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Mr. WOODS. Does that answer your question?

The CHAIRMAN. Yes.

Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. You say that you come here as a representative of the investment bankers?

Mr. WOODS. Yes, Mr. Mapes.

Mr. MAPES. To what extent has this bill been submitted to the investment bankers, and in what manner do you represent them? Mr. Woods. Why, the bill has been submitted very generally to the investment bankers in this fashion: In cooperation with the Securities and Exchange Commission some time ago, investment bankers, or a very large group of them-Mr. Keyser could give you the precise figure-formed what was known as the Investment Bankers' Conference with the object of cooperating with the Securities and Exchange Commission to eliminate practices which had been agreed were bad in the investment banking profession. Mr. MAPES. Is that country-wide?

Mr. WOODS. It is country-wide.

When this bill was originally presented by Chairman Lea, copies of it and digests of it, I believe, but certainly copies of it were furnished very freely to the various district chairmen of the I. B. C. The district chairmen in turn furnished it to their committee members, and my understanding is that the I. B. C. is collecting the written judgments of various members of the I. B. C. on this bill, and I may be mistaken, but I believe Mr. Douglas is in close touch with that. Mr. MAPES. They have authorized you to present their views? Mr. Woods. I would not put it altogether that way. Mr. Wood, Mr. Prescott, and myself were asked to come down here and study this bill and present our points of view about it. Why they asked we three gentlemen, I do not know.

My point of view in appearing here is to try to point out the difficulties from the standpoint of investors. While the issuer may propose a plan, as is provided elsewhere in the bill, the issuer or any of his employees, unless he be a representative of the majority of a board, is prohibited from trying to obtain consents or proxies, or whatever the plan calls for.

In other words, there is a circle drawn around the management and the bankers. I do not have any feeling about drawing a circle around the banker. I do not think that it is to the best interest of the investors ultimately, but I think that is all right if it is the committee's desire.

I do have a very strong objection to drawing a circle around management, because in 9 times out of 10 they are the only people in a situa-. tion of this sort who would have an intelligent grasp of the situation. Mr. MAPES. The purpose of that is to not let everybody be proposing a plan, is that it?

Mr. WOODS. You mean the purpose of this particular section?
Mr. MAPES. Yes.

Mr. WOODS. I have no idea what the full purpose of that section is I could not tell you.

Mr. MAPES. What is your impression of that?

Mr. Woods. Of this voluntary readjustment?
Mr. MAPES. Yes.

Mr. Woods. A layman's interpretation-I am not a lawyer; never studied law is that if a company wishes to rearrange its capitalization in any fashion, even in such a simple fashion as to authorize the issuance of some additional preferred stock which a lot of bankers stand ready to buy, then a plan has to be proposed and the issuer or the beneficial owner

Mr. MAPES. Why the issuer?

Mr. Woods. That is, be proposed by the issuer or the beneficial owner or representative of the issuer or by the trustee under the proposed new trust indenture act.

Mr. MAPES. And if yot proposed by one of them, the Commission may find that it is an improper proposal?

Mr. WOODS. I would say that is the meaning of it.

There is one other thing that I would like to point out, if I have time, and that is that in the solicitation of consents or proxies there must be a further agreement that the people doing the soliciting will not do business with the issuer of the securities.

There appears to be no limitation of time on that prohibition, and to my mind, that eliminates a rather broad body of possible people who might want to help in the reorganization plan. It eliminates, for instance, people who might be security holders of a given company and might be interested in helping it over its difficulties, but are unwilling to discontinue doing business with it.

In the case of a public-utility company, in many instances the General Electric Co. or the Westinghouse Manufacturing Co. are large security holders, and many times they are willing to help a utility over financial difficulties; but I am told, and certainly as I read the section-I do not know where it is right now. We could locate it.

It is on page 36.

I am told that if such concerns, doing business for instance with the utilities, were to go out and solicit proxies, then they are forbidden to do business with the utility after it is reorganized.

It seems to me that that is pretty broad.

The CHAIRMAN. Where is the language that you think has that effect, Mr. Woods?

Mr. Woods. Page 36, line 12, subdivision (B). It goes from line 12 down to line 21.

