and apparently are doomed to continue to sell, unless relieving amendments to the securities acts are passed, is to make it difficult indeed, and often impossible, for private corporations seeking expansion of their industries, even for purposes of national defense, to successfully put out and sell common-stock issues unless they are priced so low as to make it extravagant and impracticable for the corporation to secure additional capital in that way. Hence, in part, the dearth of equity financing, and the resort to bond issues and borrowing from the banks. 7. Regulation has thus also impaired and limited the scope of the country's financial activities, impeded its full development as the financial center of the world, driving many financial operations to the markets of other countries, with consequent unemployment and depression here in financial fields and districts. SECTION 16 (b) OF THE 1934 ACT RESTRICTING PURCHASES AND SALES OF CORPORATE STOCK BY OFFICERS, DIRECTORS, AND 10-PERCENT STOCKHOLDERS SHOULD REPEALED BE The congressional desire underlying section 16 was to protect a corporation's stockholders against exploitation by insiders. This is substantially accomplished by section 16 (c), which makes it unlawful for officers, directors, and 10-percent stockholders of listed corporations to make short sales of the corporate stock. In view of the protection afforded investors by section 16 (c), the provisions of section 16 (b) seem unnecessary and undesirable for a variety of reasons. In the first place, the outside investor, contemplating a purchase of stock in the corporation, is protected from exploitation by other sections of the act, notably the antimanipulation provisions. Eliminating, therefore, from consideration the nonstockholding purchaser, let us see whether, and how, the director, officer, or 10 percent stockholder can take an unfair advantage of existing stockholders. The insider's buying surely does not prejudice the already investor, even if his purchases are prompted by inside knowledge of favorable corporate developments. For if the insider's purchases put the price of the stock up, as it must do to a greater or less extent, the price of the other stockholders' holdings advance just as much. The net result of the operations would therefore simply be a higher market price level for the corporation's capital stock-a financial benefit to all concerned. If, however, the insider can in other ways take an unfair advantage of information acquired in the performance of his duties as an official of the corporation, this can still be done even under regulation; for important improvement or unfavorable changes in a corporation's business position or earning power generally do not occur at intervals shorter than 6 months. In other words, it is still possible for the insider to sell the corporation's stock upon learning fron the inside of unfavorable developments, and to buy it again when the market price is very low and prospects for better earnings have appeared. So far as the section 16 (b) is concerned, he can carry on the same operations in the corporate's stock as he did before the act went into effect, except that he would have to operate over a somewhat longer period of time. Manipulation is out by virtue of other provisions of the act. There is hardly anything, therefore, an insider can actually do, to facilitate his operations in the corporation's stock, except possibly to publish or disseminate inaccurate reports of the company's condition and affairs. Unethical practices of that kind are rare indeed and punishable under other laws, perhaps the strongest deterrent to such dishonesty being the official's fear of ouster from the corporation's service. The insider's position under regulation is this. If he buys the stock and it goes down, the entire loss is his, whenever he may sell it. If he buys it and it goes up, any profit which may accrue or be realized during the entire subsequent period of 6 months belongs to someone else. Under regulation the insider will buy, if at all, only when he can't lose; that is to say, only when he can acquire the stock at subbargain levels; and he is prone to sell promptly after the expiration of 6 months to take his long-forbidden profit, even if the price obtainable is still below what the stock should be worth. The net result obviously is to keep the stock undervalued in the market and selling in a price range between low levels and ridiculously low levels. And how often now we see it! To sum up the discussion of section 16 (b), it may be said that there are four principal objections to it. In the first place, it imposes unnecessary (and probably unconstitutional) restrictions upon honest and proper investment activities of corporate officers, directors, and large stockholders in the stock of their corporation. Secondly, it tends to produce a dead and inactive market in the stock, which makes it difficult, if not impossible, for investors to convert their stockholdings into cash, without sacrifice, when they need the money. Thirdly, it tends to keep down the price of the stock and to hold it at price levels below and misrepresentative of real value, because insiders will not now purchase or support the stock on market weakness, but will buy only when the price has declined to