purpose; the distribution aspects should be secondary. The distribution aspect should not be the primary thing that motivates the formation of these companies.

Now, we go on to section 12

Senator TAFT. I do not see what basis there is for saying that having organized one, he cannot organize another. I can see why we might prohibit an investment banker from having an interest in an investment trust; but after he once promotes it and is through with it, why should he not go on the next year and promote another one? What has Goldman-Sachs got to do with it?

Mr. SCHENKER. That was just an illustration, Senator, of the rapidity with which these things were formed. I asked Mr. Sidney Weinberg, a partner of Goldman, Sachs & Co., "Why do you form them so rapidly?" He said, "Well, the people want them.'

You were probably not here, Senator, when I started the discussion in which I said that if we permit this constantly recurring promotion, the thing that might motivate constant promotion of these companies is not any inherent belief in the economic soundness of the set-up generally, but a desire to manufacture merchandise which may have sales appeal at the moment.

Senator TAFT. That is the object of all promotion in this country. That is the way we got ahead-by promotion. That statement assumes that promotion, in and of itself, is a bad thing. I do not see why, admitting that it is perfectly proper, possibly, to prohibit anybody from promoting a certain kind of investment company, after he promotes it and starts it on its way, I do not see why he could not start another one next year, if he is out of the first one. I do not see what that story has to do with this particular section which you are discussing, except to stir up prejudice.

Mr. SCHENKER. Oh, well, Senator Taft, after all, Congress directed us to make a study

Senator TAFT. No; I am objecting to your using this to support this section with which it has no relation.

Mr. SCHENKER. The fact of the matter is, Senator, that it appears to me that it has relation, because here you have Goldman-Sachs & Co.. bankers---

Senator TAFT. Your whole argument is directed to the one question of an investment company not having an interest in an investment trust, with which I wholly agree; but I do not see what it has to do with section 11 (a) which you are discussing.

Mr. SCHENKER. Well, on section 11 (a), Senator, our study indicates that when an individual has a distributing organization with a tremendous overhead, the impulse may be to create these companies in rapid succession, not with any inherent belief in the economic soundness of the type of company he is creating, but because that particular institution has sales appeal. I illustrated that with an example where a person had one, and his salesmen told him they could sell the type---

Senator TAFT. That has nothing to do with section 11 (a). I want to know why, if a man has promoted an investment trust one year, he should not promote another one next year.

Senator WAGNER. Are they dissociated?
Senator TAFT. They may be.

Senator WAGNER. That is what I want to find out from the instance given.

Mr. SCHENKER. Section 11 (a) says (reading):

It shall be unlawful for any promoter of a registered investment company organized on or after March 1, 1940, to serve or act as director, officer, manager, investment adviser, depositor, trustee, or principal underwriter of or for such company, if within 5 years such person, or any company of which such person was then an affiliated person, has been a promoter of another investment company. Senator TAFT. I say, he may have entirely dissociated himself and has no relation with it any longer, and for 5 years after that time be can not promote another one.

Mr. SCHENKER. The bill does not say that. If you will take a look at paragraph (d), you will find that we make provision to permit other promotions if conditions warrant such promotions. But aside from the provision for exemption--you were not here, Senator, when I gave examples where there were six investment companies promoted in 1 year by one distributor, and in conjunction with that they switched them from one investment company into the other investment com

pany.

Senator TAFT. Those cases were cases in which they kept their hands on all of them. I can see the whole burden of that. But after he has entirely gotten out of one, why can be rot start another one? Mr. SCHENKER. Is it your suggestion, if he is in the business of promoting investment trusts, distributing their securities, and then severing his connection with the investment trust, why should he not be able to promote another?

Senator TAFT. Yes.

Mr. SCHENKER. Would you have any difficulty, Senator, if he not only was promoting one trust and currently organizes another, and sells securities of the other, and then starts another and sells the securities of that other-would you have any difficulty with that situation?

Senator TAFT. Well, if he has entirely dissociated himself, I do not see why he should not promote another one. We agree that there is some question about the whole matter of promotion.

