Mr. HELLER. Yes: I do.

Commissioner MCENTIRE. But he went along that line. I do not understand exactly what he meant about reorganizing the form of it. I think changes to simplify or to make more clear the exact description of items would be helpful. I do not think that it is necessary or advisable to go further and abolish the requirement of a balance sheet and a profit-and-loss statement or an operating statement. To try and put those things in narrative form-which I have heard somebody suggested was what Mr. McCormick had in mind and I want to say, although Mr. McCormick and I are very friendly personally, I have never had occasion to discuss this speech in detail with him. But any narrative-form presentation of financial data would, I think, be less helpful than the present so-called tabular form, if I may use that expression.

Mr. HELLER. May I quote from another part of Mr. McCormick's speech made on October 3, 1950. [Reading:]

Just as we realize that the formal financial statements really aim at an integrated presentation to an expert, so should our aim be to provide the investor with a single, integrated, simple story or picture. It should cull from the balance sheet, the income statement, and the surplus analysis whatever pertinent facts are essential to an understanding of the financial position and operating results of the company. It should present them in layman's language and in an order which follows the rational order in which an investor would normally ask for information about the company.

I cannot believe that we lack the ingenuity to develop a means of furnishing to untrained investors the essential accounting information necessary to make a reasonable appraisal of the situation of any particular company. I do not think that we must remain wedded to the idea that the information must be presented in highly technical language and in the traditional form of a balance sheet and an income statement set up in the conventional manner. I suggest we start from scratch and develop a technique for presenting this highly important information to the layman-to the man who cannot be expected to bring a technical background to the reading of financial statements.

Would you care to comment on that, Commissioner McEntire? Commissioner MCENTIRE. Well, generally speaking, I am in accord with the thought and the background that appears to be behind that statement, as I view it. I think perhaps my difference with it would be that I do not believe it as necessary to do away with balance sheets and operating statements as such.

That does not mean that I think they are right in their present form. I think the items are frequently stated in too confusing a manner; that there is frequently too much detail given; that there ought to be fewer entries, and that many of them ought to be lumped together. And I certainly think that accountants tend to smother financial statements with footnotes until they lose all but brother accountants, and a few of those.

About the footnote matter I am in complete agreement with what Mr. McCormick said. I do not think, however, that it is necessary to do away with tabular presentations, nor do I think that the concept of a balance sheet or the concept of an operating statement is so difficult that the lay mind cannot grasp it, if it is spelled out in plain language so they know what the various entries mean.

Is that a response to your question?

Mr. HELLER. Yes. And that is your opinion?

Commissioner MCENTIRE. Yes, it is my opinion; and it is purely an opinion, of course, with such background as I have for making one.

23578-52-pt. 1--7

Mr. HELLER. In your opinion, is there any deficiency in the existing law which would make for a more effective prospectus?

Commissioner MCENTIRE. Mr. Chairman, I do not want to officially propose this, nor say that I have fully concluded that it is necessary to do so, but we have given consideration to a suggested amendment which would give the Commission power to order a deletion of matter which we think simply makes the prospectus too complicated to be understood. Such an amendment would permit us to bar a prospectus on the ground that it was too long or complex, so that we would not have to establish in such a case that the prospectus contained misleading information or that it was presented in such a manner that it could not help but be misleading.

Mr. HELLER. In other words, you feel if you went along the lines that you just described, you would be hitting the area of regulation; is that correct, sir?

Commissioner MCENTIRE. Of course, it would be a greater degree of regulation than is presently envisaged under the act; yes, sir. And I do not want to be misunderstood. I was a State "blue sky" commissioner; I was perfectly willing to administer that law; and I was proud to administer it. On the other hand, that related to the exercise of judgment about whether there was something fraudulent or fundamentally unsound that we would prohibit the issue from being offered to the people of one State. My brother "blue sky" commissioners might have felt differently, and of course frequently did, about the same situations. I think it is one thing, Mr. Chairman, to do that in only a segment of the available market. But it is another thing to give any 5 men or any 1 man or any 50 men absolute power of life and death over the economic future of an enterprise by simply saying that they will exercise judgment not only on the question of whether they can prove fraud, but on the fundamental soundness or possibility of success of an industry, and gives, I think, too much power.

