Imágenes de páginas
PDF
EPUB

filed, and I am confident that our industry would help in any complicated problems that a company would have.

I think the burden on the SEC is for it to judge. It is obviously convinced it can handle this burden or it would not be before this committee with this bill.

I think if you balance all that against the national commitment. for timely and adequate disclosure, you want to cut as deep down the list of stockholders as possible. It makes no difference, I would think, to an individual if there are only 499 other stockholders instead of 999 others. He would still like to know the facts so he knows whether to buy or keep that security.

Senator WILLIAMS. You made your position crystal clear, I would say. Senator Javits.

Senator JAVITS. Thank you very much. I am very glad I did wait until you were through. The chairman asked some of the questions which I had in mind, and I am delighted you answered them as well as you have.

I noticed a very interesting statement at the end of your presentation, that 18 million Americans now own securities with a value of $450 billion, one-half the total private savings in the United States. Now, this represents a very materially accelerating curve; does it not?

Mr. ETHERINGTON. Yes, it certainly does.

Senator JAVITS. Is it the policy of the exchange to encourage more and more Americans to own securities?

Mr. ETHERINGTON. Without equivocation, it is.

Senator JAVITS. Has the exchange done anything about the possibility of custodial accounts in which the individual would have no contact with the stock certificates themselves and would not be burdened with handling them, but would receive his check for a dividend, or if he wrote in and ordered a sale would receive his check just as he would with a savings bank? Has the exchange done anything about

that?

Mr. ETHERINGTON. Senator Javits, as you know, we have had some peculiar and unique and, I hope, nonrepetitive problems of our own to concentrate on in the last 18 months. A good deal of thinking has been done about this sort of thing within the industry. I have done some thinking myself, but I cannot say the American Exchange has specifically analyzed the problem.

Senator JAVITS. I believe that the whole trend of labor-management relations will ultimately depend upon increased stock ownership and profit sharing. Although this subject is quite apart from the purpose of this hearing, nevertheless, you are here, and not here often. If I may, through you, speak to both yourself and Keith Funston, I hope

that you will give serious consideration to the explosion in stock owner

ship, which I am confident is coming, analogous to the explosion in education with which we are now wrestling. I would strongly commend very serious thought on how custodial accounts could best be handled for the individual, to whom a stock certificate is a difficult piece of paper and who does not have the facilities which we normally have, who own securities.

Mr. ETHERINGTON. Senator, I might also comment I think it is germane to the consideration of this bill. I think all of us will be a

lot more comfortable in encouraging employee stock purchase plans if we are sure the employees will have the information they need to know whether they ought to hold the stock.

Senator JAVITS. I think you are absolutely right about that. I accept that amendment gladly, and I do commend to you and to the New York Stock Exchange serious consideration of these questions. Thank you, Mr. Chairman.

Senator WILLIAMS. This raises an ancillary question. We are talking about disclosure for the protection of the investor. In casual conversation occasionally we hear, "Well, they don't read it anyway." What is your impression about the quality of the decision of the average individual who is entering the investment field as a shareowner? Mr. ETHERINGTON. Well, I am glad you used the word "impression," because I have only that. But my impression would be that the quality of decision is bound to increase, because of the general educational impact of the burgeoning in shareowner population. When you get up to 18 million people and have this kind of attention paid to the securities laws by the United States Senate, people are reading and thinking more about protecting themselves in choosing better investments, and I am sure the quality of decision is getting better and better through our dealings with the public.

Senator WILLIAMS. While I am riding the train I now see people turning to the financial pages before the sports pages, although I will say, Senator Javits, you and I made the sports section of the New York Daily News yesterday. I stayed through both games Sunday. Did you?

Senator JAVITS. I only stayed through one.

That does bring to mind another point concerning which Senator Williams is entirely correct and most helpful in what he said: That is the necessity of simplifying investment information so that it isn't abstruse and is readily understandable. With respect to the custodial account idea I speak of, the stockholder would get a proxy, an annual financial statement, and additional material. I assume also that the exchanges as well as the SEC are devoting thought to the understandability of the material which is sent out and to limiting its length, for if you overwhelm someone with an enormous document, he is discouraged from reading it and you want to encourage him to read it. Am I right about that?

Mr. ETHERINGTON. Certainly.

Senator JAVITS. Thank you.

Senator WILLIAMS. We have very much enjoyed this and appreciate it. Your statement and your discussion of the issues will be most helpful.

(The prepared statement of Mr. Etherington and the technical statement of the American Stock Exchange follow :)

STATEMENT OF EDWIN D. ETHERINGTON, PRESIDENT OF THE AMERICAN STOCK

EXCHANGE

S. 1642 presents a series of well-balanced remedies for problems that have been clearly identified. It lacks the glamor of a dramatic new policy proposal. It repeats, with certain thoughtful modifications, proposals considered by the Congress in the past. But it should not be misjudged as a series of minor suggestions of no great importance to the public. The SEC has pointed to important abuses that cannot be stopped without legislation.

