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public, would be going further than that and saying not only is this equitable, but it is a good workable plan for the corporation.

In addition to that it passes on one thing which I think is a very dangerous thing for any public body to pass on. It passes on the question of management.

Now, when you pass on the question of management, you can say that the management is honest and it is going to work for the security holders; but that is not the only thing that the security holder wants to know. He wants to know that the management-and he will expect that the Commission has said so—is able to operate that business well.

Now every one of us who have struggled with managements in difficulties and out of difficulties knows that there is not any single thing in the field of industry that is harder to make a judgment on than management.

So, it seems to me both in judicial reorganizations you go further in this bill than the courts have been accustomed to go but that you in addition attempt something which is much wider than the judicial reorganization, namely the voluntary adjustment, which is not now in the hands of the courts at all.

The CHAIRMAN. Mr. Wood, what particular language do you have in mind there?

Mr. Wood. I was referring to reports to be made in reorganizations and readjustments.

The CHAIRMAN. In your remarks, which you have just made, are they based upon any particular language in the bill?

Mr. WOOD. Yes, I think I can find that for you quite quickly. I have a little plan here. It is section 13. I have this plan which I have made up that probably no lawyer would approve, but it is an analysis for me. I prefer it.

It says that the Commission shall render a report on any reorganization plan required to be submitted to it by a court, under certain conditions, and then in (d) reports which the Commission is required or authorized to make shall contain a statement as to whether or not, this is on line 2, page 45—the provision which has been made in the plan for management of the reorganizing issuer is in the interest of the security holder.

I think that covers your question.

The CHAIRMAN. You referred also to the workability. I suppose the economic feasibility of the plan would also come in. Do you have any language in mind in reference to that?

Mr. Wood. No; except it seems to me, sir, that if the Commission is going to pass on a plan for the benefit of the public, the public will necessarily expect that it is going to pass on the plan in both ways, and it will want to know, not only whether or not the plan is equitable as between various classes of security holders, but whether it is an operable plan for the company. That is a conclusion or deduction that the public would not fail to make.

Mr. MAPES. The word "may" is used through that section.

Mr. Wood. There are two types of authority granted. Some are required and some are permissive.

Mr. MAPES. What would you interpret the section as far as making a finding on a report is concerned?

Mr. Wood. I would interpret it

Mr. MAPES (continuing). Generally.

Mr. Wood. In any plan before the courts not involving an amount less than $5,000, that the Commission unless

Mr. MAPES. $5,000,000.

Mr. Wood. $5,000,000; that the Commission, unless it is an intervener must make report to the court, a statement on the plan to the court: But the Commission may also go further than that. There are many permissive sections, such as that the Commission may render a report on any other plan of reorganization upon the request of the court. The Commission may render a report on any reorganization plan described in (a) or (b) or upon any plan of voluntary readjustment, if it deems it appropriate in the public interest to do so.

Now, just on that point, it seems to me that as time goes on and if the Commission reports on a plan of voluntary readjustment, that more and more, the public is going to expect them to pass on all plans of voluntary readjustments.

Mr. MAPES. Section 13 is confined, is it not, to reorganization?

Mr. Wood. In (c), Mr. Mapes, you will see that they are allowed to report on any plan of readjustment if it appears to them necessary or appropriate in the public interest or for the protection of investors.

Mr. MAPES. That would include the voluntary?
Mr. Wood. That would include the voluntary.
Mr. MAPES (continuing). Reports.

Mr. Wood. Yes. I believe that if some security holder applies to the Commission for its opinion as to a particular plan, or perhaps if a group of security holders apply, the Commission is going to feel that under its duty to the public it must report on that plan, and I think after that ball is started rolling it is going to roll up just like a snowball.

Mr. Mapes. Have you drafted proposed amendments to meet your criticisms of the bill?

Mr. Wood. I have some suggestions to make. If I may, I will defer them to the end of my talk, or I can give them to you now, whichever you prefer. If you would like to have them now I can give them to you." I would prefer to do it a little later on,

Mr. MAPES. Very well.
Mr. WOOD. May I go on, sir?
The Chairman. Yes.
Mr. COLE. Mr. Chairman
The CHAIRMAN. Mr. Cole.
Mr. COLE. I want to ask one question at that point.
Mr. Wood. Yes.

