Now, moving on to a few general conclusions, there has been a rebuilding of public confidence in the market since the crash of 1929, through self-regulation by industry, the enactment of the Federal securities laws and administration by the Commission. We believe that an investigation of the character contemplated is necessary and appropriate in the light of changing conditions in the securities markets.

With respect to the joint resolution itself, there are a few proposals for modification of a relatively minor nature, which I do wish to bring to your attention.

The first is that the Commission should be expected and permitted to report to you from time to time. Naturally, there will be a finalreport on or before January 3, 1963, as your resolution indicates, but I would hope that the Commission would be free to report to Congress without waiting until the completion of the study, if we find a particular matter which needs remedy either through legislation or, indeed, if we find that we have the power, through tightening our rules and regulations and perhaps having proposals to that effect.

I also would suggest that the House joint resolution should provide that personnel required for the study may be employed without regard to existing civil service regulations and requirements. I have detailed in the statement the precise forms of exceptions in that area which we would like.

I believe that concludes my opening statement, Mr. Chairman. I am here to attempt to answer your questions.

Mr. MACK. Thank you very much, Mr. Chairman. We are glad to have your statement and to know that you are supporting the proposed resolution.

Mr. CARY. Indeed we are. We heartily support it.

Mr. MACK. I would like to inquire whether or not you feel that the $750,000 included in the resolution would be adequate to conduct a thorough study into the exchanges and over-the-counter markets.

Mr. CARY. Mr. Chairman, we may have some of the tendencies of all governmental agencies that we don't think any amount is sufficient. But on the other hand, starting with the proposal as we look at it, we believe that it would provide us with a very substantial base. If we find that our studies have proceeded and proved to be worthwhile we might come back to you for more. But at the present time, we would accept that figure as a start and expect to try to live within it, and try to produce a good study.

Mr. MACK. You do think at this time it would be sufficient.
Mr. CARY. I do, yes.

Mr. MACK. I noticed that you included in your appendix several additional studies which the Commission has conducted. I appreciate having that appendix included along with your statement. The first study called for a study by the Commission, which the Commission made on feasibilities and advisability of completely segregating the functions of a dealer from those of a broker.

Mr. CARY. Yes.

Mr. MACK. That study I see was concluded on June 20, 1936. Do you think this matter would appropriately be included in a study as set out in this resolution?

Mr. CARY. On that question, Mr. Chairman, since I have been so briefly with the Commission, I think I would like to get the views of our Director of Trading and Exchanges, Mr. Loomis.

Mr. MACK. Would you identify yourself for the record?

Mr. CARY. It is Phillip Loomis, Director of the Trading Exchange of the Commission.

Mr. LOOMIS. I am not sure that it would be necessary to go into it as exhaustively as was done at that time, or feasible within the general limitations of this overall study, but I would presume that we would take another look at that subject also, if this study was commenced.

Mr. MACK. You feel that the resolution is broad enough to permit the Commission to study this area?

Mr. LOOMIS. I do, sir, because this could be done by exchange rules if so desired or by legislation.

Mr. MACK. Thank you very much.

The Chair would like to recognize the other members of the subcommittee at this time. Mr. Dingell, do you have any questions? Mr. DINGELL. Thank you, Mr. Chairman.

Mr. Chairman, I commend you on a very fine statement. I have in mind some questions about the resolution. House Joint Resolution 438. I would like to refer you to page 1, at the bottom, the subsection, and the top of page 2, wherein there is language setting forth the scope of authority of the Commission to investigate the securities market operations within that organization. I was wondering if you can tell us whether this will include authority to the Commission to make a study of mutual funds, management practices in handling of mutual funds, issuances of new mutual fund stocks and shares?

Mr. CARY. I am glad you asked that question, Congressman Dingell. If you read this resolution narrowly, there might be a question of whether or not it is aimed at mutual funds, because it deals with the study and investigation of the rules of national exchanges and of national securities associations. However, I would believe that since, for example, the NASD, which is the association relating to over-thecounter securities, has jurisdiction over distribution practices with respect to mutual funds, at least then a part of the mutual fund problem would fall within this resolution.