I do not mean to say, and I think it would be inconsistent with the statements I made, that probably more regulatory power, authority short of the ultimate that I mentioned on the State level, may be not only proper but may be helpful in achieving the ends that I think we all want; that investors be given a fair shake. But the economy should be left as free as it can be. We should give anyone who will tell the truth, in terms that people can understand, the opportunity to go to his fellow citizens and ask them to join him in an enterprise. Mr. HELLER. What observations can you make with respect to the assertion that information contained in the prospectus has been truthful and yet not adequate?

Commissioner MCENTIRE. I think it has been adequate except for the prolixity with which it is sometimes stated. In other words, I think a trained analyst could always get from it the information that he needs. The problem has been getting it for the average man.

As to that, I think we haven't achieved the ultimate at all. I think prospectuses are better today, if you please, than they were 6 years ago when I first started to worry about the problem. I do not think that they are perfect today.

Does that answer your question, sir?
Mr. HELLER. To a certain extent.

are incomplete or unclear?

Do you say that prospectuses

Commissioner MCENTIRE. Unclear; yes. I think that they are complete, but it is a question of clearness.

Mr. HELLER. If they are unclear, how can the average investor make an intelligent appraisal?

Commissioner MCENTIRE. If they are unclear to the average investor, I do not think that he can make a complete appraisal. That does not mean that he cannot make some appraisal; it does not mean that he cannot grasp the unfavorable factors that are pointed out.

Mr. HELLER. Has it been your experience that this situation obtains to a large degree in investment trust and holding company issues?

Commissioner MCENTIRE. I am inclined to think not. Investment trust prospectuses for the most part are pretty readable documents, relatively readable, and can be understood, I think, with much less technical knowledge than some of the others.

There was a tendency for public utility issues to be terribly complicated. Your question also encompassed prospectuses of public utility holding companies; and, I assume, of operating companies, as well. That is, operating companies that are under holding companies or subsidiaries of holding companies.

I think there we have a different problem. A utility enterprise is, by its very nature, a very much more stable sort of enterprise. It has a complete monopoly in its area, or generally bas, and a restriction on maximum earnings, or at least if utility commissioners do their jobs and they try to-it does. Likewise, it has an assured return, because if return falls below certain levels, it generally is able to get rate increases. That is not universally true, but it is generally true.

That being the situation, you have a very different kind of an animal when you analyze a utility stock or utility security of any kind. The fundamental facts are more technical than in a general industrial or investment company situation; but by the same token, they are probably fewer in number.

I cannot say that I think utility prospectuses have universally been as readable as I think investment company prospectuses have tended to be. I think progress has been made in getting them in that direction. But the individual analysis that a stockholder has to give to make a reasonably intelligent purchase in the utility field is, I think, much simpler than it is in the case of industrial or almost any other kind of security.

Therefore, I do not feel the problem is as acute in the field of utility issues.

I do think it is helpful, as far as we can, to make prospectuses more readable and understandable. We have been working on that, and I think we have had notable success in some instances.

Mr. HELLER. Would you express the same view with respect to the prospectus of medium and smaller-sized industrial companies, or would you take the view that in those instances the information in the prospectus is inadequate?

Commissioner MCENTIRE. From the standpoint of being unclear, you mean? Yes, that area is, as I view this field, really where the investor's need probably is the greatest; in the medium-sized and small industrials and exploratory companies, issuers that are not in the investment company or utility category.

In that area also, I think that we have made progress, that we are getting more readable prospectuses. They are still not what I hope they will be and what I would like to see.

On the other hand, I think that they are much better than they used to be. But these categories are important and fundamental investor judgments and decisions have to be made about such issues. Anything that we can do to equip investors to make such decisions more intelligently is in the public interest.

Mr. HELLER. Of course, we are discussing now the lay investor? Commissioner MCENTIRE. That is correct.

Mr. HELLER. And with respect to the lay investor, I think you have expressed the view-and if it is not your view, we would like to have you tell us what your view is that the prospectus today is comparable to a legal document rather than an informative piece of selling material. Would that be a correct statement?

Commissioner MCENTIRE. I think it tends too much to be a formidable legal document and not enough to be a piece of intelligent analytical and selling literature.

