SECURITIES EXCHANGE ACT AMENDMENTS OF 1973

MONDAY, JUNE 11, 1973

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCE AND FINANCE,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2218, Rayburn House Office Building, Hon. John E. Moss, chairman, presiding.

Mr. Moss. The subcommittee will come to order.

We are pleased to welcome as our first witness this morning Prof. Roy Schotland.

STATEMENT OF PROF. ROY A. SCHOTLAND, GEORGETOWN

UNIVERSITY LAW CENTER, WASHINGTON, D.C.

Mr. SCHOTLAND. Thank you, Mr. Chairman. For the record I will make a brief biographical statement.

I am a professor of law at Georgetown University Law Center. I served as consultant to this committee last summer. I worked on the Institutional Investors Study and as editor of the Special Studies of the Securities Market. I also previously had been a law clerk at the Supreme Court of the United States.

The thoroughness of your hearing has been so great that as I understand it the originally contemplated 3 days have now run to 5.

Since you will still have questions and discussion to pursue with the Commission, I am not your last witness, but at the least and in the interest of brevity, I will reduce my testimony to direct consideration of the provisions before you.

Mr. Moss. The entire, formal statement will be incorporated in the record and you may summarize your statement.

Mr. SCHOTLAND. In my prepared statement, I set forth three propositions which I will set aside today except to the extent you might wish to explore them by questions. First, I submitted and stand by the proposition so well expounded before you on Friday by Commissioner MacIntyre.

To put it in my own words, Congress has lost its arms. The familiar and comfortable assertion that the SEC and other so-called independent commissions are "arms of Congress" was true back when Mr. Rayburn presided as chairman of this committee, creating several of those commissions, including the SEC, but it is not true today.

Second, I explored how regulatory independence has been undermined by a series of laws which were sound and effective for the execu

tive branch, but which lumped in the independent commissions and were passed without any, or any significant, attention to their effect on such commissions.

The impact, from the Budget and Accounting Act of 1921, to the Reorganization Acts, has been to make the independent commissions for all significant purposes simply parts of the executive branch.

Third, I considered how the loss of independence has hurt the SEC, noting in particular, as many of you have pointed out in these hearings, the importance of the budget constrictions which so limited SEC effectiveness in the late Johnson and early Nixon years.

With your permission, I will start at page 21 of my original statement, requesting that the whole be incorporated in your record, and will try to focus on matters which questioning in the hearing has shown to be of prime interest, and in doing so will add bits to my original statement.

I will also raise for your consideration some matters not presently in the bill.

Turning to H.R. 5050's proposed section 4(a), first, the third sentence barring stock market operations by Commissioners, is retained from existing law, but I believe it needs both clarification and the addition of a new provision.

As to the clarification: Either by amendment or explicit legislative history, it should be made clear that Commissioners are not violating the law when they engage in ordinary purchases or sales of stock in full compliance with the Commission's regulation concerning members and employees' securities transactions.

This clarification has some importance, because as Manny Cohen stated last week, the President might ground his removal of a Commissioner upon the claim that that Commission has engaged in "stock market operations" and therefore it is important to clarify just what kind of such operations constitute malfeasance.

As to the additional provision, it has become customary for high Federal officials, including several SEC chairmen, to put their holdings into a blind trust. However, for the sake of appearances as well as to avoid potential abuse, the law should assure that the blind trusts are truly blind.

Doubts will persist about the integrity of such trusts as long as the official selects the sole trustee and has unlimited discretion in making that selection, and as long as the trust is only partially blind.

For example, as Bradford Cook testified when up for confirmation in February, in response to Senator Brooke's probing questions about Mr. Cook's blind trust, Mr. Cook could tell from his tax return what securities originally put into the trust were still there.

Contrast this with the admirable procedure followed by Senator Percy, who has the firm which prepares his tax return conceal from him all information about his blind trust's sales of securities.

I submit that in order to assure that blind trusts accomplish their purposes and do not become merely one more item contributing to cynicism about official integrity, the time has come to legislate on such trusts, probably by authorizing the Comptroller General to promulgate regulations which shall include provision for an independent trustee as well as the trustees selected by the officials in question.

Second, provision should be added to assure that it will no longer be possible for a President to evade the protection and independence

given by the 5-year term provision by continuing in office commissioners who are past the mandatory retirement age of 70, but for whom the President waives that age limit by reappointing for single-year

terms.

Whatever the justification for keeping in office such unique figures as J. Edgar Hoover, when it comes to independent regulatory commissioners on multimember bodies, it seems clear that independence is undermined without any justifying necessity by allowing 1-year waivers of the Retirement Act provisions.

In raising this point I intend no disrespect for anyone who now or at other times has been in this situation, and to underline that, may I point out that you may wish to provide that the 70-year limit shall not take effect in the case of independent commissioners whose term runs beyond their 70th birthday.

I am not against people over 70 on the commissions, but only against their being kept there by single-year appointments.

Third, new language proposed for the conclusion of section 4(a) aims at imposing a limit on the President's power of removal of commissioners.

I applaud the proposal, but deem fully effective limit of the removal power to be indispensable to independence, and therefore believe more is needed than the bill contains.

If you stop with the proposed language, I submit that no effective change will be made.

Unless the commissioner being removed is so unusual a person—or in so unusual a situation-that he will try to blow the whistle on the President, what will happen under the new language is what happens

now:

The President will announce that Commissioner X has submitted his resignation and except for a little buzzing here and there, that will be the last of Commissioner X.

I propose that in addition to language limiting the grounds for removal, we need to make compliance with that language more likely. At present, the most a very determined commissioner could do, if he had not resigned but it was announced that he had, is to sue in court. That course of action is unlikely to be taken and too slow for matters like these, and I cannot imagine any court ordering restoration of the office-the most that will be won is back pay, which does something but not much for regulators' independence.

