Miscellaneous Exemptions.

The other exemptions in line 14, page 15, and line 19, page 15 (secs. 3 (a) (4) and (5)) embrace the types of securities presently exempted from the Securities Act. The one in line 1, page 16 (sec. 3 (a) (6)) is a similar exemption carried over from the Securities Act.

There is, however, omitted the Securities Act exemption of securities of building and loan associations. So if there was a reorganization of a building and loan association and a committee was formed to solicit the holders of those securities, they would have to come in and qualify under the bill. That is done by reason of the critical conditions prevailing in some of those reorganizations.

Subdivision (7), line 5, page 16 (sec. 3 (a)), exempts securities issued or guaranteed by the United States or by Federal instrumentalities or by any States or Territories or of the District of Columbia.

We come down to paragraph (8) (sec. 3 (a)) and we get

The CHAIRMAN. With reference to those building and loan reorganizations, what is the general practice of the States? Do they have special provisions covering such reorganizations, or do they fall under the general corporate law?

Commissioner DOUGLAS. In some States they do. I do not have at my finger tips the details, Mr. Chairman.

Mr. BULWINKLE. In a majority of the States they do. In the District of Columbia they come under the banking department.

Commissioner DOUGLAS. Yes; the reorganization control in many of those situations has seemed to us to be somewhat inadequate. In view of the fact, however, that that is entering upon an area where States have been active, I think it might be desirable for us to submit to the committee, if you desire, Mr. Chairman, a memorandum on that point.

Municipal Securities.

The exemption in line 11, page 16 (section 3 (a) (8)) is another exemption of certain types of solicitations of securities issued or guaranteed by municipalities, for example. That is to say, suppose X town defaults. X, the issuer, can go out and solicit the holders of those securities for assents, proxies, or deposits, without coming in and qualifying under this statute.

Mr. MARTIN. Who may do that?

Commissioner DOUGLAS. A municipality itself; or an employee of the municipality may do it. However, that exemption is lost if the person who is doing it is some person disassociated from the municipality; such as the bondholders, or investment bankers who have sold those securities, or others.

Furthermore that exemption is lost if an independent contractor of the municipality makes the solicitation or if an agent not in the regular employ of the municipality makes the solicitation.

Now, the reason for that distinction is, roughly, this: (And here again is a point on which the committee might want a memorandum of law). It might be argued that it would be of dubious constitutionality to set up a control over a municipality where the municipality was endeavoring to perform an essential governmental function of readjusting its own debts.

This provision follows by and large the rule laid down by the Supreme Court of the United States in passing on the question as to whether or not the salaries of people working for municipalities were taxable by the Federal Government. The Supreme Court has held

that an independent contractor for a municipality may be taxed by the Federal Government for income received from the municipality, and that such tax does not impair the essential governmental function of the municipality.

Mr. COLE. When was that case decided?

Commissioner DOUGLAS. That was decided

Mr. EICHER. Several months ago.

Commissioner DOUGLAS. I think the Metcalf case was decided a year or so ago.

Now, what subdivision (8) does as I see it is to fall generally in line with the rules laid down by the Supreme Court in those tax cases. An independent contractor for a municipality starting a solicitation in connection with a debt rearrangement would have to file. The municipality itself or regular employees of the municipality would not have to file.

Beneficial Owners.

Subdivision (9), line 20, page 16, (sec. 3 (a)) is merely designed to exempt solicitations by the beneficial owner of securities from persons in whom legal title to such securities is vested. This provision will permit a person whose securities are held in brokerage accounts to solicit his own broker. It would be a little ridiculous if he could not. Investment and Financial Services.

The exemption in subdivision (10), line 22, page 16, (sec. 3 (a)) is for investment or financial services who may be making reports on plans to their subscribers or customers.

Technically it might be interpreted as a solicitation. It is, however, exempted here unless those financial or investment services do solicit proxies or deposits for themselves.

In that connection I should like to call the attention of the committee, Mr. Chairman, to another provision in section 16 (b), on page 46 of the bill and page 47 of the bill, beginning in line 5, a provision that has a counterpart in the Securities Act of 1933, a provision which in general penalizes, makes unlawful, the receipt of consideration for recommending a plan without disclosing that the person making the recommendation has been paid for recommending it. That would, as in the case of the Securities Act, impinge on financial and investment services, as well as others.

Commission's Exemptive Power.