The CHAIRMAN. Without advocating the matter, I would like to know what your reaction would be to a provision granting the Commission power to permit persons in these excluded classes from participating when a proper showing was made.

Mr. WooDs. In these voluntary readjustments, Mr. Lea?

The CHAIRMAN. Well, either class or both.

Mr. WOODS. Well, I separate the classes, properly or improperly. I think that there is a great difference.

The CHAIRMAN. Assuming that that were true, that you have prohibited classes of each, and it is, I take it, unquestionably true that in some cases management would be the best ones to participate in reorganization. In other cases management should be excluded, because unfitness has been shown.

Now, if you did not wish to bar all, under what conditions could those acceptable ones be permitted? That would be the problem.

Mr. Woods. That would be the problem. In judicial reorganizations, of course, everybody has his day in court and the dishonesty or

the inexperience or unwisdom of the management is presumably given a thorough airing.

Now, on these voluntary readjustments, of course, my feeling is that the management, unless it is dishonest, has no interest excepting that of its security holders. That is what it is working for.

If it is dishonest then it seems to me that the security holders are entitled to proceed against it because it is dishonest, under existing laws.

The CHAIRMAN. Suppose that incompetence or improvidence is pretty clearly manifested, 'what would you do in a case of that kind? Mr. WOODS. I beg your pardon.

The CHAIRMAN. Suppose that the incompetence or improvidence in management is clearly demonstrated from their control of affairs of the company?

Mr. Woods. Then, Mr. Lea, as a practical matter in a voluntary readjustment, the management would not be able to get necessary

consents.

I agree that there should be full disclosure by the interested parties. I would not for a minute urge the committee to leave the situation so that management that was incompetent could be successful in covering up incompetency. I certainly believe that the whole situation ought to be spread forth clearly. But, I think that by and large these managements of concerns that are endeavoring to obtain voluntary readjustments have been competent and are suggesting something that is constructive, or else they would not get their assents. It has always been true.

Mr. MAPES. Mr. Chairman.

Mr. COLE. Mr. Chairman.

Go ahead, Mr. Mapes.

Mr. MAPES. I understand that one of the primary purposes of this proposed legislation is to protect the small investor who cannot afford to hire a representative and is more or less at the mercy of the management or those who are the proponents of these reorganizations. I wonder if you and the investment bankers generally have in mind the interest of the small investor who is supposed to be protected by this bill to the same extent as the Commission has?

Mr. Woods. Why, Mr. Mapes, I think that probably the investment banker takes the interest of the small investor into consideration to even a greater extent than the Commission, and for this reason: If we fellows who earn our living selling securities sell enough bad securities, eventually people just are not going to do any business with us and we will work ourselves out of business.

Mr. MAPES. Well, you will concede, will you not, that the small holder of a $500 or $1,000 real-estate bond is pretty nearly helpless, or has been during the last few years, in the reorganizations of realestate bond issues.

Mr. WOODS. I will agree with that.

Mr. MAPES. You agree with that?

Mr. Woods. I do.

Mr. MAPES. Is there some way that we can pass legislation to protect his interests?

Mr. WOODS. Personally, Mr. Mapes, I do not believe there is. I think you have done a grand job passing legislation that will help the holder of those $500 and $1,000 bonds, because you have passed the Securities Act.

These real-estate bond holders, in most instances, never did have a fair deal.

If you started off with something that was unsound or improper, or both, it is difficult to figure out a plan or to work up legislation that is going to help those holders of such securities. They always were out of luck.

Of course, it is going to be a difficult task for the Commission to determine whether the proponents of a plan have a conflicting interest, or whether they are honest or not, or whether they are efficient and capable.

Mr. MAPES. Is there any middle course that Congress might follow in the drafting of this legislation?

Mr. WOODS. I do not believe there is. I think on these voluntary reorganizations, and believe me, I have thought about it a great deal because I have had to do with several of them-I believe on these voluntary reorganizations, the key to the whole problem is to see to it that everybody is told the whole story, and I think, when a governmental body, no matter how able, endeavors to pass upon the phases of the readjustment plan of a voluntary adjustment plan-well, it is a sort of a hopeless job.

Mr. MAPES. Well, a part of the story would be to tell the investors and those interested about the conflicting interests of the parties.