Now, may I add this further, that even if this resolution had not been proposed, it has been our thought that a study is necessary generally of the problems relating to mutual funds. As a consequence, we already have at least one or two people on our staff thinking about the problems in that area, which we may pursue pursuant to our general powers under the Investment Company Act.

I may say further this ties in with the budget. It may well be that, if we found the problems in this area of very great substance, such a finding might be a basis for coming back to this committee and asking for additional funds.

So in general, may I say that I would believe at least a part of the problems relating to investment companies falls within this resolution. Indeed, I would like to get some legislative interpretation by you with respect to that. Secondly, that quite independently of it, we are thinking about the investment company problem at the present time.

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Mr. DINGELL. I would like to refer you, if I might, to a stop order issued by the Commission previous to your appointment to that body, on July 30, 1959. It was in the matter of Managed Funds, Inc., file No. 2-11061. It involved a stop order under section 8(d). In this matter, the registrant entered into a series of agreements, largely with itself, operating as different agencies and under slightly different names. A number of practices were involved, including declaring quarterly capital gains, the sale of securities to meet the amount of capital gains fixed by the capital gains distribution in a manner detrimental to stockholder interest; a most cursory, if not outright careless, scrutiny, and supervision of the affairs of the company by the board of directors; a series of practices which were severely castigated by the Securities and Exchange, which resulted in the issuance of the stop order under section 8(d). The practices were characterized generally as poor management and as excessive profiting by the Slaytons by the Securities and Exchange Commission.

Do you envision the practices involved by the previous sentences as being within the purview of House Joint Resolution 438?

Mr. CARY. It is clearly within the preview of the Commission and certainly a part of the study that we are planning to make generally on mutual funds. As to whether or not it falls within this House joint resolution, I do not have a clear impression. I think it would take a fairly broad reading of those phases. Mr. Cohen advises me that in his opinion, a limited aspect of the problem, at least, would fall within the purview of the House joint resolution. I would, if I might, in fact, like to call on Mr. Cohen, the Director of the Division of Corporation Finance, who has more familiarity with that case than I have. It was decided before my arrival.

Mr. DINGELL. I think his views would be helpful.

Mr. COHEN. As the Chairman has indicated, there are certain aspects of that case which related to the activities of a firm which was a member of the New York Stock Exchange, and persons associated with that firm, and the firm's activities in relation to discretionary accounts and related matters, which fairly fall within exchange rules, regulations, and controls. To that extent, I believe that the resolution would encompass a survey of practices of that character. However, with respect to the major problems which you have described, that relates to an area of general problems arising more nearly under the Investment Company Act, and not, I believe, fairly within the scope of this resolution.

Mr. DINGELL. In other words, are you telling us that as you read this resolution, it would give you no authority to go into the Investment Company Act?

Mr. COHEN. We have that authority under the Investment Company Act, sir.

Mr. DINGELL. I am concerned, because as I read the financial pages, there are billions of dollars in mutual funds which, by and large, are over-the-counter securities. Am I correct?

Mr. CARY. That is correct, sir.

Mr. DINGELL. Is there any further protection offered to the investor on these over-the-counter sales of the mutual funds? Mr. CARY. I will ask Mr. Cohen to speak to that.

Mr. COHEN. If I may supplement the answer: I dealt with one aspect of the problem involved in the Managed Funds case, and that was the participation in the activities described in the Commission's opinion by a member of the New York Stock Exchange and persons associated with it.

However, under the Investment Company Act, the NASD has a large responsibility and a duty with respect generally to the sale, distribution, and redemption of the shares of investment funds. Those activities of the NASD, and its rules and regulations, are fairly within the ambit of this resolution. I think using that as a basis, many, if not all, of the abuses which, in a sense, came from these relationships with members of the NASD and the New York Stock Exchange, could fall within the ambit of the resolution. I meant only to indicate earlier that the general problems of poor management and investment policies as you have described them would not fairly fall within the resolution. But all of the activities in that case can be traced in one way or another to persons subject to the jurisdiction of the exchange or the NASD, and I think through that procedure many of these events in that case would become subject to Commission scrutiny and study.