such an extremely low level that purchase at the market amounts to a gift to the insider. Fourthly, it causes in the same way inactive markets and low prices for the stocks of many thousands of business corporations, whose shares are listed on securities exchanges, the cumulative effect of which is very detrimental to the cause of equity financing. These four results are all injurious to the interests of investors, whom the act was passed to protect. SECTION 9 (a) SUBDIVISIONS (2) AND (6) SHOULD BE CLARIFIED AND OTHERWISE AMENDED Lest they violate this section, owners of capital are afraid to conduct any large-scale buying and selling of the common stocks in which they would otherwise be actively interested. For there is always the possibility that the Securities and Exchange Commission, or those to whom the act gives a right of action for losses on purchases influenced by others' buying and selling operations (if they amount to manipulation) will seek to construe the activities as manipulation and impose penalties or sue for damages. Owners of capital, which would otherwise be employed for transactions in listed common stocks, thereby helping to afford a broader, more active, more stable, and more representative market, will simply not take the risk. Under the ambiguous and uncertain phraseology of the act, it is much too easy for the Commission or an allegedly injured party to make out a prima facie case of act violation, or even to bring proceedings which have no legal foundation. Section 9 (a) (2) prohibits, among other things, one "or more persons to effect a series of transactions in any security * * creating actual tive trading in such security, or raising the price of such security, for the purpose of inducing" purchase. * * * * * * * ac One objection to this is, that it is generally necessary to effect a series of transactions in order to acquire a block of stock, because the offerings are by different sellers and at varying prices above the market, and cannot be acquired in one transaction. As each purchase is a separate transaction in a series, it is almost impossible for a speculator-investor to buy any considerable quantity of stock without creating the appearance of act violation. Then may follow the Securities and Exchange Commission inquisition into the individual's private financial activities to find out what it is all about. If a trial follows, it can be a public one, whether or not the individual has been guilty of an act violation. (Incidentally, it is to remove the threat of such unfair and damaging publicity that Mr. Wadsworth's bill (paragraph 19) proposes to amend section 22 of the 1934 act and corresponding sections of the other acts by providing that all hearings shall be private unless otherwise requested by the party charged.) In the second place a series of transactions does of necessity create active trading and does of necessity raise the price of such security. That this is done, "for the purpose of inducing * * * purchase * * * by others" can be anybody's claim-and with some show of reason. For sufficient buying activity in any stock, which necessarily appears upon the tape and in the financial columns of the daily papers, helps to induce purchase by others. And as anyone buying a quantity of stock would like to see it sell higher, it could be claimed that his purchases were partly for the purpose of inducing others to buy and help along the move. Yet these are perfectly legitimate transactions, not intended to be barred by Congress, and it is unfortunate indeed that fears of violating the unclear antimanipulation provisions of the act have largely prevented them, with consequent damage to the liquidity of the market, the price level, and the interests of investors. For we have seen that exclusion of thousands of such buyers from operations on the country's stock exchanges tends to cause stock prices to sink of their own weight and always return to and lie close to bottom-one way of discounting and reflecting the demise of ready marketability under regulation. Thus, in order to protect those who watch the ticker tape or the market reports and buy stock upon the appearance of active trading therein (a fair picture of a margin speculator), this regulation prejudices the position of the true investor by drying up the markets in which he must sell, thereby keeping down the market value of the stocks which he holds. These considerations show the importance of amending section 9 (a) (2) and (a) (6), as proposed by Mr. Wadsworth, so as to penalize only those series of transactions entered into for the purpose of creating a misleading market appearance and to permit transactions effected for the purpose of maintaining a fair and orderly market, with certain provisos. Support buying, or stabilizing operations, to maintain a fair and orderly market are desirable and wholly beneficial to investors, when limited by the four safeguards proposed in Mr. Wadsworth's bill. How can anybody, except possibly operators selling stocks short, be hurt by large scale purchases made during weak or panicky markets, when no one else is prepared to buy, and by resales, as the opportunity offers, at prices which get the support buyers out even, or net them a small profit for their courage? It is hard to imagine that there would be