and that is put in a separate bank account and sent to the SEC, I believe before April 1 of each year.

A large number of our members are also registered with the SEC as brokers and dealers and as a result they have to pay a fee of $50 for the firm and $10 for everyone employed in the business in a sales capacity, so that those who are registered with the SEC and are also exchange members will pay double fees.

It is my belief that the SEC should have these hearings and listen to the members of the industry and then reconsider their whole program, and that if any assessment is made, it should be based on cost of performing any functions or services to the industry, and that it should be geared in some way to the extent and nature of any benefit that the industry allegedly receives.

Mr. MCGUIRE. Then you grant that our committee was on the ball by demanding that they hold public hearings?

Mr. McCORMICK. You did very well.

Mr. MCGUIRE. Do you have any idea how much increase in fees this would cost your membership?

Mr. MCCORMICK. I do not know what it might add up to, Mr. Congressman, but the SEC estimates that the return to them from this broker's fee would be approximately $455,000.

Mr. MCGUIRE. That is all.

Mr. HELLER. Mr. McCormick, from your experience you say that you are in favor of this hearing being held?

Mr. MCCORMICK. Yes, sir.

Mr. HELLER. Returning again to the discussion of the Frear bill, Mr. McCormick, you take the position that corporations which you have just described should be required to file periodical financial statements with the Commission. Is that correct?

Mr. MCCORMICK. That is correct; that is a part of the program.

Mr. HELLER. These corporations which are today trading in the over-the-counter market are not required to do so; is that correct? Mr. MCCORMICK. That is correct.

Mr. HELLER. Are the statements of these corporations that you refer to given to the public or put up for public inspection at the present time?

Mr. MCCORMICK. Some companies voluntarily provide their stockholders with very excellent reports. Some companies traded over-thecounter, on the other hand, do not. There are some that refuse to give investors even the minimum amount of information essential to decide whether or not they should retain their investment, dispose of it, or increase it.

Mr. HELLER. You believe that they should be compelled to do so; is that correct?

Mr. MCCORMICK. I believe that the purpose in passing the 1934 act was entirely correct and that was that people should have information before they trade in securities. And in this connection, I believe that there is no practical or logical distinction between publicly held companies traded on exchanges and those traded over-the-counter.

Mr. HELLER. I believe you have already stated that that would give full disclosure in connection with the solicitation of proxies and inside trading.

Mr. MCCORMICK. That is correct. At the present time my understanding is many companies do not even tell an investor the names

of the nominees for the board of directors, do not describe the nature of pension plans that are proposed to them, or bonus plans, exchange plans, options to officers, and things of that sort. I feel that the proxy requirements of the 1934 act should be extended to these publicly held companies. I believe that the investing public is entitled to such protection as prohibiting insiders from dealing in securities to their advantage and to the disadvantage of the public security holders, and I believe that feature should be extended also to these companies.

Mr. HELLER. In other words, Mr. McCormick, you would like to see the Magna Carta extended to the holders of stocks which are traded in the over-the-counter market?

Mr. MCCORMICK. That is correct.

Mr. HELLER. Is that your own personal opinion or does that represent the opinion of the board of governors of the exchange?

Mr. MCCORMICK. Well, I have not polled the members of the board of governors of the exchange, but I am sure that the benefits that would naturally accrue to the exchange as an institution are so great and so obvious that they would favor it.

Mr. HELLER. You have had a good deal of experience on both sides of the fence, and you have been very frank at all times with this committee; I am going to put this question to you, and if you care not to express your opinion please so state. From reading your statement and your testimony, I come to the conclusion that in the absence of these disclosure requirements management is holding its cards pretty close to its vest. Is that the situation?

Mr. McCORMICK. I am not sure I get the impact of your question, Mr. Chairman. I do not believe you can make such a general statement as to the attitude of management toward investors.

Mr. HELLER. Let's not make it a general characterization. I know it is difficult to do that; but do you find there are a substantial number of companies where management is really not giving the stockholders many of the rights to which they are entitled?

Mr. McCORMICK. I think undoubtedly there are many managements that do not at the present time give adequate information to their investors, information which I believe they are entitled to.

