of stock, whereas the Commission's form 8-K, the filing of which would be required by the bill, must be filed soon after the occurrence of any of these material events. This is information that is readily available and inexpensive to file, but which is of great value to investors." I must question the accuracy of the thought expressed here that the States do not know about or control the "issuance of stock," "mergers," and "acquisi tions." I cannot, of course, speak for all jurisdictions but I do know that in most States no "merger," "acquisition," or stock issue is possible without the written approval of the insurance supervisory authority. Paragraph 1 of page 53 reads as follows: "The Commission's annual report form under the Securities Exchange Act, form 10-K, requires no information, except for certain supplementary reconciliations and explanatory notes, from insurance companies that is not contained in the annual statement to State regulatory officials; indeed any deviation therefrom must be specifically noted. The main difference between form 10-K and the annual statements submitted to State regulatory officials is that the former is more simplified and, in general, contains less information than the latter." Paragraph 2 on page 54 reads as follows: "Article 7A will, in the main, codify the above-described practices of the Commission with respect to life insurance companies. It will not prescribe any method of reporting that is inconsistent with the methods prescribed in the annual statement blank adopted by the National Association of Insurance Commissioners. Consistent with the Commission's present practices, the proposed article does not require the reporting of any financial information to the Commission which cannot be obtained out of the uniform NAIC annual statement or which is not otherwise readily available." The above statements, if they mean what I believe them to, verify the fact that requirements proposed will be mostly a "duplication" and are therefore, unnecessary. I trust that the majority of the Members of Congress will see fit to include in H.R. 6789 an exemption of insurance companies. Sincerely yours, PAUL A. HAMMEL, Insurance Commissioner. THE AMERICAN DRUGGISTS' INSURANCE CO., Hon. OREN HARRIS, House Office Building, Washington, D.C. DEAR REPRESENTATIVE HARRIS: We write to you as chairman of the House Interstate and Foreign Commerce Committee, to whom Senate bill 1642 has been referred since it has now passed the Senate. We wish to register our objection to this Senate bill 1642 which would extend the jurisdiction of the Securities and Exchange Commission to all transactions involving over-the-counter securities, including the stocks of insurance companies. Insurance companies should be excluded from the provisions of Senate bill 1642 because they are already adequately regulated by the various State insurance departments. This bill would impose a very difficult burden on small insurance companies and would increase their cost of operation substantially. This is an unfair burden since it affects only capital stock insurance companies, when it is a fact that mutuals already have serious and substantial other advantages. Capital stock companies are already having a difficult time making a profit and further regulation and burdens upon their operation is wholly unnecessary and uncalled for. We hope you will express our opposition to Senate bill 1642 and please understand that we are very active in the State of Arkansas and now insure most of the retail drugstores there. Thank you very much. Yours truly, DAVID P. PICKREL, President. GREAT NORTHWEST LIFE INSURANCE CO., Hon. OREN HARRIS, DEAR SIR: We wish to put this letter on record with you as the official opposition of this company to S. 1642, which is a bill to amend the Securities Exchange Act of 1934 by extending the reporting requirements, proxy rules, and "insider training provisions" of the 1934 act to stock life insurance companies having more than 500 stockholders and assets in excess of $1 million. This bill is pending before your committee in the Subcommittee on Commerce and Finance. While we have assets considerably in excess of $1 million, we do not have more than 500 stockholders. Indeed, the number of our stockholders is considerably less than that. We would not be affected by this legislation, and you might feel that therefore we have no concern with it. We nevertheless oppose it for the following reasons. The result of this measure will be regulatory confusion. The National Association of Insurance Commissioners will require that all stock life companies furnish for 1964 the very information which S. 1642 would require. In our report to our State insurance commissioner therefore we will give this information, although we would not be included in the proposed Federal legislation. We are perfectly willing to give this kind of information and, indeed, have furnished both the financial and proxy information to our stockholders for many years. In our opinion however the critical issue here is that we firmly believe that the requirement of Federal reporting and regulation in addition to the State requirements will inevitably lead to a breakdown of efficient regulation. If the Federal Government waits for State action in regulatory matters, or the States wait for Federal action, critical problems can be allowed to drift and confusion of leadership develop. Moreover, the State regulation of insurance is well removed from politics and is well accepted throughout the industry. It works, and it works efficiently. Unless State regulation is eventually to be abandoned entirely, we submit that there is no need for S. 1642 or legislation of like kind. Yours very truly, C. ROBERT OGDEN, President. WESTERN INDUSTRIAL SHARES, INC., Representative HARLEY O. STAGGERS, Chairman, Subcommittee of Commerce and Finance, Committee on Interstate and Foreign Commerce, Washington, D.C. DEAR REPRESENTATIVE STAGGERS: Western Industrial Shares, Inc., a mutual fund, and its management company, Investment Management Corp., are so small as to be inconsequential in the industry. We have chosen not to belong to the National Association of Securities Dealers which we view even now as a restraint of trade. The association has conspired not to do business with nonmembers and since the control of