a single investor who would not approve and welcome such beneficent operations. While these purchasers, who buy in support and for the maintenance of an orderly market, may be acting for a profit and perhaps also to protect their other investments, they greatly benefit all other investors as well. The only other persons besides the short sellers, who could object to such operations would be the bargain hunters, who want prices to go way down, so they can take advantage of distress selling by other investors and speculators and acquire stocks at prices far below intrinsic value. * * * These considerations show the necessity of clarifying and making more definite the rights, obligations, and responsibilities of capital owners in making subscriptions to, and purchases and sales of, capital stock issues. It is a wise proposal to have the act provide that financial practices shall not be deemed “in contravention of any rule or regulation unless such shall be clearly or unequivocally prohibited by such rule or regulation, and such rules and regulations shall be construed in favor of the person or persons charged * * * "" This would be in accordance with American equitable principles and make it necessary clearly to acquaint those who play, with the rules of the game before they can be charged with a violation thereof. In present financial conditions, which admittedly hinder the flow of capital into private enterprise, the proposed relaxations of the act, which do not threaten to bring back the old abuses, will do much to restore the interest and activity of capital in the securities market and new capital stock issues. Respectfully submitted. W. MONTAGUE GEER, Member of the Bar 1908 to Date; Associated 90 Wall Street, New York, N. Y. STATEMENT OF R. McLEAN STEWART, CHAIRMAN, SECURITIES ACTS COMMITTEE, INVESTMENT BANKERS ASSACIATION OF AMERICA SECTION 15A OF SECURITIES EXCHANGE ACT OF 1934 The CHAIRMAN. Mr. Stewart, I understand that you have statement. short Mr. STEWART. Mr. Chairman and gentlemen of the committee, in view of the importance of certain problems raised in a proceeding presently pending before the Securities and Exchange Commission, both to the work in which your committee is here engaged, to the effort at self-regulation of the securities business, under governmental supervision, as contemplated by section 15A of the Securities Exchange Act of 1934, and to the effective functioning of the traditional American system of underwriting and distributing new issues of securities to the public, we feel it our duty, both to the committee and to those whom we represent, to bring the matter to the attention of the committee, particularly in view of the recent discussions thereof which have appeared in the public press. As the committee and the Congress knows, the predominant system in this country of distributing new issues of securities to the public, and thus funneling savings to productive industry, has involved the use of the so-called underwriting and selling group agreements. Thus, in the usual case, a group of underwriters purchases an issue of securities from an issuer and agrees to pay a certain sum therefor. This group of underwriters, in cooperation with a subsequently formed selling group, in turn offers the issue to the public, and in making such offering both the members of the underwriting group and the selling group agree that during a brief specified period they will severally offer the securities only at a uniform price. The National Association of Securties Dealers, Inc., which is registered with the Securities and Exchange Commission as a national securities association pursuant to said section 15A, has disciplined certain of its members for breaching the uniform price and concession provisions of the underwriting and selling group agreements involved in the distribution of a new issue of bonds and debentures of the Public Service Co. of Indiana, which was effected in the early part of December 1939, and the Securities and Exchange Commission, pursuant to certain provisions of said section 15A of the Exchange Act, has, on its own motion, called up certain of these cases for review. From its order covering the institution of such review proceedings and discussions thereof which have recently appeared in the press, it would seem that the Commission's staff, in these review proceedings, intends formally to raise the question not only of the appropriateness of the association's disciplinary actions under its own rules and certain provisions of said section 15A, but also the question of the legality of such underwriting and selling group agreements under the Federal antitrust laws. It has always been, and still is, the view of the industry that the agreements now challenged involve no illegal restraint of trade at common law or under the Federal antitrust laws; and, so far as we are aware, this is the first time such a possibility has been suggested from any official source. We think it will be apparent to the committee that if the Commission or the courts should finally decide that such underwriting and selling group agreements, which have formed the very cornerstone of the American system of distributing new issues of securities to the public for the past 25 or 30 years, are invalid under either the common law or any