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Now, it will vary, of course, with the type of investor. You take an astute, large investor such as an institutional investor, he knows his way around and can pretty well look out for himself.

Mr. WOLVERTON. Then, could we properly say that the purpose of this bill is to provide a governmental agency to protect investors. Commissioner DOUGLAS. Not in the sense of a governmental agency forming committees. Not in the sense of a Government agency being represented on committees.

Mr. WOLVERTON. I am speaking of it from the standpoint of the investor. Is it the purpose of this bill for a governmental agency to protect the investor against reorganizing committees?

Commissioner DOUGLAS. That is correct, sir; yes, sir.

Mr. WOLVERTON. Is it contemplated that there are any honest reorganization committees?

Commissioner DOUGLAS. Now, that comes to the second point. Mr. WOLVERTON. That you have not taken up yet?

Commissioner DOUGLAS. The second point you mentioned, whether or not it was my thought that all protective committees were dishonest.

Mr. WOLVERTON. Yes.

Commissioner DOUGLAS. That is not the observation which I would like to make before this committee. I do not feel that way.

Mr. WOLVERTON. Then, the fact remains that all reorganization committees must come under the jurisdiction of your agency as a result of the provisions of this bill.

Commissioner DOUGLAS. That is correct.
Mr. WOLVERTON. And that-

Commissioner DOUGLAS. Pardon me.

Mr. WOLVERTON. Go ahead.

Commissioner DOUGLAS. Well, you get in this field, as I suppose in most fields, a variety of types of committees and of types of practices; some the pinnacles of high perfection and honesty and efficiency and endeavor, and others the depths of dishonesty. You get all shades of differences.

What this attempts to do, as I read it, is nothing more nor less than to take the highest prevailing pattern for committee conduct found in the current field and make that a minimum requirement for all committees.

Mr. WOLVERTON. Assuming that an investor may desire to enter into a particular reorganization scheme that has not met with the approval of your commission, would it be possible for such an investor to exercise his own judgment, or would he necessarily be required to take your judgment?

Commissioner DOUGLAS. He would not be required to take our judgment. We would have no control over what he voted. He would remain the master of his own fate.

Mr. WOLVERTON. Well, if I understand it correctly, this bill is so drawn in its provisions, so general, that it would be impossible for an investor to participate in a reorganization, unless preliminary thereto, the reorganization committee had complied with all your requirements, and demands, and in effect had taken your judgment in the

matter.

Commissioner DOUGLAS. Now, if he is operating through a committee which is making a public solicitation, that is true. If it relates, however-suppose there are eleven of my friends and I, who own

securities in a particular company. We can get together and give each other powers of attorney or deposit our securities under deposit agreements and proceed without let or hindrance. This statute would not touch us.

Mr. WOLVERTON. You speak of a very small limited number of 12. Commissioner DOUGLAS. Yes.

Mr. WOLVERTON. What is the provision in the bill that fixes the limits within the bill is to apply? You have used 12 as an illustration.

What is the limitation fixed by the bill?

Commissioner DOUGLAS. At the present time, I believe that 12 is the provision in the bill. That is to be found in section 3 (c).

Mr. WOLVERTON. May I ask another question before you proceed? Commissioner DOUGLAS. May I say on that point, sir, that 12 is merely suggestive. There is a comparable provision, I think, under section 77 of the Bankruptcy Act governing railroad protective committees, and I believe, if my memory has not failed me, that 25 is the number there. But that, in my judgment, is merely suggestive of a distinction on the one hand between a private deal or a private agreement with a small group and on the other hand a public distribution or public solicitation.

Mr. WOLVERTON. Preliminary to the question that I am about to ask, let me make this observation: The underlying theory, as I understand it, of the Securities Act was to provide information upon the basis of which the possible investor would be advised as to the responsibility of the company and the worth of whose security he was about to purchase. In other words, the Government through the Securities Exchange Commission was seeking to provide a method of advising a possible investor; it was seeking to give him the information that it considered pertinent for him to have in passing upon the particular securities; but it does not undertake in any way whatsoever to preclude the issuing of securities even if they may not be sound; but merely to give the facts to the possible investor and let him use his own judgment.

