interest. Thus section 17 (b) requires the Commission to grant an exemption where the evidence adduced demonstrates that the proposed transaction accords with the statutory standards. We believe that the congressional purpose has been achieved in the actual operation of the section and that no amendment or revision of the section is necessary.

Chairman HELLER. Have there been any complaints of any kind from investors or anybody else with regard to these exemptions? Commissioner ROWEN. There have been a few complaints. Chairman HELLER. How are those complaints handled?

Commissioner ROWEN. Those complaints are received by the staff and considered by the staff. Depending upon the nature of the complaint, if it appears to be a complaint that is baseless and groundless, it is not brought to the attention of the Commission.

Mr. Heller, who has experience so far as administration under the act is concerned, perhaps might better answer that as his experience is far greater and longer than mine.

Mr. HARRY HELLER. The general practice is that an application is filed by the company, which is a public record. Anybody can look at it. The application is sworn to by a responsible officer of the applicant. By a rule that application can be placed in evidence as though it constituted sworn testimony. Every statement in the application is as though it were under oath. When it comes to us we analyze it. It is given a careful examination by the staff. We have a conference with our engineers, lawyers, and analysts and go through it, particularly if the question is one of evaluation.

If claimed values are based on an appraisal, we test that and see whether it is reasonable or accurate. If a stockholder protests during the period that we are examining, we take his protest under advisement and look at it and see whether it makes sense and whether we need more information. We get the information from the company. When we get it, we get it as an additional sworn statement again under oath.

If we are satisfied we are in a position to do so, we make a recom-` mendation on the application to the Commission, telling them the facts and the basis in the record for our view on it.

Then the Commission notices it for opportunity to request a hearing. We inform the complaining investors that they can request a hearing, appear, and adduce testimony or examine witnesses; or that they can submit any relevant information or views to the Commission for its consideration. If the notice period passes and no one has asked for a hearing, the Commission itself can order a hearing or grant the application on the record. That is a brief summary of the procedure.

Sometimes we get complaints after the application has been disposed of. If the complaint appears to have merit or information in it, or evidence we had not known or considered, we might give consideration to reopening the matter for reconsideration. In actual practice the bulk of the complaints we get are aimless squawks that the stockholders have not been treated well, without any evidence at all as against the sworn testimony of the company's officials and our analysis of the matter.

We think we are somewhat more expert than the ordinary investor. We generally write the man a long letter in which we give him very carefully our reasons for arriving at the conclusions we did and the

facts we based our conclusions on. Generally that ends the whole thing. Those complaints are very rare.

Chairman HELLER. Hence the hearings must be rare.

Mr. HARRY HELLER. An open hearing is infrequent. We have them when we determine we would like to contest it or where we believe a hearing necessary to develop fully the necessary facts or where other interested persons request a hearing.

Commissioner ROWEN. There was one relevant observation that ought to be made to complete the last answer, and that is that section 43 (a) and this deals with court reviews of orders, provides that any person or party aggrieved by an order issued by the Commission, and that would include an order under section 17, under this title may attain a review of such order in the Circuit Court of Appeals of the United States, et cetera.

Chairman HELLER. Commissioner, open-end companies are exempt from the insider trading provisions of section 16. Would you recommend that this exemption be eliminated by corrective legislation?

Commissioner ROWEN. I think again as it involves a possible change in the statute I would like to consult with my fellow Commissioners before I answer that question.

Chairman HELLER. When you do so, we will consider your answer at this point in the record.

(The information referred to is as follows:)

I have consulted my fellow Commissioners with respect to possible amendment of section 30 (f) of the act so as to subject to the provisions of section 16 of the Securities Exchange Act of 1934 officers, directors and 10 percent stockholders of open-end investment companies, as well as closed-end investment companies which are now subject to those provisions.

The Commission's experience in administration of the act has shown that transactions in the issuer's securities by insiders of open-end investment companies have been insignificant and have not involved short term in and out trading. The Commission believes that it could adequately deal with any problems which may in the future arise in this area by virtue of other provisions of the act. It is the Commission's view, therefore, that it is unnecessary to recommend an amendment to this section at this time.

