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TO AMEND THE SECURITIES ACT OF 1933
TUESDAY, JUNE 8, 1937
HOUSE OF REPRESENTATIVES,
Washington, D. C. The committee met, pursuant to call, at 10 o'clock a. m., in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding.
The CHAIRMAN. The committee will please come to order.
We have met this morning for a hearing on H. R. 6968, a bill to amend the Securities Act of 1933, as amended, by adding thereto a new title, providing for the regulation of the solicitation, in interstate and foreign commerce, and through the mails, of proxies, deposits, and assents in connection with certain reorganizations, voluntary readjustments and debt arrangements; and for other purposes.
(The bill H. R. 6968, above referred to, is as follows:)
(H: R. 6968, 75th Cong. Ist sess.) A BILL To amend the Securities Act of 1933, as amended, by adding thereto a new title, providing for the
regulation of the solicitation, in interstate and foreign commerce and through the mails, of proxies, deposits, and assents in connection with certain reorganizations, voluntary readjustments and debt arrangements; and for otber purposes
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this title may be cited as the “Committee Act of 1937'',
NECESSITY FOR REGULATION
(a) Upon the basis of facts disclosed by the reports of the Securities and Exchange Commission made to the Congress pursuant to section 211 of the Securities Exchange Act of 1934, and by the reports of the Select Committee to Investigate Real Estate Bondholders' Reorganizations made to Congress pursuant to House Resolutions 412 of the Seventy-third Congress and 39, 79, and 354 of the Seventyfourth Congress, and otherwise disclosed and ascertained, it is hereby declared that the interest of investors in securities of issuers which are in the process of reorganization, readjustment or debt arrangement, the fair and orderly administration of reorganization proceedings in the district courts (including reorganizations under the Bankruptcy Act) and the national public interest are adversely affected
(1) When such securities are widely dispersed through many States; when individual action by such investors for the purpose of protecting and enforcing their rights is rendered impracticable by reason of the unavailability to such investors of adequate information with regard to the financial condition of the issuer and other material matters, and the expense of acquiring such information and of taking such action; when concerted action by such investors in their common interest through representatives of their own selection is impeded by the suppression and monopolization, by the issuer, underwriters, and others, of information as to the names and addresses of such investors; when the issuer, its management, and the underwriters, who may be interested in concealing possible causes of action against themselves or in preserving their control of the continuing or successor company or who may have other interests materially conflicting, actually or potentially, with the interests of such investors, are thereby in a position to control the selection of the persons who assume to act on behalf of such investors and the version of the issuer's affairs presented to such investors;
(2) When the persons who assume to represent the interests of such investors, to protect and enforce their rights, and to solicit authority so to do or to solicit assents to a plan, have no bona-fide interest, by ownership or representation or otherwise, in securities of the class to be solicited; when such persons have any relationship to or connection with the issuer or any underwriter of any securities of the issuer, or hold, beneficially or otherwise, any interest in the issuer or in any such underwriter, which relationship, connection, or interest involves a material conflict, actual or potential, with the interest of such investors; when full and fair disclosure of the existence of such relationship, connection, or interest is not made to such investors;
(3) When such investors have no real alternative but to authorize such persons to represent them, on such terms as such persons may determine; when such solicitation is effected on terms which do not require the affirmative approval of such investors, after full and fair disclosure of all material facts, of any action to be taken on their behalf with respect to the approval of a plan of reorganization, readjustment, or debt arrangement or other important matters; when such persons reserve to themselves the uncontrolled right to determine their own fees and expenses, to trade in securities of the issuer and otherwise to profit from their position as fiduciaries, or to take other action inconsistent with such position; when, by reason of provisions exculpating such fiduciaries from liability for their failure properly to exercise the authority conferred upon them, the protection afforded to such investors is rendered illusory;
(4) When the plan of reorganization, readjustment, or debt arrangement is proposed, directly or indirectly, by persons having no bona-fide interest in such reorganization, readjustment, or debt arrangement, or having interests which materially conflict, actually or potentially, with the interests of the investors affected by such plan; when such plan fails to make full and fair disclosure of the terms and conditions upon which securities are to be issued thereunder, the provisions made for the selection of the management of the new or continuing company, the fees and expenses to be paid in connection therewith, or other material matters;
(5) When, in the case of reorganizations pending before Federal or State courts, officials or agencies having jurisdiction to pass upon the fairness and equity of the plan, the making of a free and informed determination on such issue and the development of a fair and equitable plan are prejudiced by the pressure of other business, the absence of disinterested expert advice, or the solicitation and marshaling of assents to such plan in advance of such determination; or
(6) When the activities of persons soliciting such authorizations or assents, extending over many States, are not susceptible of effective control by any State.
