4 (a) (13), and 6 (d) were drafted. I refer this committee to the discussion of these sections under item (J) in the joint statement on miscellaneous proposals for a description of how the proposals would operate in practice. I wish to repudiate the allegation that these amendments are an attempt by the Commission to get power over annual reports to stockholders. The suggestion is limited to situations where issuers are offering securities for sale, and the proposal constitutes only a modification of the present provisions of the act in order to provide necessary information to investors in order that they may make informed judgments as to whether to purchase securities. The CHAIRMAN. The committee will stand adjourned until 10 o'clock tomorrow morning. Mr. YOUNGDAHL. Mr. Chairman, may I ask before we adjourn, the privilege of inserting a letter in the record which I received yesterday? I would like to insert it immediately after Mr. McLaren's testimony this morning. The CHAIRMAN. You may do that. (The letter referred to will be found in the record at the end of Mr. McLaren's statement.) The CHAIRMAN. The committee will stand adjourned until 10 o'clock tomorrow morning, at which time we will take up No. 11 in the agenda, Employees' Pension Plans. (Thereupon, at 2:55 p. m., the committee adjourned to meet at 10 a. m. of the following morning, Wednesday, December 3, 1941.) PROPOSED AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934 WEDNESDAY, DECEMBER 3, 1941 HOUSE OF REPRESENTATIVES, COMMITTEE ON 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. BEGINNING ITEM NO. 11 ON AGENDA FOR AMENDMENTS STATEMENT OF HON. GANSON PURCELL, COMMISSIONER, EMPLOYEES' INVESTMENT PLANS Commissioner PURCELL. Mr. Chairman, the subject of employees' benefit plans involves a consideration of the many different types of investment programs under which employees are offered an opportunity to invest in some sort of fund set up by the employer. These programs may take the form of profit-sharing plans, savings plans, retirement or pension plans, or stock-selling plans. Some of these offers require registration under the Securities Act, and others do not. Before getting into a discussion, however, of the present status of employees' plans under the act and of the proposed amendments, I think it might be well to give the committee some background on the actual operation of employees' plans in the United States. We are very fortunate in being able to ask a man who is recognized as the country's outstanding authority on employees' plans, Mr. Murray W. Latimer, the chairman of the Railroad Retirement Board, to tell you about them. Mr. Latimer is the author of several books and articles on this subject, and his two-volume work entitled "Industrial Pension Systems in the United States and Canada" is generally considered a milestone in the field. Mr. Latimer will give the committee the benefit of his knowledge as background for a consideration of the Commission's proposals and of H. R. 5065, introduced by Congressman Paddock. After Mr. Latimer has concluded, I shall discuss the specific provisions of the proposals. May I ask Mr. Latimer to take the stand at this time, Mr. Chairman? The CHAIRMAN. Yes. Mr. Latimer. STATEMENT OF MURRAY W. LATIMER, CHAIRMAN, RAILROAD RETIREMENT BOARD Mr. LATIMER. I should like this morning to run over rather briefly, by way of introduction, some of the historical background of employee's plans in the United States, and while I have been introduced as being an authority on employee plans, I lay no such claim to that authority. I have made a good many studies of employee pension plans, but my knowledge of types of employee plans, other than insurance plans, is not very great. Since, however, the employee pension plans in recent years, at least, have been the most important form of employee plans, I suppose that the committee would be rather more interested in that particular type than in other forms of employees plans, although there are "fashions" in employee plans just as there are "fashions" in many other types of institutions and movements. Ι In times past there have been periods when employee stock purchase plans were the fashion and there have been other times when other forms of employees' savings plans have been the fashion. In recent years, there have been few savings or stock purchase plans and a very large number of pension plans, particularly since the enactment of the Social Security Act in 1935. Employee plans generally have been instituted by employers for the purpose of serving their own ends. They have not been instituted because of charitable motives or because of an intense desire on the part of the employer to give something to the employee. They have been instituted with the definite purposes of preserving employees' attachment to a particular employer; to reduce turn-over; at times to cut out strikes; to meet demands or anticipated demands for wage increases; to stop the growth of independent labor organizations; or some other purpose which made for the improvement of the position of the employer. That is true whether we take employees' stock purchase plans or employees' savings plans or employees' pension plans. The early pension plans, as probably most of you know, were largely established on railroads. It is extremely important for the railroads to maintain a stable labor force and various kinds of devices have been used to achieve that end. We have the growth of employees' seniority; the seniority system which has as its main end and effect retention of men in service by offering them under the form of what amounts to a guaranty of the better jobs. It has had that effect. The CHAIRMAN. Mr. Latimer, in your expression as to the motive of employers in giving these benefits, do you not think there are some notable exceptions to the rule that you announced there? I notice in this morning's paper, that an employer, an aged man, is giving 50 percent of the common stock of his company to the employees of over 10 years of service. Mr. LATIMER. There are exceptions to all rules, Mr. Lea, and I have no doubt there are exceptions to my rather broad statement. The CHAIRMAN. I take it that what you say is the fundamental principle involved, but some of these exceptions are so commendable that I thought that they ought to be recognized. Mr. LATIMER. I think, generally speaking, that stockholders would have a right to object unless these plans were put in for the improvement of the position of the employer. I would suppose that most businesses would not engage in, are not engaged in business except for the purpose of making profits. Business organizations are not charitable