Mr. HELLER. It is more useful to the dealers, rather than to the lay investors?

Commissioner MCENTIRE. Probably so; yes.

Mr. HELLER. And the institutions?

Commissioner MCENTIRE. That is a distinct service, I think, Mr. Chairman. I think it is helpful to have dealers informed or able to be informed about what they are selling and that is one of the very important functions that is performed.

But I think we can achieve both. Something that will in one document adequately inform the dealers and still do a better job of informing the individual investor.

Mr. HELLER. Has any recommendation to that effect ever been submitted to Congress?

Commissioner MCENTIRE. I do not think that the amendment programs we have suggested have ever come to the point of an official and definite recommendation. The 1941 program had readable prospectuses as one of its objectives; and, indeed, the subsequent programs that we have suggested since the war have had that as an objective, but we have never entirely formalized it, and we find that it is not a simple thing to do.

Mr. HELLER. Well, do you believe that you should make a recommendation to that effect?

Commissioner MCENTIRE. If possible; yes.

Now, I do not want to be flippant with that, Mr. Chairman.
Mr. HELLER. I understand.

Commissioner MCENTIRE. I think this is a field in which the industry itself has a long-range and entirely proper stake. I think that they should want to, and I believe that they do want to, achieve the same ultimate ends that we want, looking at it more acutely from the public-interest viewpoint.

On the other hand, the best statute in the world won't work if it is not properly administered or if its administrators are always engaged in a constant bitter warfare with the people who are subject to it. I do not mean to say that situation exists, or that it would exist; but the formulation of a workable basis that will meet the requirements of a highly sensitive industry, operating in a highly sensitive part of our

economy subject to wide fluctuations and subject to all sorts of difficulties; that will permit that industry to soundly carry out its functions on a basis that gives a reasonable hope of profit to make it financially attractive enough to keep people in it and at the same time not so profitable that the public is penalized, is a very difficult formula to achieve.

I hope we are going to achieve it. Maybe I am a born optimist, but I do hope so. I think that we are getting along a little bit further all of the time.

On the other hand, I do not think it will be helpful to the Congress, to the industry, to the Commission, or to the public interest, to come in with some shotgun recommendation which, if the Congress was so minded to accept it-and I do not think it would be-might unduly disrupt everything.

I do not mean we have got to keep the status quo, or that none of these relationships can be disturbed. I do not feel that at all. I think that there has got to be enough elasticity. I think that there is enough elasticity in our scheme of things, in the securities industry and in the scheme of Government, that those adjustments can be made. But they are delicate ones; they are difficult ones, and I will have to confess to you, as little as I like to, that I do not think a complete and perfect answer has been arrived at that at this moment warrants us in telling you that an amendment to the program in these exact terms would meet the needs of the situation.

Mr. HELLER. How would you personally regard a proposal to change the law which would give the Commission the power to order deletion and condensation in prospectuses on a case-by-case basis, and to give immunity from legal action based on required omissions? Commissioner MCENTIRE. I am tentatively of the opinion that might be a good thing. I am aware of the fact that the industry has indicated opposition to it. The qualification of my feeling in the matter springs from the fact that if such a system was in effect, and was part of the law, I have some reserve fears that maybe we would get prospectuses filed as long or longer than they are now with a desire to delegate to the Commission the editing job in order to put a legal umbrella over the issuer and underwriters; that a cat-and-mouse game might ensue in which the idea is to state things so complicatedly that the Commission will strike something out that might inadvertently result in failure to disclose an important and salient fact.

That is a long statement, but I trust you understand that generally I think, or I am inclined to think, it would be a good thing. I do have that one difficulty with the thing. I am interested in a fuller exploration of that suggestion with the industry to see what its reaction would be, and how things would operate under the system if it were adopted. Mr. HELLER. Would you think it wise to get the opinion of industry on this point, in connection with the proposal?

Commissioner MCENTIRE. We have discussed that with industry, Mr. Chairman, and industry has indicated that they do not think it is acceptable. They have never as far as I am concerned, exactly described their objections to it. That leads me to the question of whether or not we should get into this editing process where everything would come in looking like an unabridged dictionary and the Commission would be obligated to edit that, or the staff would have to edit it down to a pamphlet size. I think that would place an undue