reasonable diligence in whatever regulation it prescribed in this matter that would be taken care of any way; would it not?

Commissioner PURCELL. Yes; but the proposal is, if I understand you correctly, Congressman, to relieve the selling agent from using the prospectus after 8 months. If the prospectus should at that time be brought up to date, and should reflect either the reasons for the failure of the original distribution or a change in the conditions which would perhaps remove the reasons for that failure, that knowledge would not necessarily get into the hands of the prospective purchaser, because under the proposal the Commission could relieve the selling agent of the necessity of using any prospectus.

Mr. BOREN. The whole point hinges around that word "could" and I do not want to prolong the discussion at this point. I was very much interested in it because I had just read it and it appears to me to be a very moderate proposal and one that does not alter the situation at all except as it makes it possible for the Commission in these matters to waive any unnecessary penalty if in their judgment the penalty is unnecessary; then it would almost resolve itself to the point in my mind—if I am in error I want to have that error pointed out of whether or not I would have confidence in the discretion of the Commission. If I do have confidence in the Commission on matters of this character, I can see no possible reason why I should not be in favor of the proposal. If I lack any confidence in the Commission-I am reserving my judgment on that—why then I would certainly not want to see this discretionary power put into the hands of the Commission.

I am giving you a picture of my thought on the thing and if I am in error in my thinking I want to be corrected. That is the reason I wanted to correct it at this time, while the opinion was being formed.

Commissioner PURCELL. I think that at first reading it appears to be a very reasonable suggestion. Our own analysis of it has led us to believe that it would be extremely difficult to make an appropriate judgment under such discretionary power and we have felt for that reason that it probably would be very difficult to exercise it. I do not believe that we have taken the position at any time during our conferences that if this were included in the Securities Act the Commission would never exercise the power. I think we have said that we cannot conceive of any circumstances under which we would feel it appropriate to exercise the power. We simply hesitate to concur in the suggestion of including in the act any authority to the Commission which we feel on the basis of sound reason it should never exercise.

Mr. BOREN. Especially if you found that the Commission would be subjected to any great amount of pressure to grant such relaxations.

Commissioner PURCELL. Yes, sir.

Mr. BOREN. I can see that point; but still I am sure the Commission is in possession of such judgment as to be able to act on matters of that kind and I think that it would not hesitate to do that provided it comes under their discretion.

There is one point that does come in there and that is the possibility of safeguarding you folks from any possible annoyance or requests or pressure, but it could hardly be good logic, to presume

that any legislative restriction should be maintained on that basis. Commissioner PURCELL. Well, as I have said, we have found great difficulty in conceiving of a situation where we would feel it appropriate to exercise that discretion.

Now, you take the case of the Pure Oil preferred, of which Mr. Stewart has spoken. There is one statement of his which I certainly desire to check; but, from my own knowledge, as I sit here today, I am quite confident that Mr. Stewart has been misinformed. I happen to have had some part in the conferences concerning the sale of Pure Oil preferred, after the failure of the early distribution of which Mr. Stewart has spoken, and my recollection is that no statement was ever made to the underwriters that the Commission would like very much to afford them this privilege of not using the prospectus but that it could not in view of the fact that its hands were bound by the act. I think the latter part of his statement was correct. Whether it was made or not, I am not sure.

Mr. BOREN. Whether they would or would not like to, the fact remains that they could not if as a result of any remote circumstance they would like to.

Commissioner PURCELL. They could not.

Mr. BOREN. The pertinent fact remains that whether Mr. Stewart's statement is accurate or not-the only pertinent fact in it still is that the Commission could not even be open-minded, whether it wanted to or not.

Commissioner PURCELL. There is no question about that, sir; and they were so advised, that the provisions of the act would prevent the Commission from taking that action.

Mr. BOREN. I do not want to detract you too long from your regular procedure, but I did want to have an exchange of viewpoints on this proposal.

Mr. PADDOCK. Mr. Chairman

The CHAIRMAN. Mr. Paddock.