Mr. DINGELL. It is a rather tenuous way of approaching an investigation, to make such a roundabout scrutiny. Wouldn't it be better to just include a straight-out, simple declaration, authorizing the investigation of over-the-counter markets, too, through this resolution? Mr. CARY. It would not be amiss, Congressman Dingell, if you choose, to amend this resolution to include, more explicitly, problems involving mutual funds. I do think that we will take that responsibility, and, indeed, feel that responsibility, whether or not that amendment is made.

Mr. DINGELL. I was wondering-this case brought to mind a number of questions. Do you have any authority within the Commission at this time to scrutinize the amount of fees and commissions paid to investment advisers of these managed funds and mutual funds?

Mr. CARY. Mr. Chairman, this is a problem that is quite clearly before us at the present time, and because it is a fairly complicated problem I have gone so far as to prepare a brief statement on this general question. As you indicate, there are a very large number of suits relating to fees with respect to investment companies.

I think I would like to read that statement for the record.
Mr. DINGELL. We would be happy for you to proceed.

Mr. CARY. The Commission has carefully followed the recent developments in certain private investment company litigation which is now pending in various Federal and State courts involving, among other things, allegations that certain investment companies have been paying excessive fees to their investment advisers, that the arrangements between these companies and their advisers, brokers, and underwriters are unfair to the funds, that independent investment company directors are not adequately discharging their responsibilities in consistently approving these arrangements, and have abdicated their responsibilities in favor of affiliated directors in the interest of advisers, brokers, and underwriters, and that the named investment companies are generally operated in the interest of persons other than the funds' direct shareholders. In effect, I am quoting the general context or general statements in these complaints that have been filed.

Mr. DINGELL. This is not a statement of opinion on the part of the Commission, but this is a summary of the allegations.

Mr. CARY. Precisely. This is a summary of allegations and not a statement of the Commission with respect to them.

The Commission's concern with the problems raised by these cases has been demonstrated by its participation as amicus curiae in several actions in which it sought to establish the existence of private rights of action on the part of investment company shareholders for violations of the Investment Company Act. It is expected that this legal issue will be clarified in the near future. Obviously, the Commission's concern in this area does not stop with the jurisdictional border, but also encompasses the substantive charges of violation of the act which are alleged. The staff of the Commission is studying the facts in these and other cases to determine whether action by the Commission would be appropriate. Where facts come to the Commission's attention which indicate a need for prompt action, the Commission has taken action and will continue to do so. Recent instances illustrating this policy of the Commission's action in the Managed Funds case to which you referred, and with respect to the Townsend Corp. of America, in respect of which a decision was recently handed down in the U.S. Court

Mr. DINGELL. Mr. Chairman, at that point, would you say that the general level of these allegations and the general tenor of these allegations, at least in regard to the Managed Funds case, were true?

Mr. CARY. Clearly, I think my limited knowledge is such that I would rather prefer to ask Mr. Walter North to speak on that, who actually participated in that case before the Federal courts.

Mr. NORTH. In the Managed Funds case, we not only did as Congressman Dingell says, put a stop order on the sale of Managed Funds shares but we instituted action against the Managed Funds officers alleging violations of the Investment Company Act of 1940, including gross abuse of trust and gross misconduct on the part of the officers and directors of the company. I personally attended the taking of the final decree against them in the courts out in St. Louis. Mo. So we not only felt that they came within the prohibitions of the act, but we actually obtained a court decree to that effect.

Mr. DINGELL. You proved it.

Mr. NORTH. Right.

Mr. DINGELL. Returning, Mr. Chairman, to the fact of the amount of fees paid, do you or the Commission have any authority to superintend the amount of fees paid to the investment adviser under the law?

Mr. CARY. In general, my answer would be "No." If there is any amplification, I would like to check with Mr. Cohen if he has anything further.

Mr. COHEN. There is no provision in the act vesting in the Commission power to deal with the matter of fees charged by investment advisers of investment companies. The statute provides a procedure for the submission of contracts of that character to investors and for their approval or disapproval, and for renewal under certain circumstances.

Mr. DINGELL. If we can refer to that, that is section 15; is that correct?

Mr. COHEN. Section 15 (a), (b), and (c).