the board of directors of the National Association of Real Estate Boards earlier this month. The CHAIRMAN. Without objection, it will be received. (The resolution referred to reads as follows:) REAL ESTATE SECURITIES STATEMENT OF POLICY ADOPTED BY THE BOARD OF DIRECTORS OF THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, CHICAGO, ILL., JUNE 4, 1963 We pledge our cooperation with the Securities and Exchange Commission in the development of adequate regulations, including regulatory power, directed at preventing abuses in the operation of real estate companies engaged in the public offering of real estate securities. We urge that the National Association of Securities Dealers, a self-policing trade association recognized as such by the Securities and Exchange Commission, develop appropriate qualifying examinations for broker-dealers and salesmen who are engaged in the sale of real estate securities. We pledge to the National Association of Securities Dealers the cooperation and assistance of this association in the development of appropriate professional standards and qualifying criteria for those engaged in the sale of real estate securities. (The prepared statement of Mr. Williamson follows:) STATEMENT OF JOHN C. WILLIAMSON, DIRECTOR OF GOVERNMENTAL RELATIONS, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS Mr. Chairman and members of the subcommittee, I appreciate this opportunity to present the views of the National Association of Real Estate Boards in regard to S. 1642, a bill to amend the Securities Act of 1933 and the Securities Exchange Act of 1934. Our association, consisting of approximately 74,000 realtors in more than 1,450 local real estate boards, is interested in the pending legislation primarily because of its effect on real estate securities-a relatively new but fast growing segment of both the real estate and securities industries. The real estate security is a unique security in that shares in real estate investment trusts and limited partnerships convey interests in real estate. There is some reported judicial opinion to the effect that one who sells a certificate of beneficial interest in a real estate investment trust or a limited partnership unit in a syndicate is selling real estate and is therefore subject to appropriate State licensing laws. Be that as it may, our association is concerned with preventing abuses in the sale of real estate securities and in improving investor protection. We are motivated by the same considerations which inspired realtors to bring about enactment of real estate licensing laws in all 50 States. A portion of the report of the "Special Study of the Securities Market,” submitted to the Congress on April 3, 1963, is devoted to real estate securities and refers to this segment of the securities business as a "phenomenon new to the last decade." The first real estate syndicate was filed with the Securities and Exchange Commission on February 11, 1952. Since then, 130 syndicates1 have been filed representing total public offerings of $272,744,560; 75 real estate "cash flow" corporations 2 representing total offerings of $772,493,874; and 70 real estate investment trusts representing $501,119,806 in public offerings. 3 This, while impressive, is only part of the picture. Real estate syndicates, particularly in New York, rely heavily on the intrastate exemption from SEC requirements. We believe that a major portion of syndicate public offerings have been made within this intrastate exemption. Unofficial estimates of all public offerings in real estate exceed $10 billion. We are therefore talking about a significant segment of the securities market. Of the three real estate security issuers, the real estate investment trust is subject to a substantial degree of regulation by the Internal Revenue Service as 1 Ten of these, as of June 12, 1963, had been withdrawn; 6 were pending. 2 Thirteen of these, as of June 12, 1963, had been withdrawn; 6 were pending. 3 Twenty-two of these, as of June 12, 1963, had been withdrawn; 6 were pending. well as State laws governing trusts. This, coupled with the relatively recent revival of the trust as a real estate investment vehicle, has left the real estate investment trust untouched by the recent highly publicized disclosures of irregularities in the operation of real estate syndicates and "cash flow" corporations. DISTRIBUTION OF REAL ESTATE SECURITIES A substantial number of the sellers of real estate securities are not licensed to sell real estate and, because of the intrastate exemption, are not subject to the self-policing requirements of the National Association of Securities Dealers. To quote from the report of the special study: "The salesman of real estate securities is purveying a commodity more intricate than most securities. Even a sophisticated investor may have difficulty in evaluating the tax aspects of an offering, or the factors of risk and promoters' benefits, and the best investment analysts and counselors have little if any expertise in the real estate securities field." The report cites an extremely active underwriter of real estate syndicate shares which gives its salesmen total training of from 8 to 10 hours. The interests of the investing public as well as the real estate industry require, in our opinion, approval by the Congress of the proposal in the pending bill requiring all broker-dealers and registered representatives, who make use of the mails, or an instrumentality of interstate commerce, to register with the Securities and Exchange Commission and belong to a registered securities association which at present means the National Association of Securities Dealers. We endorse the provision in S. 1642 (sec. 7(a) (3)) which would require registered securities associations to adopt rules establishing standards of training, experience, and competence for members and their employees. We also have recommended that the National Association of Securities Dealers revise its testing requirements to require that broker-dealers and salesmen of real estate securities possess adequate knowledge of real estate investment and the real estate busi ness. Perhaps NASD members and persons