You may say that this would be unjust, but there is no sense in not being realistic about it, because one of the first people that an investigator would seek to interrogate would naturally be the man's own cients. People are sensitive and have a right to be sensitive on the score of the integrity of the people to whom they may entrust their fortunes for investment. If a suspicion of lack of integrity has been raised, the investment counsel's client will very likely take the position that he would rather be safe than be sorry. What is even more serious, the investment counselor thus made the subject of investigation has no satisfactory way of combating the suspicion aroused by the commencement of the investigation. He may not even know what the charges formulated against him are to be. He has no means of answering anything. An investigation even may be started on one ground and followed up on another, for the initial authorizations are broad enough to cover many matters. The result is that though an investigation may be dropped before it is fully under way, the damage done to the subject of the investigation may prove to be almost as irreparable as if it had been pursued through to the stage of public consideration by the Commission. When you are dealing with questions of character, let me repeat, you are dealing with the most delicate and at the same time the most valuable thing which investment conuselors, or indeed anybody, has. The slightest unskillful use of the Commission's powers in its investigatory field can reek a savage and most unjust result. Yet this bill takes no account of these facts and simply treats the investment counselor, whose character and reputation lie at the foundation of his success, precisely as you would treat a share of stock or a bond. These things are being said with the full realization that no regulatory power is worth the paper that it is written on unless there is coupled with it a full kit of punitive powers, and further that punitive powers are ineffective unless they in turn are coupled with full investigatory authority. I realize fully that there is no sense in being sentimental when faced with the task of uncovering and punishing fraud. In some instances, perhaps, the paramount public interest in defeating fraud may justify injuries which nobody wishes to inflict. But as has been pointed out, where the subject of the regulation rests so fundamentally upon personal character and reputation, it is of an equal paramount public interest that that reputation shall be fully protected until justification for its destruction has been established beyond a reasonable doubt. In the light of the general conditions which have been expressed, detailed discussion of the clauses of the bill would serve no useful purposes. Should the committee determine, nevertheless, that some legislation of this character is called for, we are ready to give out specific suggestions in the effort to attempt a correction of some of the more serious problems arising from its terms as drafted. But the major question of policy of course comes first. Much for example has been said here in the hearings on title I, concerning the rule-making authority under section 36 (a). Certainly seme comprehensive treatment of that should be made in any redrafting of the bill. Administrative agencies admittedly must have rulemaking authority, for without it they cannot function effectively. But I believe it to be a sound principle of administrative law that the rule-making authority should always be circumscribed by the specific grants of authority in the enabling legislation. Only in that way can the fundamental doctrine that the statement of policy is the prerogative of the legislature be preserved. In conclusion may I emphasize again our approach to this whole problem of the regulation of investment counsel hinges on the determination of a fundamental question of policy in the extension of Federal regulatory authority. There is no disposition to duck the responsibility which any profession has in the development of sound standards and clean practices in the exercise of that profession. But in a nascent profession, such as that of investment counsel, in the first analysis and in the last analysis the main spring of improvement and growth must come from within. Senator HUGHES. I am sorry that the representatives of investment counsel have the feeling they may be injured by even raising the question as to whether they should be regulated or not. I am not as much alarmed about its reputation as I am about what you may do in your association to cure the evils that exist, and try to get into your association all members who are engaged in your profession, or as many of them as you can, to the end that we may in some way if necessary deal with those who do not want to come in. They are the men who have offended. We will grant all that you have said about the excellence of your organization and all that, but still there remains the duty to protect the public. I am not going into your question of whether it is constitutional or not, or whether the State should regulate you or the Federal Government should regulate you, but certainly it is something that should be looked after, now or later, to the end of having the people who are engaged in your business, live up to the standards you have established, and your standards are good. That is the way I feel about it. Senator WAGNER. Senator Hughes, I am with you on that. Are Mr. Loomis or Mr. White here? Mr. WHITE. I am here, Mr. Chairman. Senator WAGNER. Did you want to speak again? Mr. WHITE. I wanted to say something about title II. Senator WAGNER. Oh, you do. Then you want to say something in addition to what you have already said? Mr. WHITE. Yes, sir. I spoke on title I. Senator WAGNER. Against this provision? Senator WAGNER. No compromise? [Laughter.] You will be brief I take it, because we had hoped to finish this line today. It is half past 5 o'clock now, and doubtless some of the folks present are a little weary. As you gentlemen know, there is much to be done when we get back to our offices. Mr. WHITE. It