nance, or physical operation of the New Haven Railroad. The fact that ap proximately 97 percent of the original investments under consideration were made prior to July 1, 1913, is of little solace to the present security holders and those interested in the welfare of the New Haven. The drain on New Haven resources caused by those investments was a continuing one. This record fully supports our statement in the above report that "the evil which results, first to the investing public, and, finally, to the general public, can not be corrected after the transaction has taken place."

It also may be well to take this occasion to point out that the New Haven is not the only carrier which has suffered greatly as a result of so-called outside investments and guaranties. While many illustrations might be given, reference to a few other carriers investigated by us will be sufficient.

In Denver & R. G. Investigation, 113 I. C. C. 75, it is shown that:

"By contract * * * the Denver Companies, in substance, guaranteed payment of the interest on the Western Pacific first-mortgage bonds and further agreed, in practical effect, that following completion of the Western Pacific's railroad they would advance to that company such other sums as might be necessary to meet its operating deficits and maintain its railroad in operation." This ill-advised contract resulted in the rendering of a judgment against the Denver & Rio Grande under the obligation assumed for $38,270,343.17, when the Western Pacific's operations proved unsuccessful, and brought financial disaster to the Denver companies.

In Interstate Commerce Commission v. Pennsylvania R. Co., 169 I. C. C. 618, we discussed at length the matter of acquisition of capital stock of the Lehigh Valley Railroad and the Wabash Railway Company by the Pennsylvania Railroad Company and the Pennsylvania Company. At page 641 we said:

"The purchases of Lehigh Valley and Wabash stocks by the Pennsylvania gave no indication of direct financial profit at the time the purchases were made. Computations made by our Bureau of Inquiry and presented in its brief, the correctness of which has not been questioned by respondents, indicate that up to April 30, 1930, the cost to the Pennsylvania in interest paid and in interest lost on securities sold to finance the purchases amounted to about $9,072,006.25, which exceed by $2,590,694.29 the amount of the dividends received on the stock acquired. It should be noted that the common stock of the Wabash acquired by the Pennsylvania, amounting to $36,290,000 par value, had never paid a dividend. * * *""

In St. Louis-S. F. Ry. and C., R. I, & P. Ry. Stock Acquisitions, 186 I. C. C. 137, it is shown how certain purchases of capital stock of the Gulf, Mobile & Northern Railroad Company and the Chicago, Rock Island & Pacific Railway Company were made by the St. Louis-San Francisco Railway Company, and also purchases of capital stock of the St. Louis-San Francisco Railway Company by the Rock Island. At page 149 of that report we said:

"This proceeding shows the easy manner in which the boards of directors of these railroads bore their responsibilities as such. Questions of large financial importance to the properties and to the stockholders to whom they stood in a fiduciary relation were decided by a few of the members in casual conversations. Large sums were expended or obligated on projects which, as a board, they had not considered and which, on the transactions being reported to them later, they readily ratified."

Both the St. Louis-San Francisco Railway and the Rock Island are now undergoing reorganization under section 77 of the Bankruptcy Act.

Typical of our reports which show that carrier revenue in substantial amounts is lost by outside investments intended for the purpose of meeting competition or increasing volume of traffic is Propriety of Operating Practices-New York

Warehousing, 198 I. C. C. 134. We there considered the practices of carriers by railroad subject to the Interstate Commerce Act which affect operating revenues or expenses. The carrier practices with respect to warehousing in the New York Port District were initially brought to our attention by complaints of warehouse operators located in the district. They alleged that warehouses owned or controlled by the carriers, or in which they had financial interests, were being operated in a manner which precluded warehouses of complainants from obtaining much, if any, of the business. It was claimed that they were losing much of their business to carrier or carrier-affiliated warehouses and that they could no longer meet the competition of such warehouses. At page 203 of our report it is shown that the value of carrier property used for warehouses, etc., was more than $45,000,000. The president of one of the trunk lines, which had more than $8,000,000 in warehouses in the district, testified as to the low charges prevailing as follows: "I don't think anyone can say that there is any money to be made out of this, there is no use to beat around the bush, this storage over here does not pay its way."