Chairman HELLER. May the Commission grant exemptions from the limitations and qualifications prescribed in section 12 (e)? Commissioner ROWEN. Yes, sir.

Chairman HELLER. Has it granted such exemption?

Commissioner RowEN. I believe it has in one instance in connection with the application of American Research & Development Corp. Chairman HELLER. In that company did the capital come from investment companies?

Commissioner ROWEN. Part of it came from investment companies; part of it came from institutional investors insurance companies, and part more recently from the public, as well as from individuals. originally.

Chairman HELLER. What has been the experience of the Commission with this kind of exemption?

Commissioner ROWEN. There has only been, to my knowledge, one such exemption. For myself, I would say that is the one exception, the one glaring exception to the failure on the part of the industry to do something that the Congress relied on at the time this act was promulgated back in 1940.

Back in 1940 the legislative history deals with the intention of investment companies to invest in venture capital situations. This is

the only instance that I am aware of where investment companies have invested in venture capital situations.

Chairman HELLER. Would you favor relaxing the standards which now limit investments by investment companies in other investment companies or affiliates?

Commissioner ROWEN. To answer your question, I would say "No," that I prefer the exemptive route as being perhaps the most desirable route to permit the Commission in given situations to examine in and then in the light of the standards of the statute to grant an exemption

or not.

Chairman HELLER. Commissioner, you referred a moment ago to "one glaring exception." Could you please describe that more specifically and tell us what you had in mind?

Commissioner ROWEN. I had in mind the thought that Congress had in mind the idea that investment companies would invest in venture capital situations when this law was enacted. To date there has only been one instance I am aware of where investment companies have invested in venture capital companies.

I think the use of the term "glaring instance" was perhaps an improper selection of words.

Chairman HELLER. Commissioner, would you recommend to the Congress the enactment of the statute which would require or compel investment companies to invest in venture capital?

Commissioner RowEN. No. I think the investors themselves ought, in every instance, to have the opportunity of buying into the kind of an enterprise they want to buy into.

Section 12 (e) contemplates the permission for investment companies to make such an investment. I think it would be a mistake to require companies to make such investment.

Chairman HELLER. In other words, while the statute might contemplate it, and it is hoped that the companies do so, you would not suggest that the statute should compel them to do so. Is that the correct way to put it?

Commissioner RowEN. Yes.

Chairman HELLER. Suppose we adjourn until tomorrow at 2 o'clock.

(Whereupon, at 4:30 p. m., Tuesday, February 12, 1952, the hearing was recessed util 2 p. m., Wednesday, February 13, 1952.)

STUDY OF THE SECURITIES AND EXCHANGE COMMISSION

WEDNESDAY, FEBRUARY 13, 1952

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D. C.

The subcommittee met at 2 p. m., pursuant to recess, in room 1334, New House Office Building, Hon. Louis B. Heller (chairman of the subcommittee) presiding.

Mr. HELLER. The committee will please be in order.

TESTIMONY OF BALDWIN B. BANE, DIRECTOR, DIVISION OF CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION

Mr. HELLER. Mr. Bane, would you be good enough to rise?

You solemnly swear that the testimony which you will give to this committee will be the truth, the whole truth, and nothing but the truth, so help you God?

Mr. BANE. I do.

Mr. HELLER. Will you be seated and give the reporter your full name?

Mr. BANE. Baldwin B. Bane, 1630 Rhode Island Avenue NW., Washington, D. C.

Mr. HELLER. Mr. Bane, you are the Director of the Division of Corporation Finance of the Securities and Exchange Commission? Mr. BANE. Yes, sir.

Mr. HELLER. I have your statement, dated January 15, 1952. For the purpose of this examination, Mr. Bane, do you adopt this statement as your direct testimony?

Mr. BANE. Yes, sir.

Mr. HELLER. This statement will be made a part of the record at this point.

