excellent public relations job. These fine annual reports are published not because the companies are compelled to do so by law, but because it enhances their image with the public and their shareholders. These are just a few samples of the type of reporting which we see being done more and more frequently.

None of these companies are presently covered by the reporting provisions of the Securities Exchange Act. Nevertheless, I think you will find that these reports are as comprehensive, as informative, and in such detail as to give shareholders all pertinent information about their company and its earnings as if they were covered by that act.

I am not as familiar with the type of reports being issued by small companies in other States, but I have seen a good sampling of them and I believe that generally speaking the small companies are making a sincere effort to keep their shareholders well informed.

It is my judgment, therefore, that the State laws give ample protection to investors in such securities. As support for my judgment in this connection, I would like to call the attention of the committee to a letter which the late Edmond H. Savord, former chief of the Division of Securities of the State of Ohio sent to Mr. Myer Feldman, counsel, Committee on Banking and Currency, dated July 27, 1955, relating to S. 2054 in answer to a letter from Mr. Feldman dated July 6, 1955. Judge Savord said in part:

"Thoughtful consideration of all the provisions of S. 2054 and their implications, convinces that grave doubt presents itself as to the existence of any actual or imperative necessity which would demand the enactment of this particular legislation. When the emphasized inconveniences accruing to the issuers falling within the purview of the particular legislation, the monetary and manpower cost inherent in the administration and the possible potential disadvantages consequent upon the enforcement of its provisions are weighed against any considerable promise springing from its adoption, it is our definite opinion that every end sought to be realized can be effectively attained by administration at the State level.

"Practically without exception, every safeguard sought to be realized by the proposed legislation is assured by protective provisions of the Corporation Code of Ohio or rendered certain by proper and efficient enforcement of the regulations and penal provisions of the Ohio Securities Act.

"Under the latter act, with the exception of securities listed on the recognized exchanges and a few well-justified exempt securities and security transactions, all securities or transactions therein are required to be registered and the division through the investigating and examining powers conferred by the act is given ample power to police activities therein. The enforcement provisions of the act are of such character as to fully clothe the division with authority, either through suspension or registration, or criminal prosecution, if necessary, to render certain that positive enforcement of the act is secured. "In the light of these circumstances, it is difficult to understand why small business, using the term in a relative sense, should be exposed to the additional burden of filing registration statements with the Securities and Exchange Commission and at regular intervals submit complicated financial reports. One speculates as to whether or not small business would not thus become extremely vulnerable to and made the prey of the larger and more formidable entity." I think these remarks by Judge Savord summarize more forcefully than I could hope to do, the safeguards and protection which Ohio laws provide for residents of Ohio in the purchase and sale of securities. His remarks confirm the statement which I have made that, in my opinion, the State laws give ample protection to investors, especially as to reporting requirements.

The extension of Federal power to the regulation of small companies on the State level where information is already available, where adequate regulatory supervision is already provided, and where there is no substantial market interest outside the State, would seem to be an unnecessary and inadvisable invasion of the State's right to regulate the securities industry within its own borders and would impose an uncalled for burden upon the companies subjected to such regulation, as well as upon the SEC.

BURDENSOME COST OF PROPOSED LEGISLATION

In addition to the lack of any need for the proposed legislation, especially as it applies to small companies, consideration should also be given to its estimated cost both to the companies involved and to the public.

It was testified at the previous hearings that the cost of compliance would be approximately $10,000 to $15,000 per year for even the smallest company subject to SEC regulation. Today, I believe the annual cost of complying with all of the provisions of S. 1642 would run closer to $25,000 per year for each company. Now, to a company with a net income of $1 million per year such additional cost may not appear to be unduly burdensome, but to a company with $500,000 of net income it would amount to 5 percent of such net income, and to a company with $100,000 of net income it would amount to 25 percent of such net income. The impact upon a small company is obvious.

Readily available and accurate information is essential to the functioning of our capital markets, but I raise the question whether, in view of the adequate laws which we now have at the State level to protect investors, and the enlightened public relations attitude which the vast majority of our small companies have with respect to their duty and obligation to keep their shareholders informed, if there is any impelling reason to apply the provisions of this bill to companies with assets of $1 million and 750 shareholders. I doubt if anyone knows how many companies it will affect, but we can be sure it will carry into nearly every nook and corner of this country. A million dollar company today is a tiny company by any standard.

What interest would an investor in New York have in such a small company located in Illinois, for instance? Or, a New Jersey or Virginia investor in a similar company in California or Texas?