I submit that any commissioner wishing to contest his removal should be entitled to secure the advice and consent to his removal just as was required for his appointment. He should also be entitled to sue if he wishes, but if the Senate does not agree that there was neglect of duty or malfeasance in office, then he should retain his office.

I have no doubts of the constitutionality of such a provision with respect to such a body as this Commission. See Weiner v. U.S., 357 U.S. 349, 356 (1958).

Fourth, if any new limits on the President's power of removal are established, I believe it is crucial to consider whether there should be one exception to such limits.

When a new President takes office, should he not be free to remove existing commission chairmen and appoint new chairmen? I am not sure what the answer should be, although to the extent you believe that practice over the last 10 or more years represents both reality and wis

dom, then we should have a law conforming to it. Certainly there is a strong case for allowing a new President to appoint new commission chairmen just as there is a strong case in all other situations for making independent commissioners and chairmen less removable than ordinary executive officials. Whatever answer you may conclude is the right one, the two situations should be considered separately.

Fifth and last on section 4(a) is the question of holdover periods and recess appointments. I know there is a concern that appointments be for full terms rather than such short terms as might undercut independence, and in addition, at least Congressman Eckhardt has indicated a concern about recess appointments.

As the bill stands, as Manny Cohen has noted, one probable result of the proposed language will be to increase the number and length of vacancies, and thus increase the number and significance of recess appointments. This will occur because the bill shortens the holdover period, and I must question whether the shortening is likely to be as productive of good results as of undesirable ones.

In addition to calling for reconsideration of that holdover change, I have three proposals: First, if a commissioner is reappointed, it should always be for a full term rather than for a shorter term, as might be possible if there is more than one vacancy at a time.

Second, it is worth thinking about whether we shouldn't entirely abandon the idea of five staggered terms, and instead make all appointments run for full 5-year terms commencing anew with each appointee. I believe there is more damage to independence from short-term appointees concerned about an imminent reappointment. than there is from the remote possibility of having several vacancies arise at once more frequently than already occurs.

As for recess appointments, could a statute, as one of your members has explored in this hearing, limit the number of opportunities for recess appointment by providing that the commission should not consist of five members, but rather up to five, and that if a resignation or other exit occurs after, say, September 30, then no vacancy should be deemed to exist?

I have two concerns about such a provision. First, I believe there is as much or more harm from undermanned commissions, hung up in tie votes and without a full complement of members to cover the ordinary division of responsibilities, as there is from bad recess appointments.

Second, I believe such an attempt to limit the existence of vacancies would be unconstitutional: The very purpose of the Constitution's giving the recess appointment power to the President is to assure that whatever offices have been created to do the Government's work shall not lie empty simply because the Senate happens not to be in session.

As for the proposed section 4(b), calling for Senate confirmation of the chairman seems not only a wise, but a necessary adjustment to recognize the situation which has evolved since the Reorganization Act of 1949 so increased the authority of the chairman.

As for the proposed section 4(c), dealing with the appointment and compensation of staff, three points not treated in the bill. The first point was raised by Congressman Stuckey's questions to Mr. Cohen about whether the bill should contain a provision like that in the

Consumer Product Safety Act, limiting the game of musical chairs by which members and staff of the Commission move directly from the commission to representing regulated persons.

With all respect, I must disagree with Mr. Cohen, and I take heart only because I have your Product Safety Act on my side.

Much of the problem of regulation has been caused by the musical chair game. I am not for a moment suggesting that people, while at the Commission, are less wholehearted and dedicated than they should be. Rather, I suggest that many of the ablest people leave too soon, unlike the really sadly few great public servants who, like Mr. Cohen and Phil Loomis and Irv Pollack, have both the highest ability and the dedication to keep that ability in the public service for a long time. Agencies are established to build up expertise, and inevitably that expertise resides more in the staff than in the members. But early exits diminish that buildup. In fact, the SEC is and for long has been performing three important functions for the private bar, first, as a centralized recruiting ground, second as a training ground, and third as a set of associations and acquaintanceships which facilitate private representation. None of this is illegal or unethical, it is simply that it works to improve the quality and facility of private representation, and to reduce the continued expert quality of public representation.

It seems to me that you did right in the Product Safety Commission Act last session, and that if you were right to so provide for that new body with a much greater recruiting challenge than the prestigious SEC, it is right to so provide for the SEC and similar bodies.

Nor is there any great hardship imposed by a requirement like that you put into the Product Safety Commission. Your own staff and the staffs of many other government offices are testimony to the valuable service that SEC alumni can perform for the people if they do not race from the Commission to the private bar. And I cannot believe that private firms would lose all interest in these people 1 year later, or in having them work for 1 year on non-SEC matters. Indeed, if these people would lose so much of their attractiveness to the private bar unless they came straight from the SEC side to the private side of SEC matters, that argues all the more for a statutory restriction of some kind.

My second point about section 4 (c) may be hard to believe but it is utterly serious. I have no statute lying on my side here.

Do you think Congressmen and commissioners do work as important as, for example, the new Finance Accounting Standards Board, which has seven members responsible for establishing standards of financial accounting and reporting? This is not a governmental body, but has a role and impact hard to distinguish from an official regulatory commission. The members receive $100,000 a year. I think they are worth what they get. I think the accounting profession recognized the importance of the board's task and the necessity of securing the best available people.

I think the same is true of Members of Congress and at least officials appointed with advice and consent. That is, I think we are shackling the vigor and quality of protection of the public interest, by acting as if the spirit of public service will adequately draw people into public office.