of a statistical nature, which gave us some inkling of the scope of the problem.

Now, we canvassed every source of information we could and we learned of the existence of 394 investment counselors. That, in my opinion, does not even approximate the number of people who are engaged in this profession, or business, or type of activity. After all, the only way we could get the list was through the telephone directories. But there are many who do not even have telephones or have their offices in their hats. We could not obtain any information about them.

Therefore, our fundamental approach to this problem is in the first instance, before we could intelligently make an appraisal of the economic function or of the abuses which might exist in that type of organization, to see if we could not get something which approximated a compulsory census. Fundamentally that is the basic approach of title 2. We first would like to find out how many people are engaged in this business, what their connections are, what is the extent of their authority, what is their background, who they are, and how they handle the people's funds?

Aside from that fundamental approach, the only other provisions in that title are just a few broad general provisions which say that you cannot embezzle your client's funds or you cannot be guilty of fraud. One other provision relates to the transfer of the contracts which a client makes with investment counsel. I will elaborate on those provisions at a subsequent date.

Senator TAFT. What is the constitutional basis for regulating a person who simply has an office in Cincinnati, for instance, and advises people to come to see him?

Mr. SCHENKER. Well, Senator, we intend to submit to the committee quite a comprehensive brief on the constitutionality not only of title 1 but title 2. I do not make a pretense of being an expert. constitutional lawyer

Senator TAFT. Title 1 has to do with an investment trust which buys and sells securities. That business is more or less interstate. However, I do not see how a firm that sets itself up as an adviser, like the Scudder, Stevens & Clark people, to whom people come and ask for advice, can be said to be engaged in interstate commerce.

Mr. SCHENKER. Judge Healy wants to elaborate on that, but I would like to try to answer that. It is not unlike our approach to the investment company title. If you believe in the constitutionality of the 1934 act, then the investment company is engaged in interstate commerce because of its constant use of the exchanges which are an instrumentality of interstate commerce. Similarly an investment counsel gives advice with respect to the execution of orders relating to securities listed on exchanges and in a great many instances has discretionary power to execute those orders. In addition, they have branch offices throughout the country. In addition to that, a great many of them-not all of them-conduct their business through the mail.

Senator TAFT. I wondered if it was just on the fact that the mail is used and nothing else. That, it seems to me, is a very thin basis for its constitutionality.

Mr. SCHENKER. Senator, our provisions

Senator TAFT. I do not quite see how, if that kind of man is subject to the regulations of the Federal Government, every lawyer in his

legal business is not subject to the regulations of the Federal Government, and every doctor. He is certainly giving advice about things that relate to interstate commerce in many cases.

Mr. SCHENKER. Well, we have attempted to formulate an exemption which is consonant with your ideas. We have said that if the investment adviser maintains his business in one State and bis clients reside in one State he is exempted. It seems to me necessarily that if his major functior or his primary function is to give advice relating to the purchase and sales of securities listed on the stock exchange, which is an instrumentality of interstate commerce, then that fact, in conjunction with the power of Congress to regulate the mails, is sufficient to confer jurisdiction to compel these people at least in the first instance to tell that they are engaged in that business. That substantially is the whole extent of title 2.

Senator TAFT. Of course, many law firms are engaged in that business. Our office has a fairly large estate business and we are constantly called upon to advise and counsel as to investments. It is not something you might like to do, but you have to do it sometimes. Mr. SCHENKER. Being a lawyer myself, Senator, I took particular pains to see that we were not included within the scope of this legislation.

Senator TOWNSEND. That point may bother a layman a little.

Mr. SCHENKER. I was not merely being facetious. You say, "Well, why didn't you include lawyers?" We felt,in the first place, since a lawyer is subject to the Bar Association and there is a high fiduciary duty on him

Senator HUGHES. He is an officer of the court also.

Mr. SCHENKER. He is an officer of the court also.

Senator TAFT. There was not any scruple about leaving him out because he was not engaged in interstate commerce?

Mr. SCHENKER. Oh, we had difficulty with that problem too. Senator WAGNER. Í do not want to anticipate your testimony, but have you some instances of the activities of these counselors or abuses in connection with their activities?

Mr. SCHENKER. In a brief time, Senator, I think I can give you a short description or over-all picture of the industry. I have brought along with me copies of the report that we have submitted to Congress, and as I elaborate I will refer to the pages which deal with these subjects. You will be able to see what those problems are.

Senator WAGNER. Would you rather go on and have us ask questions later on? What is your preference about that?

Mr. SCHENKER. For 4 years I have been asking everybody else questions, and I think it only fair that somebody ask me questions now. Senator WAGNER. That is fair.

Mr. SCHENKER. I say we learned of the existence of 394 investment advisers. Now, the estimates as to the number of investment counsel, of course, vary a great deal. Some estimates put the number at 10,000, some at 6,000, and so forth. Now, this is fairly important: We did not obtain detailed information with respect to all these 394 investment advisers that we found, for we were conscious of the limitation of our jurisdiction with respect to the scope of the investigation we could make. We felt we could only ask people who acted as investment managers to investment companies for detailed information. We tried to get some idea of the amount of funds that these people manage

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, holding 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. Í 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. 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 mvestment 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 say, "Here is my certificate. Give me the asset value of my certificate."