* * *

Amendments have been added to the regulatory statutes since the first of the above-quoted reports was issued, some of which would prevent some classes of the outside investments as made by the New Haven management. Under section 20a of the Interstate Commerce Act, for example, we may deny an application of a carrier for authority to issue securities for acquiring property that is not to be used in the operation of its railroad or in the legitimate improvement, extension, or development of its railroad. Paragraph (12) of this section makes it unlawful for any officer or director of any carrier to participate in the making or paying of any dividend of any operating carrier from any funds properly included in capital account.

Under section 5 (4) and (5) of the act, no railroad may lease or purchase any other railroad or any part thereof, or acquire control of another railroad by purchase of stock without prior authorization.

Notwithstanding the several amendments to the act, there is nothing in the law directly to prevent a railroad company from acquiring stock of other railroad companies where the amount of stock purchased is insufficient to give the acquiring company control, or from acquiring stock of companies not engaged in interstate commerce, or from acquiring property of any character so long as such acquisitions are made without the issue of securities or the assumption of obligation or liability in respect to the securities of some other person. The law as now in force does not prevent carriers from buying into many such undertakings as those reported above, nor is the law now adequate to protect the investor in railroad securities from results similar to those reported above.

Railroads also are required to keep their accounts in accordance with our regulations. Those regulations relate only to the accounting of carriers under our jurisdiction. They do not, and under the law cannot be made to, relate to the accounting of the many permissive outside companies. A railroad may form a "company" (such as a holding company), own, report, and account for its investment in such company, and through the company proceed to bankrupt the railroad. The financial results of the experiences of the New Haven with "outside companies" were predicted in our report to the Senate of July 11, 1914, and are reflected fully herein.

If the law is to remain as it is at present, permitting common carriers to form holding companies and to function through subsidiary companies not subject to the act, then, to say the least, such companies and subsidiaries should be made subject to our jurisdiction and regulation as to accounting and the issuance of securities. As previously stated, the act, as amended in 1933, requires that our authorization be obtained before investments in other carriers by railroad which

amount to control or power to exercise control are made. Acquisition of control by railroads of motor carriers is restricted by the Motor Carrier Act, 1935. No restriction on investments other than in carriers is now imposed. The unfavorable financial effect of so-called outside investments, including those in other carriers not amounting to control, indicates a practical necessity of amending the law in this respect. On consideration of the amendments to the act since 1914, and in view of the fact that outside investments may, in specific instances, be found justified, we now are not prepared to renew our recommendation of the absolute prohibition of all such investments. The resources of a railroad ordinarily should be devoted to the proper development of its own transportation system. If they are to be invested in an outside activity it should be after a finding that such investment constitutes a proper use of railroad funds or credit, that the terms of the transaction are reasonable, and that the investment is in the public interest. The rule should apply equally to subsidiaries. Restrictions, to this end, should be imposed on the expenditure of money, incurring obligations or acquiring property by a carrier other than in the operation or legitimate improvement or development of its own railroad. Reserves and surplus funds awaiting use should, however, be available for the production of income. In order that this may not be impeded there should be exempted from such restrictions investments such as are permissible for savings banks and trustees.

Our regulatory laws should be so framed as to afford as complete protection to investors in railroad securities as is practicable. We are convinced that the amendments herein suggested will aid in attaining that end.

On the facts reflected by this investigation, and in the light of existing conditions, we again recommended that non-carrier railroad subsidiaries be brought within our jurisdiction, at least as to their accounting and the issuance of securities. We further recommended that certain restrictions be imposed on the expenditure of carrier funds, incurring obligations, or acquiring property by a carrier or its subsidiaries, except for the operation or legitimate improvement or development of its property.

ADMISSIONS TO PRACTICE

During the year ended October 15, 1937, 1,307 applicants were admitted to practice before the Commission. This is the largest number admitted in any period of 12 months since the initial year when the roll of practioners was set up, 1929-30. Of this number 1,077 were members of the bar of the Supreme Court of the United States or the highest court of some State, and 230 were admitted upon a showing of their qualifications, under paragraph 2 (b) of rule I-B of the Rules of Practice. A total of 8,876 persons have been admitted to practice since the register of practitioners was established September 1, 1929, of which number 5,087 were admitted upon a showing of membership of the bar, and 3,789 were nonlawyers found to be qualified. The tendency shown in our previous reports for the lawyers to far outnumber the nonlawyers has been slightly strengthened during the year, when 82.4 percent of those admitted were lawyers and 17.6 percent were nonlawyers. It is evident that since

the Motor Carrier Act became effective about 1,500 practitioners have been added to the roll above the number which might have been expected based upon the average for the preceding years, roughly in the proportion of 9 lawyers to 1 nonlawyer.

