The Commission has under consideration reducing that 10 percent figure to 5 percent. I think that would take legislation. Actually, the 10 percent requirement as it now exists may amount to several million shares in really large companies. We have thought about requesting this committee specifically to consider reducing that 10 percent requirement and making it 5 percent. We will study that further and make our recommendation to the committee. Mr. ECKHARDT. That would, of course, tend to meet the question I was raising, an area where conglomerates' operations might not be fully disclosed. This would require a further disclosure and the minimal operations would become further minimal because of the increased size of the conglomerate. Mr. BUDGE. If they comprised the present 15 percent or the proposed 10 percent of the overall operation of the conglomerate, they would have to be reported, yes, sir. I may say that this conglomerate is a new phenomenon. One of the most informative things I have seen on it was this month's issue of Fortune magazine. There is an excellent discussion. A lot of it was news to me as it is described in the article. It is something with which the Commission, as such, has not really dealt with for a very long period of time because it is a new phenomenon. Mr. ECKHARDT. Thank you, sir. Mr. Moss. Mr. Keith? Mr. KEITH. Thank you, Mr. Chairman. I regret that I could not be here to hear your testimony, Chairman Budge, so I am not, perhaps, in a position to ask many questions at this time. I will go over your statement carefully. As you know, I have sponsored two bills, one in the 90th Congress on institutional trading and another in the 91st on the question of conglomeration. Have you any observations to make concerning the problem of institutional trading? Mr. BUDGE. I think I should report particularly to you and to Chairman Moss, because you were the authors of the legislation that set up the study which the Commission is undertaking, that we encountered some substantial delays, first in appropriations and second in recruiting of personnel to conduct this study. We do now have a director of the study and we are filling some of the positions with people who will actually conduct the study. We have had the industry groups in. It was our representation to you that this would be conducted in full cooperation with the industry. We have set up an advisory committee which has a very broad representation of American business and banking interests and securities interests. I feel that the study is now really about to be fully launched. We do have the feeling, as I have indicated in my statement, that there is a very real, substantial impact on the markets from the activities of institutional investors. We hope the study will give us the answers as to just exactly what takes place, and the results. Mr. KEITH. The question is sometimes a difficult one to comprehend, but do you think there is adequate information available to the public in keeping with the full disclosure philosophy of the Congress as to the assets, liability, profits, and losses? Is there going to be full disclosure, and is full disclosure necessary and legal insofar as the institutional trading is concerned? Is it beneficial to the public, and is it the right of Congress to acquire, to have much more extensive information as to this activity? Mr. BUDGE. I am not sure I understand your question. Mr. KEITH. Mr. Loomis is waiting to get into the picture. Perhaps he would comment on it. Mr. BUDGE. I would be delighted. Mr. LOOMIS. I am afraid I don't understand either. Are you asking for disclosure concerning the trading activity of institutions? Mr. KEITH. Yes. Mr. LOOMIS. There isn't adequate information about that now. We hope the study will provide it. We also believe it altogether likely, though the study may have to verify this, that there should be a continuing flow of disclosure concerning these activities and not merely a one-shot look at it. Mr. KEITH. On the full disclosure philosophy as it pertains to the conglomerate, I understand your testimony speaks of the conglomerate in some detail, but is it not once again the question of the full disclosure philosophy being extended to another area, this being in the case of conglomerates amongst others? Mr. BUDGE. We do have under consideration now, Mr. Keith, whether or not we will lower the 15-percent rule which is the present rule applying to reporting companies. If they do 15 percent or more of their sales, or if their profit is 15 percent or more in any particular area of their activity or section that must be reported. The Commission is currently considering lowering that 15 percent figure to 10 percent. Mr. KEITH. There was an article in Forbes magazine this week by a man with a proper Bostonian name, Paul Cabot, in which he draws a new idea. You mentioned that the conglomerate phenomenon was new to you. It didn't seem to be too new to him. He thought it was to some extent a new name for a kind of activity that took place in the 1920's. Mr. BUDGE. I think that is correct, particularly with respect to the conversion from equity to debt within the capital structure. In fact, I think the Public Utility Holding Company Act of 1935 resulted from the fact that there was a large percentage of utilities which did the same thing. They changed their capitalization to the point where they had 80 or 90 percent of debt and maybe 10 or 20 percent equity. That is in the same direction in which