Mr. HELLER. With respect to the policy of the State Department with regard to the bonds in default in these foreign countries, isn't there a certain policy that puts a restriction on them?

Mr. MILLONZI. I don't know the exact answer to that. I suspect that the State Department and the Department of Defense at the present time both would have some regard for the settlement of the German problem, for example, the question of reparations. The question of how much is going to be left after the Government has paid for private claimants is a question that will have to be settled over-all, I presume by a meeting such as a meeting of the minds between our Federal departments.

And I am also aware of the fact that the State Department does have an interest in that it maintains a German desk, a French desk, an Italian desk, and so forth, to look after the interest of our nationals in those foreign countries. The point I want to make, however, is that the State Department, as capable as it is in its own field, and I make no comment on that, is not as qualified as the Securities and Exchange Commission in the field of securities, and that it ought to be the Securities and Exchange Comission which should look after the interest of the American investor.

Mr. HELLER. In other words, there ought to be a removal, I suppose, of subdivision (c) of section 210 of the act; is that not correct, or some kind of change made in that section?

Mr. MILLONZI. That is a larger question that I don't feel capable to come to any conclusions on, Mr. Chairman, for this reason: I think it is entirely possible for the State Department to get around to the view that the Securities and Exchange Commission is a Federal agency which looks afer the interest of the American investor. We do not maintain offices in foreign countries, as the State Department does, and I don't want to be in the position here of advocating any disagreements between what the State Department does in its proper field and what we do in our proper field. I think that it is purely a matter of education both on our part and on their part.

If they could become aware of the fact that we are going to protect the American investor and would accede to our predominance in that respect, then I think this would be satisfactory. If, however, this clause would be a deterrent to our full representation of the American investor, then I would recomment that it be eliminated.

Mr. HELLER. Of course, in view of the present world situation, you just could not eliminate it without a reexamination.

Mr. MILLONZI. That is precisely what I wanted to say. I didn't want to be arbitrary about it. I do realize that there are overriding considerations, but I don't feel that the American investor should continue to go on unrepresented. The State Department is responsible for the implementation of point 4, but it is to the Securities and Exchange Commission that the American investor is going to look for protecton.

Now, if we as a Commission under the 1933 act are going to pass on these foreign issues in the first instance and the investor is going to get a prospectus that is cleared by the Securities and Exchange Commission and makes an investment in a foreign country, it is ludicrous to me that in the event of default, because of the problem of an investor as against a foreign country, that he should not be able to look to the

Securities and Exchange Commission for help just as he did when he bought the security. There is no one looking after him now adequately, in my opinion.

Mr. HELLER. We certainly appreciate your personal opinion on this question of foreign securities, but I wonder whether it has been called to your attention that your fellow Commissioners-this was of course years before you became a Commissioner, I think it was in 1948-urged that the National Advisory Council rather than the SEC could adequately protect the American investor in foreign securities.

Mr. MILLONZI. I am aware of that fact.

Mr. HELLER. You take a contrary view, do you not?

Mr. MILLONZI. I do, very definitely. I cannot urge too strongly that something be done in the situation. We are having a lot of difficulty with the problem and really we are in this whole problem by sufferance rather than by direction of Congress.

Mr. HELLER. I might say that you are going to find a lot of company accepting your view from what I have been able to gather.

Mr. MILLONZI. I hope so, because I think it is a very serious problem. Mr. HELLER. I think that is about all, Commissioner. I should like to say this, that this subcommittee certainly thanks you for your very interesting testimony. I would like to make the observation that for a man who has not yet completed 1 year on the Commission, you have certainly given us some very valuable information and have been an excellent witness and we appreciate your being here with us.

Mr. MILLONZI. It was a pleasure. I hope I can be of help.

(Whereupon, at 3: 50 p. m., the committee was recessed until 12:30 p. m., Friday, March 28, 1952.)

STUDY OF THE SECURITIES AND EXCHANGE COMMISSION

FRIDAY, MARCH 28, 1952

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE OF THE COMMITTEE ON

INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The subcommittee met at 12:45 p. m., pursuant to recess, in room 1334, New House Office Building, Washington, D. C., Hon. John A. McGuire presiding.

Mr. MCGUIRE. The committee will come to order.

The first witness will be Mr. Yohalem, Director, Division of Public Utilities, SEC.

