Senator WAGNER (chairman of the subcommittee). Will you proceed, please, Mr. Quinn?

STATEMENT OF CYRIL J. C. QUINN, VICE-PRESIDENT, TRICONTINENTAL CORPORATION AND PARTNER OF J. & W. SELIGMAN & CO., NEW YORK CITY

Mr. QUINN. Thank you, sir.

Senator WAGNER. Mr. Quinn, you represent the Tri-Continental system?

Mr. QUINN. Mr. Chairman, I should like to begin by explaining that I am a vice president and director of Tri-Continental Corporation and of the four other investment companies that are associated with it. I am also a member of the firm of J. & W. Seligman & Co.

Like Mr. Bunker, in my discussion I shall confine myself to only the closed-end companies. I am not going to talk about open-end companies, unit-certificate companies, or those other types of companies with which I am not familiar.

I am proceeding on the assumption that you are not interested in generalities, neither are you interested in any extended discussion of the detailed, technical draftsmanship of the bill-although I must say that in some sections it is rather ambiguous, in a few sections it is rather contradictory, and in many places it is so vague that it is very difficult to comment successfully upon it.

I assume that what you really are interested in is in knowing what is our position with respect to regulation-that is the first thing; second, what sections I think are in the bill that should not be in itthat is the second thing; third, what, as a person with some practical experience, I think of the way that some principles with which we agree have been worked out, in those cases where we disagree with the manner of working them out.

In other words, I am proceeding on the assumption-and this is confirmed by the way the bearing has gone that you welcome an honest and sincere attempt to help you gentlemen work out workable and reasonable regulations.

Let me cover the first point, as to my position with regard to regulation.

Senator HERRING. Mr. Chairman, I wonder if Mr. Quinn cannot address the Secretary, and then we shall all hear better, down here, and I think you will hear just as well, will you not?

Senator WAGNER. Yes, of course. Incidentally, I do not want to be critical at all; I know we all do it; but if we could refrain as much as possible from conversation, we shall all be helped very much.

I am as much guilty of that as anyone.

Senator HUGHES. I wonder if the Senator would not be in a better position up here at this end of the table.

Senator HERRING. I can hear all right; I am just thinking about some of the rest.

Mr. QUINN. I am sorry.

If I may readvert to our position with respect to regulation, Senator: In 1937, we, like Mr. Bunker, appeared at a public hearing of the S. E. C. in connection with the investigation and hearing on our companies. That was part of the general investigation of all investment companies. The chairman of the companies I represent at that

time stated that he felt some measure of governmental regulation of investment companies was desirable; he said he felt that if it was done on a proper basis, it would result in benefits to the holders of investment-company securities and to the public.

That was our position then, and that is our position now.

I might add that the statement of policy, which contains certain specific recommendations and certain general recommendations about what a proper regulatory bill ought to be, was sent out to all the shareholders of the companies. Some 40,000 shareholders got that statement at that time.

Now I come to the second question which I think you are interested in: That is, What parts of the present bill do I think have a proper place in a sound regulatory bill?

Mr. Bunker has set down certain principles. I shall try to elaborate those somewhat and to tie them in to the specific bill under discussion. I must add, however, that these things which I think should be in a regulatory bill, I think should be there in principle. I say that because I think there are many reservations with respect to the way in which they are put in there.

However, in principle I think a proper regulatory bill should contain (1) a provision for the registration of investment companies; (2) a provision for classification and subclassification of investment. companies, although I think that the classifications used in this particular bill are illogical and absolutely misleading. I refer to the fact, for instance, that a company is called a trading company, for instance, because it has senior securities outstanding which has nothing to do with whether or not it is a trading company. However, that is a further detail.

The third point that I have in this connection is I think a proper regulatory bill should contain provisions requiring the approval of stockholders for any change in fundamental policy. However, this is not a subject which is easy of solution; and Mr. McGrath, another one of our group, will later explain to the committee some of the difficulties encountered in this respect, under the provisions of this bill.

Fourth. I agree that there should be a prohibition against short sales and participations in pools or similar accounts.

Fifth. I think there should be prohibition against any direct sales or purchases of securities or other property between the investment companies on the one hand and their officers, directors, sponsors, and 10 percent shareholders, on the other hand. I say "10 percent," because that is the rule laid down in the other laws as to the person who has to report his holdings. This should not, of course, prevent the payment of salaries, management fees, and customary charges for agency services; and you will also hear from some other gentlemen, who are going to appear later, that a flat prohibition of this kind has certain disadvantages to particular companies. I think you gentlemen ought carefully to consider their viewpoint in connection with that.

Sixth. I think there ought to be requirements for adequate representation on boards of directors of persons independent of the management or sponsors.

Seventh. I think there ought to be a prohibition on loans by investment companies to officers, directors, or sponsors.