Mr. COLE. In the Securities Act, it is my recollection that this committee insisted very definitely on a provision to the effect that the Federal Government in the exercise of its power under the Securities Act would in no way guarantee any securities.

Mr. Wood. I think that is so, sir,

Mr. COLE. I understand that your criticism of the bill now before us is to the effect that if the Securities and Exchange Commission is a party in a court proceedings or in a reorganization out of court, to the extent of almost dictating management, or at least expressing opinions that might prevail, that then a purchaser of securities growing out of such reorganization might very properly look to the Government for protection under that guaranty.

Mr. Wood. I do not think that they will fail to do so, sir. I think it will follow just as sure as day follows night. And I think it will

if I may

increase with time and I do not believe that the Government should put itself in that position, because it is going to get all of the criticism if the thing does not work, the criticism that we bankers have had for years.

Mr. COLE. Of course in the Securities Act where you file a prospectus and it places a premium upon honest lawyers, accountants, and experts, dealing with the formation of corporations, which is something which the Commission looks into, it is easy to say that the Government does not guarantee the securuties issuing therefrom.

Mr. Wood. Yes.

Mr. COLE. If the Federal Government intervenes in a court proceeding, and carries that case say to the Supreme Court, because of the disagreement with the court's decision as to management placed on certain properties in reorganization or reorganized company, John Doe as a purchaser of those securities might feel that the Government not only is back of the value, paper value, of what he buys, but later on ask this Government under a claim, to reimburse him for what he loses.

That is a field we are liable to get into if we go too far and I think it is but restating the sentiment of thus committee at the time the Securities Act passed when we insisted upon that very language being in there.

Mr. Wood. I think this bill as drafted in this respect is going contrary to the statements which your committee laid down in the Securities Act on the question of policy.

Mr. REECE. Mr. Chairman-
The CHAIRMAN. Mr. Reece.

Mr. REESE. I am impressed, with reference to the nature and origin of this type of legislation, that it does not rise out of the same causes which gave rise to the Securities Act. It arises out of the same causes that gave rise to the bankruptcy laws; the bankruptcy, receivership, judicial reorganization, and kindred laws

Mr. Wood. If I may say.
Mr. REECE. May I complete my statement?
Mr. Wood. Yes.

Mr. REECE. As I conceive, they were enacted by the Congress for the purpose of conserving the assets of a corporation which might be in difficulties for the benefit of its creditors.

The purpose of this proposed legislation is to set up additional safeguards for the preservation of the assets of a corporation that might be in difficulties for the benefit of its creditors.

That is rather my conception of the origin and the purpose of this legislation; that it arises out of those causes and not out of the causes which gave rise to the Securities Act and, to my mind, it does not embrace any new ideas; that it is expanding our present laws to throw further safeguards around the conservation of the assets of a corporation which might be in difficulty for the benefit of its creditors.

Mr. Wood. Well, sir, I am sorry, but I cannot agree with you, Mr. Reece, that that is what is going to happen. I think

Mr. REECE. I might be wrong with reference to what might happen; but I was giving my idea with reference to the origin and purpose of this type of legislation.

It may be drawn in such a way as to not accomplish what I thought its purpose might be.

Mr. Wood. Well, that is my fear. I think it is going beyond the duty now imposed upon the courts, and that it adds quite a little, cumbersome machinery.

I do not know whether you gentlemen realize how fast a company, especially an industrial corporation, operating in a receivership may disintegrate. It loses its salesmen. They do not know whether the company is going to go on or liquidate. It loses customers. It cannot collect its accounts.

What I would hope is going to be accomplished-I am now speaking of the Bankruptcy Act—is greater speed to conserve those assets before they begin to waste away.

I think this act is creating more machinery and that is not going to increase speed. It is going to stop and delay, and every week that goes on may be vital. It may be a question of whether the company is to continue or actually may have to liquidate. It may not only affect the security holders but the community.

