Investment Company Act, or must have been issued pursuant to certain sections of the Public Utility Holding Company Act or the Federal Power Act. If securities met those tests the Boren proposal would exempt them outright from registration, from the requirement of using a prospectus, from the Commission's stop-order powers to prevent misleading registration statements and prospectuses, from the civil-liability provisions of section 11 and from the provisions of proposed sections 12 (a) and 12 (b).

Insofar as the Holding Company Act is concerned, the Commission's objections to the securities industry's proposal, which I discussed at pages 781 to 801, are equally applicable. In the first place it should not be forgotten for a moment that the heart of the Securities Act is the disclosure achieved through the registration statement and the prospectus. The whole registration procedure, the Commission's examination, its authority to enforce truthful presentation by instituting stop-order proceedings, the civil liabilities, all of this structure really has but one aim and that is to get accurate, adequate information into the hands of the prospective buyer so that he may intelligently make up his mind whether or not he wants to buy the particular security which is offered to him.

If the principle of disclosure which the Congress adopted in 1933 means anything, it means that the buyer shall have a prospectus prepared under suitable sanctions and safeguards. Under Mr. Boren's proposal no prospectus would be required. The seller could use any prospectus he desired and he would be less than human if the result were not a document which to a greater or lesser degree sacrificed facts to emotional selling appeal.

As I pointed out in discussing the industry's proposal to exempt utility securities, not only would the investor be denied the prophylactic now afforded by the registration procedure, but by the same token his right to recover after he had been "taken in" would be seriously curtailed. A person who purchases a registered security is not now limited to recovering from his immediate seller, who in most cases is a dealer, perhaps a very small dealer, with limited financial responsibilities. Under section 11 the buyer may recover against the issuer, the issuer's officers and directors or the underwriters for false statements in the registration statement. Moreover, he does not have the difficult burden of proof that he would have to sustain both at common law and under the civilliability provisions of section 12 (2) of the Securities Act. Section 11 gives the investor an adequate remedy at law; Mr. Boren's proposal would take it away.

The proposal to exempt debt securities issued pursuant to the Utility Act is extremely dangerous to investors but it is not as dangerous as the rest of the proposal. Under clause (a) debt securities would be exempted if the issuing company had already registered other securities under the Securities Act. Registration under the Securities Act does not vest the Commission with any of the regulatory powers granted under the 1935 act; the 1933 act is purely a disclosure statute. There may be registered under it the most speculative ventures, the most fanciful promotions. Yet an issuer, once having filed a registration statement, whether or not he sold any of the securities thereunder, would be in a position later to issue and sell without registration, income bonds or convertible debentures. These could be sold without fulfilling any requirements whatsoever with respect to giving information to the public. Certainly the mere fact that there is already some information on file in one registration statement affords no substitute for getting adequate information into an investor's hands as to the terms of a subsequent issue.

Much the same is true under clause (b) of Mr. Boren's proposal, which would exempt securities issued by a company which has a security listed and registered under the Securities Exchange Act of 1934. Again the Commission has no regulatory authority whatsoever. National securities exchanges admit to listing securities of widely varying merit. Yet once a security had been listed on any exchange the issuer could sell other bonds or notes without complying with the registration provisions of the Securities Act.

I have already discussed the problem with respect to debt securities sold pursuant to the provisions of the Holding Company Act. The exemption for those securities is contained in clause (c) of Mr. Boren's proposal.

Clause (d) would exempt securities issued by investment companies registered under the Investment Company Act of 1940. This clause is relatively of little importance since investment companies do not normally issue debt securities. I do believe it is significant, however, that it has not been 2 years since Congress

passed the 1940 act, which did not exempt the securities from the 1933 act. I know of no new developments since the passage of the act which would change the determination that Congress clearly reached at that time that registration under the 1940 act should not be substituted for registration under the 1933 act. There can be no doubt about this intention, since Congress provided for the inclusion of material filed in a 1940 act registration statement when an investment company subsequently registers under the 1933 act and vice versa (secs. S (c) and 24 (a).)

