Under subsection (d), such reports need contain only such findings and comments as the Commission deems necessary or appropriate. SECTION 14. INTERVENTION; SUPERVISION OVER DECLARANTS Subsection (a) empowers the Commission to intervene in any reorganization proceedings, but in the case of reorganization proceedings pending before a State court, official, or agency, it may do so only with the consent of such court, official, or agency. The Commission is required to intervene in all reorganization proceedings pending before Federal courts, officials, or agencies where the indebtedness exceeds $5,000,000. Subsection (b) authorizes the Commission to act as arbiter between any declarant and the security holders represented by it, or to review or determine the fees and expenses of any declarant, or to supervise its activities, but the Commission may not be so designated by any declarant without its prior written consent, and may resign at any time. SECTION 15. UNLAWFUL SALES AND PURCHASES This section makes it unlawful for any person for whom the declaration is effective to buy or sell any security of the issuer during the pendency of the reorganization, voluntary readjustment or debt arrangement by the use of the mails or any means or instrumentalities of interstate commerce. SECTION 16. UNLAWFUL METHODS OF SOLICITATION This section corresponds to section 17 of the Securities Act of 1933. Subsection (a) prohibits solicitation, through the use of the mails or of any means or instrumentalities of interstate commerce, by fraudulent or misleading methods. Subsection (b) prohibits the use of such means for "puffing" by ostensibly disinterested persons, without disclosing the fact that a consideration is being received by them. SECTION 17. REPATRIATION OF SECURITIES OF FOREIGN GOVERNMENTS AND POLITICAL SUBDIVISIONS This section prohibits the use of the mails or means or instrumentalities of interstate or foreign commerce to purchase or participate in the purchase of a defaulted foreign bond, knowing or having reasonable cause to believe that such bond is being acquired or will be acquired, either directly or by subsequent transfer, by the foreign government or any agent thereof, or by any corporation subject to its jurisdiction or any individual domiciled or residing within its territory. This section is designed to prevent the repatriation of such bonds at the reduced prices induced by the default. SECTION 21. LIABILITY FOR MISLEADING STATEMENTS Subsection (a) imposes the civil liability of the Securities Exchange Act of 1934 in connection with false or misleading statements in any declaration, report or document filed under this act. Subsection (b) is substantially similar to section 28 (a) of the Securities Exchange Act and provides that the rights and remedies provided by this act shall be cumulative. ADMINISTRATIVE PROVISIONS Sections 18, 19, and 20, and sections 22 to 26, inclusive, contain the administrative provisions of the act, following substantially in this regard the Securities Act of 1933. The sections deal with the following matters: Section 18: Covers the rule-making power of the Commission. Section 20: Covers investigations by the Commission; injunctions to enforce the provisions of the act and the rules, regulations and orders of the Commission; the jurisdiction of civil and criminal offenses under the act; provides for court review of the orders of the Commission at the instance of parties aggrieved thereby. Section 22: Covers unlawful representations. Section 23: Sets forth the criminal penalties for violation of the act. Section 25: Makes invalid contracts to waive compliance with the provisions of the act. Section 26: Contains the separability provision. SCHEDULES A AND B These schedules set forth the requirements with respect to the information to be contained in the declaration. Schedule A is applicable in the case of reorganizations and voluntary readjustments. Schedule B is applicable in the case of municipal or foreign debt arrangements. Both schedules outline the information required to be furnished with respect to the issuer, its capital structure and financial condition; the identity of the underwriters of its outstanding securities; the declarant and its affiliations and interests; the purposes for which and the terms upon which the solicitation is to be made; the persons proposing the plan and their affiliations; and a detailed description of the plan itself. Mr. MARTIN. Is that available in the mimeographed form, Mr. Douglas? Commissioner Douglas. It is, sir. I believe that I gave it to Mr. Layton; I believe that I gave Mr. Layton copies of that. Mr. MARTIN. I was just inquiring. It may be that I have a copy of it. The CHAIRMAN. Well, we thank you, Mr. Douglas. Mr. MAPES. Mr. Chairman, I would like to ask a question. Mr. MAPES. Are you familiar with the Sabath bill, and the substitute, reported by the Committee on the Judiciary, dealing with realestate bonds, reorganizations, and bankruptcies? Commissioner DOUGLAS. I have seen the bill, Mr. Mapes, and when it was reported out, I scanned it hurriedly. I, unfortunately, do not have the bill clearly in mind at the present time, except in its most general aspects. Mr. MAPES. Were you able to tell from your hasty examination of it to what extent it treats with the same subject matter that this bill treats with, and to what extent it is a duplication of this bill? Commissioner DOUGLAS. I am not certain, Mr. Mapes, of the extent to which there is duplication. I believe that insofar as the Lea bill sets up control over committees in proceedings under section 77-B, that there is a duplication. I believe that the Sabath bill, as reported out, sets up controls over committees in such proceedings. I think, although I do not want to be too certain about it, I think it does not set up controls over any other committees. Mr. MAPES. It gives the Commission, does it not, some control over the fees of receivers? Commissioner DOUGLAS. There are phases of that Sabath bill, as I recall it the first is that it would vest in the hands of the Securities and Exchange Commission power to pass on plans of reorganization. Secondly, it vests in the hands of the Securities and Exchange Commission power to control committees