perior's decision as to his salary or grade or type of work, could have his hearing, and if that went against him, could take the case to the Commission. The Commission would be obliged by the bill to enter an "order" in the matter, and if that were not pleasing to the aggrieved employee he could petition a circuit court of appeals for review of the Commission's order by virtue of present statutory provisions.

It is impossible to forecast the enormous variety of matters that could be made the subject of formal hearings under this proposal. Informal administrative "decisions" by subordinate employees, interlocutory rulings by trial examiners, personnel and other problems of internal administration, are only starting points. The act of the general counsel in filing a complaint in a district court seeking an injunction would also appear to be within the scope of the proposal. At the very least, its provisions are directed toward a vast overexpansion of formalized controversy and review.

For the foregoing reasons the Commission recommends the rejection of the proposal.

D. COMPETENT EVIDENCE

As they now stand, the statutes that we administer require that our findings be based upon "substantial evidence." 25 H. R. 4344 would amend these statutes so as to provide that our findings, if supported by "substantial, competent evidence," shall be conclusive upon review.20

The significance of adding "competent" to "substantial" is not clear. In the law of evidence the term "competent" and its converse, "incompetent," have a highly technical meaning. Under the applicable case law, "substantial evidence" means "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion" (Consolidated Edison Co. v. N. L. R. B., 305 U. S. 197, 229). It does not include "mere uncorroborated hearsay or rumor.' Id.

28

As a matter of practice, this Commission has been careful, in contested proceedings, to exclude from its consideration evidence that is not trustworthy within the spirit of the rules against hearsay." But there are forms of evidence which may be entirely trustworthy but which, for one reason or another, may not conform with jury trial rules of admissibility. Such evidence may well be appropriate for consideration by a specialized agency such as ours. In some of our proceedings, e. g., where an exchange seeks to prove that a specified security has adequate public distribution and trading activity in a given vicinity to permit it to be given unlisted trading privileges, strictly competent evidence is usually not obtainable or could, at any rate, be procured only at prohibitive expense. If technically competent evidence were required, and if an over-the-counter dealer objected to the type of evidence commonly used-the stock records of transfer agents, and compilations of numerous brokers' transactions-the case would ordinarily end there; and the converse is also true, for the same kind of evidence is used by issuers and over-thecounter dealers seeking to terminate unlisted trading privileges.2

29

Since in general the rules of evidence bearing on competency are designed to exclude certain types of evidence which, although relevant and material, may create confusion in the minds of an inexpert jury, there would seem to be little reason for requiring the strict application of such rules in administrative proceedings. Moreover, their strict application by a Federal agency would be beclouded by the differences of opinion among the courts of the several States and Federal jurisdictions as to what evidence is or is not "competent."

We believe that as the law now stands, appellate courts are able and ready to strike down an administrative finding based on evidence not properly admissible within the spirit of the court-made rules of competency. Enforcement of the mere technicalities thereof would not, we suggest, represent a step forward in the progress of administrative law, but would surely contribute to the growth of a litigious and tactical spirit in proceedings designed to be simple and inexpensive. It would add nothing to substantial justice.

25 Section 9 (a) of the Securities Act omits the word "substantial," but it is clear that the courts interpret such a provision as though it specified "substantial evidence." Consolidated Edison Co. v. N. L. R. B., 305 U. S. 197. In this respect the statement of Mr. Putney (unrevised transcript, pp. 2653-2654) indicates a misunderstanding of the law. 26 H. R. 4344, secs. 7, 210, 404, and 503, amending the Securities Act, Securities Exchange Act, Investment Company Act, and Investment Advisers Act, respectively. The Trust Indenture Act would be similarly amended since it incorporates by reference the provisions of the Securities Act regarding judicial review.

27 Queensboro Gold Mines, Ltd., 2 S. E. C. 860, 863-864 (1937); cf. American Terminals and Transit Co., v. S. E. C. 701, 729-730 (1936).

