or with respect to which they have some influence. We found that 51 out of 394 companies give investment advice and have influence with respect to $4,000,000,000 of funds. Now, it is true that substantial parts of these funds are funds of banks and insurance companies. However, if you will take a look at pages 8 and 9 of the report, you will see that with respect to 49 of these firms, as far as the total amount of funds of individual clients is concerned and that falls in the category of "other clients" in table 6they handle. almost a billion dollars of these funds. If you will look at the other two large companies, they have individual accounts of clients of $350,000,000. So that these 51 companies alone give investment advice and handle accounts of $1,350,000,000. These investment advisers are virtually in every State. You can get the geographical distribution of these companies on page 6. These are the firms about which we knew. In addition, we tried to get some comprehensive analysis as to whether these people devoted their time exclusively to giving investment advice or whether they were engaged in some other occupation. If you will look at page 11 you will see the variety of other businesses in which investment counsel engage. These other businesses are brokers or dealers in securities, publication of investment manuals and periodicals, financial counsel, general business counsel, trust work, underwriting, business management, real-estate management, real-estate dealers, evaluation of securities, training analysts, bolding company, insurance broker, estate planning, estate and tax counsel, import and export merchandise, industrial management and reorganization, investment bankers, mining, and so forth. It is true that there are some people who feel that the investment counsel is in a profession just like the legal profession and that all the efforts and time and activities of this company should be devoted exclusively to the giving of investment advice. I will discuss an investment counsel association which has been formed and some of the things they hope to accomplish along that line. Now, I cannot impress too strongly upon the Senators the fact that our title 2 does not attempt to say who can be an investment counselor, who can't be an investment counselor, and does not even remotely presume to undertake to pass upon their qualifications. All we say is that in order to get some idea of who is in this business and what is his background, you cannot use the mails to perform your investment counsel business unless you are registered with us. What is this registration requirement? What does it amount to? It discloses their name and address, who are their partners, what is their background, what is their experience, what is their discretion over their customers' accounts, and we ask them if they engage in any other business. If they have been convicted in connection with a securities fraud or if they are subject to an injunction in connection with a securities fraud, we have the right-we are not under dutyafter considering all the factors, if we think that the public interest would be injured, to say that "We will not register you." Now, I have discussed this title at great length with the representatives of the industry. Of course, it is always difficult to presume to talk for somebody else. I think by and large that the people in the investment counsel business may perform a very valuable function. But, Senators, what is the situation? The very wealthy man has his own private investment counselor. The individuals in the lower income stratum cannot afford any investment counselors, because the advisers usually charge a minimum fee. You have that tremendous population in between these two strata, people of moderate wealth, who feel that they are not competent to pass upon their investments. It is that portion of our population that these advisers can serve. And some want to do that job. However, they are impeded in doing that job by the fact that there is a fringe of people who do not perform that function, but who, if I may use the expression, crash in on the good will of these reputable organizations which have the substantial research organizations, by giving themselves a designation of investment counselors. These individuals are nothing more than tipsters, who have outrageous arrangements with respect to profit sharing, and so on. I think and I say again I do not presume to talk for the investment advisory services-that the investment counsel industry would desire the simple approach of Title 2 in the first instance. I am not saying they may not have difficulty with some of the language or the way we phrased the provisions. I think you will find that is true with respect to the portion of the bill which relates to investment trusts, investment companies, but I anticipate at least, I believe— that they will go along with the title as it is drawn. Senator TOWNSEND. You speak of your limitations under this authority. In what way are you limited? Mr. SCHENKER. Now, Senator, Title 2 begins Senator TOWNSEND. I mean in your study. The language here is very broad: The commission is authorized and directed to make a study of the functions and activities of investment trusts and investment companies, the corporate structures, and investment policies of such trusts and companies, the influence exerted by such trusts and companies upon companies in