acting in 77-B proceedings. It does not cover, I believe, municipal protective committees; committees acting in the foreign field; committees acting in connection with the reorganizations before State courts; or committees or others acting in connection with voluntary readjustments. In other words, so far as committees are concerned, I think that the Lea bill has a broader basis. Mr. MAPES. The Sabath bill, as you know, in some form has been pending before the House for some time, and the Judiciary Committee has reported the bill with a substitute to the House. There is an application now pending before the Rules Committee for a rule to make it in order. My understanding is that some encouragement was given to the author of the bill, some time ago, to think it would be taken up in the near future on the floor of the House of Representatives. Commissioner DOUGLAS. I am not acquainted with those developments, sir. Mr. MAPES. It is a matter which has been discussed before the Rules Committee to some extent. Commissioner DOUGLAS. I have just been handed a copy of H. R. 6963, Report No. 1042. Mr. MAPES. That is the Sabath bill? Commissioner DOUGLAS. That is the Sabath bill; yes; and the report of June 17, 1937, with the amendment. Mr. MAPES. Which is the committee substitute. Commissioner DOUGLAS. That is correct, sir; "committed to the whole House on the state of the Union and ordered to be printed." Mr. MARTIN. What legislation are you referring to, Mr. Mapes? I did not hear your statement. Mr. MAPES. I am referring to the Sabath bill. Commissioner DOUGLAS. As respects the committees that the Sabath bill covers, I notice here on page 29 of H. R. 6963: The Commission shall either approve or disapprove the provisions or limitations of any such committee agreement and the membership of any such committee. In case of an approval by the Commission, it shall file a statement of approval in the proceeding. In case of a disapproval by the Commission, it shall file a statement of disapproval in the proceeding, together with its reasons therefor. Mr. EICHER. The Sabath bill would also give the Commission jurisdiction over a much greater number of corporations, would it not, than the Lea bill, as to the making of reports? Commissioner DOUGLAS. On the making of reports, it would; yes. I think that the limitation in the Sabath bill, although I would not want to be sure about it, is $250,000, as respects the size of the case in which the Commission would make a report. Under the Lea bill it is $5,000,000. The CHAIRMAN. Is that all, then? Commissioner DOUGLAS. That is all, unless the committee has some further questions. The CHAIRMAN. We are very much obliged to you, Mr. Douglas. You have certainly made a splendid contribution in the explanation of the bill. Commissioner DOUGLAS. Thank you, Mr. Chairman. May I ask, will the hearings go on tomorrow? The CHAIRMAN. I am not sure whether they will go ahead in the morning or not. Commissioner DOUGLAS. They are not concluded? The CHAIRMAN. How is that? Commissioner DOUGLAS. Are the hearings concluded? The CHAIRMAN. No; the hearings are not concluded. We expect to hear from Mr. Wilcox and Mr. Sabath, at least, and if we are not able to go ahead in the morning, we will hear them at some later date. Before we adjourn, I would like to put into the record a letter that I have received from Foreign Bond Associates, Inc., 1 Exchange Place, Jersey City, N. J., in criticism of some phases of the bill, and particularly of section 17 that was referred to this morning. Also, a letter from Allen L. Chickering, an attorney, of San Francisco, in criticism of some phases of the bill. Also, a letter from Homer D. Crotty, of Los Angeles, Calif. The Foreign Bond Associates make some criticism, severe criticism, of section 17, probably expressing the general criticism in this letter of that situation. (The letters referred to are as follows:) Hon. CHARLES F. LEA, FOREIGN BOND ASSOCIATES, INC., Jersey City, N. J., June 24, 1937. Chairman, Interstate and Foreign Commerce Committee, House of Representatives, Washington, D. C. DEAR SIR: Foreign Bond Associates, Inc., of which the undersigned is president, is an investment company owned by about 250 shareholders. Our portfolio consists almost entirely of foreign dollar bonds, and we probably rank as one of the largest holders of this class of security in the United States. Our attention has recently been called to section 17 of H. R. 6968. This section has provoked considerable discussion among our officers, and it may be that some of the comment will be useful to your committee. Before outlining these comments, however, I want to make clear that the activities of our company will not be affected if this section becomes law. (1) We are, of course, aware of the findings of the Securities and Exchange Commission relative to the repatriation of foreign bonds as set forth in part V of its recent report to Congress on the work of protective committees. Apparently section 17 is designed to correct or eliminate the abuses of the repatriation traffic, a very desirable aim. However, we do not understand how the American holder of foreign bonds will be benefitted by the prohibition of repatriation, unless the foreign obligor can be forced to apply the funds now utilized for this purpose to increased interest payments. The usual effect of active repatriation has been to support and stimulate the market for the bonds involved. If repatriation is to be prohibited, the market would be adversely affected without any commensurate gain to the investor by reason of his receiving larger amounts of interest. The real problem is to force the foreign obligor to utilize these funds for interest payments, and the bill is silent on this point. (2) Even if section 17 became law, its effectiveness in the prohibition of repatriation would be doubtful. We have observed the methods used by obligors in many foreign countries in the repatriation of their bonds over a considerable period of time. In most cases the obligor does not come in direct contact with the American bondholder or even his broker. Devious channels involving banks or agents in several foreign financial markets are usually employed. Obligors desiring to continue repatriation in