TESTIMONY OF MORTON E. YOHALEM, DIRECTOR, DIVISION OF . PUBLIC UTILITIES, SECURITIES AND EXCHANGE COMMISSIONResumed

(Mr. Yohalem submitted the following statement for the record :) OF THE COMMISSION IN CORPORATE REORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY ACT

PARTICIPATION

I. GENERAL STATEMENT OF THE COMMISSION'S FUNCTIONS UNDER CHAPTER X Chapter X of the Bankruptcy Act governs the reorganization of corporations, other than interstate railroads. The Commission (at the request or with the approval of the court) appears as a party in the larger reorganizations to provide independent expert assistance to the court and security holders. The Commission has no statutory right of appeal in any such proceeding, although it may participate in appeals taken by others. The Commission acts in a purely advisory capacity. It has no authority either to veto or to require the adoption of a plan of reorganization or to render a decision on any other issue in the proceeding. The facilities of its technical staff and its impartial recommendations are placed at the service of the judge and the security holders, affording them the views of disinterested specialists in a highly complex area of corporate law and finance. The Commission may not receive compensation for its services in the proceedings. This paper can only briefly summarize the scope of the Commission's activities under chapter X. For a more detailed discussion of the background and objectives of chapter X and the Commission's functions thereunder, reference is made to the report which has previously been prepared for and submitted to the committee.

II. ROLE OF COMMISSION IN THE 1938 AMENDMENT OF BANKRUPTCY STATUTE The Securities Exchange Act directed the Commission to make a study and investigation of protective and reorganization committees and to report the results to Congress. The protective committee report, issued in 8 volumes, revealed a host of abuses recurring in reorganizations and that the then available reorganization statutes were inadequate to meet the needs and interests of investors. Proposals to revise various portions of the Bankruptcy Act had been made previously. The disclosures of the Commission's protective committee study

23578-52-pt. 1--60

served as added impetus to a revision of the corporate reorganization provisions of the Bankruptcy Act (sec. 77B). The Commission assisted in drafting a new section on reorganizations in the proposed legislation together with members of the National Bankruptcy Conference. The revision of the Bankruptcy Act was enacted by Congress and approved by the President on June 22, 1938. In substance, the Commission's basic recommendations were adopted by Congress.

III. ADMINISTRATION

OF COMMISSION FUNCTIONS UNDER CHAPTER X

The position of the Commission under chapter X differs from that under the other acts pursuant to which it operates in that the Commission does not initiate the proceedings, hold its own hearings, or adopt rules and regulations. As stated, it acts in the interest of investors and as an aid to the court solely in an advisory capacity.

In carrying out this function the Commission has stationed analysts, accountants, and lawyers in some of its regional offices, where they can keep in close touch with the proceedings and be readily available to the courts and the parties. This decentralization, designed to avoid delay and expense, was accomplished without delegation by the Commission of any power of decision. Supervision of the field activities is exercised by the Division of Public Utilities.

In the period since the enactment of chapter X, the Commission has been a party to 304 proceedings involving the reorganization of 391 companies with assets of $3,227,552,000 and indebtedness of $2,158,673,000. As of June 30, 1951, the Commission was participating in 53 reorganization proceedings involving the reorganization of 75 companies, with aggregate stated assets of about $730,000,000 and aggregate stated indebtedness of about $450,000,000.

Upon its appearance in a reorganization, the Commission's staff immediately begins to obtain and analyze information concerning the company. It assembles data with regard to the physical and financial condition of the company, its past performance, the history and background of the company, including its important financial and corporate transactions and the reasons for its financial difficulties. Economic factors affecting the particular industry and the competitive conditions faced by the debtor are also necessarily considered.

As a party in the case, the Commission is represented at all important hearings and customarily expresses its views on the issues arising therein. It frequently files legal or analytical memoranda on the problems coming up for decision by the judge. Of equal, if not greater, importance, the staff regularly participates in informal discussions and conferences with the trustee and the parties.

While the preparation of formal advisory reports has occupied only a small part of the time spent by the Commission in chapter X proceedings, nevertheless the advisory reports occupy a prominent position in reorganization literature. Where no advisory report is submitted, Commission counsel makes a detailed oral presentation of the Commission's views and the reasons therefor. Some of the typical issues arising under chapter X and the Commission's position with respect thereto are summarized briefly below.

IV. PRINCIPLES AND POLICIES ADVOCATED BY COMMISSION

(a) Issues involving the trusteeship

A prominent part of the Commission's work involves its concern with the functions of the trustee who occupies, under chapter X, the focal position in the reorganization. Thus, while the Commission is rerely consulted with respect to the appointment of a trustee or his counsel by the judge, the Commission has always endeavored to assure that the trustee and his counsel are "independent" as required by the statute.

The Commission has at all times striven to be of assistance to the disinterested trustee in the carrying out of his responsibilities and to make available to him the fund of experience and information accumulated by the Commission through its activity in hundreds of cases. Throughout the proceedings the staff consults with the trustee and his counsel as to the steps to be taken in the reorganization, the timing of these steps, and the appropriate method of taking them. Assistance is rendered to the trustees regarding the employment of engineers, accountants, and others, the preparation of reports, the conduct of hearings, and the consideration of plans.