In a merger of opinion that may be unprecedented, the Commission has found substantial support, throughout the securities industry, for the legislation it seeks in a move toward three important goals:

First, an upgrading of the standards of entrance and responsibility for people and firms in the securities business;

Second, a refinement of the disciplinary controls of the SEC over brokers, dealers, and their employees; and

Third, an extension of disclosure requirements as the key element of investor protection.

Enactment of the bill as presented would bring about a logical and necessary extension of sound national policies tested during 30 years of experience and reviewed during 18 months of intensive study.

We have submitted a detailed statement that echoes, in part, certain technical comments made by others and cities our specific reasons for supporting the bill. My purpose in this summary is to view the proposals against the background of policies reflected in the securities laws and experience since the laws were enacted.

It is natural, at the conclusion of a special study of the securities markets, to think of S. 1642 as the product of recent thought or the expression of recent experience. There is no question that the documentation in the special study does point up the current need for this legislation. But an even more compelling consideration is the fact that 30 years of experience have revealed gaps in the Federal securities laws-gaps so wide that sound national policy is undermined and the efforts of people in and out of Government to assure responsible behavior are sometimes frustrated.

The central philosophy of the 1933 and 1934 securities laws might be distilled in three sentences: (1) A person who buys securities is entitled to the facts; (2) a person who owns securities is entitled to know when the facts change; and (3) broker-dealers should be honest, competent, and financially responsible people. Under this philosophy, the twin touchstones of national policy related to the securities industry might be characterized as self-protection and selfcontrol.

The opportunity for self-protection was afforded investors in new issues of publicly held companies, as well as to owners of securities listed on stock exchanges, through the disclosure provisions in the laws passed in 1933 and 1934. The doctrine of self-control was recognized in the 1934 act, which confirmed the primary obligation of stock exchanges to regulate their own operations and the conduct of their members.

Experience has confirmed the wisdom of these policies, but it has also revealed how unevenly they apply. Most publicly held companies have no obligation to disclose pertinent facts to their owners (except in the case of new issues) unless they list their securities on a stock exchange. Broker-dealers can skirt the industry's self-control mechanisms if they are not NASD or stock exchange members. The NASD itself lacks some of the authority it needs to preclude the admission of unqualified people. The disciplinary powers of the SEC often leave it with a choice of being overextreme or underextreme, because of the difficulty of focusing its action on an individual directly responsible for a violation.

These deficiencies in the law can be understood in historical context.. The basic Federal securities laws were born during a depression whose start, in public memory, traced to the stock market crash of 1929. Since the organization, techniques, and economic importance of the stock exchanges were well understood, legislation concerning the integrity of these markets and the practices of issuers was the proper first goal. On the other hand, the over-the-counter market, as stated in a 1936 SEC report, was one of the "enigmas" of our financial structure. It would have been difficult to frame parallel provisions governing practices in a market that was not as fully organized or as well understood. Congress did grant the SEC power, in section 15 of the 1934 act, to register and revoke the registration of broker-dealers. Moreover, through the Maloney Act in 1936, it provided for the creation of national securities associations. Since then, the NASD has become a self-governing body of critical importance to the public and the industry. It shares with the SEC coordinate responsibility for sound and orderly over-the-counter markets.

Although subsequent developments have confirmed the soundness of these legislative steps, sufficient authority to prevent or punish abuses in a huge market for securities is not lodged in anyone. One of the major reasons is the fact that

the disclosure provisions of the 1934 act have never been widened to cover many publicly held companies whose issues are traded in the over-the-counter market. We have commented in our written statement on the provisions of the bill relating to NASD authority as well as refinement of the disciplinary controls of the SEC. We support those provisions, but we recognize the fact that the NASD and the Commission are most competent to discuss their significance. For that reason, and because of our historical commitment to the policy favoring disclosure to shareowners, my remaining remarks will be directed to the critical importance of sections 3, 4, 5, and 8 of the bill.

The over-the-counter market in the 1930's was a place for trading special types of securities-railroad and industrial bonds, Government bonds, public utilities, investment trust shares, foreign securities, bank and insurance company stocks. It was also a place for handling blocks of securities considered too large to be placed in the auction market without provoking distortions or wide fluctuations. Generally speaking, however, active industrial stocks were traded on the exchanges.

The situation is not the same in 1963. The shares of many industrial corporations having substantial lists of stockholders are now traded over the counter, beyond the purview of the regulatory standards applicable to securities listed on the stock exchanges. The SEC report estimates that the dollar volume of sales in the over-the-counter market has risen from $4.9 to $38.9 billion during the last 12 years.

From a functional or economic standpoint, it is impossible to rationalize the difference in regulatory treatment of the two markets. The tested policy of providing timely and adequate disclosure to investors, who deserve a fair opportunity to protect themselves against unwise or unsuitable commitments of their funds, should apply regardless of the marketplace.

The SEC special study catalogs typical abuses tracing directly to the lack of disclosure by unlisted publicly held companies. It shows the correlation between unfair practices and nondisclosure, citing a recent 18-month period when 93 percent of all reported fraud cases where the security was named involved issues not subject to the continuous reporting requirements of the 1934 act. We would not jump from such a startling statistic to a statement that full disclosure is an impregnable shield against fraud. But the prophylactic value of disclosure is clear. It is time to place the requirements applying to large publicly held corporations on a parity regardless of the market in which their issues happen to be traded.

