So it might appear that the Commission is pursuing this course and will reach the logical end of finally saying that the labor unions in some instances were collecting money.

Mr. CASS. We seem to be getting far afield in a lot of things.

Mr. WADSWORTH. I think so.

Mr. CASS. There is another matter that ought to be emphasized, and that is the management of these funds.

Now, insofar as the employee welfare plans in effect on our member companies' properties are concerned, in all cases the employees share in the management of the funds, and in many cases they operate the funds entirely under their direction. In other words, the employees select their own representatives in these employee-welfare plans, and as I say, in many cases they furnish the employee management of the funds. In no case that I know of or know anything about does the company furnish all of the management, and in most cases they have less than half of the number of men on the governing board; perhaps i or 2 officers of the company against 5 or 6 members; 5 or 6 of the employees.

Another thing, in some instances, and in very large instances, too, all of the money is put up by the employer. It is turned over to an exclusively employee representation committee who manages the money. I have in mind one instance of a very large transportation company that is under contract with the union to pay in about $700,000 a year to an employees' selected governing board, and they manage the money. I take it that the Commission should be just as much concerned about that as they might be in taking care of $700,000, if half of it is given by the employees and half by the company, because the employees in every instance get the full benefit of the funds.

Now, I think that there may be some justification in the Congress providing some measure of protection insofar as the investment of funds which are either contributed entirely by the employer or partly by the employer and partly by the employees, or entirely by the employees, if you please, if those funds are set aside some place, then perhaps you ought to say something about what ought to be done with them after they have been set aside.

The Commission proposes in its amendment as presented in the committee print on page 11, among several factors, none of which I think are pertinent, except this one, the following proposal:

At least 75 percent of the assets is required to be held in cash or invested in securities which are legal investments for national banking associations under section 5136 of the Revised Statutes, as amended, or in insurance or endowment policies or annuity contracts issued by any corporation subject to the supervision cf the insurance commissioner, bank commissioner, or any agency or officer performing like function, of any State or Territory of the United States or the District of Columbia.

Now, if you have nothing in mind but this separate protection of this fund after it is put aside, you can do one or two things. You can either prescribe that the fund must be invested according to the statute governing investments and insurance funds, and subject to supervision and that would not be particularly restrictive because there are a lot of legal investments under the National Banking Actor you can say that if the fund is not so invested, or any part of it is not so invested, then the Commission may step in and issue such

regulations as they may deem necessary to protect the employees' interest in that fund. I have prepared an amendment of that kind. Mr. WADSWORTH. That goes further than a mere employer.

Mr. CASS. Yes.

Mr. WADSWORTH. That would be actual regulation.

Mr. Cass. It would not require disclosure, so far as that is concerned. The only thing it would require would be that the trustees of the fund would have to take cognizance of the fact that the Congress has said that these employee trust funds must be invested according to statute or else the Commission is given jurisdiction to prescribe regulation which will protect it.

Now, personally, I would have no objection to that. I have got an amendment here which is proposed as a substitute for the two amendments that the Commission offers. I would like to hand each one of you a copy, and I do not care to discuss it, because it simply is translating into language what I have just said as briefly as I could. The CHAIRMAN. Give one to the reporter for inclusion in the record. (The matter referred to is as follows:)

EMPLOYEE-WELFARE PLANS

PROPOSED AMENDMENTS TO THE COMMITTEE PRINT DATED OCTOBER 18, 1941, WHICH CONTAINS PROPOSED CHANGES IN THE SECURITIES ACT OF 1933

Amend the committe print by striking out paragraph (1) of section 3 (a), and renumbering the remaining paragraphs of said section 3 (a) accordingly; further amend the committee print by striking out paragraph (2) of section 4 (b); and further amend the committee print by inserting after section 3 (a) a new paragraph to be designated "section 3 (b), as follows:

"SEC. 3 (b). The provisions of this act shall not apply to any employee-welfare plan (hereinafter termed 'plan'), including, but not limited to, plans involving pensions, savings, profit-sharing, retirement allowances, annuities, insurance (life, accident, disability, and all other kinds of insurance of persons), sick benefits, accident benefits, hospitalization, funeral, and death benefits, employee clubs, and social organizations, or any other plan, unless the plan involves contributions, dues, or assessments, to be paid by employees and the funds derived wholly or partly from such contributions, dues, or assessments are wholly or partly invested in securities or investments, other than those which are legal investments for national banking associations under section 5136 of the Revised Statutes, as amended, or other than in insurance or endowment policies (including disability and death benefits), or annuity contracts, or building and loan stocks issued by any corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States, or the District of Columbia. In its exercise of jurisdiction over any plan not exempted by the provisions of this paragraph, the Commission may make such rules and regulations, and issue such orders as in its judgment are necessary to safeguard the employees' investments under such plan; provided, however, the provisions of this paragraph shall not apply to any plan unless such plan is otherwise subject to the provisions of this act."