Mr. HELLER. Can you estimate how many corporations might be affected by this proposed legislation?

Mr. McCORMICK. It is my recollection that some 1,600 or 1,700 companies have more than $3,000,000 of assets and more than 300 security holders and, therefore, would be required to submit the required information.

Mr. HELLER. Mr. McCormick, you take the position that there is no better advertising than the financial story of a sound business, and, in essence, that is what you are trying to tell this committee.

Mr. McCORMICK. That is correct.

Mr. HELLER. You talked about proxy requirements, and I believe your statement was to the effect that they should be extended. Mr. MCCORMICK. That is correct.

Mr. HELLER. Of course, when you talked about extending the proxy requirements a few moments ago, you had in mind the extension of these requirements to corporations which would come under the Frear bill; is that correct?

Mr. McCORMICK. That is correct.

Mr. HELLER. Would you please express to this committee your views of the general system of proxy voting?

Mr. McCORMICK. I think it is one of the most important provisions of the Securities Exchange Act of 1934. I believe it has brought into our industrial section of our life an element of democracy that was woefully missing before 1934. For the first time the right to vote at a stockholders' meeting had some significance. Before a proxy is voted, the security holder is entitled to know what is coming up at the meeting and to be advised as to what effect the various matters that are to be taken up at that meeting will have. In addition, a very, very sound and important feature of the proxy rules is the provision which permits a security holder to contact his fellow security holders through the medium of the management's own proxy statement. There has been a great deal of criticism of that feature, and in the early days of the rules I think it was abused. I think a lot of crackpots did require the management to clutter up their statements with unnecessary and unimportant provisions, but I believe by this time things have sort of settled down to the point where that privilege had added greatly in bringing democracy into the conduct of corporate meetings.

Mr. HELLER. Do you believe that there is a need for better and more proxy information in regard to the holdings of directors, executives' salaries, and pensions in the case of listed and unlisted companies? Would you extend that democracy?

Mr. McCORMICK. I am inclined to think that the basic and important information relating to direct and indirect compensation for officers and directors is pretty well covered in the requirements at this time. It is my understanding that the Securities and Exchange Commission now feels they should extend the requirement to cover another kind of indirect remuneration or compensation, namely expense accounts. To the extent that expense accounts in fact represent additional compensation, obviously no one can quarrel with the provision or the proposal.

However, I see very serious practical difficulties in ascertaining just what an expense account is. I don't know how to divide up the company car, company airplane, or company dining room. I don't know whether my coming over in a cab today would be considered an expense account. Things of that sort, I think, raise some very serious practical problems. But to the extent that there is in fact additional remuneration which is significant in that direction, obviously no one can quarrel with the extension of the requirements.

Mr. HELLER. Many listed companies, as we understand, have refrained from or refused to solicit proxies; is that correct?

Mr. MCCORMICK. That is correct. Certainly, any management that perpetuates itself through the simple device of not calling a stockholders' meeting, not soliciting proxies, and not obtaining a quorum to have an election, I think should be reprimanded and should be required to hold such meetings. The management should be willing to come up periodically and have themselves voted in or voted out.

Mr. HELLER. If management does not choose to send out a proxy and solicit the rights and suffrage of the owners of the stock under the present law, the Commission is powerless to compel management to do so.

Mr. McCORMICK. That is correct. The proxy rules apply only in those instances where the company itself chooses to solicit proxies. Mr. HELLER. As a result, the corporate democracy theory is nothing more than just a term. Would you subscribe to that?

Mr. McCORMICK. No.

Mr. HELLER. That is the fact.

Mr. MCCORMICK. No, I would not say that because I believe that many companies do solicit. I agree with your statement insofar as it applies to those companies who choose those managements of companies that choose to perpetuate themselves by not soliciting the proxies and not obtaining quorums. To that extent I would agree with your statement.

Mr. HELLER. Would you subscribe to the proposition that the law should require that proxies of publicly owned corporations be automatically sent out once a year?

Mr. MCCORMICK. I think so, yes.

Mr. HELLER. Would you be in favor of requiring that all corporations applying for listing on the curb exchange must guarantee to furnish every shareholder with a proxy statement once a year prior to the date of its annual meeting?