A proposal that a company having assets of $1 million and 500 coowners file periodic reports and furnish reasonably adequate information to its stockholders is hardly extreme. When a company has sought the public's money-and found 500 or more people to share in the risks or rewards of ownership-it is right to insist that it keep those people reasonably well informed of its business progress and financial position.

The corollary provisions of S. 1642 are equally reasonable. Under the bill, large companies would have to solicit proxies or offer their owners information substantially equivalent to that required in a proxy statement. With certain exceptions, trading of the stock by officers or directors, or those who are beneficial owners of more than 10 percent of the stock, would have to be revealed, and short-swing profits might be recoverable on behalf of all shareowners. These are the well-tested protections already in effect for similar companies whose stocks are listed.

The bill would not affect all of the estimated 11,000 companies traded over the counter. The asset and stockholder tests are set at high enough levels to postpone the application of disclosure requirements during the early growth period of small businesses. But an estimated 3,000 companies with substantial assets and wide share distribtuion would be prodded into a responsive attitude toward their owners, and another 1,000 that now report regularly would be subject to the insider trading and proxy requirements.

Leaving aside, for the moment, questions raised on behalf of banks and insurance companies, the few reservations concerning these proposals seem to be centered on the added time and cost involved for companies. Congress will want to avoid giving this factor more weight than it has. A sampling of relatively small companies listed on the American Stock Exchange, supplemented by discussions with representatives of a few New York law firms and a major accounting firm, indicates that neither the time nor the cost would be overly great.

The initial statement to be filed by a company would involve accumulating information covering a 3-year period. The task is similar to the one involved

in a listing application for our exchange and less demanding than the filing of a company when it seeks public investment under the 1933 act. As a one-time project, and not a continuing obligation, it should not present a great burden to any company having adequate books and records.

After the initial filing, the process is one of supplemental disclosure. Current reports, designated as 8-K's, would be filed after any month when there were significant corporate events. New York City law firms peg the cost of preparation within a range of $50 (for reporting routine events) and $400 (for reporting complex matters such as mergers). A sampling of American Stock Exchange listed companies indicates that the average filing is 1.7 reports per year. At least one 8-K must be filed each year. On this basis, the annual cost might be as low as $50, with the possibility of greater costs in the event of a major development. Very few companies would pay more than $200 per year.

Semiannual reports, designated as 9-K's, contain midyear profit, loss, and earned surplus figures. This form is usually a single piece of paper prepared without the aid of outside lawyers or accountants from the running records of a going concern. It should not be a burden to a company that has gone through the process of issuing equity securities held by at least 500 people.

Annual reports, designated as 10-K's, summarize material events of the preceding year and must be coupled with certified financial statements. We asked Peat, Marwick & Mitchell, an accounting firm well experienced in these matters, to advise us as to the cost for a company that has met the registration requirements of section 12 as it would be amended. The firm says that compliance, for a company that receives an unqualified report on examination of its financial statement,

"*** would not involve a material increase in the annual auditing fee which would otherwise be incurred. Compliance involves the expansion of certain financial statement captions, additional footnote disclosure, and the submission of additional schedules, data for all of which could be updated periodically by company personnel. These data, in our opinion, could be covered by the accountants' report in the absence of unusual circumstances without involving a substantial increase in time on which the audit fee is based.".

We have attached a copy of the full letter from Peat, Marwick & Mitchell to the written copy of this statement. (See p. 146.)

Our survey also shows that proxy statements normally involve legal costs ranging from $500 to $1,500. If major events, such as mergers, recapitalizations or the adoption of stock purchase plans are involved, the preparation of proxy materials is handled as an incidental part of the larger task involving creation of the corporate papers underlying the corporate event. Several law firms say there is no extra charge for proxy material work in many of these major situations.

The average proxy statement runs to about six pages. Printing and mailing costs vary with the size of the statement and the mailing list, but would not be a significant consideration.

Joining all of these figures, we conclude that the total cost of annual compliance with all of the requirements now applicable to lised companies apparently would be in the area of $1,500 to $3,000 for the smaller industrial companies covered by this bill except in most unusual circumstances. A company willing to share the cost of disclosure when it first turns to the public market for funds should not object to the relatively minor cost of keeping its owners and the public advised of its progress or problems.

The size, public share distribution and accounting requirements of corporations vary widely. We do not want to overgeneralize, but we have made an effort to weigh the time and cost factors fairly. In the absence of special problems confronting a particular company, we see no evidence that the requirements in S. 1642 would be unfair or unreasonable. In addition, it is important to note that the legal and accounting costs involved in complex matters relate largely to the handling of the transactions themselves, rather than to reports after the event.

The questions of those speaking on behalf of banks and insurance companies have a different emphasis. There is much to be said for suggestions that both types of business are already regulated. Surely no business wants to be stifled in a maze of redtape or have an unnecssary obligation to respond to authorities whose purposes or requirements may sometimes overlap in substance or clash in procedure.

20-226 0-63- -11

« AnteriorContinuar »