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prevent further defaults. The county is convinced that it must use on its assembling committee certain underwriters who cannot serve if H. R. 6968, by Congressman Lea, is passed. Also Reconstruction Finance Corporation has recently authorized a refinancing loan to Cameron County to take up its approximately $1,374,000 of flood-protection bonds now bearing 42- and 5-percent interest in such manner as the refinanced debt will be $1,021,000 principal bearing 4-percent interest. It will be impossible for the county to complete that refinancing without continuing to employ an independent agent or committee. The independent agency cannot complete the service for the county without making trades of other bonds for flood-protection bonds and in turn delivering the flood-protection bonds to the county as the holders of the protection bonds would not surrender these for the offered cash price, but we feel that they will likely trade the flood-protection bonds for other securities which the independent agency can obtain but which the county cannot obtain. This function of the independent agency is prohibited by the Lea bill. We are informed final session of hearing of bill will be on July 13. Please go to Washington at once by plane and represent the interests of Cameron County in presenting our problem to the committee and request the committee to pass no legislation which will deprive the county of these valuable rights now possessed by it.

Another case may be mentioned. Reference is made to Cameron County water improvement district no. 1, which served as the spearhead to determine whether the Municipal Bankruptcy Act of 1934 was constitutional. That district was involved a long time in the litigation, which resulted in nullifying the Municipal Bankruptcy Act, and recently Reconstruction Finance Corporation reconsidered the application of the district and has authorized a refinancing loan whereby the district hopes to retire approximately $970,000 of indebtedness by utilizing $535,000 of R. F. C. money and certain of its own assets. Unquestionably if this district were not permitted to employ a responsible bond house as its assembling agent in this transaction, it could not possibly close this loan. Both the district and the Reconstruction Finance Corporation are acquainted with the facts and realize that the assembling agent must trade for or otherwise acquire a substantial block of these bonds in order to accomplish the refinancing. If this bill should become effective in the near future, in my opinion the Cameron County water improvement district no. 1 loan could not be completed. I am bond counsel for the district in this transaction.

Without specifying the districts involved, the speaker is serving as bond counsel for some 8 or 10 water districts which are still endeavoring to assemble bonds under Reconstruction Finance Corporation loans and in each of said instances said districts are employing independent assembling agents who would probably be disqualified under this bill for the remainder of the performance, having less than 50 percent of the program completed.

I have just received a telegram, which will be filed with the committee, from the Board of Public Instruction of Dade County, Fla. Miami is situated in Dade County. The attorney for the Board says that unless the Board can employ the bond houses which distributed the original bonds, in presenting its refunding plan, the Board will be deprived of the benefits of a refunding plan involving $8,000,000.

Accepting their statements as true, the pending enterprises of these four municipalities will be wrecked if the bill is passed in its present form.

(The telegram referred to is as follows:)

MIAMI, FLA., July 12, 1937. Hon. John D. McCall,

Carleton Hotel: Board Public Instruction, Dade County, Fla., now engage in refunding operations involving $8,300,000 and using services of bonding houses that handled original issues. Their services are of material value in refunding operations. Understand Lea bill no. 6968 up for hearing before committee Tuesday. Please express our opposition to having municipal securities included in scope of bill; suggest law may be confined to securities hereafter issued and so worded would not damage refunding operations now in progress. We are sending this wire to you as we understand you are there representing other interested communities before House committee. This wire also forwarded to Congressman Wilcox.

C. W. PETERS,

Attorney for Board of Public Instruction. In addition to controlling the public agency's refinancing operations, when there is a debt default, it appears that the public agency would be forced to submit its declaration to the Securities and Exchange Commission in a plain business transaction of calling in optional bonds and reselling them on a favorable market, if in so doing it should employ the services of a fiscal agent to furnish the money, pending the call of bonds and their resale. In support of this position reference is made to four provisions in the bill:

(a) On page 8, line 22 of the bill the term “municipal debt arrangement” is defined as follows:

The term "municipal debt arrangement” means any modification of the terms, priorities, rights, or privileges of any security issued or guaranteed by any political subdivision of a State or Territory of the United States, or by any public instrumentality of one or more States or Territories; or any exchange of any such security in whole or in part for any other security or securities and/or other property, other than an exchange exclusively for cash; or the assertion of any rights evidenced by any such security.