The final clause, clause (e), of Mr. Boren's proposal, would exempt from registration under the Securities Act any security issued or sold pursuant to section 204 of the Federal Power Act. The Federal Power Act is administered not by the Securities and Exchange Commission but by the Federal Power Commission. It has to do with the regulation of public utility operating companies as such, rather than the financial regulation of public utility holding companies. The act contains nothing approximating the prospectus requirements of the Securities Act and it contains not even the limited civil liability provisions found in the Holding Company Act. Therefore, the arguments advanced against exempting debt securities of utility companies applies with even greater force to the proposed exemption of securities pursuant to the Federal Power Act.

The mere fact that the proposal is limited in effect to debt securities and does not cover stocks does not in the Commission's opinion make it more acceptable. There is nothing magical about a bond. If anything, the fact that an investor is buying a bond may give him a false sense of security; particularly if the seller represents (as he probably would) that it is exempt from registration. Many bonds today are issued on an income basis so that interest need not be paid unless the issuer has earnings. The fact that bonds are frequently secured by specific assets and that they have a prior claim on assets is important to investors chiefly in the event of bankruptcy; at the time an investor puts his money into securities he is not interested in investing in a reorganization. It is undeniable that investments in many common stocks are in fact more secure both as to principal and income than investments in many bonds. Therefore, I repeat that to give the exemption to debt securities would, in effect, be holding out assurance to the investing public that safety exists where in fact there is only speculation.

Mr. Boren stated in introducing his proposal that his object was to meet the problem of eliminating the burdens of registration so that securities would be available for small individual investors and for savings banks and other smaller institutions. In other words, the proposal is a suggestion as to how to meet the "private placement" problem. It is to be noted that the language of the five clauses, (a) to (e), is identical with the language of the five clauses in the new section 7 (a) (2) which has been jointly recommended by the Commission and the representatives of the securities industry. That section appears in italics at pages 37 and 38 of the committee print. Section 7 (a) (2), you will recall, is a proposal to simplify the registration procedure in the case of securities as to which information has been filed with the Commission or with the Federal Power Commission. Under the proposed section 7 (a) (2) any registration statement filed in one of those five situations would consist merely of the general prospectus and of such additional information and documents as the Commission might require. The purpose of that proposal is to simplify registration and avoid duplication in all situations where it is possible to do so without injuring the investing public. The representatives of the securities industry with whom the Commission has worked on these proposals have told us that they regard it as one of the most constructive results of our work with them. The proposal would make registration in the five classes of cases which Congressman Boren would exempt a relatively simple matter without at the same time depriving investors of the protection which the registration process now affords them. We believe that it is adequate to remove any avoidable burdens placed upon registrants.

In conclusion, we wish to state that we appreciate Mr. Boren's invitation to comment upon his proposal. We have considered it thoughtfully and it is with regret that we must recommend that it be not adopted.

74947-42-pt. 5-7

M. UTILITY OF DISCLOSURE PROVISIONS IN RAILROAD FINANCING Representative Boren (at pp. 781-782 of the printed transcript) asked for information as to fraud or misrepresentation in the sale of railroad securities since the enactment of the Securities Act of 1933, and Representative Wadsworth (at pp. 794-795 of the printed transcript) asked that this information be furnished from the date of the Transportation Act of 1920. The report of the Senate Committee on Interstate Commerce pursuant to Senate Resolution 71, Seventy-fourth Congress (S. Rept. No. 25, Seventy-sixth Congress, first session (1939-1940) and Senate Report No. 26 Seventy-seventh Congress, first session (1941)) contains references to the following illustrations:

(1) "Delaware & Hudson System-Purchases of Lehigh Valley and Wabash Stocks." Senate, Report No. 25, part 17, particularly pages 15-17, 24-27.

(2) "Wabash Railway Company Income in 1930." S. Rept. No. 25, part 23, particularly page 32.

(3) "Market Operations with Railroad Funds-Missouri Pacific Purchases of System Securities and Related Accounting Practices." S. Rept. No. 25, part 11, particularly pages 7, 24-25.

(4) "Chesapeake & Ohio Railway Company-$15,000.000 Preference Stock Issue of 1937." S. Rept. No. 25, Part 16.

