment will be made for any reason and the purpose of that requirement is to give potential planholders the opportunity to reconsider any decision that they have initially made at their leisure and in the light of extended scrutiny of the full information which has been given them as to sales and other charges. A majority of the members of our association are also members of the National Association of Security Dealers. Some, however, are not members of that association due to the fact that they have their own selling organizations and do not utilize brokers and dealers in their sales activities. There are also a number of important sponsors and underwriters of contractual plans who are not members of our association, the reasons for their failure to join our association being various in character, but centering in many respects about their unwillingness to extend to their planholders the 30-day rule mentioned above. The members of our association are not prepared as yet to commit themselves to the idea of being required to join the National Association of Security Dealers or to alternatively form a self-regulatory association which would qualify under section 15A of the Securities Exchange Act. However, the members of our association are unanimously of the opinion that their experiment in the field of self-regulation has produced benefits to their portion of the mutual fund industry. They consequently believe that the principle of self-regulation should be extended to all members of their industry, as advocated by the Securities and Exchange Commission. They consequently wish to place themselves on record in behalf of the aforementioned proposal of the Securities and Exchange Commission. It would therefore be appreciated if you could make this letter a part of the record educed by your subcommittee. Our members naturally do not wish to be compelled to join two associations and thus be subject to the requirement to pay double dues and be subject to dual regulation. Nor do they wish to be deprived of certain necessary privileges they may presently possess as members of the National Association of Security Dealers by choosing to belong to some other duly registered self-regulatory association. These are problems of detail, in their opinion, that can be readily worked out at a later stage. But they firmly believe in the principles enunciated by the Securities and Exchange Commission, first, that self-regulation is desirable, and, second, that to be effective it must embrace all of the persons engaged in the particular type of business given the privilege of self-regulation. I might add as a personal note that, as a former Chairman of the Securities and Exchange Commission, I was a prime proponent of the Maloney Act, to wit, section 15A of the Securities Exchange Act. In my opinion, it has been a valuable adjunct to the regulation of our securities markets, and I believe that its extension to cover the entire field and to permit, as the pending legislative proposals do permit, the creation of separate associations to deal with certain phases of the securities field that are quite distinct from the normal sale of stocks and bonds, will be definitely in the public interest. Respectfully yours, JAMES M. LANDIS. THILL SECURITIES CORP., Statement by Lewis D. Thill, former member of the U.S. House of Representatives from the Fifth District of Wisconsin (January 1939-January 1943), president and licensed sales agent of Thill Securities Corp., 13360 Marquette Avenue, Elm Grove, Wis. : In connection with the hearings now being conducted by the Senate Subcommittee on Banking and Currency, regarding proposed amendments to the securities laws, I present the following suggestions for your consideration: It is wise and proper to have informed shareholders of stock in publicly held corporations. It is therefore suggested, that, in the future, all securities of whatever nature, sold to the public, in a registered SEC offering of any size, the mailing of semiannual reports to the shareholders by the issuer of said stock, be made mandatory. That such semiannual reports must contain a balance sheet and profit and loss statement in accordance with customary accounting procedure, as specified by the SEC. Too many stockholders remain uninformed about the financial condition of the companies in which the public has been invited to purchase stock. If the public is so invited to become shareholders in a corporate enterprise, there is a duty on the part of management to keep the shareholders informed. The officers and directors of such publicly owned corporations bear a trust or fiduciary relationship to the shareholders, and one of the duties which can logically be said to result from such relationship is to keep the shareholders properly informed about corporate affairs. Another suggestion which I present is that, in selling securities of new issues and other issues, where present laws require a prospectus, it is desirable that such prospectuses be mailed or placed in the hands of investors at least 2 days before such prospective investor makes a purchase of such security. At the present time, many investors do not receive a prospectus until the day the security is sold to the investor and sometimes the prospectus is mailed to the investor with the statement confirming the transaction. Thus the investor does not have sufficient time to examine the prospectus, to read it, and to arrive at an informed opinion regarding the purchase of said security. The 2-day period during which the investor has an opportunity to read the prospectus should give the investor time to read the prospectus and to digest the material in the prospectus and thus arrive at an informed conclusion before the investor commits himself to purchase the security. Respectfully submitted. LEWIS D. THILL. INVESTORS DIVERSIFIED SERVICES, INC., Hon. HARRISON A. WILLIAMS, Jr., DEAR MR. CHAIRMAN: This letter has reference to Senate bill 1642 which proposes amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended, and which has been the subject of recent hearings before your Subcommittee on Securities. This letter will constitute the statement of Investors Diversified Services, Inc. (IDS), with respect to the proposals contained in that bill. BACKGROUND OF IDS IDS is a Minnesota company, which was incorporated in 1894. Until 1941 it sold instruments commonly referred to as "face amount certificates" under which stated amounts were paid to the holders of the certificates at maturity, in consideration of periodic payments made by the holder during the accumulation period of the certificate. The proceeds of the payments were invested in Government, corporate, and mortgage obligations in order to produce the funds necessary to discharge the obligations of the certificates at maturity. Since 1941 this operation has been continued through a wholly owned subsidiary, Investors Syndicate of America, Inc. Commencing in 1941 IDS also entered into the mutual fund industry with the formation of Investors Mutual, Inc., and, thereafter, Investors Stock Fund, Inc., Investors Selective Fund, Inc., Investors Inter-Continental Fund, Ltd. (formerly known as Investors Group Canadian Fund, Ltd.), and finally, Investors Variable Payment Fund, Inc. By contract, |