the securities business rests in their hands we are already deprived of the single major source of doing business with the public. Had we chosen to join the NASD it would have been of no value since the member firms would have naturally sold mutual funds whose history and size facilitated a ready sale. Specifically I refer to section 6(a) of S. 1642 which your subcommittee is now considering. This amendment to section 15(a) of the Exchange Act would compel a broker dealer such as Investment Management Corp., to become a member of a national securities association or to be put out of business. With individual freedom comes individual responsibility. We absolve this responsibility partly by a 30-day money back return regardless of reason; and, a return within a year in case of misrepresentation, etc. It has not been proven that either membership or nonmembership in any association alters standards of ethics. To compel a small firm to join an association is to legislate away our constitutional rights and to leave us to the discretion and mercy of larger and stronger competitors and, to a group not judicial in training which might not be impartial in judgment. Are we As a small firm we already quake under the ominous shadow of the SEC, somewhat frightened and afraid to voice ourselves for fear of reprisal. In my opinion, the industry is already stultified in being able to develop new and progressive ideas by which the free enterprise system is advanced. further to restrict liberty by compulsory membership in a trade association with life or death powers over its members when in this day of mass-media even the slightest censure is the kiss of death? We are a small minority; it is easy to deprive us of our liberty. INVESTMENT MANAGEMENT CORP., STATE BOARD OF INSURANCE, Re S. 1642 Hon. OREN HARRIS, Chairman, House Interstate and Foreign Commerce Committee, DEAR CONGRESSMAN HARRIS: This summary of the convictions of the State Board of Insurance, State of Texas, is respectfully submitted for inclusion in the hearing record of the House Interstate and Foreign Commerce Committee on S. 1642. As a first consideration the Texas board requests exemption of all insurance companies from SEC regulation. As a second consideration, in those areas where similarity of operation exists, to wit: financial condition and proxy solicitation, the board opposes SEC regulation of one type of insurance company (stock) and nonregulation of mutual, reciprocal, Lloyd's assessment, stipulated premium, and other types of competing organizations. Subjects of concern and extant circumstances are briefly discussed below: State regulation is more exacting and comprehensive Public disclosure could hardly be more complete or detailed. Annual statement requirements of insurance companies are searching and voluminous. They contain more data than is required by SEC. They are public records in each State of license. Their contents are published in several services of wide national distribution. Annual statement blanks for 1964 contain "stockholders information supplements" as prescribed for use in all States by the National Association of Insurance Commissioners. These stockholder disclosure requirements equal those of SEC. Texas authority to enforce compliance is clear and absolute. Texas insurance companies are required to be examined every 6 months until 3 years old and every 2 years thereafter. This work is done at the offices of the companies by a large staff of trained examiners and actuaries. Financial condition, competency of management, and compliance with law are determined. SEC authority stops well short of this State authority. S. 1642 authorizes Federal regulation of insurance The possibility of Federal insurance regulation is a very real one. The Securities Exchange Act of 1934, subsection (b) of section 13 provides in part: "The Commission may prescribe * ** the methods to be followed *** in the appraisal or valuation of assets and liabilities ***." Further, authority is granted to issue "such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors * * *." These grants of authority are vast. They are comparable in extent to that under which State supervision functions. Mutuals will have a competitive advantage It has been the policy of Congress for 50 years and of the States for longer periods to make no difference in application between stock and mutual companies. The common purpose has been to preserve competition in a severely competitive business. Stock insurance companies, particularly the small stock companies, translating the rather substantial expenses imposed by S. 1642 into premiums charged to policyholders, could be at a severe, even disastrous, disadvantage. There is evidence that some insurance people, seeking reduction of competition, support SEC entrance into insurance supervision: some persons in the life insurance business would welcome (SEC) intervention." Page 227, Michigan Law Review, December 1963. "The large number of companies now operating in the United States, and the rapid rate at which the number has grown in recent decades, suggests that some restrictions upon access to the market would do no harm and might possibly be desirable." Page 253, Michigan Law Review, De.ember 1963. "Every thoughtful life insurance executive must necessarily feel some concern about the number of companies being formed." T. A. Sick, chairman, Life Insurance Association of America, as quoted in January 20, 1964, United States Investor. Such concern may be misplaced. Best's Weekly News Digest, February 10, 1964, reports there to have been a net increase of only 21 life companies (stock and mutual) in the United States in 1963, less than one-half company per State, and a net decrease of 47 fire and casualty companies (stock and mutual). This would not appear to warrant Federal legislation. At apparent odds with the restraint theories of SEC and Mr. Sick, is James J. Saxon, Comptroller of the Currency, who, administering to a rapidly expanding number of banks and branches, is quoted: "It is a bleak future we would have to paint for the future of our banking" system, if our efforts were to be centered on safeguarding the markets for any segment of that system." "*** banks ought to be left free to compete for the available pool of savings without the Government's intervening." January 