Mr. SCHENKER. Mr. Chairman, Mr. John Hollands, who has a sisted us in the drafting of the recommendations of the Commissio will take up some of the subsequent sections.

But before we do that I would like to introduce into the record th chart of J. & W. Seligman & Co. group, which we discussed yesterda I understand they are examining it for any inaccuracies, but I wou like to introduce it subject to correction by them.

Senator WAGNER (chairman of the subcommittee.) It may be ma a part of the record.

(The chart headed "J. & W. Seligman & Co. group, December 3 1939," is here made a part of the record.

Mr. SCHENKER. There is one other thing I would appreciate bei done, and that is, for the record to indicate that in my discussion of t Harrison Williams' group of investment companies and the Centi States Electric group set-up, that my discussion as to the extent of M Williams' ownership of Northern States Power through his control Central States was as of December, 1935. There have been sor changes since because of the Utility Holding Company Act. think he has redistributed, or may have liquidated, some stock that he would not be considered a holding company under the 1935 a Now, if Mr. Hollands might be heard.

Senator WAGNER (chairman of the subcommittee). Give your fi name, Mr. Hollands.

STATEMENT OF JOHN H. HOLLANDS, ATTORNEY ON THE STA OF THE SECURITIES AND EXCHANGE COMMISSION, WASHIN TON, D. C.

Senator WAGNER. What page of the bill are you looking at? Mr. HOLLANDS. Mr. Chairman, I will start with section 20, page 45.

Senator WAGNER. All right, Mr. Hollands, you may proceed. Mr. HOLLANDS. Subsection (a) of section 20 contains the pro provision that is customary in legislation administered by the Cor mission. Those companies that have securities listed on stock e changes are already subject to a similar provision in the Securiti and Exchange Act of 1934. This provision would make all inves ment companies registered under this act, subject to the same requir

ments.

The section has been changed slightly from the earlier sections point of language to make the provisions a little more definite in t light of the experience in administering other proxy sections. It hị gone about as far in that direction

Senator TOWNSEND (interposing). Do you mean that you hay changed it since the writing of this bill?

Mr. HOLLANDS. No. I say that this section of this bill is modele on other proxy sections in other statutes. In the earlier acts it slightly different in language. The effect of the changes in this bi is to narrow rather than to enlarge the power of the Commission, should say.

Subsection (b) prohibits a public offering of voting trust securitie if the underlying securities in the voting trust are those of a registere investment company. It permits a private offering of voting trus certificates, which means that if a family, for example, wanted to tur

over the voting power of the family holdings to one member of the family, it would be quite possible to do that because that would simply involve a private offering of voting trust certificates. It was felt that the use of the voting trust as a control device in these companies has no justification.

Subsection (c) prohibits what is known as cross-ownership or circular ownership. That exists when you have two or more companies. Let us take the case of company A and company B: If company A owns some voting securities in company B, and company B owns in turn some voting securities in company A, the result is to greatly dilute the voting power of other shareholders, and also to create a very complicated situation so far as ever seeing a clear picture of the companies is concerned.

Yesterday one of the charts handed up was that of the American Capital Corporation, where, if I remember correctly, there were three companies, and a ring-around-a-rosy arrangement.

This prohibition extends not only to cases where both companies are investment companies, but to cases where any one of the companies involved is a registered investment company. For example, in the Petroleum Corporation case the Petroleum Corporation owned a sizable block of securities of an industrial corporation which in turn owned securities of the Petroleum Corporation. Will you give the figures on that, Mr. Schenker?

Mr. SCHENKER. In the Petroleum Corporation situation, the Consolidated Oil Co. owns approximately 40 percent of the total outstanding of the Petroleum Corporation, which is an investment trust. The investment trust in turn owns about $1,200,000 of the total outstanding shares of the Consolidated Oil Co., which is approximately 9 percent of the total outstanding of the Consolidated Oil Co. So you have got the Petroleum Corporation owning a substantial or almost controlling block in the Consolidated Oil Co., and the Consolidated Oil Co. owning 40 percent of the Petroleum Corporation, and the remaining 60 percent being in the public's hands.