Mr. SCHENKER. I am not unconscious, Senator, of the fact that this. is a question that has two sides. We have discussed it at great length. The fact of the matter is that the situation which you describe never exists. I think I know of only one case where that was done. In all these cases, Senator, he not only promotes it; he is not only the distributor, but he is the manager, and as soon as the security loses its "sex appeal," he starts organizing another one.

Senator TAFT. Why not say "any company of which such person has been a promoter of another investment company of which he is a stockholder, director, officer, manager"

Mr. SCHENKER (interrupting). Or distributor?

Senator TAFT. Yes; then my objection would be removed.

Mr. HEALY. May I have an opportunity to discuss that with my associates?

Senator WAGNER. Yes.

Senator MILLER. Would it be feasible to incorporate in subsection (d), page 28, terms or provisions which would determine or which should guide the Commission in answering a question propounded to it when a group or an individual came to it for a license to organize another investment company, or is the theory the same as that govern

ing charters for national banks and other banks that are organized now? As I remember the statute relating to the creation of a bank, the mere fact that a group wants to organize a bank is not the determining factor. The needs of the community are determined, and the character of the men proposing to organize the bank. I was just wondering, in order to get away, if I can, from so much discretion now-and this is not said with any reflection upon the present Securities and Exchange Commission-just assuming that the personnel of that Commission were changed and a different philosophy entirely should be installed there, and I was just wondering if there might not be some danger in a wide open discretion and whether or not it is feasible to undertake to limit the discretion of the Securities and Exchange Commission.

Mr. HEALY. May I say a word on that?

Senator MILLER. Certainly.

Mr. HEALY. I do not think the Commission wants unlimited or unbridled discretion. Our conception is that every one of these statutes should have definite standards in them. But there are situations where those standards ought to be administered, it seems to us, by the Commission. I think that unbridled and uncontrolled discretion is unthinkable under our constitutional system. I think that every time it is said that the Commission can do a certain thing, it should be allowed to do it if a certain standard is established. Then you get a legal standard and get a thing that is reviewable in the courts and the Commission is deciding people's legal rights.

As to this subsection (d), if more definite standards can be written than the draftsmen of this bill have devised, they would be entirely acceptable.

Senator MILLER. That is not said from a critical standpoint. It is just a proposition of trying to lay down some standard there to guide not only the Commission, but the officers. In other words, I can visualize, and I know that the Commission can, a group that has made a success, that is basically sound; that is, their company is basically sound. Those men ought not to be prevented, and I do not assume that the Commission's theory is that it would prevent those men, from organizing another business and branching out.

Mr. HEALY. I have much sympathy with what you have said. May I call your attention to the fact that subsection (d) was written assuming that (a), (b), and (c) might be enacted

Senator MILLER. That is, subsections (a), (b), and (c)?

Mr. HEALY. Yes; subsection (d) represents "rubber" in the language. That is, having adopted rigid standards in (a), (b), and (c), then you try to give the Commission authority to relieve a person of the undefinable and unpredictable case, at the same time trying to specify in the statute the circumstances to which you shall give weight in making your decision.

However, I would like to repeat that any more definite standards that can be devised, or any other means that would give a little flexibility where it is needed. I would not have the slightest objection to. Senator MILLER. I did not think you would have any objection to a reasonable standard in there if it can be devised.

Mr. HEALY. No. I am all for it.

Mr. SCHENKER. Section 12 deals with the functions of investment companies and the formation of investment-company systems.

This bill, in my opinion, cannot even remotely be considered as an attempt to influence or participate in the management policy of investment companies. What does 12 (a) say? It says that it shall be unlawful for any registered investment company to purchase any security on margin or credit except such short-term credits, necessary for the clearance of transactions, as the Commission may designate by rules and regulations or order.

Subsection (2) is a provision which says they shall not participate in joint trading accounts.

Subsection (3) relates to the effecting of a short sale of any security in contravention of such rules and regulations as the Commission may prescribe.

The Commission has the feeling that at the present time, at least, they see no reason why an investment trust should not be able to effect a short sale. However, you cannot predict what may happen in the future. With respect to that the Commission feels that maybe at some time in the future, in the public interest, it may be necessary to formulate rules.