this conglomerate is moving. So we do have that history in the 1920's to help us evaluate what is going on now. Mr. KEITH. I understand the chairman has filed some legislation on this conglomerate subject as well as I. Will you be ready with your reports in support of this legislation, hopefully, in the next month or two? Mr. BUDGE. Yes; I am sure that we can be. Mr. KEITH. I have no more questions at this time, Mr. Chairman. Mr. Moss. I think, gentlemen, before recognizing the very distin guished chairman of this committee, I would like to observe that I had directed a request to the Commission that legislation be prepared regarding the removing of the profit from some of these takeover transactions and application of the modified section 16(b), with the SEC empowered to move. I am wondering if that legislation is now being prepared by the Commission. Mr. LOOMIS. I am not certain the actual legislation is being prepared. I have seen your letter and we are preparing our response to it. (The following correspondence was received for the record:) U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Hon. MANUEL F. COHEN, Chairman, Securities and Exchange Commission, DEAR CHAIRMAN COHEN: Your letter of November 8 in response to my inquiry of July 16 regarding certain data relating to tender offers reached my office after the adjournment of the Congress. I note that you have supplied certain data regarding the various tender offers made during a select period prior to the enactment of S. 510 as well as a short period thereafter. I further note that in several cases the Commission has taken legal action where fraudulent conduct occurred in connection with the tender offer. On the other hand, I still am not quite clear from the memorandum which your Division of Trading and Markets prepared in response to my inquiry what is the Commission's position with respect to any means which should be employed to make use of tender offers nonprofitable, especially in situations where it has appeared that the offers have been used as a means to raise the securities' price so that the tender offer maker can sell at a profit. Am I to understand the last paragraph of this memorandum referring to the statutory approaches under sections 10(b), 14(e), and 16(b) to be a suggestion on your part that you have additional authority under section 16 (b), or other appropriate section, to initiate in effect a derivative suit for the recovery of the profit by the issuer? Sincerely yours, JOHN E. Moss, Chairman, Subcommittee on Commerce and Finance. SECURITIES AND EXCHANGE COMMISSION, Hon. JOHN E. Moss, Washington, D.C. DEAR MR. Moss: This is in reply to your letter of January 6, with further reference to our correspondence last year concerning certain aspects of tender offers. You refer to the situation where a person has made a tender offer and thus raised the price of a security, and then is able to resell the security so acquired at a profit, usually by reason of a competing offer being made at a still higher price, and inquire what means should be employed to make this situation unprofitable. If it should appear that the tender offer was not bona fide but was made simply for the purpose of affecting the market price in the hope of selling at a profit, then, as the Division of Trading and Markets indicated in its memorandum accompanying former Chairman Cohen's letter of November 8, the anti-fraud provisions in Sections 10(b) and 14(e) might permit recovery of the profit so acquired. We know of no case, however, where the making of a tender offer and the subsequent resale of the tendered securities at a profit has been shown to have been a part of a fraudulent scheme that would have provided recovery under the anti-fraud provisions. As you are undoubtedly aware, Section 16(b) of the Securities Exchange Act provides for the recovery by or on behalf of the issuing corporation of profits from a purchase and sale, or sale and purchase, within any six-month period, by a person who is the beneficial owner of more than ten percent of the class, or a director or officer of the issuer. This provision may become applicable in a tender-offer situation where a person who made the tender offer accumulated more than ten percent of the shares of the target company and subsequently resold them at a profit in a competing tender offer, or otherwise. Section 16(b) actions may be brought only by the company, or any shareholder of the company, and the Commission is not authorized to commence such litigation. A number of suits have been brought under Section 16(b) in tender-offer situations. The Crane Company situation, referred to in the Division's memorandum, is one example, and there is also litigation of this nature pending in connection with the resale by Occidental Petroleum of securities involved in the takeover of Kern County Land Company by Tenneco. One difficulty in connection with applying Section 16(b) in these situations is the fact that the statute says that it shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and of the sale. This may mean that the only profits which can be recovered are those on shares in excess of ten percent, or, conceivably it might be interpreted to defeat recovery altogether. The courts have not as yet settled this question in the tender-offer area. We are giving further consideration to the extent of the problem and to the adequacy of the securities laws and our present rules for treatment of the problem. Sincerely, Mr. Moss. Thank