Shall I go on, sir?
The CHAIRMAN. Yes.

Mr. Wood. I think that I have covered the expansion in personnel that the Commission will have to make and that it will have to be a very trained personnel.

Now, frankly, one of the things that those of us who come in contact with it are worried about today is the changing personnel in the Securities and Exchange Commission. We have had one chairman leave. We are about to lose the present chairman. We have lost a general counsel, and I am informed that there have been many changes in the understaff.

Now, I do not think that is a picture on which to build the trained staff which will be necessary in this sort of situation, and I emphasize further that is not a question of government, but I do not believe any body of men can cover and successfully cover this very wide field which this act covers.

When I say “successfully cover”, I am thinking of the investor, because after all the bill is drafted for him.

Now, I want to call your attention to the fact that I believe, despite the disclaimer in section 22, that the Securities and Exchange Commission in the public mind will become a proponent or an opponent of plans and committees.

Now, I would like to speak about the duties which will fall, and the responsibilities, which will fall upon the Securities and Exchange Commission.

First, their duties as regards committees: That is to find that there is a lack of conflict of interest. That is one thing it is to find.

And then there are certain definite disqualifications that it has to find. If a man has been a director of a company, or an officer of a company, or an employee, he is disqualified from taking part in the proceedings of a committee.

Now, if this is not to be a disclosure act—which it is not-but is to be an act where the Commission makes definite findings, that means investigations of the membership of these committees. The commission cannot take the statements which come to them as they do now in the Securities Act, and put the responsibility on the maker of the statement. It must investigate those statements as to whether they are correct. Otherwise, the act is nothing but a disclosure act and should be drawn in that form.

Now, in regard to the disclosures required as to committees, may I just submit this point to you gentlemen? What in effect the Securities and Exchange Commission finds is that the members of each committee are not disqualified because of conflicting interest. What the public will think that the Commission finds is that the committees are men of ability who can really do a job and pass on a plan and investigate it and say that the plan is good. That is what the public wants to know.

I think Mr. Wood, or Mr. Prescott, will probably cover that point more thoroughly.

Now, as regards committees, I think I have covered that.

The CHAIRMAN. Mr. Wood, assuming that the Federal Government was going to assume jurisdiction such as is set up in this bill, would you suggest any other organization in preference to the Securities and Exchange Commission for the regulatory body?

Mr. Wood. No, sir; I would not. I have a suggestion to cover this field, but it is not a question of the Securities and Exchange Commission or some other body. I have the highest respect for the Securities and Exchange Commission. And, it is not a question of selection between governmental departments, sir.

I have spoken about the committees and I now wish briefly to describe the work and responsibility placed on the Securities and Exchange Commission by this bill in the matter of passing on plans in judicial reorganizations and plans of voluntary readjustment. In judicial reorganizations pending before a Federal court and involving a sum of $5,000,000 or more owed to creditors the Commission is required to make a report to the court provided that as intervener, or in some other manner, the Commission has not otherwise advised the court. In other cases of judicial reorganization the Commission may make a report if requested by the court, or if it appears to it that such a report is necessary in the public interest or for the protection of investors. In voluntary readjustments which do not now come before a court it may make a report if it believes that it is in the interest of the public or the investor for it to do so.

The bill requires that when the Commission makes a report it shall contain among other matters its comments as to the fairness and equity of the treatment accorded various classes of security holders, and, in the case of reorganizations, whether the provision made for management is in the interest of the security holders, and any other phases of the plan.

Now it seems to me that what the public wants to know about a plan is two things: First, is the plan equitable—that is, does it divide the assets and earning power of the corporation in accordance with the rights of the security holders; two, is the plan workable—that is, can the company operate successfully under the new financial set-up. As to management, what the public wishes to know is whether the management is (1) honest, and (2) is able—that is, that it will probably operate the company successfully. It seems to me, therefore, that first or last the Commission will be expected by the investor in reporting on plans, whether of judicial reorganization or merely of voluntary readjustment, to give its opinion on these subjects. When it does it will have assumed a grave responsibility, and will, in my judgment, have placed itself in a position where it may receive much criticism.

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