Mr. McCORMICK. I would. However, I think in fairness to the exchange, the requirement should be extended at the same time to the over-the-counter securities.

Mr. HELLER. I think that is a very forward-looking and practical approach to the subject, and I want to compliment you, Mr. McCormick.

Mr. MCGUIRE. Do you believe corporate annual reports should be mailed prior to soliciting proxy material?

Mr. McCORMICK. Whether it should be delivered prior? Undoubtedly. As a matter of fact, present rules require that. I think intelligent use of the proxy is enhanced by having the annual reports submitted to the security holders in advance.

Mr. MCGUIRE. You stated that most securities sold today are sold orally and without the delivery of the prospectus in advance of sale. Can you tell us what percentage of dollar volume of securities are sold in this manner?

Mr. MCCORMICK. I do not believe any definite study has been made, but the impression I had in connection with my work at the Securities and Exchange Commission and since is that as much as 80 percent of securities dollarwise are now sold by use of the telephone without delivery of prospectuses in advance of sale.

Mr. MCGUIRE. Can you tell us how this percentage varies for different classes of stock?

Mr. MCCORMICK. I would say in all probability the percentage is much higher in connection with the larger companies where a person will be more likely to purchase his securities as a result of a telephone conversation. I doubt that you could call up and induce someone to buy a company he does not even recognize the name of. I imagine in those cases, in all probability, you will find the prospectus is used more frequently than in the other situation.

Mr. MCGUIRE. That is all, thank you.

Mr. HELLER. The question which my distinguished colleague, Mr. McGuire, has just asked, poses a very interesting problem. I believe

you said approximately 80 percent of the sales are made by oral communication?

Mr. MCCORMICK. That is my understanding; yes. I do not have any specific statistics but I think it is a reasonable estimate.

Mr. HELLER. I might say to you that seems to be approximately the estimate given to us by some of the Commissioners and witnesses who have testified. In our opinion, that is a very serious situation. Mr. McCORMICK. I think so.

Mr. HELLER. Do you believe, Mr. McCormick, that the act should be reworded?

Mr. MCCORMICK. Very definitely, yes.

Mr. HELLER. And the loopholes plugged.

Mr. MCCORMICK. That is one of the five basic changes required today under the Securities Act which should be made.

Mr. HELLER. How could that be accomplished, if you care to tell us, Mr. McCormick?

Mr. MCCORMICK. I think my program of requiring advance delivery of the prospectus before a man can be bound buttons that up. In other words, make all the telephone calls you want, offer securities orally, but before you can bind a man you have the requirement of delivering him a prospectus 48 hours before you can conclude the sale. So that then the prospectus performs and serves the function the Congress intended when it passed the act in 1933, not recognizing it would be possible to avoid or evade such delivery as a result of the language of the statute.

Mr. HELLER. I have just a few questions regarding prospectuses, which I think we have covered quite fully. In view of your experience as a member of the Securities and Exchange Commission this testimony might be quite relevant. In your experience as a Commissioner, Mr. McCormick, you have come across many prospectuses and have examined them?

Mr. MCCORMICK. Thousands of them.

Mr. HELLER. The sellers prepare these prospectuses themselves? Mr. McCORMICK. That is correct.

Mr. HELLER. In their preparation, we permit the sellers to exercise their ingenuity to minimize any data which might deter the sale of the securities?

Mr. McCORMICK. No; I don't think that is typical. No; I don't think that issuers and their attorneys studiously attempt to avoid giving the material facts. I think they do give the facts. The thing I referred to here is that I think they lack ingenuity or I might say are too lazy to sit down and do a real job of summarizing and pointing up properly. I think they take the easy way out by putting every possible pertinent fact in the prospectus, and that has a final result, I think, of tending to obscure the important facts. I do not think it is done with the intent of obscuring the facts.

Mr. HELLER. I am glad to have your opinion on that. I remember the statement that you made in your book to the effect that they set them up with an eye toward legal defenses.

Mr. McCORMICK. That is correct.

Mr. HELLER. When they do that, they might want to overlook a couple of items that they may not want the public to know. Wouldn't you say that?