which they are interested, and the influence exerted by interests affiliated with the management of such trusts and companies upon their investment policies, and to report the results of its study and its recommendations to the Congress on or before January 4, 1937. Mr. SCHENKER. You notice that language says we are authorized to make a study of investment trusts and investment companies, which is different from investment counselors, because investment trusts and investment companies sell their securities to the public, and an investment counselor is a partner or individual who has a professional relationship with a client. client. He is not part of the investment trust or investment company except as he may give advice to an investment company or investment trust. We made a detailed study of the investment companies. We expect in a few days to tell you what we found. But with respect to the investment counselors, we felt that our only jurisdiction was to get some information with respect to those investment counselors who are associated with investment companies. The jurisdiction to investigate investment companies was broad. The only thing we could do with respect to investment counselors was to find out what influence they exerted on investment companies and we have done that. Senator TOWNSEND. Well, what, if anything, has held up the report that should have been made in 1937 until 1939? Mr. SCHENKER. I am glad to answer that question, Senator. The Public Utility Holding Company Act was passed, if my memory serves me right, in July of 1935. The 1933 act had been passed, the 1934 act had been passed, and the 1935 act had been passed, and in connection with every one of these acts, Senator, there were certain organization problems. We tried to get started as fast as we could, and my recollection is that we started holding conferences with the industry in connection with the preparation of a questionnaire to be sent to the industry sometime in November or December of 1935. Now, when we come to analyze this industry, Senator, I thought, as probably you do, an investment trust is a simple organization run by people who are expert managers. You turn your money over to these organizations and they manage it. Apparently, therefore, it looks like quite a simple matter. However, when we came to study the industry we found that the situation was not that at all. In the first place, you have investment companies which give their management untrammeled discretion with respect to the investments they can make. Then you have the so-called fixed trusts, which were devices whereby management was completely eliminated. You had the so-called open-end companies, and that is the Boston type of company, which gives the stockholder the right to redeem his share at asset value. Then you have the type which sells a face-amount contract, which is nothing more than a contract, a promissory note to pay a specified sum, which you purchase on the installment plan at $10 a month. Not only did you have these broad classes, but in each type you had a variety of types. In connection with the management companies, some companies say, "We are management companies but we limit our discretion with respect to special types of securities like insurance stocks." That is not so bad; complications are all right, but the fact is that during the very course of our investigation the basic underlying nature of the industry was changing. Up to the time we started our investigation most of these companies were closed-end companies which had raised their funds in 1929. Their securities were selling at a discount, and in order to overcome that situation new types of companies were being organized and emphasis was being placed on new type of investment companies. While this investigation was going on there suddenly appeared a type of situation like this: Investment-trust certificates were being sold to the public on the installment plan, and that means that they were getting down to the lowest stratum of our economic population. As we will show, that development took place during the very course of the investigation. So we had a situation where servant girls, miners, policemen, letter carriers we will have a full list of these occupations were being sold equity stocks under the guise that they were investing in a savings plan. That problem was almost equal in scope to the one which existed before. These Boston companies which had previously been in existence grew tremendously in that period and they presented peculiar problems. Their problems mostly related to the distribution aspect, because in an open-end company the stockholder can value of my certificy, "Here is my certificate. Give me the asset The assets of open-end companies rose to $600,000,000 in this period. Senator, you were not here when Judge Healy made this statementand that is one of the things that in my opinion makes it essential that this legislation be passed that at the very time we were conducting this investigation some of the most outrageous abuses and wrongs were being perpetrated. I thought every day, "Thank God, I am through with hearings," and then I would get a telephone call. Somebody was looting another investment trust by some other method, and we had to start all over again. The fact is that one of the most outrageous things, and you will hear all about it tomorrow, took place in the latter part of 1937. Here I