Third, the self-enforcing and disciplinary procedures of the National Association of Securities Dealers seem largely oriented to the problems of the general securities business, and subjects such as markup policies, free-riding, transactions between members and nonmembers, and other problems of that nature. We do not believe that anywhere else is there a detailed and specific program of good standards and practices in the distribution of mutual funds which is coupled with an effective mechanism for the enforcement of these standards and practices which comes even close to comparing with these elements of the IDS program. The practices and standards, the enforcement thereof and the methods of selection and training of sales representatives which IDS has developed over the years and which it vigorously enforces at a cost in excess of $500,000 per year is, we feel, unique. We cannot believe that in any alteration of its existing rules or in any new rules that it might adopt the National Association of Securities Dealers would make applicable to all of its members training and selection requirements, standards and practices of conduct, and policies of enforcement which would even approximate those presently in effect at IDS. Finally, membership in the National Association of Securities Dealers would saddle IDS with excessive and wholly unnecessary entrance, membership, and examination fees. We estimate that these fees and expenses would be in excess of $100,000 the first year of IDS membership. As I have indicated IDS already spends large sums each year to insure compliance with its operating and sales standards which, as we have stated, we feel far exceed any imposed by the National Association of Securities Dealers upon its members. This needless duplication of expense, with no possible benefit to the customers of IDS or its fund companies seems completely unjustified. If the effect of this legislation would be to require membership in the National Association of Securities Dealers and if alternative arrangements, either by way of a new association independent of the National Association of Securities Dealers or by other means, were not available, IDS would be forced to take a position in opposition to this feature of the proposed legislation. May I express the appreciation of my company for this opportunity to State its views to your subcommittee. We hope that they will be constructive and helpful to you in recommending sound and salutary legislation. We are deeply involved in the mutual fund industry, and we believe most sincerely that our industry furnishes an efficient and effective way for the people of our country to participate in our economic system. In turn, this participation stimulates the system to work for the benefit of all of our citizens. Good and thoughtful legislation designed to encourage the mutual fund industry and good practices and high standards in its operation cannot produce anything but beneficial results. If you or your committee feel that any further information or expansion of the views expressed herein would be helpful, we would be most happy to cooperate in any way whatsoever. Cordially, THOMAS W. MOSES. STATEMENT OF NATIONAL ASSOCIATION OF LIFE COMPANIES, INC., IN OPPOSITION TO S. 1642 National Association of Life Companies, Inc., submits its statement in opposition to S. 1642. This association is composed of life insurance companies of medium and smaller size throughout the United States. A list of the membership is attached as exhibit A. The association can be said to represent, generally speaking, the viewpoint of the smaller life insurance companies. The proposed legislation will damage the interests of the members of this association without just or sufficient cause demanding such damage. The results anticipated from the legislation are considerable and grave. In support of the statements just made the following considerations are submitted to the committee: 1. THE PROPOSED LEGISLATION WILL IMPOSE AN INTOLERABLE COST ON SMALLER LIFE INSURANCE COMPANIES The members of the committee are aware of the cost of filing a registration with the SEC. In addition to a detailed and extensive audit it is necessary that costs be incurred for attorneys fees, printing costs, travel expense, and other like expense. Costs of registration have run roughly speaking anywhere from $20,000 to $50,000. If the members of the committee would look at "Best's Life Insurance Reports" they would find that a great many life insurance companies of sufficient size to be covered by the proposed legislation do not ordinarily have net earnings exceeding the amount of costs which such a registration would involve. It is, therefore, of great concern that for many of the members of this association the costs of this registration will take from the stockholders conservatively speaking a substantial part of the net earnings of their company for the year in which the registration is effected. Surely the committee does not intend for any such result as this to follow. 2. THE BUSINESS OF LIFE INSURANCE IS OF SUCH AN ECONOMIC CHARACTER THAT THE ORDINARY PROCEDURES OF SEC FILING ARE INCOMPATIBLE (a) Specially informed experts are required to determine operating results of life insurance companies Certified public accountants do not as such deal with the fiscal affairs of life insurance companies. It is not possible to determine the results of operations of such companies from year to year, except through the extensive use of actuaries who are specially trained in dealing with mortality tables, policy forms, and the like. The heart of the operation of a life insurance company depends upon wise handling of its reserves. The amount of reserves to be carried is solely and purely a matter of opinion which must be determined by actuaries. A company can show a profit or a loss, depending altogether on the amount of reserves which its actuary sets aside. For this reason it is almost pointless to require that independent certified public accountants make an audit of the company affairs each year. Not only does such an audit not reach the heart of operations of a life insurance company, it is also true that an audit of a life insurance company is made more expensive because it must be accompanied by special attention from actuaries in order that the audit will make any sense at all. It is also true that life insurance companies have this unique characteristic: When they are young companies the success of the company may be said in a real sense to depend on the company expending a large amount of its surplus without showing a profit. It is well known that the cost of putting life insurance on the books always exceeds the immediate returns to be expected by the company. A company that is too successful in its sales program will soon expend its surplus. A company could show a profitable year by simply investing its funds and making no sales. Thus life insurance companies fall into a different category in a fiscal sense and in what may be reasonably expected