Mr. PADDOCK. Do you happen to know what percentage of that Pure Oil preferred issue is still in the hands of the underwriters?

Commissioner PURCELL. I am advised that recent press reports within the past day or two have stated that about 10 or 11 percent of the issue is still in the hands of the underwriters.

Mr. PADDOCK. Do they mean by that that about 90 percent of it is in public hands and being bought and sold daily on the exchanges without any use of prospectuses?

Commissioner PURCELL. Well, I think, Mr. Paddock, it would be difficult to say that 90 percent of it is in the hands of the public, in the sense of small holdings. I may be wrong, but I know there was a time not long ago when considerable blocks were held by institutional investors. That condition may have changed, it is true. Mr. PADDOCK. I use the word "public" in the sense of describing the group of purchasers as separate from the group of underwriters or sellers.

Commissioner PURCELL. It is perfectly true, as Mr. Stewart pointed out, that those dealers and brokers who are not still engaged in the distribution of that security are not under an obligation to supply the prospectus to their customers and, of course, there is the Commission's special rule with respect to the delivery of prospectuses in stock-exchange transactions. So the dealers or underwriters who are

still obliged to deliver a prospectus are those-if there is more than one who still hold the 10 or 11 percent, according to the press reports. Mr. PADDOCK. On that basis then there might be 90 percent of the buyers who would buy without having the prospectus. It seems unreasonable to compel those restrictions after such a long period as to the small volume of stock remaining in the hands of underwriters. Do you not feel that the Commission in this particular case would be able to decide on a request for the exemption without any great difficulty?

Commissioner PURCELL. Well, I do not know that that would be true, sir. There are a good many factors that would go into making up or arriving at a judgment on that. I would not be prepared to say one way or the other. I might point out, however, that, under the very proposal which is made by the securities industry to amend the dealers' exemption now contained in the act, a prospectus would have to be delivered only by a dealer who still retained any of the securities as a participant in the distribution. Dealers not participating in the distribution would never have to use a prospectus, and even those dealers participating in the distribution would be relieved of the requirement of using a prospectus after their participation had ceased. Therefore, just as in the Pure Oil situation today of which the industry complains, at any particular moment, under their own suggestion, a person who bought a share of X stock from dealer A would be entitled to a prospectus, whereas, if he bought from dealer B, dealer B would not have to give him a prospectus. Today all dealers, whether they participate in the selling group or not, must deliver a prospectus in the case of all purchases made within 12 months after the offering date, and after 12 months a prospectus must be used only insofar as any particular dealer has an unsold allotment. Thus the Pure Oil situation-where at any given moment one dealer may be required touse a prospectus and another may not-cannot arise for 12 months. today, but it would be extended by the representatives of the industry themselves to every single distribution, whether it took 2 years or 2 'days to be substantially completed.

Mr. PADDOCK. Would you not feel that the Commission could do a better job on deciding on that exemption in 1941 than Congress did in 1934?

Commissioner PURCELL. Well, we have had a great deal of experience, of course, and Congress has been busy with other things, and it has been our prime job; and I think we probably are in a better position than almost anyone else to make recommendations concerning the proposal. We do not think it would be wise to give the Commission power to excuse anyone from delivering a prospectus.

The CHAIRMAN. Would this be a convenient time to adjourn until tomorrow morning?

Commissioner PURCELL. Yes; it would, sir, and then I can start at the beginning of the item and go right through.

The CHAIRMAN. Very well; the committee will stand adjourned until 10 o'clock tomorrow morning.

(Thereupon, at 11:28 p. m., the committee adjourned to meet at 10 a. m., the following morning, Thursday, November 27, 1941.)

PROPOSED AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934

THURSDAY, NOVEMBER 27, 1941

HOUSE OF REPRESENTATIVES,

COMMITTEE OF INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The committee met, pursuant to adjournment, at 10 a. m., in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will please come to order. Mr. Purcell, you may proceed.