N. REGISTRATION STATEMENTS CLASSIFIED BY SIZE

Representative McGranery (at p. 794 of the printed transcript) asked for a break-down of all registration statements filed under the Securities Act of 1933 by size of offering. I am submitting for inclusion in the record a table which supplies such a break-down for all registrants in 18 industrial categories. Registration statements filed classified by size of issue registered (18 industries)

This table is based upon an analysis of registration statements filed during the period between July 1, 1936, and June 30, 1940, by companies in 18 industrial categories. The greatest dollar amount of securities registered in any single registration statement was $327,018,860 of debentures and common stock of American Telephone & Telegraph Co. The registration statement for these securities became effective in July 1941.

O. TRANSCRIPTS OF STAFF INTERVIEWS ON RULE U-50-COMPETITIVE BIDDING Representative Wadsworth (at p. 801 of the printed transcript) asked that there be made available to the committee transcripts of the interviews which members of the staff of the Public Utility Division of the Commission held with various persons in July 1941, on rule U-50, the Commission's rule with respect to competitive bidding under the Public Utility Holding Company Act of 1935. For the use of the members of the committee I have handed to the clerk, with the consent of each of the persons interviewed, transcripts of the testimony presented by all of the persons interviewed, namely:

Lee M. Limbert, of Blyth & Co., Inc.

Charles E. Mitchell, of Blyth & Co., Inc.

George Woods, of the First Boston Corporation.

H. G. Freeman and Wright Duryea, of Glore Forgan & Co.

Walter E. Sachs, of Goldman, Sachs & Co.

Joseph W. Dixon, of Graham, Parsons & Co.

Robert McLean Stewart and Harry W. Beebe, of Harriman, Ripley & Co., Inc.

Clifford Hemphill, of Hemphill, Noyes & Co.

Amyas Ames and Charles Delafield, of Kidder, Peabody & Co.

Paul M. Rosenthal, of Ladenburg, Thalmann & Co.

W. C. Langley, of W. C. Langley & Co.

James J. Lee, of Lee, Higginson Corporation.

Wycliffe Shreve, of Lehman Bros.

Lawrence M. Marks, of Lawrence M. Marks & Co.

Thomas T. Coxon, of Mellon Securities Corporation.

Maurice M. Wheeler and David J. Lewis, of Paine, Webber & Co.

Stanley Russell, of Lazard Freres & Co.

Henry J. Rosenfeld, Jr., of Salamon Bros. & Hutzler.

Francis M. Blodgett, of Spencer Trask & Co.

Joseph Klingenstein, of Wertheim & Co.

P. YIELDS ON UTILITY SECURITIES

On Friday, November 28, at page 801, of the printed transcript, the chairman of the committee asked if tables or statistics could be supplied which would show the yields being made on utility securities. To meet that request, the following items have been handed to the clerk for the use of the committee:

A is a tabulation of financial data on security issues of electric and gas utilities for the period from January 1 to October 31, 1941. This table lists all public offerings of utility securities for the first 10 months of 1940 and, in the last column, it shows the yield to the public with respect to each issue. In the column showing "Price to Underwriters" the letters (d) and (e) indicate the issues which were sold privately to insurance companies and bankers, respectively. It will be observed, for example, that of the 49 first-mortgage issues, 26 were sold privately to institutions. In that connection it will be noted that the same column shows, by the letter (x), the issues which were sold by competitive bidding pursuant to rule U-50. Only one of the six issues there listed was bid in by institutional buyers and even in that case more than 180 bankers, divided in three syndicates, availed themselves of the opportunity to compete for the issue. This may be contrasted with the other issues which were sold privately in the great majority of which underwriters had no opportunity whatsoever to compete. B is a similar compilation of figures covering new issues of electric and gas utility securities for the period 1935-40. This item is included since it shows the yields at which securities have been sold in the years prior to the period covered by item A.