28 See Spiller v. A. T. & S. F. Ry. Co., 253 U. S. 117, 129–132; I. C. C. v. Baird, 194 U. S. 25; American Terminals and Transit Co., supra; Wigmore on Evidence (Third Ed., 1940), vol. I, pp. 14-110, esp. secs. 4a, 4b, and 4c (pp. 25-95).

29 Such proceedings arise under sec. 12 (f) of the Securities Exchange Act.

In their statements before the committee Messrs. Twombly and Putney quoted members and officers of the Commission in such a way as to indicate that they supported proposals similar to those proposed in the bill. An examination of the complete context from which these quotations were taken indicates clearly that these Commissioners and officers are in disagreement with these features of H. R. 4344.

The Commission respectfully recommends that H. R. 4344 be not approved.

EXHIBIT A

For immediate release Friday, April 18, 1941.

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON

Securities Act of 1933-Release No. 2532

According to announcements in the press, the Government of Great Britain, acting under its war powers, recently acquired from Courtaulds, Ltd., a block of the securities of American Viscose Corporation, and disposed thereof to a banking group in the United States. As a result of this transaction, the question has been presented to the Securities and Exchange Commission whether, if the banking group should in turn dispose of the securities by means of a public distribution in the United States, the British Government would be subject, in connection with such distribution, to the liabilities of an underwriter under the Securities Act of 1933.

In examining this question, the Commision has recognized the accepted principle of international law, reflected in many decisions of the United States courts, that a foreign friendly government is immune from suits brought, without its consent, to enforce claims against either it or its property. Without considering the extent to which this immunity could legally be abrogated by the appropriate constitutional authority, it appears clear that no intent on the part of the Congress to abrogate it can be presumed in the absence of express statutory language.

The Securities Act of 1933 contains no express language subjecting foreign governments to civil liability as underwriters. In fact, it can be argued that an intent to exclude foreign governments from civil liability under the Act affirmatively appears from Section 6 (a) of the Act, which provides that a registration statement relating to a security issued by a foreign government, or political subdivision thereof, need not be signed by the issuing government.

Accordingly, the Commission has concluded that under the circumstances involved in the American Viscose Corporation case, the British Government will not be subject to the liabilities of an underwriter under the Securities Act of 1933 in the event of a public distribution by the banking group which has acquired the American Viscose Corporation securities. In order to give its conclusion the status of a rule of the Commission, the Commission has adopted Rule 143 under the Securities Act of 1933.

The full text of the Commission's action in the promulgation of the Rule is as follows:

The Securities and Exchange Commission, acting pursuant to authority conferred upon it by the Securities Act of 1933, as amended, particularly section 19 (a) thereof, and deeming such action necessary to carry out the provisions of the Act and necessary and appropriate in the public interest and for the protection of investors, hereby adopts the following rule:

Rule 143. Definition of "Has Purchased," "Sells For," "Participates," and "Participation," as Used in Section 2 (11), Relation to Certain Transactions of Foreign Governments for War Purposes.

The terms" has purchased," "sells for," "participates," and "participation," in section 2 (11), shall not be deemed to apply to any action of a foreign government in acquiring, for war purposes and by or in anticipation of the exercise of war powers, from any person subject to its jurisdiction securities of a person organized under the laws of the United States or any State or Territory, or in disposing of such securities with a view to their distribution by underwriters in the United States, notwithstanding the fact that the price to be paid to such foreign government upon the disposition of such securities by it may be meas

ured by or may be in direct or indirect relation to such price as may be realized by the underwriters.

This action shall become effective April 18, 1941.

EXHIBIT B

For immediate release Wednesday, January 21, 1942.

SECURITIES AND EXCHANGE COMMISSSION

WASHINGTON

Securities Exchange Act of 1934-Release No. 3131

To facilitate the proposed sale of defense securities by brokers and dealers, the Securities and Exchange Commission today amended its rules so as to make it unnecessary for such persons to make the usual bookkeeping entries or to send out written confirmations as required by such rules for other transactions. This action was taken in view of the proposal of certain national securities exchanges and associations of over-the-counter brokers and dealers to sell defense securities without compensation. The amended rules apply not only to Defense Savings Bonds and Stamps but also to Tax Savings Notes issued by the Treasury. The text of the Commission's action follows:

The Securities and Exchange Commission deeming it necessary for the execution of the functions vested in it and necessary and appropriate in the public interest so to do, pursuant to authority conferred upon it by the Securities Exchange Act of 1934, as amended, particularly Sections 15 (c) (1), 17 (a) and 23 (a) thereof, hereby takes the following action:

I. Rule X-17A-3 is hereby amended by adding thereto the following paragraph: "(c) This rule shall not be deemed to require a member of a national securities exchange, or a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended, to make or keep such records as are required by Paragraph (a) reflecting the sale of United States Tax Savings Notes, United States Defense Savings Stamps, or United States Defense Savings Bonds, Series E, F, and G."

II. Rule X-15C1-4 is hereby amended to read as follows:

"The term 'manipulative, deceptive, or other fraudulent device or contrivance,' as used in Section 15 (c) (1) of the Act, is hereby defined to include any act of any broker or dealer designed to effect with or for the account of a customer any transaction in, or to induce the purchase or sale by such customer cf, any security (other than United States Tax Savings Notes, United States Defense Savings stamps, or United States Defense Savings Bonds, Series E, F, and G) unless such broker or dealer, at or before the completion of each such transaction, gives or sends to such customer written notification disclosing (1) whether he is acting as a broker for such customer, as a dealer for his own account, as a broker for some other person, or as a broker for both such customer and some other person; and (2) in any case in which he is acting as a broker for such customer or for both such customer and some other person, either the name of the person from whom the security was purchased or to whom it was sold for such customer and the date and time when such transaction took place or the fact that such information will be furnished upon the request of such customer, and the source and amount of any commission or other remuneration received or to be received by him in connection with the transaction."

Effective January 21, 1942.

EXHIBIT C

For immediate release Wednesday, April 9, 1941.

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON

Holding Company Act-Release No. 2681

The Securities and Exchange Commission today announced the adoption of a rule under the Holding Company Act dealing with expenditures by registered

holding companies and their subsidiaries in connection with the solicitation of proxies.

The rule provides in substance that, except pursuant to an effective declaration under the Act, no registered holding company or subsidiary shall expend more than $1,000 during any one calendar year in the solicitation of proxies, in addition to the ordinary expenses of preparing, assembling, and mailing the proxies.

The new rule is designated Rule U-65 and becomes effective immediately. In this connection, the Commission points out that the immediate effectiveness of the rule does not change its general policy of submitting rules to the industry for comment prior to adoption. In the case of Rule U-65, however, immediate effectiveness was necessary to prevent substantial expenditures of corporate funds by the management of a registered holding company to employ solicitors to aid them in obtaining proxies in a contested election before the Commission had an opportunity to pass upon the propriety of such expenditures under the provisions of Section 12 (e) of the Act.

The text of the Commission's action follows:

Acting pursuant to the authority conferred upon it by the Public Utility Holding Company Act of 1935, and particularly sections 20 (a) and 12 (e) thereof, and finding that such action is necessary and appropriate in the public interest and for the protection of investors and to prevent the circumvention of the provisions of the Act and the rules and regulations of the Commission thereunder, the Securities and Exchange Commission hereby adopts the following rule:

RULE U-65. Expenditures In Connection With Solicitation of Proxies.

(a) General provision.-Except pursuant to a declaration notifying the Commission of the proposed transaction, which has become effective in accordance with the procedure specified in Rule U-8, and pursuant to the order of the Commission with respect to such declaration under the applicable provisions of the Act, no registered holding company or subsidiary thereof shall expend any money or other consideration in connection with the solicitation of any proxy, consent, or authorization regarding any security of such company. (b) Exceptions.-This rule shall not apply to

(1) Ordinary expenditures in connection with preparing, assembling, and mailing proxies, proxy statements, and accompanying data; or

(2) Other expenditures not in excess of $1,000 during any one calendar year.