STATEMENT OF HON. GANSON PURCELL, COMMISSIONER,

SECURITIES AND EXCHANGE COMMISSION-Resumed

PERSONS NOT SELLING TO THE PUBLIC

Commissioner PURCELL. Mr. Chairman, I shall discuss first the first item under the present topic, namely, the suggestion for an amendment to section 2 (11) of the Securities Act to provide for authority in the Commission by rules and regulations to exempt from the definition of "underwriter" any class of persons who do not purchase securities with a view to distribution or who do not sell for the issuer. Mr. Starkweather discussed that subject first in his appearance.

The suggestion which I am discussing is the outgrowth of the Commission's concern, which it has had for some years, lest the free flow of capital into enterprise be impeded-as it has been at timesby the fact that investment bankers are unable or perhaps unwilling to undertake financing where they have doubts of their ability to resell the securities immediately. It has seemed apparent for some time that institutional investors such as insurance companies, investment companies, and banks have an abundance of funds for investment. On the other hand the capital of underwriters in the American type of underwriting is not investment capital. With rare exceptions our underwriters do not contemplate that in underwriting an issue they will have to hold any portion of the securities for more than a few days or perhaps weeks at the very outside. Occasionally, however, market conditions or over-pricing or some other factors may operate to retard the distribution of an issue, with the result that a substantial amount of the available capital of one or more of our investment bankers becomes tied up for an extended period. This, of course, may impair the ability of underwriting firms to participate in other distributions while they are so restricted as to

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capital. Furthermore, it may result in making underwriters unwilling to take issues which they otherwise might be willing to take.

In this connection, I would like to refer to some remarks that Mr. Stewart made several days ago in connection with a statement which former Chairman Frank of our commission made before the House Appropriations Committee. You will perhaps recall that Mr. Stewart took issue with Mr. Frank's statement to the effect that the investment banker is at a disadvantage as compared with the insurance company, by reason of the fact that he cannot put cash on the line for an issue because, as was quoted from Mr. Frank's statement, "he has not got it until he sells the issue."

While one may differ perhaps with the portion of the statement relating to the availability of funds until the issue is sold, the fact remains that Mr. Frank's view that the investment banker is at a competitive disadvantage in comparison with the insurance company is demonstrably true. The investment banker can-and I might say he generally does go out and arrange for a short-term bank loan on the basis of his underwriting commitment-that is, after the commitment is signed-and he can turn the cash that he obtains in that manner over to the issuer in full. But, for whatever reason, it is a fact that he is unable or unwilling-and it really does not matter which to commit himself as early in a deal as the insurance company, for instance, does.

Now, the issuer wants to know just as early as possible what funds the financing will yield to him. The insurance company is willing and able to satisfy this issuer's need by committing itself to a definite figure at the earliest possible moment. This can be done by the insurance company, because it has the funds, and it is not interested in any temporary price fluctuation, since it purchases for investment and not, as the underwriter does, for resale.

The investment banker, on the other hand, naturally wishes to wait until the very last possible moment, because market fluctuations will interfere radically with the purpose for which he takes or purchases the securities that is, for immediate resale rather than for investment. A demonstration of this fact is found in the investment banker's usual insistence on a provision in his contract releasing him from the commitment if the securities market is so affected by political or economic events that the securities cannot be sold in accordance with schedule. A provision of that character is generally referred to in the business as a "market out" clause. Because of the limited character of the actual capital of an underwriter, he has to operate in this way if he is going to avoid the risks of being put out of business or seriously impaired by just one single misjudgment in an underwriting venture.

A couple of day ago Mr. Starkweather made reference to the capital currently employed in the business by the present underwriting firms. Now, quite apart from the character of the capital which Mr. Starkweather was discussing or its availability for underwriting, such part of it as is actually available for underwriting purposes is available whenever the underwriter is satisfied that he can immediately resell the securities; but it is not available if the underwriter thinks that he may have to hold the securities for any extended period of time, even though the firm may believe that the security is a good long-term investment.