Mr. CASS. Now, I want to point out again to you that this amendment is intended to take the place of the two amendments proffered by the Commission. It is intended to strike directly at the safety of these trust funds and nothing else.

I think, Mr. Chairman, that is all I have, and I thank you for your patience and attention.

The CHAIRMAN. Thank you, Mr. Cass.

Mr. CASS. Is there are any questions, I would be glad to answer them. Thank you.

STATEMENT OF MEYER M. GOLDSTEIN, REPRESENTING THE LAW AND LEGISLATION COMMITTEE OF THE NATIONAL ASSOCIATION OF LIFE UNDERWRITERS 1

The CHAIRMAN. Mr. Goldstein.

Mr. GOLDSTEIN. Mr. Chairman, my name is Meyer M. Goldstein. I am here as a representative of the law and legislation committee of the National Association of Life Underwriters.

Our interest in this matter obviously comes from its connection with life insurance and annuity contracts.

The first thing that I would like to say is that we are in favor of anything that would protect the employees in any of these types of plans.

Secondly, we are not seeking favor for any type of plan which sets out life insurance or annuity contracts apart and gives them any peculiar advantage over any other type of exempt security as defined in the act (such as Government bonds, etc.).

When it was first called to our attention that these types of plans might come under the jurisdiction of the Securities and Exchange Commission, we were naturally surprised. Also, there seemed to be some difference of opinion as to whether the statute exemption of direct purchase of exempted securities (e. g., insurance and annuity contracts or governmental securities) was lost, if the funds were invested through the medium of a trust fund-that is, where the insurance or annuity contracts, for example, become a part of a trust fund. Mr. Purcell this morning apparently cleared that up reasonably satisfactorily, but not entirely so.

So that if a plan were such as is typical of many of these plans today, where an employer pays over to a trustee, usually a bank, the money with which the bank pays the premiums for these insurance or annuity contracts, we always had the idea that such a trust fund represented an exempt type of transaction and was exempted from the registration and prospectus requirements. Apparently that is the situation as Mr. Purcell explained it this morning.

However, we hope you will agree with us that any matter of this nature should be cleared up by a direct definition in the statute itself rather than through any expression of opinion in connection with the administration of the law. But, this aspect goes more to the technical wording of the law in its proposed amendment. From the comments that have been expressed in connection with the testimony, it appears to us that the committee seems more interested in the broader issue than in any question of the technical wording of a proposed amendment.

Frankly, that is also the position of our association.

Our point, therefore, in appearing before you at this time is because we believe that there needs to be a little clearing up of the relationship which the prior testimony has to the broad field of employee pension and benefit plans.

1 The National Association of Life Underwriters membership consists of some 33,000 individual life underwriters who are also members of 380 local associations and 38 State organizations. This national association is independent of life insurance companies and is organized for the protection and benefit of the policy-holders of the Nation.

Mr. Goldstein is also director of the Pension Planning Co. of New York City, an organization that specializes in the designing of employee benefit plans for employers on a fee basis. He is also the author of a book entitled "Pension, Bonus, and Profit-Sharing Plans," published by Diamond Life Bulletins, a leading national insurance publication.

As has been stated, there are various aspects to the subject of employee benefit plans.

Among other things, these include protection concerning the five basic provisions as follows: (1) Premature death, (2) disability, (3) unemployment or emergency funds (accomplished through some form of thrift provision, (4) pension benefits, (5) incentives (in the form of bonus or profit-sharing).