(6) On page 16, line 11, under the subdivision of the bill entitled "Exempted Solicitations” is contained the exemption in respect to municipal securities. That section is as follows:

A solicitation in respect of any security issued or guaranteed by any political subdivision of a State or Territory, or by any public instrumentality of one or more States or Territories, where such solicitation is made by such issuer or guarantor, or in its name and on its behalf by an employee of an issuer or guarantor, but this exemption shall not apply to any such solicitation by a person who occupies the position of independent contractor with respect to, or agent not in the regular employ of, such issuer or guarantor.”

(c) Section 5 of the act specifies certain data which should accompany the declaration. Within that section on page 20 at line 12 among the information and documents to be filed in connection with solicitations concerning municipal securities are “and in the case of municipal or foreign debt arrangements, the information and documents specified in schedule B”.

The ingredients of schedule B are set forth on pages 61 to 66 of the bill. Within those pages in reference to scheule B on page 63, line 13, is the following:

“The solicitations: The purposes for which the proxies, deposits, or assents are to be solicited

Regardless of any other provisions of the act which might be interpeted otherwise it appears that under the provisions quoted hereinabove a municipality could not employ an independent contractor; for example, a bond house to work for the municipality on the contract to assemble either proxies under a deposit agreement or “assents” for a refunding issue without the necessity of said independent contractor's filing the declaration required under this act.

Without Securities and Exchange Commission's approval, after burdensome showings the public agency could not modify in any particular the "terms, priorities, rights, or privileges of any security without Securities and Exchange Commission's supervision, if in

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doing so the agency employed the services of an independent contracting agent.

I think this committee will conclude that the elements which might render underwriters of real estate or corporate bonds undesirable for membership on debt adjustment committees are not present ordinarily in the case of underwriters of municipal securities. the case of real-estate securities the underwriter frequently retains common stock, equities, or securities junior to those he sells; and as such owner of equities and junior liens his interests might conflict readily with those of the bondholders. On the other hand, underwriters of municipal bonds, ordinarily, are established bond investment houses which buy the bonds from the municipality and sell them at reasonable profit to private or institutional investors. The financial advantage to the underwriter is the difference between cost price and sale price. Frequently and perhaps usually the gross profit out of which must be paid overhead and sales expenses is around 3 percent.

Perhaps instances can be found wherein underwriters of municipal securities have sustained improper relations with officials, but after 18 years of close contact with the issuance of municipal bonds in the southwestern part of the United States I believe the number of such instances has been negligible.

At any rate in its report the S. E. C.-part IV, dated April 30, 1937-concludes that municipal bonds cannot be contacted and assembled for refinancing without the assistance of the underwriters. Notice the words "the assistance." The inference is drawn by the Commission that underwriters will withhold the names and addresses of bondholders because of some fear that if the municipality should contact the holders, otherwise than through the underwriters, the holders might acquire information which would establish grounds of civil liability of the underwriters to the holders. In other words, the underwriters might expose themselves to fraud or deceit action to be brought by their former customers. This might be the case in some instances. The Securities and Exchange Commission report devotes several pages to a single case in Florida, wherein there was an alleged collusive issuance and sale of bonds. The city and not an investor contemplated bringing action against the underwriters. Presumably State laws were sufficient. The vice would not be met by this bill.

But the real reason underwriters of municipal bonds withhold the lists of their customers is free from culpability. Its customer list is its most valuable asset. To disclose the names of the holders of a bond issue would publish to competitors information they would give much to have. Furthermore, the distributing bond house owes a duty to its customers not to make public their private business transactions, including the purchase of bonds.

Conceding constitutionality for the moment, I feel that Congress will not place burdensome restrictions on the fiscal operations of public agencies unless the relief is fervently sought and the need imperative. We have been unable to trace to investors a popular demand for the legislation. There are before the committee specific pleas by several public agencies that the passage of the bill in its present form will imperil or destroy them. Doubtless the illustrations could be multiplied throughout the country:

The position has been taken before this committee that this bill seeks to regulate committees and independent contractors and not municipalities. I trust the committee will conclude that if by such attempted regulation the interests of the municipalities are imperiled or their functions embarrassed, the part of the bill affecting municipal securities will be eliminated.

I feel that the people of the United States appreciate the good work which the Securities and Exchange Commission is doing. Its burdens will be sufficiently heavy without assuming supervision of the fiscal affais of municipalities and political subdivisions. To confer this authority on the Commission would subvert a long-recognized principle of Government.

As the authorized spokesman for several responsible municipalities and political subdivisions, I urge the committee to eliminate from the bill the provisions which would regulate the securities issued by municipalities and political subdivisions.

Mr. EICHER. Do you think the Municipal Bankruptcy Act would be overruled when the court gets another chance at it?