you. HAMER H. BUDGE, Chairman. Now I would like to recognize the chairman, Chairman Staggers. Mr. STAGGERS. Thank you, Mr. Chairman. I would like to thank you, Mr. Budge, Commissioner Wheat, Commissioner Smith, and Mr. Loomis, for coming up and giving us the benefit of your views. I remarked a while ago I believe Phil Loomis has been around here as long as I have been around here, 20 or 20-odd years. You have been with the Commission that long, I am sure. Mr. LOOMIS. Not quite, sir. Mr. STAGGERS. We are happy to have you come up because we thought it was time that we had a little get-together and aired some of the problems and things that you might have on your mind. The rate of sales has jumped so terrifically in the last 2 or 3 years, what we used to consider 2 million shares and 3 million shares as a big day seems to be gone forever. Today it is 10 million and even 12 million; 12 million seems to be normal now. Many things are happening. We thought it was time that you came up and gave us an accounting of the markets and what is going on, and tell us whether you needed additional legislation. I want to thank you for coming in response to our call. Mr. LOOMIS. Thank you, Mr. Chairman. Mr. Moss. Thank you, Mr. Chairman. Now I would like to ask Dr. Stevenson if he has questions to complete the development of the record on this first phase of the hearing. Mr. STEVENSON. Mr. Chairman, there are just a few, and I think also several things to be introduced into the record for the information of the committee. Chairman Budge, in connection with the conglomerates which we have been discussing, you were requested to draw up a memorandum giving us an illustration. You referred to it in your text as a railroad out West that had several other interests. It is my understanding that you had a short memorandum on the subject which you were ready to give us today. Of course, we are aware of the matter before you in regard to an exchange offer which North west Industries has made, but I thought you were going to give us just the chronological data with regard to this exchange so that the members here would appreciate what is involved. Mr. BUDGE. That I have not seen, doctor. I am very much aware of the subject of Northwest and Goodrich, but I have not seen the memorandum. Mr. LOOMIS. There is such a memorandum but it is not here. We will have to supply it for you. Mr. Moss. We will hold the record open, without objection, at this point, to receive the memorandum. Is there objection? Hearing none, the record will be kept open to receive it. (The following letter and memorandum was received by the committee:) Hon. JOHN E. Moss, House of Representatives, Washington, D.C. SECURITIES AND EXCHANGE COMMISSION, DEAR MR. Moss: At the hearings before your Committee on February 25, you requested a copy of a staff memorandum with respect to the proposed takeover by Northwest Industries of The B. F. Goodrich Company. I enclose herewith three copies of that memorandum. It should be borne in mind that this is an internal staff document prepared for the purpose of giving a very brief, and certainly incomplete, analysis of the situation. It was prepared on the basis of reviewing certain affidavits and other papers filed in the court proceedings referred to and on the basis of the preliminary prospectus filed by Northwest on February 6, 1969. As the memorandum points out, that prospectus is a very elaborate document and only the highlights are mentioned in the memorandum. The registration statement also may well be amended before it becomes effective. It should also be noted that according to press reports, there have been further developments in the matter since February 13, the date of the memorandum. If you include the memorandum in the record of the hearings, I would appreciate it if you would also include this letter in order that the nature and limitations of the memorandum can be a matter of record as well. Sincerely, HAMER H. BADGE, Chairman. MEMORANDUM-PROPOSED TAKEOVER BY NORTHWEST INDUSTRIES, INC., OF THE B. F. GOODRICH COMPANY The purpose of this memorandum is briefly to summarize certain aspects of the above transaction, with the thought that this may prove useful in connection with our consideration of the problems presented by the activities of conglomerates. Chronology of Events Through February 7 On the basis of papers filed in the court proceedings referred to below, the following is a brief outline of the early stages of the transaction: Sometime in October, 1968, Mr. Howard A. Newman, Chairman of the Board of Northwest, whose principal activity appears to be the development of an acquisition program, determined to make an analysis of Goodrich to determine its desirability as an investment for Northwest. This proposal was approved by Mr. Ben Heineman, President and Chief Executive Officer. In November, Mr. Newman reported favorably on this matter and on or about December 23, 1968, Mr. Heineman determined to take a position in Goodrich and obtained authorization from the Executive Committee of the Board of Directors. Between December 23 and February 3, Northwest purchased in the open market 700,000 shares of Goodrich stock, constituting about five percent of the total amount outstanding. On January 20, the Executive Committee authorized a tender offer of Northwest for Goodrich stock and on the same day, Northwest issued a press release announcing that it proposed to offer, in exchange for each Goodrich share, $50 |