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The CHAIRMAN. Mr. Douglas, I presume, whether or not the reply to a letter such as Mr. Cole suggests, would, of course, depend upon the nature of the reply. If he gave information without going any further, you would not call that solicitation.

Mr. COLE. No, I did not understand your answer to deal with that situation or to agree with the statement of Chairman Lea.

You said that beyond any doubt that if there are two dual committees in the field attempting to organize a company, in which I am interested, and I care not which one handles it, but I do know the president of the company and the officers of the company, have investigated the company and have confidence in its future, and I write in and just ask the bold question, which group I should recognize to take my proxy, and he writes back and advises your group is the better of the two. That is solicitation?

Commissioner Douglas. It might very well be. What I say, sir, is this: That it is sufficiently close that it would be wise to study it and it may require some clarification and amplification of the concept.

Mr. COLE. You had in mind something beyond that.

The CHAIRMAN. I was under the impression that solicitation was defined in the bill, but it is not.

Commissioner Douglas. No, the term is not defined. And I think that that is a possible improvement that could be made.

Mr. COLE. A definition of the term.
Commissioner DOUGLAS. Yes.

The CHAIRMAN. I had in mind that solicitation carried the idea of attempting to persuade and not the mere statement of information. Of course, if in the letter he solicited, there could be no doubt about that.

Commissioner DOUGLAS. No.

The CHAIRMAN. But, I take it that it is necessary to distinguish carefully in the bill, and describe what is and what is not solicitation.

Commissioner Douglas. I understand that the legislative counsel of the House has been working over this bill very carefully.


Commissioner Douglas. That concept of solicitation is an extremely difficult one from the legal draftsman's end, and at the same time, to leave it free so that you will not interfere generally with communications and general expressions of opinion and so on.

Mr. EICHER. Don't you think the definition should include the element of initiation?

Commissioner Douglas. I think that that might be a very valuable lead to follow.

The other provisions of subsection (b), line 12, page 18 (sec. 4) relate to solicitations in respect of a plan which may involve the registration of securities issued or to be issued under the plan.

I do not know that I need to go through all of these paragraphs of subsection (b). They do, I think, make it unnecessary for issuers and committees to qualify under this bill and also to register under the Securities Act.

DECLARATION MACHINERY Mr. Martin. Is a declaration effective when it has been approved by the Commission?

Commissioner Douglas. That is generally correct. That is covered by section 5, page 22, line 23.


(c) A declaration filed under this section shall become effective within such reasonable period of time (but not less than twenty days) —

Twenty days is the period prescribed in the Securities Act. The examining staff of the Commission needs some time to go over the data filed. And it is the suggestion of the Commission that since the 20-day period is quite satisfactory under the Securities Act, it might be carried over here.

However, the Commission, on the filing of a declaration and prior to the expiration of that reasonable period of time has the power to issue an order to the declarant, the person who files it, to show cause why such declaration should become effective. That is on page 23.

Ånd, within a reasonable time after the opportunity for hearing upon an offer to show cause, unless the declarant withdraws his declaration, the Commission must enter either an order fixing the date upon which the declaration becomes effective, or refusing to permit such a declaration to become effective.

This provision for a show-cause order is carried over from section 7 of the Public Utilities Holding Company Act of 1935. It is a procedure that Congress used in the Utilities Act; there is a similar provision in this section of this bill.

The CHAIRMAN. Mr. Douglas, you have completed your statement up to section 5?

Commissioner Douglas. I have completed my statement up to section 5.

The CHAIRMAN. Friday morning, would you prefer to go ahead with your statement, or have us bring on other witnesses who expect to be here at that time?

Commissioner Douglas. I should think it would be preferable, certainly from my point of view, to complete the statement on Friday.

The CHAIRMAN. Very well. I understand that some of these witnesses are coming from quite a distance expecting to be heard on Friday. Do you know how accurate that is?

Commissioner Douglas. I do not, Mr. Chairman.

The CHAIRMAN. Judge Knox expects to be here on that day. He may have made an arrangement in his court to be absent that day. I do not know.

One of these witnesses is from Kansas City and one from Boston, and one from New York.

Commissioner Douglas. That would be perfectly agreeable to me.

The CHAIRMAN. So that these other witnesses could go ahead, and we could prepare the record in that manner.

Well, then, we will adjourn, and we will ask these witnesses to be here Friday morning, and if you do not have an opportunity to complete your statement at that time, you will have an opportunity to complete it at a later time.

Commissioner Douglas. There will be no hearing tomorrow, Mr. Chairman?


The committee will then stand adjourned until Friday morning at 10 o'clock.

(Thereupon, at 11:53 a. m., the committee adjourned to meet Friday, June 18, 1937, at 10 a. m.)


FRIDAY, JUNE 18, 1937


Washington, D.C. The committee met, pursuant to adjournment, at 10 a. m., in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will please come to order.

Mr. Wood, are you going to testify first, or do you have any preference as to the order in which you appear?

STATEMENT OF ORRIN G. WOOD, BROOKLINE, MASS. Mr. Wood. Mr. Chairman, I would like to appear first. I am Mr. Wood from Boston, and with me are Mr. Woods from New York, and Mr. Prescott from Kansas City.

The CHAIRMAN. Very well, you may proceed.

Mr. Wood. First, I would like to thank the committee for giving us an opportunity for this hearing.

My name is Orrin G. Wood, and I live at 388 Warren Street, Brookline, Mass. I am a member of the firm of Estabrook & Co., of Boston, and I and the two gentlemen with me are appearing at the request of Mr. Hall, president of the Investment Bankers Association of America. In order to try to present the matter as clearly as possible, I propose to speak on the general theory and policy of the bill. Mr. Woods will speak on the sections pertaining to voluntary readjustments and recapitalizations, and Mr. Prescott will speak on the sections pertaining to the effect of the bill in judicial reorganizaitons.