(c) Scope of declaration.-A declaration with respect to any matter within the scope of this rule shall state the amounts and purposes of the sums proposed to be expended, and set forth any information available to the company as to any contest which has arisen, or may arise, with respect to the subject matter of such solicitation. Any such declaration may be included in any application or declaration filed with the Commission as to any related matter. Effective April 9, 1941, except that this rule shall not apply to proposed expenditures disclosed in any statement, application, or declaration filed with the Commission on or before April 5, 1941.

EXHIBIT D

For immediate release Wednesday, January 21, 1942.

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON

Holding Company Act-Release No. 3281

The Securities and Exchange Commission announced today that it will not adopt a rule at this time dealing with payments by subsidiaries of registered public utility holding companies on indebtedness held by the parents.

A preliminary draft of such a rule was submitted to the utility industry for comment on April 16, 1941, and was the subject of a public conference on June 10. The proposed rule prohibited a registered holding company or subsidiary thereof, which was in arrears in the payment of dividends on any class of its cumulative preferred stock, from making any payment on principal

or interest on any indebtedness held by the parent unless a declaration covering the proposed transaction had become effective under the Holding Company Act. The Commission has concluded, however, that for the present it will be more satisfactory to deal with problems of this character by order, on notice initiated by the Commission, than by the alternative procedure suggested in the proposed rule.

The statement of the Commission follows:

On April 16, 1941, there was submitted to the industry for comment a draft of a proposed rule entitled "Payments By Subsidiary Companies On Indebtedness Held By Parent Companies." The Commission has had the benefit of oral and written suggestions on the part of those favoring and opposing the rule. The Commission is presently of the opinion that it is preferable to deal in other ways with the problems which the suggested rule was designed to meet. In view of the general interest in the matter, it seems appropriate to set forth our reasons for not adopting the rule.

As pointed out when the rule was first suggested, the Commission's attention had been called to a number of situations where there are substantial dividend arrears on the publicly-held preferred stock of subsidiary companies, and, also, debt claims of the parent company which purport to rank ahead of such publicly-held preferred stock. In many such situations there appear to be possible grounds for subordinating the parent company's claim to the publicly held preferred stock of the subsidiary company under the equitable principles laid down by the Supreme Court, particularly in the so-called Deep Rock case (Taylor v. Standard Gas and Electric Company, 306 U. S. 308 (1939)).

The proposed rule contemplated in effect a freezing of payments of principal or interest on such claims until the Commission would have an opportunity to pass upon the question of possible subordination after hearing those affected. The latter submitting a draft of the proposed rule for discussion called attention to the Commission's responsibility for protecting the public holders of the preferred stock of subsidiaries, and to the desirability, from the point of view of the security holders of both parent and subsidiary companies, of resolving any uncertainties as to the status of such claims.

In connection with the discussions on the rule, and subsequently, our attention has been called to a number of critical situations involving such intercompany claims. In these instances we have instituted proceedings to deal with the status of the claims by order, after notice to the companies concerned and the public.

In the light of our experience in dealing with such problems by order, we are of the opinion that it is presently unnecessary to have a general rules covering payments of both principal and interest and of the broad scope proposed, although further study may lead to the conclusion that there is some room for the exercise of the rule-making function within this field. The method of proceeding by order permits a greater flexibility in selecting the most pressing problems for immediate attention, and in many instances permits the problem of the intercompany claims to be dealt with, as an incident to proceedings under Section 11 (b) (2) of the Act, more economically than in the type of proceedings which might be precipitated by such a rule. Moreover, the proposed rule was aimed at only one of the various classes of cases, where there may be equitable grounds for questioning the enforceability against a subsidiary of purported claims of a parent holding company. For example, the rule was not designed to deal with the problem of subordination of debt claims, when this may be justified even in the absence of dividend arrears on publicly held preferred stock of the subsidiary, or the problem of possible subordination of preferred stock holdings of the parent company, or the problem of possible limitation to cost on the equitable grounds described in our opinion in the Federal Water Service Corporation case (Holding Company Act Release No. 2635).

The failure of the Commission to adopt the proposed rule should not be construed as accepting any of the legal arguments urged in opposition to the rule. In fact, the determination of the Commission to proceed by order necessarily assumes that the Commission regards the matter of taking action with reference to such intercompany claims as within