Senator TAFT. You mean that you are permitting short sales?
Mr. SCHENKER. Yes.

Senator TAFT. Why? What is the purpose? Is it not rather questionable whether they should engage in short selling?

Mr. SCHENKER. On that aspect, Senator, we make provision for a so-called trading corporation. If they are going to be a speculative investment trust, and they disclose that fact to their investors, and the investors want to invest in that type of investment company, who are we to say, "No; you shall not invest in that type of company"? So the statute permits it, and we feel that, if they are that type of company, why should they not sell short if that is their best investment judgment?

However, there may be some possibility of abuse. In that connection I started to say that a person came in to see me the other day and said, "I am thinking of organizing a short-selling trust." What that means, I don't know, or what its effect will be I don't know. But it is to meet that type of situation that we put this "rubber" in. Senator TAFT. I think that if you distinguish between the two types of companies there is no harm in an investment trust making short sales. On the other hand, if the other kind of investment trust is supposed to do it, I see no reason why it should not be done.

Mr. HEALY. That is exactly the philosophy with which the Commission approaches this problem.

Senator TAFT. No; it is not. The approach is that the Commission is going to say in the future whether either kind of company shall do it or shall not do it.

Mr. HEALY. I did not speak of our approach. I said that was the Commission's philosophy. I meant to say that the point of view that I have heard expressed in the Commission is just the one which you have expressed.

Senator TAFT. We are all trying to get away from the discretion question.

Senator WAGNER. I agree with that, but as I studied this bill I thought that the discretionary powers were rather to the advantage of the company than to its disadvantage. It does provide flexibility, whereas a fixed rule would make it much more rigid.

I was going to ask you this, Mr. Schenker. There has been talk here about the promotion of investment trusts. So far as any instances that have been cited here are concerned, as I understood it, in each case those who organized a trust and distributed shares represented it not to be any trust to promote any new risk venture, but rather to provide a diversified investment for the individual, with assurances in all these cases that it is a safe investment with a very definite maturity and a sure return of the money with profit.

Mr. SCHENKER. I think you may have misunderstood Senator Taft's point, which merits consideration. Senator Taft says that if an individual promotes a company and distributes it and severs every connection with the company, why should he not be able to promote another and to sever his connection with that? Of course the answer to that, Senator, is that such a situation has not existed. But of course I think there is a great deal to that point in that type of situation.

Senator WAGNER. You misunderstood me. I do not know of a single instance where there has been any advertising that "We want this money in order to undertake a venture, some new venture," or something of that kind. Are there any such trusts formed?

Mr. SCHENKER. There have been trusts in the past, which started out originally as so-called diversified investment companies. They said they were going to buy a cross section of securities. But ultimately the fundamental nature of their business changed, and they became what we call special situation companies. They took concentrated positions in companies, reorganized them, worked them out to help them financially. The classic example of that was the Atlas Corporation, which had a $20,000,000 position in the Utilities Power & Light. The Phoenix Securities Corporation, which I told you about, has a substantial position in the United Cigar Stores, Loft, Inc.; Pepsi-Cola; New England Bus Co.; Autocar; and Southwest Corporation. Recently the Chicago Corporation has started to change the fundamental nature of its business and is attempting to serve a very useful function in making capital available to small industries. But in those circumstances, because the securities they get are not liquid and have no market, they necessarily have to take a controlling position to protect their investment.

Senator WAGNER. I do not see any objection to that method of changing their activities; but should not the stockholders who originally put their money in under certain definite assurances, know about that change of policy?

Mr. SCHENKER. That is the approach of this bill, Senator; and when we come to section 13, which deals with changes in fundamental policy, I will elaborate upon that.

Senator TAFT. Were there not always a fair number of trusts that frankly went in as trading companies? It seems to me that I remember several small ones in Cincinnati which frankly said, "We can trade on the market better than you can, and you might as well let us do it."

Mr. SCHENKER. Yes.

Senator TAFT. I remember one or two of that kind.

Mr. SCHENKER. I do not think you were here, Senator Taft, when we discussed the classifications of investment companies. This bill does not say that that type of company should not exist. It just says,