During the year we have continued the policy outlined in our last report, with respect to independent investigation of individual applications by committees of the Association of Practitioners before the Commission, and have received the recommendations of those committees.

MINIMUM RAIL-WATER RATES

In our annual reports for 1935 and 1936 we called attention to the fact that section 15 (1) has the effect of exempting from our control minimum rates in the case of a through route where one of the carriers is a water line. We recommended that the act be amended to include the power to regulate minimum rates of water carriers otherwise within our jurisdiction. For the reasons there stated we renew that recommendation.

STANDARD TIME ZONE INVESTIGATION

By our twenty-third supplemental report in this proceeding, effective April 25, 1937, we authorized an additional operating exception to the central time zone covering the line of the Pennsylvania Railroad Co. between Richmond and Adams, Ind., so as to permit that road to operate its trains between Cincinnati, Ohio, and Fort Wayne, Ind., on a single standard of time. This exception was allowed for operating purposes only, and the railroad is required to observe central time in its published advertisements, public time cards, and bulletin boards.

In recent years we have directed the attention of Congress to the complete failure of the Standard Time Act (40 Stat. 450) to accomplish its stated purpose, namely, "to provide standard time for the United States." In our 1936 report we recommended that Congress amend the act so as fully to occupy the legislative field respecting standards of time. We renew that recommendation.

PROPOSED AMENDMENT OF SECTION 20 OF THE ACT

We have experienced difficulties in obtaining accurate answers to questions set up in the report forms prescribed by us under paragraphs (1) and (2) of section 20 of the act.

While section 20 (1) authorizes us to require detailed annual reports from all common carriers subject to the provisions of part I of the act and from the owners of all railroads engaged in interstate commerce as defined in that part, we are authorized to require only from such carriers "specific" answers to all questions upon which we

may need information. The latter requirement, it will be noted, is lacking in two respects, first, it omits reference to "owners of railroads" included in the first requirement in respect of annual reports and, second, it does not authorize us to require "correct" answers to such questions.

Section 20 (2) provides that said detailed reports shall be filed within the time prescribed by statute or fixed by us, and that they shall be made under oath. Penalties are prescribed for failure to make and file the reports on time and for failure to make "specific" answer to any question authorized by the provisions of the section, but there is no provision for a penalty for failure to make "correct"

answer.

As a result, it is not possible under the act to punish a carrier or its officers for making answers which, though "specific", nevertheless are inaccurate, even in those instances where the answers may have been falsified intentionally. The failure to include owners of railroads under the provisions of 20 (1) in respect of the requirement as to specific answers, also causes a doubt as to whether we could require either "specific" or "correct" answers to questions in connection with the annual reports which we are authorized to require such owners to file.

During the year our attention was called to the fact that annual reports filed on behalf of the Pittsburgh & West Virginia Railway Co. for the past several years failed to disclose that the carrier was controlled by the Pennroad Corporation through ownership by that company of 222,800 shares, approximately 73 percent, of the carrier's stock which had been purchased and paid for during 1929.

In reply to the question, "Did any corporation or corporations, transportation or other, hold control over the respondent at the close of the year", the answer made in those reports was "No."

The reports were prepared under the supervision of the carrier's general auditor, and they were sworn to by him and the carrier's vice president. The excuse given by them to our representatives for the negative answer to the question mentioned above was that the stock acquired by the Pennroad Corporation had remained on the books of the carrier in the name of the carrier's president; that it had been voted by him under proxies; and that the lists of stockholders furnished to the auditor by the transfer agents showed said president as the owner and were relied upon as being correct.

The answer appearing in the reports, though "incorrect," was "specific." In the absence of provision for a penalty for this conduct of the Pittsburgh & West Virginia or its officers, prosecution of the carrier was instituted under the provisions of section 20 (7) of the act which declare to be unlawful the willful making of false entries in books of account or "in any record or memoranda kept by a car