Frankly, I dislike to appear before this committee on this bill, because for several years I have had most cordial relationships with the Securities and Exchange Commission, both as a member of the Investment Bankers Conference and during my term of office as president of the Investment Bankers Association, but many members of the Investment Bankers Association feel that certain parts of this bill and its effect on the investor should be called to the attention of you gentlemen.

Now, let me say first that the Investment Bankers' Association is in favor of registration of committees and disclosure of the interest of committees in the particular situation.

We believe in a full disclosure of any plan to all security holders but in such simple form that the security holders can readily understand what that plan proposes.

However, it seems to me that this bill goes very much further than any bill that we have at the present time under which the Securities and Exchange Commission is operating.

As you gentlemen know, the Securities Act is a disclosure act. It is based on the theory that if the investor is given full and frank statements of all of the facts that he should be allowed to make up his own judgment.

This bill, however, goes far beyond that. It makes it mandatory for the Securities and Exchange Commission to make certain definite findings, first as to committees, and second in certain instances as to plans. In other types of cases it gives the Commission broad permissive authority in regard to plans.

Now, these required findings which the Commission is required to make not only greatly increase the amount of work which it must do, but greatly add to the responsibilities, the public responsibilities of the Commission to the investor.

It seems to me that the questions to be answered in this situation are comparatively simple. First, whether you gentlemen, as a matter of policy, think that these great responsibilities should be placed on the Securities and Exchange Commission, and secondly, whether you think that if they are placed upon the Commission that the Commission can satisfactorily do the job which will be expected of them by the investor.

I would like for a minute to visualize the field that this act covers. It covers reorganizations, judicial reorganizations. That, of course, is a broad field. How many judicial reorganizations take place at any particular time, I have no particular knowledge; but I think some light is thrown on the subject by Mr. Douglas' statement before you gentlemen the other day that during the last several years thousands upon thousands of corporation debtors in this country have been unable to meet their obligations and have had to go to their creditors for some assistance; but in addition to that, this bill also covers the question of voluntary adjustments, and the definition of voluntary adjustments under this bill is very broad.

It includes, in addition to readjustments where there has been some failure on the part of the corporation to live up to the terms of aividends, we will say, of a preferred stock, ordinary simple charter amendments where the priorities of any outstanding security or stock are affected and where the changes in those priorities necessitate the vote of the stockholders. It would include in many instances the authorization of a new issue of securities which would later have to be registered under the Securities Act.

I have no figures on this subject but I saw some figures the other day, which, unfortunately, I left behind me, covering 1 year in certain States, and I think I am not overstating the case when I say that the number of cases of voluntary readjustments, as defined in this bill and which would come before the Commission, is vastly greater than that in the reorganization field.

Now, with this very vast field to cover which, in my judgment, will be greater than any field now covered by the Securities and Exchange Commission,

there will have to be a vastly increased staff of the Securities and Exchange Commission.

I am not touching on the question of added expenses, because if the job is well done that added expense will pay for itself. But, I would like to call your attention to two facts: Reorganizations usually occur either during the end of or just after a depression such as we have been

through. They come in tremendous numbers. Readjustments that are as broad as are covered

by this bill are going on daily. In the first place, the staff which the Securities and Exchange Commission will have must cover this entire country, and will have not only to be familiar with the legal aspects of readjustments and reorganizations, but in order to do the job required by this bill, that staff will have to be familiar with all types of industries-public utilities, extractive industries, manufacturing industries, and distributing industries, and also financing companies. And, it will not only have to be familiar with those businesses in general, but it will have to be familiar, also, with all the peculiar problems which each particular company that is to be reorganized or readjusted will have problems of production, of sales, of finance, and of management. Secondly, this staff will at times have to be largely and quickly expanded.

Mr. REECE. Mr. Chairman-
The CHAIRMAN. Mr. Reece.
Mr. REECE. May I interrupt you?
Mr. Wood. Yes.

Mr. REECE. Is it not, in a measure, true of the courts which are called

upon to pass upon these matters pertaining to bankruptcies and receiverships, that they must be familiar with these same matters to which you refer? If so, I should think that might be a reason for having another agency given some responsibility in these matters which might be a continuing organization with trained personnel to gather this information, so as to have it available to the courts, which now have authority over the bankruptcies, receiverships, and reorganizations?

Mr. Wood. May I answer
Mr. REECE. If I may complete, before you answer.
Mr. Wood. Yes.

Mr. REECE. In that same connection, you refer to this legislation as going farther than the present Securities and Exchange Act.

Mr. Wood. The Securities Act.

Mr. REECE. The Securities Act. It would seem to me that in that connection we should also consider the bankruptcy and receivership laws.

Mr. Wood. Bankruptcy and what; I did not get that.
Mr. REECE. The bankruptcy laws.
Mr. Wood. Bankruptcy laws; yes.

Mr. REECE. And see how far those laws go, because this, in addition to being supplemental to the Securities Act is in a way supplemental to the bankruptcy and receivership laws.

Mr. Wood. Well, I think your question covers simply the question of judicial reorganizations. You realize that this hili as drafted also covers voluntary adjustments, which do not now come before the courts.

Now, I would say also I am not a trained lawyer—but I would say this, that this bill puts on the Securities and Exchange Commission a much more drastic responsibility for approving a plan in reorganizations than I believe the courts now undertake.

The Commission not only must pass upon the equity of the plan, but it seems to me that when it passes on a plan and says it is good or bad, that the Securities and Exchange Commission, before the

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