C is a tabulation showing the percent of return earned on the book values of the common stocks of 65 leading operating utility companies for the year 1940. The figures in column (3) were computed by dividing the balance of earnings available for common stock by the sum of the stated value of common stock and surplus. Column (4) shows the net return earned from utility operations as such measured by the ratio of net operating revenues to net utility plant. Thus the Ohio Public Service Co. earned a return on the book value of its common stock amounting to approximately 23 percent, and it earned an over-all return on the net book value of its utility plant amounting to 8.2 percent. The last item in the table shows the Alabama Power Co., which in 1940 earned only 1.22 percent on the book value of its common stock and only 4.5 percent on its net book utility plant.

D is a tabulation copied from the Wall Street Journal of Wednesday, November 12, 1941, showing certain market data for 25 utility preferred and common stocks, including per share earnings for the 12 months ended September 30, 1941, compared with the like 1940 period; the indicated or actual 1941 dividend payments, the closing market prices as of November 10, the times earning ratio and the dividend yield based on November 10 closing prices and the 1941 highs and lows. Some of the companies are utility holding companies and some of them are independent operating utility companies.

E is a report entitled "Dividend Status of Preferred Stocks of Registered Public Utility Holding Companies and their Subsidiaries as of December 31, 1938." The covering letter for this study, which is the first sheet inside the cover, gives a convenient summary of the significant figures in the report. The figures have not changed greatly in the period since the report was prepared. The summary table shows that, as of December 31, 1938, there were $3,591,000,000 of holding and operating company preferred stock held by the public. Of this total $1,581,000,000 had dividend arrearages amounting to $372,000,000. It will also be noted that slightly more than three-fourths of the arrearages had accumulated on the preferred stocks of the holding companies as compared with operating company issues. The summary table also shows the number of individual security holders owning issues not in arrears as compared with the number of people owning issues which were in arrears.

Q. FORMER COMMISSION EMPLOYEES WITH ASSOCIATED GAS & ELECTRIC CO. TRUSTEES

Representative Reece (at p. 890 of the printed transcript) asked for information as to the number of former Commission employees who left the Commisison to go with the trustees in bankruptcy of the Associated Gas & Electric Co. system. He asked specifically the identity of the various individuals involved, their compensation at the Commission, and their compensation in their present positions.

In order to assist the committee in its consideration of the pertinent information, I am submitting for inclusion in the record a schedule furnishing the details requested. As you will note from the schedule, there are 10 persons who resigned from the Commission to accept employment with the trustees. The schedule identifies them and specifies their salaries at the Commission, and their initial and present salaries with the trustees. It also indicates their respective positions at the Commission and with the trustees. As you know, there are two Associated holding companies undergoing reorganization under chapter X of the Bankruptcy Act-Associated Gas & Electric Co., the top holding company of the system, and its immediate subsidiary, Associated Gas & Electric Corporation. The latter company controls directly and indirectly the approximately billion dollars of stated assets of the far-flung, scattered utility and other properties in the system. I have assumed that the questions asked referred not only to those persons now employed by the trustees of the top holding company, that is, Associated Gas & Electric Co., but also by the Trustees of Associated Gas & Electric Corporation and subsidiary or affiliated companies. The schedule has been prepared accordingly.

I should add that there are 4 persons in addition to the 10 listed in the schedule who are now employed by the trustees or affiliated companies and who were employed in the past by this Commission. These persons were omitted from the schedule because they had been employed in other positions during varying intervals between their resignation from the Commission and their employment by the trustess. The persons in question are: Allen E. Throop, former General Counsel of the Commission, who resigned on October 28, 1938, to become associate professor of law at Yale University, and who was employed as general counsel to the trustees on March 18, 1940; O. John Rogge, former Assistant General Counsel of the Commission, who resigned on June 22, 1939, to become Assistant Attorney General of the United States, and who was employed as special counsel to the trustees on January 15, 1941; Henry F. Hartman, former senior attorney in the Public Utilities Division of the Commission, who resigned October 15, 1939, to resume a previous connection with the Prudential Insurance Co. of America, and who was employed by the trustees on June 18, 1941; and James R. Brackett, former Assistant Supervisor of Information Research at the Commission, who resigned on May 15, 1939, to become executive secretary to the Temporary National Economic Committee study, and who was employed by the trustees on July 8, 1940.