Commissioner DOUGLAS. That is true, sir, and that is the spirit in which the Commission has administered the Securities Act of 1933. Mr. WOLVERTON. Now, does that same theory underly this bill, or does it go a step further?

Commissioner DOUGLAS. We go a step further, sir.
Mr. WOLVERTON. It seemed so to me.

Commissioner DOUGLAS. There is no doubt about it.

Mr. WOLVERTON. Now, if it is justifiable to take this forward step after the investor has lost; after the horse has been stolen, so to speak, why does not the same reason exist even with greater force to protect him in the first instance?

Commissioner DOUGLAS. Well, Mr. Wolverton

Mr. WOLVERTON (continuing). And preclude him from entering into a company that has the possibilities of failure and subsequent reorganization?

You expect by this bill, as I understand it, to take care of and protect the investor in reorganization of a company that has failed, might have been designed to fail from the very beginning; but there is no such protection given to him when he makes the investment in the original instance.

Now, if there is justification for this latter step why does it not equally or even more forcibly apply in the first instance?

Commissioner DOUGLAS. For this reason, sir: Suppose I am a promoter of a company, and I come to you, a prospective buyer of the securities that I have, and I tell you the truth, the whole truth, and nothing but the truth. You have your money, and you can decide whether or not to put that money into my speculative enterprise, just as you like. There the disclosure of the truth is basic and fundamental. There it is absolutely necessary. If after having been told the whole story, you decide that this proposition is perhaps nothing more nor less than a horse race, but nevertheless you want to put in your $10,000, that is your decision and your judgment. But once you have gotten locked into that situation, once you have parted with your $10,000, there is nothing you can do about it. Along comes a committee and says, "Let us protect you, sir." That committee has all of the information; that committee has all of the lists; it has the banking connections; it has the prestige. It knows all of the inside tricks and strategies. The only practical thing you can do is to deposit with that committee and if they say to you in so many words that "we are faithless fiduciaries", there is little in that disclosure that will help you. You are at the committee's mercy.

Mr. WOLVERTON. In other words, if I had $10,000 to invest you would let me be just as foolish as I please, after you have stated the facts to me; but by the provisions of this bill you will seek to protect me after only $500 or $1,000 remain as a result of my foolishness in making the particular investment?

Commissioner DOUGLAS. For the reason that the disclosure to you of all of the facts by the committee which purports to be your protector will not help you substantially.

Mr. WOLVERTON. I cannot yet see any reason for solicitude over what remains, that does not equally apply in the first instance. If you are going to exercise a protective attitude toward me, why not first, as well as last?

It is difficult for me to see why the step is taken in one instance and not taken in the other.

Commissioner DOUGLAS. Well, the point that you are making, sir, raises a broad question as to whether or not the type of control over the capital markets envisaged in the Securities Act of 1933 is adequate. Now, I think that—

ADMINISTRATIVE ASSISTANCE TO COURTS

Mr. WOLVERTON. Is it the purpose of this act to supplement or supersede court jurisdiction? There are seldom reorganizations that take place outside of a court proceeding of some kind or character, whether it be a bankruptcy act or whether it be under a receivership or by any other of the ordinary methods.

Is it the purpose of the Securities and Exchange Commission to set themselves up as the protective agency for the investor notwithstanding the fact that the case might be in a court and subject to court approval?

Commissioner DOUGLAS. It is not the intention nor the desire, nor the philosophy expressed in our reports or in our specific recommendations to usurp the power of the courts.

Mr. WOLVERTON. Well, take for instance the case of a reorganization under the bankruptcy act, before the United States District

Court for the approval of the plan. Would this bill in a case of that kind have any bearing whatsoever?

Commissioner DOUGLAS. Yes, sir; it would, and that was the second major point, Mr. Chairman, that I wanted to discuss before I got down into the specific provisions of this bill.

Mr. WOLVERTON. Then, is the bill drawn on the theory that even the courts cannot be trusted?

Commissioner DOUGLAS. No; in that second part of the bill, the Commission is given a limited function to perform as an administrative agency in the proceedings. That part of the bill is drawn on the theory that the Commission could act in an advisory capacity and render a service to the court without usurping the power of the court or taking away from the court any jurisdiction that it has. It would become an administrative adjunct of the court.

Mr. WOLVERTON. In other words, the theory of the bill is, in instances of that kind, not only to protect the investor, but you will advise the court?