At one time the portfolio of the Petroleum Corporation had such a substantial block of Consolidated Oil stock in it that 80 cents of every dollar of that company was in Consolidated Oil stock. Even at the present time the Consolidated Oil stock held by the Petroleum Corporation is about 42 percent of the total value of the portfolio of the Petroleum Corporation-the investment trust.

I examined Mr. Elisha Walker, who was on both the boards of directors, and I examined Mr. Earl Sinclair on this situation; and it seemed to me at the time I examined them that the block of stock constituted about 70 or 80 percent of the total assets of the investment company.

I said to Mr. Walker and Mr. Sinclair, "Why don't you liquidate your Petroleum Corporation and declare a dividend with your Consolidated stock, which is virtually all you have, and therefore not subject to stockholders to a charge for an operating expense which last year was $80,000?"

They said, "We do not know."

I said, "Let me see if this is not the reason."

What would happen, Senator, if they declared the dividend in kind and liquidated the Petroleum Corporation? That means that the Consolidated Oil Co. would get back a very, very substantial

block of stock of its own company; they would get a block of stock which constitutes 5 percent of the total outstanding. Once that becomes treasury stock, the management cannot vote it; but by taking that block of stock and insulating it in an investment which the management controls, they can vote that 10 percent block of stock in favor of the management. We say, for that reason, that that sort of tie-up where an investment company has a big block of stock in an industrial corporation and the industrial corporation has a big block of stock in the investment company is a device for perpetuating the incumbent management, regardless of whether or not they are doing a good job, you see. So we have that situation, and in addition thereto you get this accentuated picture of earnings. If the Consolidated Oil Co. makes money, then the holdings of the investment company go up; and if the value of the investment company's stock goes up, then since the industrial corporation owns a big block of that investment company's stock, its earnings go up; and if its earnings go up, then the investment company's stock goes up. You get that vicious cycle there, and we say that as far as an investment company is concerned that situation should not be permitted to exist. At least you cannot create it knowingly in the future; and as far as the present situation is concerned, there is a time element that applies, specifying a time within which they can sever that relationship.

Senator WAGNER. Right at that point I was going to ask you a question. What is the public purpose served under the circumstances you just mentioned in having an investment trust at all?

Mr. SCHENKER. In our opinion there is absolutely no economic public service in that relationship. In fact we consider it a detriment to the public stockholders.

You see, the Consolidated Oil Co. may not wish to have the investment company reduce its block of stock in the Consolidated Oil Co., because the incumbent management would then be losing a controlling block of stock with which it could perpetuate itself. That may be to the advantage of the incumbent management of the Consolidated Oil Co. but it may not be to the interest or to the advantage of the large group of public stockholders who own 60 percent of the outstanding stock of the investment trust. It may be to the public stockholders' interest that they get out of the Consolidated Oil stock; yet because the Consolidated Oil Co.'s management has control of 40 percent of the investment company's stock, the probabilities are that they will not do it. They may reduce their position slightly, but not in a very substantial amount in the aggregate. You have this picture where at least half of the assets of the investment trust consists of the securities of another company. They are paying $80,000 a year for officers, to research and operating expenses, although the company is just sitting there with this one big block of stock. That is the story.

Senator WAGNER. Is Mr. Hollands going to explain just how, by these provisions, you are preventing that situation?

Mr. SCHENKER. He will explain the mechanics that we have recommended to the committee.

Senator WAGNER. All right.

Mr. HOLLANDS. Subsection (c) on page 46 prohibits acquisitions by a registered investment company of securities if as a result of the acquisition cross-ownership or circular ownership exists. The line is drawn at 1 percent of the outstanding voting securities of the other company.