would take 15 or 20 minutes to make my statement. Senator HUGHES. Won't you be here tomorrow? Mr. WHITE. Oh, yes. Senator HUGHES. I will leave that to the chairman, as to whether we will go on any longer this afternoon. Senator WAGNER. We will have time to hear you tomorrow morning. Senator HUGHES. He says he will be back here tomorrow. Senator WAGNER (chairman of the subcommittee). Mr. White, you are on the list and we will hear you tomorrow morning. The subcommittee will now adjourn until 10:30 o'clock tomorrow morning. Thereupon, at 5:35 p. m., Monday. April 22, 1940. the subcommit tee adjourned until 10:30 o'clock the following morning.) INVESTMENT TRUSTS AND INVESTMENT COMPANIES TUESDAY, APRIL 23, 1940 UNITED STATES SENATE, SUBCOMMITTEE ON SECURITIES AND EXCHANGE OF THE BANKING AND CURRENCY COMMITTEE, Washington, D. C. The subcommittee met, pursuant to adjournment on yesterday, April 22, 1940, at 10:30 a. m., in room 301, Senate Office Building, Senator Robert F. Wagner presiding. Present: Senators Wagner (chairman of the subcommittee), Hughes, and Herring. Senator WAGNER. The subcommittee will come to order. Mr. White? Mr. WHITE. Yes, Mr. Chairman. Senator WAGNER. You may proceed. ADDITIONAL STATEMENT OF JAMES N. WHITE, OF SCUDDER, STEVENS & CLARK, INVESTMENT COUNSEL, No. 10 POST OFFICE SQUARE, BOSTON, MASS. Mr. WHITE. Mr. Chairman, as I told you before, I am a general partner in the firm of Scudder, Stevens & Clark. I am appearing in opposition to title II, but first I want to tell you. our position on Federal regulation generally. It is this: We would not oppose registration, or regulation, if there were a need for it, and if the interests of our clients were adequately protected, and if the objectives of the bill and the powers of the Securities and Exchange Commission were adequately prescribed. The last two points-protection of the interests of our clients and definition of the objectives of the bill and of the powers of the Securities and Exchange Commission-relate to the provisions of this particular bill. The first point is whether there is any need for registration or regulation of any kind. If we thought there were any need for legislation, we should gladly agree to it. In this connection, may I make one comment on yesterday's testimony? There may have been some misapprehension arising from what Mr. Rose said concerning the association. The association represents only a portion of the profession, not because the remainder of the profession does not observe the same standards but because many firms have doubted the advisability of an association at this stage of development. My firm, for example, is not a member of the association. There is no basis for any impression you may have gathered that nonmembership in the association implies any lower standards. I am sure that Mr. Rose did not mean to convey any such implication. Senator WAGNER. Well, we do not understand it so either. Mr. WHITE. Now, gentlemen, what is the case for regulation? We know the case as stated in the Securities and Exchange Commission report to Congress and in the testimony of its representatives before this committee. If there is any other case for title II, we do not know it and, though I may be wrong, I seriously doubt whether it exists. The case for title II as stated by the Securities and Exchange Commission is based entirely on certain testimony given before the Securities and Exchange Commission by the very group of witnesses from the investment counsel profession whom you heard here yesterday. From that testimony, the Commission has apparently gathered that we believe that there is a racketeering element in the profession which needs regulation. That testimony was given at a hearing before the commission in February 1938. I want to tell you about that hearing very briefly. A group of investment counsel firms, practically the same group which has been represented here, met by invitation with the Securities and Exchange Commission. Our attendance, while voluntary, was requested by the Commission, and we were glad to help in making ourselves and our business known to the Commission. The conference took the form of a public hearing, with Mr. Schenker, on behalf of the Commission, asking us questions. The hearing dealt only briefly with the history of the investment counsel profession and with its methods of operation. Very early in the hearing, Mr. Schenker, indicating some general approval of the way we carried on our business, suggested that there existed in the broad field of those giving investment advice what he described as a fringe of racketeers. Specifically, he referred to a so-called financial advisory service advertising in the newspapers that they would furnish the name of a $2 stock likely to advance in value. The suggestion was, of course, that this racketeering fringe ought to be regulated. This question was asked-referring to this supposed tipster element: Question. However, it is a condition and not a theory which confronts the Commission. That type of thing exists, does it not? Answer. When I say yes, I do not know. I could not put a name to any individual. Question. I am not being critical of Town Topics that was the name of the financial advisory service but that type of organization which gives that type of investment service exists, isn't that so? Answer. Yes. I mention this brief colloquy because it is typical of the testimony that we gave at this hearing before the Securities and Exchange Commission, and because it is that testimony which seems to furnish the principal basis for this attempt to regulate the investment-counsel profession. I must say I think we were all no doubt glad to find that the Commission apparently approved of the job that we were doing, and we were quite willing to agree with the suggestions of Mr. Schenker that there was a racketeering element of tipsters which need regulation. Accordingly, it is not surprising to find that the subsequent testimony, consisting largely of long questions as to the importance of regulating this racketeering fringe, contained answers varying from outright |