The subcommittee held hearings on the original provisions of title II as they were included in S. 3580. At these hearings representatives of the larger investment adviser firms and representatives of a voluntary association of investment advisers opposed that title. However, at the conclusion of the hearings, much as in the case of the investment trusts and investment companies, representatives of the investment adviser organizations and the Securities and Exchange Commission, at the suggestion of the chairman of the subcommittee, conferred with a view to drafting proposals which would have the support of the investment advisers and the Commission. As a result, title II of S. 4108 was prepared. This title has the affirmative support of virtually all investment advisers, both the members of the association and those who are not members, who appeared before the committee.

GENERAL STATEMENT

Investment advisers are persons who for compensation engage in the business of advising others, either directly or through publication or writings as to the value of securities, or as to the advisability of investing in, purchasing, or selling securities or who for compensation and as part of a regular business issue or promulgate analyses or reports concerning securities.

The emergence of the investment adviser as an important occupation or profession did not occur until the World War. However, it was not until after 1929 that the investment adviser firms organized and increased rapidly. The number of investment advisers presently functioning has been difficult to ascertain. The Commission reported to the Congress that in connection with its study of these firms, it obtained replies to questionnaires from only 394 persons or firms which administer funds or give investment advice.

Similarly, it is difficult definitely to estimate the amount of funds under the influence or control of investment advisers. However, some idea of the size of the funds administered by investment advisers may be deduced from the fact that 51 firms for which information was obtainable by the Commission managed, supervised, and gave investment advice with respect to funds aggregating approximately $4,000,000,000.

The nature of the functions of investment advisers, their increasing widespread activities, their potential influence on security markets and the dangerous potentialities of stock market tipsters imposing upon unsophisticated investors, convinces this committee that protection of investors requires the regulation of investment advisers on a national scale.

The report of the Commission to the Congress and the record before the committee is clear that the solution of the problems and abuses of investment advisory services-individuals and companies which either handle pools of liquid funds of the public or give advice with respect to security transactions-cannot be effected without Federal legislation.

Not only must the public be protected from the frauds and misrepresentations of unscrupulous tipsters and touts, but the bona fide investment counsel must be safeguarded against the stigma of the activities of these individuals. Virtually no limitations or restrictions exist with respect to the honesty and integrity of individuals who may solicit funds to be controlled, managed, and supervised. Persons

who may have been convicted or enjoined by courts because of perpetration of securities fraud are able to assume the role of investment advisers. Individuals assuming to act as investment advisers at present can enter profit-sharing contracts which are nothing more than "heads I win, tails you lose" arrangements. Contracts with investment advisers which are of a personal nature may be assigned and the control of funds of investors may be transferred to others without the knowledge or consent of the client.

Title II recognizes that with respect to a certain class of investment advisers, a type of personalized relationship may exist with their clients. As a consequence, this relationship is a factor which should be considered in connection with the enforcement by the Commission of the provisions of this bill.

ANALYSIS OF PROVISIONS OF TITLE II

Findings and definitions.-Sections 201 and 202 contain, respectively, the findings of the Congress with respect to investment advisers and the definitions of various terms used in title II. The term "investment adviser" is so defined as specifically to exclude banks, bank holding company affiliates, lawyers, accountants, engineers, teachers, brokers (insofar as their advice is merely incidental to brokerage transactions for which they receive only brokerage commissions), publishers of bona fide newspapers, news magazines, or financial publications of general and regular circulation, and persons whose advice is limited to securities issued by the United States and certain instrumentalities of the United States. In addition, the Commission is authorized by rules and regulations or order, to make certain further exceptions according to prescribed statutory standards.

Registration of investment advisers.-Investment advisers who make use of the mails or instrumentalities of interstate commerce in connection with their investment advisory business, unless they fall within one of the specific exemptions provided in section 203 (b), are required to register by filing with the Commission an application for registration containing certain information, the character of which is specified in the bill. The administrative machinery for registration is similar to that provided in the Securities Exchange Act of 1934 for the registration of over-the-counter brokers and dealers. Registration may be denied or revoked if the registrant has within 10 years been convicted of a crime or is enjoined by a court in connection with a security or financial fraud, or if his application for registration is materially misleading. The data contained in the application for registration must be kept reasonably current by such annual and special reports as the Commission may require for that purpose (secs. 203, 204).

Investment advisory contracts.-Contracts or agreements between an investment adviser and a client may not provide for compensation to the investment adviser based upon capital gains or capital appreciation. Each such contract must be non-assignable, and must provide, if the investment adviser is a partnership, that the client will be notified of any change in the membership of the firm, so that he will be in a position, if he so desires, to disaffirm the contract (sec. 205).

Certain prohibited transactions.-Transactions and practices which defraud or operate as a fraud or deceit upon clients or prospective clients are prohibited. Registered investment advisers are also for

bidden to purchase securities from or sell securities to any client, either as principal or in connection with a brokerage business, without first advising the client of the transaction and obtaining his consent thereto (sec. 206).

Unlawful representations, administrative and enforcement machinery, and formal provisions. In these respects title II contains provisions generally comparable to those of title I (sec. 207 to 221, inclusive). Section 210, which relates to publicity, recognizes that in many instances the adviser-client relationship has a confidential basis, and provides for confidential treatment of information obtained in the administration and enforcement of the title, to the extent that such treatment is consistent with efficient enforcement.

76TH CONGRESS 3d Session

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SENATE

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REPORT No. 1776

THEODORE R. TROENDLE, FOR THE DAWSON SPRINGS CONSTRUCTION CO.

JUNE 6 (legislative day, MAY 28), 1940.-Ordered to be printed

Mr. HUGHES, from the Committee on Claims, submitted the following

REPORT

[To accompany S. 4037]

The Committee on Claims, to whom was referred the bill (S. 4037) to confer jurisdiction upon the United States District Court for the Western District of Kentucky to hear, determine, and render judgment upon the claim of Theodore R. Troendle, for the Dawson Springs Construction Co., having considered the same, report favorably thereon with the recommendation that the bill do pass without amendment.

The purpose of the bill is to confer jurisdiction upon the United States District Court of the Western District of Kentucky, notwithstanding the lapse of time or the statute of limitations, to hear, determine, and render judgment upon the claim of Theodore R. Troendle, for the Dawson Springs Construction Co., of Dawson Springs, Ky., for losses or damages arising out of a contract dated February 2, 1920, for the construction of eight buildings for the United States Public Health Service Sanatorium at Dawson Springs, Ky.

Under the terms of a contract dated February 2, 1920, the Dawson Springs Construction Co. agreed to furnish (with certain exceptions) all labor or materials required for construction of eight buildings for the United States Public Health Service Sanatorium at Dawson Springs, Ky. Among the materials excepted from the contract requirements was a quantity of rough lumber which the Government agreed to supply to the contractor for use in construction of concrete forms, scaffolding, etc.

The record indicates that the Government furnished the required lumber in the quantities and at the times requested by the contractor. The contractor alleges, however, that a large portion of the lumber was unsuited for the purpose for which it was required, and that it was obliged to purchase additional lumber in order to complete the contract work.