of the Federal antitrust enactments, such a decision would have a very direct bearing upon the utility of the Federal securities laws and the proposed amendments thereto, here under consideration. It is also the opinion of many in the business that such a decision would largely destroy the economic sanctions which were provided for in the so-called Maloney Act, section 15A of the Securities Exchange Act of 1934, to make disciplinary actions by national securities associations effective, and that it would create chaos generally in the business of underwriting and distributing new issues of securities. We have no concrete proposals to make with respect to these problems at the present time, but, as already indicated, we feel that the matter is of such importance that it should be brought to the attention of the Congress. Thank you, Mr. Chairman. The CHAIRMAN. Thank you. STATEMENT OF BENJAMIN A. JAVITS, NEW YORK CITY, RE PROPOSED AMENDMENTS IN THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934 PROPOSED AMENDMENTS I desire to urge the enactment of legislation (1) conferring authority on the Commission to permit interventions of interested persons in matters pending before it under the 1933 and 1934 acts, (2) conferring authority on the Commission to make allowances to intervenors appearing before it where in the opinion of the Commission the services of such intervenors have been of benefit to the declarant or registrant in relation to the matters involved in proceedings before the Commission, such allowances to be payable by the registrant or declarant subject to a court review of the findings of the Commission, and (3) requiring the Commission to permit the intervention in proceedings before it, on due application, of interested parties, unless the Commission shall affirmatively find such intervention to be against the public interest or that the persons or class of persons or interests which the applicant for intervention seeks to represent are already adequately represented. PRESENT STATUTORY SITUATION There is absent from both of these statutes authority on the part of the Commission to permit the intervention of interested persons in matters pending before it. In the Public Utility Holding Company Act of 1935, there is a provision permitting intervention. Section 19 of this act provides as follows: "SEC. 19. Hearings may be public and may be held before the Commission, any member or members thereof, or any officer or officers of the Commission designated by it, and appropriate records thereof shall be kept. In any proceeding before the Commission, the Commission, in accordance with such rules and regulations as it may prescribe, shall admit as a party any interested State, State commission, State securities commission, municipality, or other political subdivision of a State, and may admit as a party any representative of interested consumers or security holders, or any other person whose participation in the proceedings may be in the public interest or for the protection of investors." Contrast the foregoing provision with the provisions of section 21 of the Securities Act of 1933 and section 22 of the Securities Exchange Act of 1934, which provides respectively as follows: "SEC. 21. All hearings shall be public and may be held before the Commission or an officer or officers of the Commission designated by it, and appropriate records thereof shall be kept." "SEC. 22. Hearings may be public and may be held before the Commission, any member or members thereof, or any officer or officers of the Commission designated by it, and appropriate records thereof shall be kept." RULE XVII AND PRESENT PRACTICE Rule XVII of the Rules of Practice of the Commission sets forth circumstances under which intervention will be permitted in any proceeding: "(a) Any interested representative, agency, authority, or instrumentality of the United States, and by any interested State, State commission, State securities commission, municipality, or other political subdivision of a State, shall be permitted to intervene in any proceeding upon written request. Any other person may be permitted to intervene in any proceeding upon written application to the Commission showing that he possesses or represents a legitimate interest which is or may be inadequately represented in such proceeding, but no person will be permitted to intervene if after examination the Commission finds that, for any reason (including the existence of undesirable conflict in the interests possessed or represented by the applicant), his participation in the proceeding would not be in the public interest, or for the protection of investors or, in a proceeding under the Public Utility Holding Company Act of 1935, for the protection of consumers. Intervention shall be subject to such terms and conditions as the Commission may prescribe, which may include a requirement that the applicant divest himself of specified interests which might conflict with the interests upon which his intervention is based." Presumably, the authority to adopt such rule, insofar as it applies to matters other than proceedings under the Public Utility Holding Company Act, is based on the principle that the Commission has the power to determine the procedure and rights to be heard in matters pending before it. |