Subdivision (b), line 1, page 17 (sec. 3), of the bill is the Commission's general power to grant further exemptions within certain limits. Clause (1), beginning in line 8, is taken over from the Securities Act where there is an exemption from registration of issues not exceding $100,000.

As I indicated previously in response to Congressman Martin's question, I am not at all sure that that $100,000 is the appropriate figure. It is suggestive, however, that there is a limit below which it probably would not be profitable for a Federal regulatory system

to go.

Mr. MARTIN. It is not an absolute exemption. It is a discretion. Commissioner DOUGLAS. That is correct, sir.

Line 13, page 17 (sec. 3 (b)), also permits the Commission to exempt a solicitation of a limited character. One example of that might be where a broker solicits his own customers. He has 10 accounts in which these first-mortgage bonds are deposited. Those 10 persons

may be on a vacation in Canada or Europe. He has to use the mails or agencies of interstate commerce to get in touch with them, to get their bonds in, or to get proxies from them running to the committee. Now, insofar as he only is acting as a broker advising his customers, he probably would be entitled to an exemption under (b) (2), line 13, on page 17 (sec. 3). That is merely exemplary of the type of situation envisaged. It would be a little harsh on him, it seems, if he had to register or file with the Commission in order to perform a broker's normal advisory function.

Private Solicitation.

As I have previously indicated, subdivision (c) on page 17 is intended to cover exemptions for solicitations from a group of not more than 12 (sec. 3). As I have indicated, that in my judgment is merely suggestive. The Commission does not go on record as recommending that the number be 12. But somewhere along the line there will be a number where everyone will say that there is a public solicitation. Some rule of thumb I think would be desirable. Perhaps 25 would be more adequate than 12. Twenty-five would follow the pattern of the Railroad Reorganization Act.

The CHAIRMAN. Mr. Douglas, in the authority given the Commission to make exemptions such as you have here, what is the general principle of law that determines their right to make exemptions?

Commissioner DOUGLAS. The legislative standard is set forth in line 6 and line 7 of page 17, the fact that it is not necessary in the public interest or for the protection of the investors. Whether or not it could be made more precise, I do not know. It would be rather difficult to make that standard more precise. There certainly has to be a standard for administrative action. That standard, or rather the type of situation that might lead to the granting of an exemption by the Commission within the limit set forth on page 17 would be purely local transactions. That is where the enterprise was predominantly a Utah, or a New York, or a Massachusetts, or a Colorado small enterprise.

The CHAIRMAN. That rule rests on the general proposition that the Commission finds the facts and to them applies the rules.

Commissioner DOUGLAS. Yes, sir.

The CHAIRMAN. So you are supported in that section by finding the facts involved under these standards.

Commissioner DOUGLAS. That is correct. I think that the standard is an adequate constitutional standard. Whether or not any more specific content could be given to that standard is not clear to me. I am not certain that it could be worked out so as to permit that flexibility which is desirable.

SOLICITATION OF PROXIES, DEPOSITS, AND ASSENTS

Section 4, line 23, on page 17, prohibits the use of the mails or any means or instrumentality of interstate commerce to solicit proxies or deposits.

Mr. BULWINKLE. Mr. Douglas, just for my information as to what you might call the machinery of this act. It looks like subsection (b) should follow at another point.

(b) The following transactions shall be exempt from the provisions of the Securities Act of 1933.

That has nothing to do with the mails, has it?

Commissioner DOUGLAS. I beg your pardon, sir.

Mr. BULWINKLE. I was thinking that this probably would be in order. This is similar to your Securities Act, and that you could put that under the title of the exempted transactions.

Commissioner DOUGLAS. That might be a desirable change.

Mr. BULWINKLE. Following that, and then transpose the use of the mails afterwards.

Commissioner DOUGLAS. Yes, I think that that might be a desirable

change.

There is a distinction between the exemptions I have just covered and the exemptions beginning in line 12, page 18, section 4 (b). Mr. BULWINKLE. One exempts solicitation covering securities and the other exempts them from the standard, which also covers. Commissioner DOUGLAS. That is true.

Mr. BULWINKLE. And then the unlawful use of the mails.

Commissioner DOUGLAS. I might take occasion at this point, Mr Chairman, merely to indicate that, as I view it certain phases of this bill are simple suggestive of the broad outlines of the type of approach to the problem which the Commission feels necessary and desirable. I think that there are provisions in the bill that could be greatly improved; details could be improved, and the substance as well.