institutions; we ought to view them as profitmaking organizations. In the early history of the railroad pension plans, there were provisions by which the promised benefits were forfeited upon any voluntary break in service. Benefits were not forfeited if the cessation of compensated services came about at the instigation of the employers—for example, a furlough because of lack of work-provided, of course, that the furloughs were not so long as to produce a permanent cessation or a break in service under the seniority rules. There were specific rules which provided for the forfeit of pensions, of course, in the case of a strike. These restrictive features were emphasized by the fact that under these plans, almost without exception, the employer reserved to himself the right of judging and passing on all questions and the employer's word was final. Finally, most employers specifically reserved the right to discontinue the plan; to reduce annuities either individually or for the whole group, at any time and for any reason they saw fit; and there have been cases where even though that right was not specifically reserved in terms in the plan itself, that nevertheless reductions and discontinuances have taken place. Despite the rather tenuous legal basis for these plans, employers found that once having installed them, as a matter of fact, they tended to become permanent and that in practice despite the conditions and qualifications surrounding their maintenance they did in fact produce results which were desirable from the point of view of the employer even though such results were not those originally intended. But after a period of years the pension plans began to involve costs very much larger than had been anticipated. Of course, when the plans were started, there were relatively few men who qualified for benefits. Most American corporations had grown rather rapidly in the early 1890's and the early 1900's; on the side of employment and the growth had been reflected in the hiring of additional young people. Employees were predominantly less middle-age; and the older man was an exception. Nobody thought very much about costs, and it was thought that the installation of a pension plan would have the rather desirable effect without costing a great deal of money. Ordinarily, without much thought, the company undertook to pay for the whole cost. Of course that happened in the fields other than industry. Mr. Carnegie began the university and college pension plans with no idea of the ultimate cost and as a result there had to be several successive reductions in the benefits promised under the Carnegie teachers' plan. But gradually, as the growth of the personnel of the companies maintaining plans stopped; as the turn-over stabilized and the older men remained in the service until retirement; and, therefore, as pension payments began to aggregate large sums, it was realized that these plans were very costly. As a result, there began to be, about 1925, a very marked trend toward the securing of employee contributions. In the meanwhile, there had been developed plans for employees' sav ings; plans for stock purchases, which made it probably more feasible in the late 1920's to secure the cooperation of employees through contributions than would have been the case had an attempt been made generally to secure contributions even 10 years earlier. Now, the early employee contributory plans carried over with them the same lack of guaranties and pretty much the same kind of employer control that was found under the earlier noncontributory plans. There was, generally speaking, no guaranties on the part of the companies for the return of contributions. There were no specifications of investments; no provisions for any reports to employees on either the condition of the funds or the condition of an individual account. There tended to be the same lack of any guaranty on the continuance of the plan or the maintenance of any specified benefits, and the employer reserved usually to himself the right to discontinue the plan at will. In the case of the Morris & Co. pension plan the courts held that no vested rights had been created by it; no company liability attached beyond the insignificant contribution specified in the plan. That court decision, while perhaps not completely good law today, has, so far as I am aware, never been specifically overruled. But, beginning in the latter part of the 1920's, it came to be realized probably by more than the number who did not so realize, that it was not good business and not particularly good industrial relations policy, for an indefinite period of time to secure substantial contributions from employees-and those contributions today run into many millions of dollars annually-to secure those contributions on terms which offered no protection at all to employees. That realization was aided by certain developments outside the companies themselves. For example, in the income-tax legislation, it was not possible to secure deductions from gross income as a part of the operating expenses for amounts paid in advance by a company, unless those amounts were paid into a trust; and such a trust had to be arranged so that, at least for the time during which the plan was in existence, payments into the trust were not recoverable by the company or, in the event they were recoverable, recoveries had to be counted as income. But perhaps more important than that, insurance companies began to be interested in the underwriting of employee-pension systems. The insurers insisted that for the protection of the plan itself, for its ultimate working out, it was highly essential that reserves be accumulated on a sound insurance basis. An insurance company will not relieve the companies of direct liability for a pension plan unless adequate reserves were accumulated with the insurance company. An insurance company, of course, cannot underwrite liabilities for an indefinite future on any terms under which it might at some time or other have to surrender the reserve back to the employer. Even in cases in which there are proper refunds to the companies, as in the case of withdrawal prior to retirement, many insurance contracts contain provisions under which the potential drain on the insurer in a period of depression when a number of withdrawals tend to become quite large, could be limited and there would not be required to be refunded to the employer any large sum of money over a short period of time. Thus, in the past 25 years there has been a vast change in the form, substance, and solvency of industrial pension plans. But it is too much to say that they are as yet perfect; and it is too much to say |