(b) When abuses of the character above enumerated become persistent and widespread, the solicitation of such authorizations and assents, unless regulated, is injurious to the capital markets, to investors and the general public, and hinders the fair and orderly administration of reorganization proceedings in the district courts (including reorganizations under the Bankruptcy Act); and it is hereby declared to be the policy of this act, in accordance with which policy all provisions of this act shall be interpreted, to meet the problems and eliminate the evils, as enumerated in this section, connected with such solicitation by the use of means and instruments of transportation and communication in interstate commerce and of the mails.
(1) The term "security” means any note, stock, treasury stock, bond, debenture, evidence of indebedness, certificate of interest or participation in any profitsharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing.
(2) The term “person" means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. As used in this paragraph the term “trust” shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security.
(3) The term “issuer”, when used with respect to a security, means the original issuer of such security, any obligor thereon, and the owner of any property securing the same.
(4) The term "owner”, when used with respect to any security, means any person owning the legal or beneficial interest in such security, and shall also include any agent or representative of such owner when acting with respect to such security.
(5) The term “reorganization” means (A) any proceeding pursuant to section 77B of the Bankruptcy Act or (B) any receivership, rehabilitation, or foreclosure proceeding.
(6) The term “plan of reorganization" means in the case of a reorganization specified in clause (A) of paragraph (5) of this section, a plan within the meaning of section 77B of the Bankruptcy Act; or the plan, agreement, or general arrangement designed to effect a transfer, disposition, or revesting of assets in a reorganization specified in clause (B) of said paragraph, whether or not such plan, agreement, or arrangement is in documentary form.
(7) The term “voluntary readjustment” means any statutory merger or consolidation, or sale of all or substantially all of the assets of a person for securities, or partly for securities and partly for cash or other property, other than a merger, consolidation, or sale effected in a reorganization or in a municipal or foreign debt arrangement; and any modification of the terms, priorities, rights, or privileges of any security, or any exchange of any security for any other security or securities, or partly for securities and partly for cash or other property (other than a modification or exchange effected in a reorganization or in a municipal or foreign debt arrangement), for which modification or exchange the vote or consent of the owners of the security modified or exchanged or of the owners of all or of any specified proportion of any class of securities is required by law or by the terms of the certificate of incorporation, trust agreement, or indenture, or other instrument: Provided, however, That the Commission may by rule, regulation, or order declare any such modification or exchange, or any class or classes thereof not to be a voluntary readjustment within the meaning of this paragraph, if and to the extent that it deems that, subject to such terms and conditions as may be set forth in such rule, regulation, or order, the application of this act with respect thereto is not necessary or appropriate in the public interest or for the protection of investors, by reason of the insubstantial effect on security holders of such modifi. cation or exchange.
(8) The term plan or readjustment” means the plan, agreement, or general arrangement designed to effect a voluntary readjustment, whether or not such plan, agreement, or arrangement is in documentary form.
(9) The term “municipal debt arrangement” means any modification of the terms, priorities, rights, or privileges of any security issued or guaranteed by any political subdivision of a State or Territory of the United States, or by any public instrumentality of one or more States or Territories; or any exchange of any such security in whole or in part for any other security or securities and/or other property, other than an exchange exclusively for cash; or the assertion of any rights evidenced by any such security.
(10) The term "foreign debt arrangement” means any modification of the terms, priorities, rights, or privileges of any security issued or guaranteed by any foreign government, or by any political subdivision of any foreign government, or by any person controlled or supervised by and acting as an instrumentality of any foreign government; or any exchange of any such security in whole or in part for any other security or securuties and/or other property, other than an exchange exclusively for cash; or the assertion of any rights evidenced by any such security.
(11) The term “plan of debt arrangement” means the plan, agreement, or general arrangement designed to effect a municipal or foreign debt arrangement, whether or not such plan, agreement, or arrangement is in documentary form.