Mr. WOODS. Yes. I do not believe the average investor is so terribly unintelligent. I believe that if the average investor was given to understand in some concise fashion, if you were making a proposal and had a conflicting interest, he would put two and two together and say "I am going to sit back and see what happens."

I think his trouble is that he has not always had the information. Mr. MAPES. How would you cure that? What provisions would you put into the bill, authorizing the Commission to make that known? Mr. WOODS. Well, what I would do would be to eliminate from your Committee Act of 1937 all matters having to do with so-called voluntary readjustments. That is my strong feeling.

I would then give consideration to the advisability of requiring, under the terms of the Securities Act of 1933 as amended, full disclosure with respect to the one or two things concerning which the Securities Act, as it now stands does not require full disclosure.

Mr. MAPES. It seems to me if you leave out all of the voluntary readjustments, you leave out perhaps those most in need of protection. Mr. WOODS. Why, Mr. Mapes?

Mr. MAPES. Because the courts, as you have indicated, are supposed to take care of all persons who are in court; but a great many of these voluntary readjustments are never brought into court. There is not enough money involved to justify taking them to court.

Mr. Woods. But, Mr. Mapes, on the face of it, the term "voluntary readjustment" means it will not be approved if the facts are fully stated, unless it is reasonably fair, because it is a voluntary adjustment.

If a company had earnings on its common stock for years-this is carrying it to one extreme, but it is in the bill-if a corporation has had earnings on its common stock for years and wants to get out $50,000,000 preferred stock, because business is good, it has to get the common stock holders' approval of that. Why should it not be able to go out and get that approval without filing a lot of papers with the Commission?

Mr. MAPES. Let us confine ourselves to real-estate bonds. Mr. WOODS. All right, real-estate bond issues. You have a realestate bond issue. Probably the interest is not being paid. Now then, if a group of people just spring up over night, as unfortunately they have in the past, and proceed to make an offer to these holders of the bonds, my contention is that if they are required by law to state all of the facts, and all of their various interests in the given situation, the individual bondholder is capable of making up his own mind.

If we are talking about the owner of a real-estate bond who is telephoned to, and is talked to, and is taken out to dinner, and there is no particular disclosure of facts, and no liability for not disclosing them, then I agree with you that that bondholder is in a bad fix.

Mr. MAPES. A great many of them have been readjusted in such a way that the bondholders received practically nothing.

Mr. WOODS. Well, that may well be true; but as I said before, I think that you have licked 90 percent of that in your Securities Act, because most of those things were not good in the beginning, and therefore, when reorganized and revamped and had their faces lifted, they are still not good.

Mr. MAPES. I am interested in your statement to that effect.

Mr. Woods. I really feel that. I am afraid that if the history with respect to real-estate bonds is going to underlie the philosophy of this bill then the corporations that are in legitimate business, and have been for years, are really going to have a very difficult time of it, because the facts and history with respect to real-estate bonds are not average.

Mr. COLE. Mr. Chairman, may I ask a question?

The CHAIRMAN. Mr. Cole.

Mr. COLE. A great many voluntary readjustments simply amount to amendments to their existing charters.

Mr. WOODS. A great many of them do.

Mr. COLE. And before such amendments are obtained, of course, they apply to the State tax commissions, or such State agencies as grant charters.

Mr. WOODS. Presumably.

Mr. COLE. And it is not because a lot of the States are inclined to give the corporations anything that they ask for, that the small investors have been robbed in so many cases? That is, the States give them that, while they are dealing with a "commodity" that is national, trafficked in all over the United States, and yet in some little State a corporation is set up, dictated to by those experienced in the formation of corporations and they get away with a lot of things. And that is what we are trying to break up. Is that not an actual fact?

Mr. Woods. I dare say that there is a great deal in what you say, Mr. Cole. The charters are merely filed or amendments to the charters are merely filed, and that is the end of that. Nobody looks at them. Nobody knows anything much about them.

Mr. COLE. Under a voluntary adjustment-I do not mean little trifling matters like the issuing of some additional stock or putting a mortgage on their properties, but one that is really, you might say, a voluntary proceeding comparable to those under 77B, although we are not in the courts, you would have such proceedings without any judge presiding over it. Those have to go in under 77B, which is a reorgani

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