One final comment in regard to cost and what it will gain for the public. The principal argument that has been advanced in support of the legislation is the need for reporting to shareholders. But the bill does not give assurance that reports will be furnished to shareholders. It will require the filing of information in Washington, but how does it get to the shareholder? Is it logical to expect that an Ohio shareholder, for instance, would spend time and money going to Washington to obtain information on an Ohio company which, by existing State law, must be made available to shareholders by the company? Isn't it more likely that he would get in his car and in an hour or two be in Columbus, Dayton, Cincinnati, Cleveland, or wherever the principal office of the company is located and talk direct to the management?

INTRASTATE EXEMPTION

The Securities Act of 1933 provides an exemption for companies whose securities are distributed locally to residents of the State of incorporation. I believe this is a desirable exemption-one that has operated to the satisfaction of all concerned and with entirely adequate protection of local interests at the State level.

In my considered judgment any legislation of the character now proposed should provide a specific exemption for local companies which are substantially owned by local shareholders. I, therefore, suggest that if this bill is favorably considered, an exemption be given for any company the majority of whose shares are owned by shareholders within the State of its incorporation.

Small industry is the backbone of our Nation and should be encouraged and not discouraged and burdened by the obligations which this bill would provide. Congress has in many ways and over a long period of years shown its concern for small business as witness the special provisions of our income tax laws, the small business administration act and other acts designed to help small business.

The enactment of this bill would be a step in the opposite direction.

COMPLIANCE TEST

As previously noted, the bill provided that every issuer with assets exceeding $1 million and shareholders of record of 750 or more persons shall be subject to the registration provisions of the bill. The asset test can be easily determined because it is a fixed-dollar amount. The shareholders test is also easily determinable, but the value represented by such shareholders can vary substantially depending upon the market value of the shares. If it were applied to a stock selling at $5 per share. for instance, it could cover a very small company. A stock selling at $100 per share would, of course, represent

a much larger company.

We would, therefore, respectfully suggest to the committee that the test figures be raised to companies with assets in the range of $15 million to $20 million and shareholders of 1.500 to 2,000 shares.

SUMMARY

Ohio is a State of many, many small industries which will or may be affected by this bill. Investment dealers form a financial lifeline between these small industries and the thousands of investors who furnish the capital for Ohio's industries. As an investment dealer we are not directly affected by this bill. But we feel a duty to oppose legislation which will impose unnecessary financial burdens on small companies, our clients, and possibly affect the soundness of their securities. Therefore, our position is that—

(1) In view of the excellent reporting job which corporations generally are now doing, not only in the interest of better public relations with their shareholders but in their own self-interest as well, there is no need for this legislation as was demonstrated by the study made by the SEC and referred to herein.

(2) The laws of most States provide for the supplying of information to shareholders and make the books and records of corporations available at all reasonable times except for improper purposes. Therefore, the extension of Federal regulation to cover small corporations whose business is primarily intrastate would impose unnecessary and unduly burdensome obligations on such corporations.

(3) The expense of administration and enforcement of the legislation would create additional burdens on taxpayers when budgetary requirements are already high.

On the basis of our experience and knowledge of the reporting and other practices of companies which would be affected by the proposed legislation, and in the light of our analysis of the SEC study, we earnestly urge that the bill be amended to exempt companies with assets in the range of $15 to $20 million and 1,500 to 2,000 shareholders from the registration, reporting, and other provisions of the Securities Exchange Act.

The CHAIRMAN. The next witness is Mr. Richard Ney, of Richard Nev & Associates.

Mr. Ney, you may put your statement, as the other witnesses have done, in the record, and if you wish to summarize it, we will be glad to have you do so.

STATEMENT OF RICHARD NEY, RICHARD NEY & ASSOCIATES

Mr. NEY. Thank you, Mr. Chairman. I want to say at this point that this is the biggest moment of my life, being able to appear before you. I feel that this is why I am alive. I will be very honest with you. It is a great honor and it makes me feel more patriotic than anything that I have ever done to be able to appear before you gentlemen, Senators, here today.

The CHAIRMAN. I appreciate that. You may proceed.

Mr. NEY. I worked until 5 o'clock this morning trying to capsulate some of the material that is in this brochure I want to discuss. And with reference to the proposals, I think they are perfect as far as they go. I don't think they go far enough concerning the Federal securities. And I want to say if you dealt, possibly, with investors the way I do and saw the agony when they come to you, not as clients, but just as individuals, the cogency, perhaps the overemphasis that I place on some of these things would be better understood. In the SEC explanation of the proposed legislation it states here that it should be emphasized that the common goal is the raising of standards in the securities markets, particularly the over-the-counter markets-particularly, perhaps, but I hope not exclusively.