Of the first four employee benefits mentioned above, namely, death, disability, unemployment, or old age, it is the latter problem of oldage pensions or retirement benefits which requires the maximum contributions from both employer and employee. On reflection this will appear obvious, because, naturally, it takes a very substantial sum of money to provide a pension for life beginning at a normal retirement age, let us say age 65. Furthermore, pension or retirement plans generally call for some fixed formula for contributions from employees and the employer as contrasted to bonus or profit shares that are paid primarily in years in which there are profits.

Also, it appeared to us that some of the testimony which was advanced was more concerned with stock-purchase plans for employees than with the subject of pension or retirement plans. Consequently it would seem to us that any interpretation of the present law or any proposed amendments to the law should be so clearly stated as to indicate the intent of its application with reference to the different types of plans involved.

It seems self-evident that it is quite a different problem that is involved when asking for a full disclosure of a plan in which an employee purchases stock of his employer as contrasted to a plan in which an employee invests in life insurance or annuity contracts. Let us, then, confine the balance of our discussion to the field of employee pension plans.

In this field the subject matter divides itself naturally into three categories, namely: (1) Self-administered plan, (2) group annuities, (3) a pension trust, using individual insurance or annuity contracts as the investment medium.

VEHICLE NO. 1. SELF-ADMINISTRATION

This group is the ore in which the employee administers same himself or through the medium of a trust fund. The trend, especially in those that call for contributions from the employee, is to have such funds segregated from the assets of the employer and set up as an irrevocable trust for the exclusive benefit of the employees. In fact, section 165 of the Internal Revenue Code requires such a status in order to give the three parties, namely, the trust fund, the employer, and the employees, the benefit of the tax provisions enumerated therein.

The early history of this type of self-administered plans was such that the employer set up these funds as a bookkeeping reserve, but then later employers began divesting themselves of these funds and set them up in separate irrevocable trusts, as above stated. But most of these plans were, and still are, noncontributory; that is, the employer paid all the costs and the employee contributed nothing.

It is our understanding that both the present law and the proposed amendment of the Securities Act will give a noncontributory plan

automatic exemption from the registration and prospectus requirements. We think the law ought to be clear on this point.

Consequently, at the present time, it is only the minority of the self-administered plans that would be of the contributary type, that is, with employee contributions-and hence, it is only a small minority of these plans which would come under the registration and prospectus requirements of the present law or the proposed amend

ment.

In order to make our meaning clear, it might be stated that there are probably no more than 200 to 300 of these self-administered pension trusts in existence in our country today.

These represent, however, some of our largest corporations with the largest number of employees.

Examples of noncontributory types of self-administered pension plans are: (1) American Telephone & Telegraph Co., (2) Niagara Hudson System Co., (3) Consolidated Edison Co. of New York, Inc., (4) Atlas Powder Co.

Examples of contributory types of self-administered pension plans are: General Mills, Inc., Guaranty Trust Co., United States Steel Corporation, Johns-Manville Corporation, Bankers Trust Co., Retirement System of the Federal Reserve banks, American Brake Shoe & Foundry Co., Procter and Gamble Co., General Motors Corporation. Mr. WOLVERTON. What is the percentage of self-administered plans in which the employee pays nothing.

Mr. GOLDSTEIN. A very large percentage are noncontributory, that is the employee pays nothing.

VEHICLE NO. 2. "GROUP ANNUITY PLANS"

Perhaps some members of the committee may feel that they would prefer to have matters of this nature considered by the various State insurance departments. For such of you gentlemen who feel that way I believe it may interest you to know that a step in this direction has been taken by at least one State with which we are personally familiar, namely, the State of New York.

About a year or so ago, the then counsel to the joint legislative committee on insurance in the State of New York, asked us to assist him in the preparation of a questionnaire to be sent to companies that had self-administered plans in operation in the State of New York. This questionnaire was prepared and sent out to a list of such corporations. Among other things, we believe the purpose of this preliminary survey was to ascertain whether the insurance laws of the State of New York should be so amended as to require employee benefit plans to come under the jurisdiction of the insurance department of the State of New York-or at least to require that these employee benefit funds be segregated from the assets of the corporations for the protection of the employees. We mention this fact to indicate that an alternative to a Federal statute and Federal jurisdiction over these matters might be State laws and State jurisdiction.

State jurisdiction of companies or plans that are providing death, disability or pension benefits would seem to be a natural zone of influence of State insurance departments, since such employee benefits are essentially insurance benefits. In addition, of course, insurance laws of the various States have protective-investment provisions for any