SECURITIES ACT OF 1933

The Securities and Exchange Commission made public today an excerpt from a letter of its General Counsel, John J. Burns, considering the application of the exemption in section 3(a) (10) of the Securities Act of 1933 of securities issued in exchange for other securities where the terms of this issuance and exchange were to be approved by a State public utility commission. Although the excerpt concerned a proposed consolidation under the supervision of a public utility commission, the interpretation of section 3(a) (10) applies to all exchanges of securities approved by State commissions or other State authorities.

The excerpt from the letter follows:
Section 3(a) (10) exempts from registration:

Any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.

I shall take up in order the three questions you have raised as to the interpretation of this section.

1. Is adequate notice to all persons to whom it is proposed to issue securities of the hearing on the fairness of their issuance necessary for an exemption under section 3 (a) (10)?

Although the wording of section 3 (a) (10) does not demand such notice, in my opinion this requirement is to be implied from the necessity for a "hearing . . . at which all per

sons to whom it is proposed to issue securities -shall have the right to appear." To give substance to this express requirement, some adequate form of notice seems necessary. The usual practice of giving notice to persons who will receive securities in reorganizations, mergers and consolidations supports this view. Of course, the question of what mode of notice is adequate cannot be answered in the abstract but may vary with the facts and circumstances in each case.

2. Is a grant of "express authorization of law" to a state governmental authority to approve the fairness of the terms and conditions. of the issuance and exchange of securities necessary for an exemption under section 3 (a) (10), or is express authorization merely to approve the terms and conditions sufficient?

The punctuation and grammatical construction of the last clause of section 3 (a) (10) indicate that the words "expressly authorized . . . by law" were not intended to modify "courts or officials or agencies of the United States." In my opinion a state governmental authority (with the possible exception of a banking or insurance commission) must possess express authority of law to approve the fairness of the terms and conditions of the issuance and exchange of the securities in question. This interpretation seems necessary to give meaning to the express requirement of a hearing upon the fairness of such terms and conditions, which must subsume authority in the supervisory body to pass upon the fairness from the standpoint of the investor, as well as the issuer and consumer, and to disapprove terms and conditions because unfair either to those who are to receive the securities or to other security holders of the issuer, or to the public. This requirement seems the more essential in

that the whole justification for the exemption afforded by section 3(a) (10) is that the examination and approval by the body in question of the fairness of the issue in question is a substitute for the protection afforded to the investor by the information which would otherwise be made available to him through registration. The requisite express authorization of law to approve the fairness of such terms and conditions, however, probably need not necessarily be in haec verba but, to give effect to the words "express" and "by law," must be granted clearly and explicity.

3. Does a hearing by an authority expressly authorized by law to hold such a hearing satisfy the requirement of a hearing in section 3(a) (10), if the state law does not require a hearing?

I believe that, as a corollary to the view expressed in my answer to the second question, supra, and in order that a hearing have legal sanction, the approving authority must be expressly authorized by law to hold the hearing;

SECURITIES ACT OF 1933

but in my opinion it is unnecessary that the hearing be mandatory under applicable state law. Therefore, if state law expressly authorizes the approving authority to hold a hearing on the fairness of the terms and conditions of the issuance and exchange of securities, and such a hearing is in fact held, this requirement of section 3 (a) (10) is satisfied. As stated before, the express authority need not be in any particular language, but a clear and explicit grant of statutory power is essential.

You will appreciate that the General Counsel's office cannot attempt to interpret the relevant statutes of each state to find whether they grant state authorities the powers necessary to satisfy the requirements of section 3 (a) (10). Obviously, these are questions of local law and must be for the determination of local attorneys. For these reasons, I am not in a position to render any opinion as to whether specific legislation grants to a state authority the powers necessary for an exemption under section 3(a) (10).

The Securities and Exchange Commission today published a revised opinion of its General Counsel, John J. Burns, as to the applicability to Collateral Trust Notes of the exemption from registration provided for in section 3(a)(3) of the Securities Act. A recent opinion on this matter, made public in Release No. 388 has been withdrawn.

The revised opinion follows:

Section 3(a) (3) of the Securities Act of 1933 exempts from the registration requirements of the Act "Any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."

The question of what is a "current transac

tion" is one which must be considered in the light of the particular facts and business practices surrounding individual cases. In general, it would seem that the proceeds of notes having a maturity of not more than 9 months, of the type normally issued by finance companies, may be regarded as used for current transactions if the following conditions are satisfied:

1. The issuer of the notes for which exemption is claimed is in the business of making loans on or purchasing notes, instalment contracts, or other evidences of indebtedness.

2. The proceeds of the notes for which exemption is claimed are used for current transactions, which may properly include either (a) the making of loans upon or the purchasing of such notes, instalment contracts, or other evidences of indebtedness in the usual course of business, or (b) the