I discussed the over-the-counter market; I also tried to discuss the listed exchange here, and with reference to the Securities Act amendments of 1934, which states that

Each proposal would be an important advance, but it is the sum of all of them which will produce the maximum benefit in the public interest.

And

to secure the dissemination of accurate information to investors and maintain investor confidence.

Particularly with respect to that I would like to comment more

now.

I would like it understood at the outset that I consider the securities markets a great American achievement. They are the symbols and keystone of our American way of life. They are things of will and intelligence, and I have come here in the hope that I may contribute to the improvement of their potential by helping to illumine some of their blunders and abuses in order that they may be converted into more viable instruments-instruments that will serve the purpose of our way of life rather than the purposes of our enemies. Nor can I overemphasize the seriousness of these blunders and abuses or the need implicit in them for more realistic regulations. For, although regulations are anathema to our way of life, in this instance they are imperative, I believe, if the way of life we all cherish is to survive, for the Nation cannot much longer tolerate what has, in fact, become a bureaucracy unto itself a system of highly privileged men divorced from an awareness of, or the needs of, our human traditions. And all this in the pursuit of their immediate, definite, and tangible, but myopic materialism.

Prior to my departure for Washington from Los Angeles yesterday, I located this brochure. It is called "Marketing Methods for Your Block of Stock" and is referred to on the title page as "An Investment Manager's Handbook from the New York Stock Exchange." It might, I believe, be more appropriately titled "The New Machiavelli or How To Put One Over on the Public Without Trying."

(The brochure referred to is on file with the committee.)

Mr. NEY. In the course of my talks I have suggested that the New York Stock Exchange is very much like a vast chainstore whose principal function is to prosper commissionwise by serving the institutional account at the wholesale level at the public's expense at the retail level. This is not penetratingly described in this brochure. Remembering that the securities exchanges always refer to themselves as an auction market, let me read to you some excerpts from this handbook that has been prepared for the managers of large portfolios quite a few of whom are investment advisers like myself:

From page 5:

If the customer's requirements cannot be fulfilled quickly in the auction market, his member firm might recommend one of the special procedures for handling blocks, as described in the following pages.

In other words, while the fund doesn't have to deal in the auction market, the public does. In fact, it can be shown that the public

obligation to exist only in the auction market is the sine qua non of the fund's existence. The public doesn't need the fund, but the fund needs the public and the specialist.

On page 8:

** the first of the Stock Exchange's special block procedures available to the investment manager and his member firm is called the specialist block purchase or sale.

A typical instance is then provided:

** the floor broker disclosed the details of the order (to sell 5,000 shares of stock) to the specialist and told him privately how much stock was involved and stressed the need for speed. By thus confiding in the specialist, the floor broker enlisted a strong ally.

The trade was made privately. There was no print on the ticker * * * and more than once the New York Stock Exchange likes to stress the fact that the transaction is not printed on the ticker and that, in other words, the public never learns of it, so that the process can be repeated and repeated until a large distribution is effected, the public holding the bag again—

* *

no announcement of any kind, before or after * no entry in the specialist's book. The specialist block purchase developed as a logical outcome of assessing the auction market first.

So much for the proper dissemination of knowledge to the public, one of the primary functions of all of our present regulations.

This fantastic document then pays tribute to a verbal conscience, to a lip morality when, with extreme irrelevance it states, "the block transaction would not affect the price structure in the auction market adversely." In market parlance, "adversely" means to send the price structure down so that this statement is quite right. The price structure is not affected adversely-but it should have been had the laws of the auction market been allowed to function. And who pays for it? The public, of course. The specialist has made it necessary for him to pay 5 or 6 points more for the stock so that the New York Stock Exchange could make an extra fee and the fund get out with a price advantage. Pure and simple legal larceny.

On page 10, the New York Stock Exchange states the same procedures apply for the buy side, and it is demonstrated how the investment manager can accumulate just as efficiently as he can distribute with the aid of the specialist.

In the case of an "exchange distribution" the brochure states:

No prior public announcement of a forthcoming exchange distribution is made.

And I ask you again, at whose expense?

On page 15, discussing another large block technique: "The special offering." "*** buyers are attracted by the net price offering, while the incentive commission invites special brokerage efforts * * *" while to "acquire" stock, the reverse procedure known as a "special bid" is also available.

Sellers in this case find the net price offering attractive and the special commission invites member firm brokerage efforts. ***

In other words, the fund decides that now is the time to accumulate stock of the XYZ company and "special brokerage efforts" help them to buy or accumulate one stock while "special brokerage efforts"