Eighth. I think there ought to be a requirement that all management or investment advisory contracts be submitted to stockholders. I cannot, however, agree that the basis of compensation under such contracts or the compensation of officers and directors should be limited in the manner prescribed in the proposed legislation. Furthermore, I see no reason why certain existing contract rights should not be recognized and respected.

Ninth. I think you might well put in provisions along the lines of section 16 of the bill with respect to changes in the board of directors, which should go far toward preventing the transfer of control without the stockholders' knowledge and consent; and in that connection I think you will recall that the witnesses on the other side said that went to the root of one of the principal cases that they cited. Senator WAGNER. You approve of that?

Mr. QUINN. I think that is right, sir.

Tenth. I think there should be provisions with respect to proxy regulations, partly because I believe some form of proxy regulation is desirable and partly, I am afraid because the companies in the group that I represent are already subject to the proxy regulation which now applies to companies listed on national securities exchanges. However, I should like to say, parenthetically, that the present proxy regulations, to my mind, work out to the utter confusion of the poor stockholder; because it seems to me that this regulation requires so much information that the stockholder does not get a clear picture of it. Nevertheless, that is quite apart from this discussion.

Eleventh. I agree with the attempt to provide for underwriting by investment companies, but I think the present provisions ought to be tuned in carefully to the actualities of how that thing works out.

Twelfth. I approve whole-heartedly of the theory of those sections of the bill which are designed to provide shareholders and the public with full, complete, and periodic information. I disagree very strongly, however, with some of the methods proposed in this bill to achieve that objective.

I wish to make clear that when I say I agree in principle with this not inconsiderable portion of the bill, I must honestly point out that neither I nor any experienced person can agree with the way it is all worked out. The present bill is extremely intricate-perhaps necessarily so, although I doubt it. It does seem to me possible for draftsmen to work out a bill which would embody the above prohibitions and requirements, in order to prohibit certain things, and require certain other things in a way that would be clear, specific, and understandable. You would then have a bill which in my opinion would go as far as legislation can go to protect the investors against the abuses that have been revealed and against possible repetition of those abuses, without putting the management in strait jackets and without treating the investors like incompetent children.

I realize that this is not an easy task. I should like to be able, Senator, to come here and say that here are a few amendments which we propose and which, if accepted, would in our opinion make this much of the bill reasonable and workable.

That, however, is not really possible. There is hardly a paragraph and certainly not a section which, in my opinion, does not require revision; and the real point I want to make is that no one will get

anywhere in that necessary revision until someone has winnowed out those portions of the bill which have nothing to do with and nothing to contribute to reasonable and workable legislation.

Senator WAGNER. Are you going to enumerate those?

Mr. QUINN. I am going to take up specifically those sections that I think ought to be out of here.

Senator WAGNER. All right.

Mr. QUINN. I understand the approach of the S. E. C. to this problem, even though I cannot say I sympathize with it. They have seen wicked things happen, and they want to prevent their recurrence. This is very understandable. I doubt if anybody has ever gone down to see them and has said a kind word about investment companies, on a voluntary basis. They have seen only the one side of the picture, and they probably have been too busy chasing troubles to familiarize themselves with day-by-day, technical details of operation of investment companies, as run by decent and reasonable people.

We are just as anxious as they are to see the wrongs stopped; but I think it is only more natural for us to be conscious of the fact that in trying to cure a wrong, you may be doing a great deal of unnecessary harm.

May I reiterate my statement that I believe that if you will write a bill containing the prohibitions and requirements I have mentioned, and requiring the fullest publicity of any company's affairs, you will have gone as far as it is feasible to go toward according protection to the investor.

Of course, you can go at it and you can iron out every possibility of evil and every possibility of wrongdoing in this business, just as you can in any other business; but I think that when you get through such a process as that you will have rather effectively destroyed the business, in doing so.

I know you gentlemen are too experienced to think that you can set up a bill which will stop wrongdoing. Certainly, one wonders, in considering the cases that have been cited in these hearings, if the enactment of one more law will deter people from doing what they should not do. They certainly did not show very much compunction about breaking the existing laws in these cases. I know also that you gentlemen are too experienced to think that laws are going to prevent people from losing money; because you cannot do that; you cannot endow them with good judgment and foresight.

I do feel, however, that a bill such as I have suggested will go a long way toward curing all the revealed abuses, insofar as proper legislation can cure them. If you will review in your mind the abuses that have been presented to you by the statements here, I think that you will agree that, to the extent that it is legislatively feasible, you will have met the problem.

It will not go the length of this bill; but this bill attempts, on the basis of a short experience of 10 years, to legislate for all times and to legislate for all contingencies. That is just too big a job. Would it not be wiser to restrict the present legislation to those things on which the case is clear-those things which should be stopped, things the recurrence of which should be prevented?

But do not try in an unrealistic zeal for perfection to cure in one omnibus bill all the faults which have been revealed and to prevent all the abuses which might happen. That is bound to freeze