(The statement referred to is as follows:)

THE DIVISION OF CORPORATION FINANCE

The Division of Corporation Finance is the largest of the operating divisions of the Commission. Its major functions and responsibilities are:

1. The examination of, and action on, all registration statements, prospectuses, oil and gas offering sheets, and related material filed with the Commission under the Securities Act of 1933 including the review of conditional exemption filings (letters of notification) filed in the several regional offices pursuant to regulations promulgated under section 3 (b) of the act.

2. The examination of, and action on, applications under the Securities Exchange Act of 1934 for registration of securities on national securities exchanges, annual and periodic reports filed for the purpose of keeping current the information

contained in original applications and in certain registration statements filed under the Securities Act.

3. The examination of, and action on, applications for qualification of indentures, and reports of obligors and indenture trustees filed under the Trust Indenture Act of 1939 and the examination of indentures not qualified under, but required to conform generally to the provisions of that act in connection with administration of the Public Utility Holding Company Act of 1935.

4. The examination of, and action on, registration statements; annual, periodic, and supplemental reports and sales literature filed under the Investment Company Act of 1940.

5. The examination of, and action on, reports of security ownership and transaction filed by officers, directors, and principal stockholders filed under the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Public Utility Holding Company Act of 1935.

6. The examination of, and action on, proxy soliciting material filed pursuant to rules and regulations promulgated under the Securities Exchange Act, the Investment Company Act and, except for those pertaining to plans of reorganization, under the Public Utility Holding Company Act of 1935.

7. The examination of, and action on, applications for the confidential treatment of contracts or portions thereof filed under the Securities Act and of information contained in documents filed under the Securities Exchange Act and the Investment Company Act. The Division also performs certain censorship duties, in the interest of national security and after consultation with the Government agency concerned, with respect to material filed under the foregoing.

8. The drafting of forms, rules, regulations, and procedures necessary in the administration of the above acts for adoption by the Commission.

9. The preparation of advisory reports in respect of the fairness of plans of reorganization involving registered investment companies at the request of the managements or security holders of such compar ies or, if the plan is in issue in any court proceedings, upon submission by the court. The Division is also charged with certain duties in connection with bankruptcy proceedings of. face amount certificate companies.

10. Under sectior 361 (c) of the Internal Revenue Code (added by the Revenue Act of 1951), the analysis and investigation of the activities, for at least the previous 10 years, of certain investment companies seeking certification by the Commission to the Secretary of the Treasury that such companies are, very generally stated, "venture capital" companies.

11. The conduct, under the Securities Act, of formal examination proceedings and of hearings before hearing officers and the Commission of refusal order and stop order proceedings; under the Securities Exchange Act, of hearings in suspension proceedings and upon requests for confidential treatment; under the Trust Indenture Act, of hearings in formal examination proceedings and in refusal order and stop order cases and, upon application of others, in connection with applications for exemptions or declaratory orders; under the Investment Company Act, of hearings in stop order proceedings, proceedings for the suspension, termination or revocation of registration and, upon application by interested parties, in proceedings for exemption or declaratory orders under approximately 40 different subsections of the statute. In contested cases the Division is responsible for the conduct of the proceeding and the briefing and argument of the issues before the hearing officer and the Commission. In uncontested cases the Division prepares draft findings, opinions, decisions and orders for adoption by the Commission. In addition, the Division conducts field investigations of a formal and informal character under all of the foregoing acts by engineers, lawyers, accountants and analysts in connection with documents filed with it and administrative proceedings initiated by the Commission or others, and as a consequence of complaints filed with the Commission.

12. Rendition of interpretative and other advice to registrants, applicants, their attorneys, accountants and other representatives and to the public generally regarding the application of the statutes and of the rules, regulations, forms and procedures promulgated or adopted thereunder. The Division reviews and coordinates the work of the Commission's regional offices with respect to the rendition of interpretative and other advice.

13. Assistance to the Office of the Chief Accountant in the preparation and conduct of disciplinary proceedings under rule II (e) of the Commission's Rules of Practice.

14. Assistance to the Office of the General Counsel in civil, criminal and appellate litigation, litigation in which the Commission appears amicus curiae, and in general problems under the acts and regarding proposed legislation.