associated with members dealing exclusively or principally in real estate securities could be classified as such and be subject to specialized training and qualifications. This, we believe, is contemplated in the new section 15A (b) (3) which would be added to the Securities Exchange Act of 1934. We have advised NASD of our views on the subject and have offered our cooperation in developing appropriate professional standards and qualifying examinations for applicants who propose dealing in real estate securities. I am pleased to advise that the officials of NASD have accepted our offer of cooperation in this matter. ADEQUATE REPORTING TO INVESTORS I will now turn to another aspect of the report of the special study and the pending legislation. This relates to adequate reporting of information to investors by promoters of syndicates, trusts, and corporations. Quoting from the report: "Issuers of real estate securities seem to share a general reluctance to send regular reports to their security holders with information adequate for an informed appraisal of the issuers' operations including distribution policy, although they may be required to submit an annual balance sheet and profit and loss statement of income to each participant." However, even these annual balance sheets and profit and loss statements sent to investors fall short of our view of “adequate reporting" because such statements as a rule are not certified. In the language of the report: "Holders of real estate securities rank high among those in need of protection that can be provided by legislation extending certain reporting provisions of the Exchange Act of 1934." Section 4 of the bill (amending sec. 13(a) of the act) would remedy this deficiency in reporting to investors by providing for the filing of annual reports containing certified financial statements, semiannual reports of uncertified profit and loss and earned surplus statements, and current reports whenever events of immediate interest to investors occur. We endorse section 5(c) of the bill (adding sec. 14 (c) to the act), which provides that a company not soliciting proxies would nevertheless be required to furnish shareholders with information equivalent to that contained in a proxy statement. We also endorse the provision requiring an issuer having total gross assets in excess of $1 million to file a registration statement with the Commission for any class of its equity security held of record by 500 or more persons. This requirement would cover issuers whose securities are traded by use of the mails or any means or instrumentality of interstate commerce. Earlier in my testimony I referred to estimates of approximately $10 billion in real estate public offerings, although only about $1.5 billion represented filings under the Securities Act of 1933. The balance of $8.5 billion represents intrastate exemptions. The proposed section 12(g) will reach a substantial portion of these exempt offerings and result in a measure of disclosure and regulation both necessary and desirable in the public interest. Another desirable change flowing from section 3(c) of the bill (adding sec. 12(g) to the act) would require issuers to file information with respect to material contracts not made in the ordinary course of business. With respect to real estate this would include, for example, management contracts, leases, and mortgages not covered in the initial disclosure. We concur in SEC Chairman Cary's statement in his testimony that "a company which goes to the public for funds should not subsequently be free to seal off its operations from disclosure." We appreciate the administrative requirements that necessitate limiting the application of section 12(g) to issuers whose shares are held by 500 persons or more (750 or more persons until July 1, 1966). However, we hope that the Congress and the SEC, after further study, will find it practicable to reduce this minimum to perhaps 300 shareholders in order to bring within the requirements of section 12(g) a greater number of real estate syndicates. In closing, I want to submit for the record a copy of a resolution entitled "Real Estate Securities" adopted by the Board of Directors of the National Association of Real Estate Boards on June 4, 1963. (See p. 96.) We hope that the Congress will complete action on this legislation during the current session of the Congress. The CHAIRMAN. Are there any question? The CHAIRMAN. We thank you. The next witness is an old friend of the acting chairman of this subcommittee, Mr. Morris Schapiro of M. A. Schapiro & Co., Inc. Mr. Schapiro publishes the Bank Stock Quarterly, a magazine devoted to comments on bank stocks from the point of view of the investor. In March of last year the Bank Stock Quarterly carried an article entitled "Don't Tell the Stockholders" which made a strong argument for giving additional information to bank stockholders. Without objection, this article will be printed in the hearings following Mr. Schapiro's statement. (See p. 104.) Senator Williams, thinking that Mr. Schapiro would have information which would be helpful to the committee in its consideration of the disclosure requirements applicable to banks, requested him to come to the hearings as a witness, and he has accepted the invitation. Unfortunately, it was not possible to arrange for him to come when Mr. Williams could be here. It is our hope that Mr. Schapiro can, from the benefit of his long experience in the field of bank stocks and bank stockholdings, give us a great deal of information as to the need of further disclosures from the point of view of investors, the kind of additional information which is needed for the benefit of bank stockholders. This information may result from provisions which we include in this bill or from regulations adopted by the Comptroller of the Currency, although he could only issue regulations as it would affect national banks. The commercial banks of the country are a vital part of our financial structure and our entire enterprise. Commercial banks are based in the final analysis on the stockholders' money invested by individuals and other investors in our commercial banking