(12) The term "plan" includes plan of reorganization, plan of readjustment, or plan of debt arrangement.
(13) The term "assent” or “assent to a plan” means any approval, acceptance, or assent to a plan, or any authorization to approve, accept, or assent to a plan, in whatever manner evidenced, and whether conditional or unconditional, tentative or final, or any failure to disapprove, reject, or dissent from a plan, in whatever manner evidenced, except an assent evidenced by a proxy or deposit.
(14) The term "dissent” or “dissent from a plan” means any disapproval, dissent from, rejection of, or authorization to disapprove, dissent from, or reject a plan, in whatever manner evidenced, and whether conditional or unconditional, or tentative or final, or any failure to approve, accept or assent to a plan, in whatever manner evidenced, except a dissent evidenced by a proxy or deposit.
(15) The term "proxy” means any authorization, in whatever manner evidenced, to act for or to represent any owner of a security in any reorganization, voluntary readjustment, or municipal or foreign debt arrangement, or in any matter relating to any of the foregoing (including any authorization to approve or disapprove a plan), but shall not include any such authorization which confers no discretion as to whether the authority is to be exercised, or as to the manner in which or the conditions on which the authority is to be exercised.
(16) The term “deposit” means any surrender of custody or possession of any security which constitutes, or has the effect of constituting, in whole or in part, an authorization to act for or to represent any owner of a security in any reorganization, voluntary readjustment, or municipal or foreign debt arrangement, or in any matter relating to any of the foregoing, including any authorization to approve or disapprove a plan.
(17) The term “director” means any director of a corporation or any individual performing similar functions with respect to any person whether incorporated or unincorporated.
(18) The term "underwriter" means any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. The Commission may, by rule or regulation or order, declare any such person or any class of such persons not to be underwriters for the purposes of the provisions of sections 6 or 11 of this act if and to the extent that it deems that, subject to such terms and conditions as may be set forth in such rule, regulation, or order, it is not detrimental to the public interest or the interests of investors so to do. As used in this paragraph the term “issuer" shall have the meaning provided in section 2 (4) of the Securities Act of 1933, as heretofore amended, and in addition shall include any person directly or indirectly controlling or controlled by such issuer, or any person under direct or indirect common control with such issuer.
(19) The term “Commission" means the Securities and Exchange Commission.
(20) The term “Territory" means Alaska, Hawaii, Puerto Rico, the Canal Zone, the Virgin Islands, and the insular possessions of the United States.
(21) The term "State” means any State of the United States.
(22) The term “interstate commerce" means trade, commerce, transportation, transmission, intercourse, or communication among the several States or between the District of Columbia or any Territory of the United States and any State or other Territory, or between any foreign country and any State, Territory, or the District of Columbia, or with the District of Columbia.
(23) The term "declaration" means the statement provided for in section 5, and includes any amendment thereto and any report, document, or memorandum accompanying such statement or incorporated therein by reference.
(24) The term “voting security” means a security presently entitling the holder or owner thereof to vote for the eclection of directors. (25) A person shall be deemed to be an “associate” of a specified person if
(A) Such specified person or any of its directors, officers, or partners own, individually or in the aggregate, 5 per centum or more of the outstanding voting securities of such person;
(B) Such person has as a director, officer, or partner any person who is a director, officer, partner, or employee of such specified person;
(C) Such specified person or any of its directors, officers, or partners, individually or in the aggregate, directly or indirectly control such person, whether by agency, stock ownership, or otherwise;
(D) Such person is a director, officer, partner, employee, or representative of such specified person;
(E) Such specified person is a director, officer, or partner of such person;
(F) Such person owns 5 per centum' or more of the outstanding voting securities of such specified person;
(G) Such person directly or indirectly controls or is under direct or indirect common control with such specified person; or
(H) Such person is a director, officer, partner, or employee of a person 5 per centum of the voting securities of which are owned by such specified person, or which directly or indirectly controls or is controlled by or is under
direct common control with such specified person. (26) The terms "Securities Act of 1933", "Securities Exchange Act of 1934", and "Public Utility Holding Company Act of 1935” shall be deemed to refer, respectively, to such Acts, as heretofore or hereafter amended.