violation of section 17 would find little difficulty in so masking their operations and distributing their purchase orders that the tracing of repatriation traffic would be rendered almost impossible without having access to the files and records of banking houses located abroad. Repatriation and violation of foreign exchange rules has continued in many foreign countries in the face of extremely drastic regulations, and we have no reason to believe that methods employed abroad would not succeed equally well in our markets. (3) It will, of course, be possible for the Securities and Exchange Commission to draft such stringent regulations and to exercise such great pressure upon banks, brokers, and dealers subject to its control in this country that dealings in certain specified bond issues might be brought to a virtual standstill. In this event it is likely that the principal result would be to drive this traffic underground, entirely out of the hands of legitimate dealers and brokers in securities. In fact, this is what has happened abroad where the regulations in many instances have been made so drastic as to involve long jail sentences and even death for their violation. In turn, the further result of making certain issues contraband would be to depress their market prices, not only because additional middlemen would be injected into the transaction between the time of the actual sale on the part of the bona-fide holder and the ultimate repurchase by the obligor, but also because the "bootleg" operator would demand a large commission to compensate him for the risk involved. (4) The definition of the term "defaulted security" as it appears in the last paragraph of section 17 is unrealistic. This portion of the bill virtually declares that where the consent of the owner has been obtained to a compromise in debt service, a default no longer exists. In actual practice the consent of the individual is rarely obtained. In most cases foreign defaulters have made unilateral offers to the American bondholders, leaving the choice to them as to whether they shall accept or reject. In the report of the Securities and Exchange Commission referred to above, "consent". under these circumstances would occur when the holder cashed his coupons in accordance with the new terms offered by the obligor. In this event, default, according to section 17, would be cured and the obligor would be free to repatriate such assented bonds, and they would normally sell higher in the market than the nonassented bonds. This discrepancy in market price would become very wide should the obligor utilize large funds for repatriation, and at the same time threaten to withdraw his offer. In this event, section 17 might actually be the instrument of forcing acceptance of such a unilateral offer regardless of whether it was fair and equitable to the bondholders. (5) A large number of unforeseen problems might arise as a result of the definition of default in section 17. For example, the Chilean Government made a unilateral offer which was rejected by the Foreign Bondholders Protective Council, wherein the earmarking of a substantial fund for the repatriation of these obligations was provided. If section 17 is stringently enough enforced to prohibit the Chilean Government from buying its bonds in this market, it might be driven to continue its repatriation operations to the London and Zurich markets with the obvious decline of the dollar bonds in New York. In this case we doubt whether section 17 would force the Chilean Government to improve the terms of its offer to bondholders. The only result might be that the market price for Chilean dollar bonds in this country would decline and the price for sterling and franc issues improve. (6) The net effect of section 17 as a whole is to set in motion a number of forces to depress the market in this country on the foreign dollar bonds concerned. This not only acts to the disadvantage of the American holder, but plays directly into the hands of the foreign obligor, and facilitates rather than interferes with the process of repatriation. The preceding paragraphs, of course, are only brief observations upon a very technical subject, and I would be happy to enlarge on any portion of them should you so desire. Yours very truly, Hon. CLARENCE F. LEA, House of Representatives Office Building, ROBERT S. BYFIELD, President. CHICKERING & GREGORY, Washington, D. C. DEAR MR. LEA: Although I have never had the pleasure of meeting you personally, I have for a number of years past had occasion to admire what seemed to me to be your sound views on national questions. On this account I have thought it worth while to address you in connection with the bill known as H. R. 6968 or the "Committee Act of 1937" amending the Securities Act of 1933 in certain respects. In my opinion this bill will produce a serious and very pernicious effect on legitimate and necessary corporate management, which I cannot believe that you intend. You will, of course, realize that business corporations are on the defensive against the host of legislation which is coming from Washington since the present administration went into office, and that the policies of this administration have raised many problems of a serious nature. I cannot, of course, do more than touch on two or three phases of the effect of your bill, but I should like to point these out. First: I will first take up its effect on corporate changes necessary to meet the undistributed profits tax. Although it does not seem to have been given thought by Congress, this tax presented an almost impossible burden to corporations which were either new and had an expanding business or had lost considerable money during the depression and were thus not prepared with working capital to meet an expanding business. The corporations mentioned were doing a good business but, on account of the greater capital involved, their profits were largely represented by increased inventory and accounts receivable and not by money. Payment of the undistributed surplus tax, in one or two instances which I have in mind, would have put these corporations seriously in debt to banks. Thus they were obliged to rapidly meet the situation by one of several methods. One, which |