was in the midst of writing my report. Through some fortuitous circumstance we got the information about this looting and I had to undertake an investigation of the whole Continental Securities case, where they cleaned out the First Income Trading Corporation out in Detroit, Mich. They cleaned out the Continental Securities Co. Then they got into the Bonding Share Co., the Reynolds Investing Co., the Burco Trading Corporation, and the Insuranshares of Delaware Corporation. Senator TOWNSEND. Do you not think, if that happened in 1937, Congress was entitled to a report earlier than this on that matter? Mr. SCHENKER. Maybe I am to blame a little for that. I have listened to statisticians a little too much, and if you ever had anything to do with a statistician you will know the meticulous care with which they want to prepare the information. The fact of the matter is that we have a thousand pages of statistics, and Prof. E. B. Wilson, of Harvard University, said that it is one of the most thorough jobs he has ever seen. The fact is that we made progress reports to the Congress as we went along and we started sending out our reports on June 10, 1938. That is in addition to the summary reports that were sent up. Then, Senator, no one is more mindful than I am of the technical aspects of this business. I just did not want to go haywire and I just wanted to make sure, as did the Commission, that we understood every aspect of this business, that we understood every aspect of every subdivision of this business. We wanted to do a most competent, objective job, and I think the consensus of opinion, even among the industry, is that we did that. We may have taken a little longer than we should have. Senator TAFT. How big a force has been used on the work? Mr. SCHENKER. We started, of course, in the first instance, with a staff of about 45, which included people who had to go out in the field. Now, you take one of the biggest system investment companies, the Founders companies, to which $500,000,000 of the people's money was contributed by 1929 and in which the stockholders lost $376,000,000. There was nobody there to help us make a study of these companies. They literally did this, Senator Senator TAFT. I am not criticizing you. I was just trying to find out how many worked on it. Senator WAGNER. You started to say "They literally did this.' You did not finish. Mr. SCHENKER. They took two roomfuls of books and dropped them in Bill Spratt's lap. In direct answer to that question, my guess is we had 45 to 55 people in the first instance. As we completed the field investigation we kept letting the men go and depleting our staff. Senator ToWNSEND. You can furnish for the committee the number of people and the cost? Mr. SCHENKER. Yes, sir. Senator TAFT. Will you do that? Mr. SCHENKER. Yes, sir. In that connection, if I may make this observation, I think you have got to study that figure with two or three things in mind. May I take a second on that. Senator TOWNSEND. Yes. I was only trying to find out for the information of the committee. Mr. SCHENKER. It was during the course of our investigation that the use of Bahamas Corporation for avoidance of income tax was uncovered. In the second place, because of our investigation, in my opinion and I was never more serious-we have saved the investor many millions. Let me give you an example. You asked me why I did not get it finished before, and maybe this will explain it to you. Our jurisdiction in connection with investment trusts was limited to the investigation and making reports to Congress. In the early part of 1938, after the Continental Securities clean-out, a person who controls an investment trust came to me and said, "I am going to sell control of this investment trust to Mr. So-and-so." You would think, when he said, "I am going to sell control of this investment trust to Mr. So-and-so," that he owned that investment trust. What he had was some of this tricky management stock, which had been issued in the first instance to the management. The fact of the matter is his stock had absolutely no asset value and all of the assets really belonged to the senior security holders. Yet he was going to sell the trust. I said, "To whom are you going to sell the trust?" I said, "What are you getting for your stock?" He said, "Well, we are going to get $2,000,000," which was a $2,000,000 premium on the stock, Senator, because my recollection is that the total assets would have to come back approximately $2,200,000-before his stock was worth nothing, you see. I said, "How is he going to pay you for that stock?" I said, "Anybody who will pay you a million dollars or two million dollars for stock that is under water 50 dollars a share must have some fancy ideas. The only way he could get his money back is either to put his hand on the cash register and take the money or he has some crackpot theories that he can run the trust in such a manner as to get his money back.” He said, "He is going to buy the control block of stock. Simultaneously I am going to turn over the board of directors to him. He then expects to liquidate the blue-chip portfolio, pay me for the control block; then in order to reimburse the investment trust he is going to" Senator TAFT (interposing). Is it fair to ask who the party was? Mr. SCHENKER. Yes, it is fair. The prospective purchaser of the trust was an individual by the name of McDermott, and I do not |