Mr. McCALL. I am hopeful that the Supreme Court will sustain the constitutionality of the pending bill, which was rewritten so as to eliminate some of the objectionable features which might have influenced the constitutionality, yes. I think we ought to have a Municipal Bankruptcy Act.

The CHAIRMAN. Thank you, Mr. McCall.
Mr. McCall. Thank you.
The CHAIRMAN. Commissioner Douglas.

STATEMENT OF COMMISSIONER WILLIAM 0. DOUGLAS,

SECURITIES EXCHANGE COMMISSION–Resumed

Commissioner Douglas. May I say at this juncture, Mr. Chairman, that there has been a complete misconception of this bill by Mr. McCall; also, his description of the application of the bill to the municipal situation is so completely distorted that I think, as I come to the relevant parts of the bill, I may want to give a little more time to that phase than I had originally planned to do.

At the close of yesterday's testimony I believe I had arrived at the bottom of page 25, dealing with section 6 (a) of the bill. I believe I had described how the bill provides a legislative mandate to the Commission to determine whether or not committees acting in reorganization—that is, proceedings before a court—whether or not such committees had conflicts of interests. And I had just completed, I believe, the further point under section 6 (a) that the bill regulates not only conflicts of interest but also the form and content of proxies and deposit agreements; and I had gone through at some length, I believe, section 10 (a), which prescribes the type of provisions which the Commission would have to find present in the proxies and deposit agreements before it could permit the committee to solicit proxies and deposits.

What section 6 (a) does is this: First, it sets up controls over committees as respects conflicts of interests; and second, it provides control over committees as respects their powers contained in proxies and deposits agreements. Approval of plan before solicitation.

Now subsection (5), at the bottom of page 25, does one further thing not related to conflicts of interest and not related to powers in proxies and deposit agreements. Subsection (5) of section 6 (a) provides that the declaration shall not become effective if it relates to the solicitation of authorizations to approve a reorganization planpending before a court having jurisdiction or authorized to approve plans—until and unless that court has first passed on that plan and approved it as fair and equitable. It has been the reorganization practice in the past, in many States at least, to get an approval of a plan from security holders, before the court had passed on the plan and even before the court had seen the plan. The result has been, as evidenced in the various volumes of our report on this subject, that security holders were asked to vote when they did not have at that time the benefit of the scrutiny or supervision of the court on that particular plan. After the votes were collected, the plan would then be submitted to the court with the votes attached and then the court would approve or disapprove it. This bill follows the suggestion, described in detail in part I of our report, that for the purpose of protecting the investor the court first should look at the plan and determine whether or not it is suitable for submission to security holders; and then on the basis of a plan that the court has first decided to be fair to security holders, they could then proceed to cast their ballots. That is a provision which is consistent with the Chandler bill, which one of the members of the committee was discussing here yesterday.

We discussed the reason for that kind of provision at page 900 of part I of our report to Congress, where we say:

Acceptances of a plan (conditional or unconditional, preliminary or final) should not be solicited until the plan has been carefully scrutinized by the court and its submission to the creditors and stockholders authorized. This is essential for the following reasons. In judicial reorganizations, scrutiny of plans of reorganization is the responsibility of the court. But adequate performance of this duty by the court has been inhibited by the practices of reorganizers. There must be removed the indefensible pressure upon the court which reorganizers are able to exert by confronting it with assents to a plan obtained from security holders prior to any review of the fairness and equity of the plan but who have been induced to give conditional approval to a plan in advance of its formulation, or to endorse the general activities of a committee or group by sending them blanket or broad proxies, or by depositing their securities with them. Under the system which has prevailed that practice has tended to shift the attention and emphasis of the court from the merits of particular plans of reorganization to the ostensible backing which various proponents have. Renewed emphasis on the fairness, equity, and soundness of plans necessitates removal of the undue and unwarranted pressure which those first in the field may exert by reason of their ostensible representation of substantial groups of security holders. Such representation by and large is not real. It should no longer be used to detract attention from the fundamental and basic problem of the fairness, equity, and soundness of the plan. Existence of specific plan.

Then subdivision (6) of section 6 (a), on page 26, requires a finding by the Commission, before the declaration becomes effective, that where there is a solicitation of proxies and deposits which constitute authorization to accept, approve, or assent to a reorganization plan, there is a specific plan. We will know, if this bill is enacted into law, that in the future a committee is not getting a blanket power-ofattorney and is not obtaining from investors authority to accept any old plan that the committee may cook up. Court approval of plans.

Under section 6 (a) (5) the plan has to be submitted first to the court, if there is a court which has jurisdiction to pass on the plan; and the court then must hold that it is a plan which should be sub

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