20, 1964, United States Investor. The policy of the Legislature of Texas is to permit incorporation of soundly financed insurance companies to the limits demanded by an expanding economy and to permit competition within limits neither jeopardizing to policyholders nor beyond normal risk to stockholders, and, in the application of that policy, not to discriminate as between stock or mutual companies, or large or small companies. Small companies will be damaged It is undisputed that young insurance companies operate at substantial losses for years. Such companies would be further burdened by the substantial expense imposed by S. 1642. Even the established companies would be put to expense not inconsequential in amount. While Mr. Cary has stated that the added burden on life companies would be tempered by his willingness to accept annual statement forms, plus supplemental data, the statement may have obscured the fact that fire and casualty companies were excluded from his offer and will be subject to the full impact of added expense. Furthermore, subsection (2) of section 13 (a) of the present act and as amended by section 4 of S. 1642 specifically authorizes requirement of certified reports by independent public accountants to be filed annually and as often as quarterly. Eighty-three Texas companies would immediately come within S. 1642. As secondary sales of stock add to stockholder numbers and as assets increase in the next few years the number should reach 150. Proxy solicitation If there be a need for disclosure with proxy solicitations, such need exists in mutual as well as stock companies. Solicitations, in both instances, are of "owners" and for the purpose of electing management. The Texas Supreme Court has held that the State of Texas, if it were a policyholder in a mutual fire insurance company, would occupy the position of a "stockholder." (Lewis v. Austin I.S.D., 161 S.W. 2d 450) The Wisconsin Insurance Department has been upheld by the trial court in its position that in an insolvency of a mutual fire insurance company its policyholders have no claim for unearned premiums since the policies are, in effect, similar to stock owned in a corporation. (Insurance Guide, January 1964) Conclusion To avoid burdening the record, comments on conflicts of S. 1642 with congres sional policy as established in the McCarran Act and on other subjects amply developed in hearings have been omitted. Very truly yours, WM. HUNTER MCLEAN, Chairman. DURWOOD MANFORD, Member. Hon. WILLIAM CARY, LOS ANGELES, CALIF., December 5, 1963. Chairman, Securities and Exchange Commission, Because of newspaper reports that a State securities commissioner has questioned the constitutionality of pending legislative proposals to expand controls exercised by Securities and Exchange Commission over securities brokers and dealers and securities markets, I wish to advise that in my opinion there is no question as to the constitutionality or desirability of the proposals in question. The California securities law and the office I hold were established in 1913. Citizens of California are probably the ultimate purchasers of more securities than citizens of any other State. Between 1959 and 1962, according to the census of shareholders published by the New York Stock Exchange, more Californians became, for the first time, shareholders in publicly held corporations than citizens of any other State, by a wide margin. Our securities regulatory staff is considerably larger than that of any other State. Consequently the proposed Federal legislation has necessarily received our attention. The constitutionality of the proposals appears beyond question for several reasons. A basic reason in my opinion is that the securities markets are primarily national markets. Elaborate systems of interstate electronic, telephonic, telegraphic, and other communication devices connect the offices of most securities brokers, the public's money is primarily invested in securities sold in interstate commerce. Most of the public's funds are invested through brokers doing an interstate business. There are hardly any corporations whose shares are held by the public which do not have shareholders residing in more than one State. Those securities which are not sold in interstate commerce are ordinarily sold in competition with securities which are sold in interstate commerce and therefore have a direct effect upon securities sold in interstate commerce. If a securities broker is to render proper service to his customers he should, to the best of his ability, sell the securities best suited to the needs of his customers. therefore, in the ordinary situation if the broker is to properly serve his customers he must understand, to a substantial extent, securities which are sold in interstate commerce, as well as securities sold purely locally. The desirability of the current legislative proposals is demonstrated by the careful study made by the SEC pursuant to congressional authorization. In the past the Securities and Exchange Commission have successfully coordinated their regulatory efforts in California with those of the California Division of Corporations. I see no reason for supposing that such coordination will not be continued in the future. In the event Congress should grant additional authority to the SEC, I would anticipate that the coordination between the SEC and various State commissioners would grow even closer since we all have the same general objectives-that of protecting the investing public. I see no basis for assuming that any regulatory authority granted the SEC by the proposed legislation will not be as wisely and efficiently administered as in the past. On the contrary, the proposed increased powers should permit greater protection to the public with better coordination with the securities industry so that in this area the national growth can expand even more rapidly and with even greater protec tion to the public. You are authorized to make any use which you deem proper of this telegram. Although, as you know, I am commissioner of corporations of California, I feel this legislation does not directly affect my official duties and therefore am sending this telegram in my private capacity and at my own expense. With best wishes for the success of your fine le lat posals, cordially JOHN G. SOBIESKI. |