Mr. BULWINKLE. Mr. Chairman, may I not suggest to you, Mr. Douglas, that you offer such amendments to the committee so that we can have your suggested amendments.

Commissioner DOUGLAS. I will be very happy to do so, sir, before the committee completes its deliberations.

The CHAIRMAN. Yes, I am sure that will be helpful.

Commissioner DOUGLAS. Section 4 (a), as I was saying, prohibits the use of the mails or any means or instrumentalities of interstate commerce to solicit proxies or deposits, in connection with reorganizations, or municipal or foreign debt arrangements, or to solicit assents, proxies, or deposits in connection with voluntary adjustments. Declaration and Prospectus.

Now, there are two conditions that have to be complied with before the mails or agencies of interstate commerce are employed in such solicitations. One is indicated on page 18, line 6, where it says that a declaration has to become effective.

For a declaration to become effective the Commission must have looked at the members of the committee and must have looked at the proxies and the deposit agreement and have concluded that the qualifications of the committee members meet the standards set forth in section 6 and the contents of the proxies and the deposit agreements meet the standards set forth in section 10. In other words, subdivision 1, line 6, page 18 (sec. 4 (a)), relates to control over conflicts of interest and control over the contents of the deposit agreements and proxies, while subdivision (2), line 10, page 18 (sec. 4 (a)), is the disclosure phase of the bill which I have previously mentioned. Threefold Control.

In other words, a person can use the mails and agencies of interstate commerce to solicit proxies, deposits and assents, if the Commission has qualified the declarant in the light of the conflicts of interest provisions, in the light of the provision as to deposit agreements and proxies, and if that person has made full disclosure.

In other words, at this point in the bill the machinery ties up to that threefold program that I outlined earlier in the morning. Exemptions from Securities Act.

Those provisions of subsection (b), line 12, page 18 (sec. 4), are designed to prevent a cumbersome, onerous, and unnecessary overlapping between this bill and the Securities Act of 1933.

For example, solicitation which is subject to this bill may under some circumstances constitute an offering of a security for which a registration under the Securities Act would be necessary. Now, one example: A, B, and C form a committee that is to solicit deposits in connection with a foreign-debt arrangement or in connection with a reorganization pending in some State court. Since it is soliciting deposits and issuing certificates of deposit against the physical deposit of securities, it is an issuer under the Securities Act. That which it is issuing is a certificate of deposit. So, it has to come in and register under the Securities Act.

Now, to require that committee also to come in under this bill would seem a little harsh and unnecessary. So subdivision (b) attempts to lift the requirements of the Securities Act where the particular solicitation is covered by this bill, so that you will have a neatly balanced system rather than an overlapping cumbersome system.

Solicitation.

Mr. COLE. May I ask a question?

The CHAIRMAN. Mr. Cole.

Mr. COLE. Assuming you were attempting to reorganize a company and you are not a part of the management-I am a large stockholder, and I write to the president of the company in whom I have confidence as to whether your group or some other group is the proper one to recognize. Does the management of the company become a soliciting, or is he regarded as soliciting my proxy, if he replies to that letter? Commissioner DOUGLAS. Conceivably, that might make him so, if the management had a committee in the field. Say this is a voluntary readjustment.

Mr. COLE. No, if there are two committees. The management is entirely out of it and there are two committees; dual set-ups. You control one and Mr. Layton there the other. I am a large stockholder and I have heard from both of you. I write to the management. Commissioner DOUGLAS. Yes.

Mr. COLE. Do you think that their reply to my letter would come under this language of solicitation of proxies? I have not sent in my proxy, but I have asked which group to send it to.

Commissioner DOUGLAS. Conceivably it might and I think here again, Congressman Cole, you have put your finger upon a phase of the bill where it is not clear to me that the language is adequate.

I think improvement and clarification can be made so that the bill would not paralyze communications, expressions of opinion, and so on, that would fall short of an attempt to drive in votes in support of a plan or against a plan.

Mr. COLE. It seems to me according to your testimony that the provisions of this bill require considerable revamping or redrafting. Commissioner DOUGLAS. I think so, sir. But I think, sir, this is suggestive in broad outline of a very desirable and necessary reform, long needed in this field.

We can submit suggestions to the committee on relatively short notice.