Commissioner DOUGLAS. It would make it possible in many cases. for the court, if the court felt that it needed the assistance of an agency like the Commission in making a report on the plan, to ask the Commission to render it a report.

Mr. WOLVERTON. Mr. Chairman, I have several more questions I would like to ask but I do not want to take up the time of the committee any further at this time. I will reserve them until another time.

The CHAIRMAN. You have not concluded your general statement? Commissioner DOUGLAS. That raises the point we are just discussing, that is this, that the Lea bill does entail more than just supervision over committees.

The CHAIRMAN. You had not completed your general statement? Commissioner DOUGLAS. That is right. There are a few observations on that second phase.

The CHAIRMAN. You may proceed.

Commissioner DOUGLAS. Next is participation in reorganization proceedings by the Securities and Exchange Commission:

Control over the reorganization process in the interests of investors entails more than the foregoing supervision over committees. Some strengthening of the reorganization proceedings themselves is necessary. Insofar as reorganizations under section 77B are concerned, the Chandler bill makes significant and noteworthy reforms. Some elements of those types of reform are needed in other counterparts of the reorganization system. They are appropriate to incorporate in an amendment to the Securities Act of 1933, since they pertain to the power and functions of the Securities and Exchange Commission.

VARIETY OF REORGANIZATION PROCEDURES

The present reorganization system is composed of a variety of procedures. In the first place, many different sorts of debtors utilize that system. It is not only the industrial, real estate, utility, and commercial corporation which has sought reorganization. Many municipal corporations have endeavored to work out debt rearrangements. Numerous foreign governmental obligations, widely held by American investors, have gone into default and these have needed

readjustment. In the second place, the methods and techniques of reorganization have varied widely. The hard-pressed domestic corporation may seek a haven in equity receiverships or the bankruptcy courts, and thereby stay the efforts of creditors to collect upon their individual debts while the effort at over-all readjustment goes on. Or while yet able to meet their obligations, domestic corporations have sought to forestall impending receivership or bankruptcy by effectuating so-called voluntary plans of readjustment. In the case of domestic corporations, these voluntary plans may run the gamut from mere moratoria-primarily affecting claims of creditors-to consolidations, mergers, and sales of assets-primarily affecting stockholders. latter have been made possible--if securityholders consent in sufficient numbers-by corporate charter or trust indenture provisions, or by statutory authority granted by the debtor's state of incorporation.

NEED FOR SUPERVISION OF VOLUNTARY PLANS

The

From the angle of regulation of security holders' committees, these voluntary reorganizations present an anomolous situation for it frequently happens that no committees appear in such reorganizations. The plan is commonly formulated by the management and bankers of the corporation, and is directly submitted by them to the security holders for their assent. In such circumstances, some minimum control over the solicitation of assents or acceptances by the debtor corporation is necessary, as I have indicated. And even more important is the fact such voluntary plans are not subjected to any scrutiny or review as in case of reorganizations in the Federal courts. The management alone is the arbiter of the fairness of the plan. As a consequence, great inequities have been done to security holders. A management, heavily interested in the common stock, has foisted on the preferred stock, by means of divers threats and practices, plans of readjustment which have been unfair and inequitable. A management, faced with the dire threat of being ousted from power by means of receivership or bankruptcy, has by high-powered tactics and by transforming the company's treasury into a war chest, coerced senior claimants into receiving junior interests. These and like cases have been of frequent occurrence in the voluntary field. State corporation laws afford little protection to investors. Those who dissent may obtain a rather tenuous appraisal right. They may, if they have adequate funds, resources, ingenuity and perseverance, be able to obtain injunctive relief from the courts. But there is no large or substantial measure of protection in these ways. The States have provided no system of administrative supervision over those readjustments. And it is unlikely that they can effectively do so, in view of the orgy of competition among the States for the corporate business. These are compelling reasons for a Federal administrative agency such as the Commission to assume some role in such cases. A signal and important function, however, which such an agency may perform in this type of case, is to undertake for the benefit of investors-or at least to have the power in necessitous cases to make a careful scrutiny and examination of the plans which managements and bankers seek to have consummated.

Mr. KENNEY. Mr. Chairman-
The CHAIRMAN. Mr. Kenney.

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