system-some $24 billion. These investments in commercial bank stocks must grow in order to enable the commercial banking system to continue to provide additional money supply for a growing, developing economy. We will be glad to hear from you, Mr. Schapiro, at this time. STATEMENT OF MORRIS A. SCHAPIRO, PRESIDENT, Mr. SCHAPIRO. Thank you, Senator. Mr. Chairman and members of the committee, I am honored to have received the invitation of Senator Williams and to appear as a witness before this committee and offer my views on legislation compelling banks to make periodic reports of earnings and to disclose other material information to their shareholders. For the record, I would like to state that I am president of M. A. Schapiro & Co., Inc., underwriters, brokers, and dealers in bank stocks, and of its affiliate, Second District Securities Co., Inc., a government bond dealer. Bank Stock Quarterly, to which you have referred so kindly, is published by M. A. Schapiro & Co., Inc. The Securities and Exchange Commission's Special Study of Securities Markets represent a thoughtful and thorough probing of the securities industry. The SEC has made clear the need for improving investor protection in the over-the-counter market, and bank stocks are traded in the over-the-counter market. I am primarily interested in the rights of the bank stockholder and believe that as owners of a bank, shareholders have the responsibility to choose its management. Stockholders are entitled to as much information as is feasible to enable them to fulfill this responsibility intelligently. The Federal laws and those of the States already provide stockholders of banks the right to elect their directors. But while the laws provide that right, until Comptroller Saxon recently promulgated regulations with respect to proxies the law did not make it mandatory that stockholders be given sufficient information on which to base a judgment that an intelligent vote requires. Indeed, even today, many banks outside Comptroller Saxon's jurisdiction solicit proxies for their annual meetings without so much as listing the names of the proposed directors. I do not think anyone can argue seriously that the right to vote is of any consequence if the voter is kept in ignorance with "blind" proxies A bank stockholder should also have available to him sufficient information with which to appraise intelligently the value of his stock. The correlation between earnings and market value is so basic that no determination can be made of the latter without the former. The need for regulation requiring uniform and consistent earnings statements has been discussed in the March 1962 issue of Bank Stock Quarterly, a copy of which you have before you. The examinations conducted by regulatory bodies are not substitutes for needed financial data since those examinations are conducted primarily for the protection of the depositor and so do not necessarily give consideration to the consistent and uniform reporting of earnings. The results of those examinations are, of course, confidential and not available to shareholders. The provisions of S. 1642 go far toward making available the information intelligent investment requires. My only criticism is that the protection and benefits which the bill provides stop short of where they are needed most. I understand that the bill as written would be applicable only to banks with more than 500 stockholders. This would cover less than 4 percent of the more than 13,000 insured commercial banks. The banks with fewer stockholders are those most reluctant to give information. Since banks of all sizes have the advantage of Federal deposit insurance, it would only be fair to require each bank, regardless of size, to furnish its stockholders with certain minimum information usually set forth in a proxy statement and also to furnish, in at least summarized form, an annual comparative report of earning and financial condition, as well as reconciliation of capital accounts. These reports, if not certified by independent auditors, should be certified by a principal officer of the bank with respect to the consistency of the application of methods of accounting and reporting. Many banks, large and small, now provide shareholders with financial statements prepared by independent public accountants. Senator Robertson, this ends my prepared statement. However, with your permission, I would like to say a few more words. It occurred to me that the committee might be interested in a concrete example of a way a bank can inform its stockholders. I am referring to a national bank in the New York area which is currently raising additional capital. My firm is one of a group of investment bankers which is underwriting a new issue involving the sale of 141,000-odd additional shares of the Security National Bank of Huntington, Long Island. The lawyers for the bank and the lawyers for the underwriters worked together at the joint request of the bank and the underwriters to prepare a prospectus which would be a model of full disclosure to shareholders and prospective investors. May I, with your permission, submit the prospectus of the Security National Bank for your consideration? (The prospectus appears on p. 199.) The CHAIRMAN. Do you wish to make any further comment on this prospectus of the Security National Bank of Long Island common stock? Mr. SCHAPIRO. Mr. Chairman, the prospectus conforms (to the extent that a bank can conform) to the standards of the Securities Act of 1933. The issuance of these shares is, of course, subject to the final approval of the Comptroller of the Currency. The prospectus contains an audited statement prepared by an independent certified public accountant. On page 15, there is disclosure of insider transactions with the bank. Incidentally, the preparation of this prospectus was not unduly costly. Disclosure of relevant information, such as appears in this prospectus, on the standing of a bank, its condition, and its prospects should result in a broader investor interest. The CHAIRMAN. Now you are discussing the prospectus concerning the offering to the public of 141,519 shares of Security National Bank of Long Island? |