from them from year to year in order to produce favorable results for their stockholders. (b) The proposed legislation imposes an unfair burden on stock life insurance companies in comparison with mutual life insurance companies As may be verified by a reference to the "Life Insurance Fact Book" the largest companies by far writing life insurance in this country are mutual life insurance companies. The stock companies have only a fractional part of the total business. The "giants" are almost all mutual. On the contrary, while there are some large stock life insurance companies, the largest number of stock life insurance companies are small in comparison with the mutual companies. The proposed legislation will add to the already heavy burden of competition which stock life insurance companies have in competing with mutual life insurance companies. There is not only the considerable expense of filing a registration, but also the burdens of regulation which must necessarily follow from all such companies being under the jurisdiction of the SEC when their large competitors, the mutual life insurance companies, are not under such jurisdiction. If the members of the committee feel that the interests of the economy require that stock life insurance companies continue to grow and prosper they will give considerable weight to the point made here. We would bring to the attention of the committee that it is only through the continuing process of new companies being formed that vigor and imagination are kept in the life insurance business. The large companies, whose fortunes are already made, have no interest in experiments or in adjusting their practices to the ever-expanding needs of the present. We plead that the committee will give consideration to this factor of public interest in its handling of this legislation. (c) Life insurance companies, like banks, have special regulatory bodies governing them, and the proposed legislation is not justified in their case The legislation will exempt banks from the control of SEC and place jurisdiction entirely in the hands of the Federal authorities who now regulate banks. Some such disposition as this it is submitted should be made in the case of life insurance companies. The committee is well aware of the fact that each State has an insurance commissioner or board which has powers of life and death over the operation of life insurance companies in the State. The proposed legislation inevitably will create conflicts as between the orders of State regulatory authority and the SEC. Nothing but trouble can be expected from the legislation in this connection so far as life insurance companies are concerned. This trouble does not arise from any evil inherent in the situation which needs to be corrected, but arises from the inevitable situation that life insurance companies will have to seek to follow the dictates of State agencies on the one hand and of a Federal agency on the other which has no peculiar knowledge of life insurance companies. It is evident that the SEC has no means of acquiring the peculiar and involved knowledge which is necessary for the prosperous operation of a life insurance company. Decisions involving such companies require delicate adjustments of various factors, none of which can be within the contemplation of the SEC experts. (d) The proposed legislation would act as a brake on commerce Clearly it is in the interest of the country to encourage transfers of securities so that commerce may be increased rather than impeded. The proposed legislation will necessarily bring about the result that companies which are near the line in respect of assets or stockownership will do everything within the power of the management and in the interest of existing stockholders to keep on the side where they will not fall within the purview of the legislation. It is submitted that this is not a good result from the standpoint of the national inerest. (e) This proposed legislation will add another column of the already huge edifice of Federal jurisdiction and power It is perhaps considered somewhat out of fashion to call attention to the fact that more and more Washington is shutting the power of States off and taking over to itself the regulations which previously had been left to local authorities. It is perhaps a late date to put in a plea for the preservation of the joint system of government which up to recent years had done so well for this country. In seeking to remedy what may appear to be isolated cases of fraud or the like it is, we submit, a mistake to rush into yet one more instance of setting up a central authority to control local matters. This proposed legislation would impose upon companies which do not seek to sell new issues of stock, merely because their issues are traded in local over-the-counter trading, a perpetual burden of supervision from Washington. It is earnestly urged that the members of the committee consider carefully the benefits to be expected from the legislation in the light of the unfortunate results to be expected as pointed out in this memorandum. We, therefore, request that the committee so deal with the legislation that these results in the case of smaller life insurance companies may be avoided. Respectfully submitted. NATIONAL ASSOCIATION OF LIFE COMPANIES, INC., By DEVEREAUX F. MCCLATCHEY, Hon. HARRISON A. WILLIAMS, General Counsel, Atlanta, Ga. CHAMBER OF COMMERCE OF THE UNITED STATES, Chairman, Securities Subcommittee, U.S. Senate, Washington, D.C. DEAR SENATOR WILLIAMS: The Chamber of Commerce of the United States supports the principle of free, private enterprise with a minimum of governmental controls. However, because of the growing number of shareholders in our country, it is in the public interest to provide for reasonable and proper disclosure of certain operations of corporations with substantial stockholder ownership. For this reason, we support, with exceptions as indicated hereafter with regard to banks and insurance companies, amendment of the Securities Act of 1933 and the Securities Exchange Act of 1934, as proposed by certain sections of S. 1642, to extend disclosure requirements to the issuers of unlisted publicly held securities sold over-the-counter as follows: (a) Requirements, involving application of reporting, proxy solicitation, and insider trader requirements, would be made applicable initially to companies with $1 million in assets and 750 shareholders and, after 2 years, shareholder minimum would be reduced to 500. (b) The over-the-counter market would be made subject to controls comparable to those which the SEC exercises over exchange markets. One type of business which does not require additional regulation is the insurance business. We urge its exemption from the disclosure requirements of S. 1642. The insurance companies which would be affected by the SEC proposal are now subject to extensive and detailed regulation, examination and reporting requirements by the various States. The addition of Federal regulation on top of State regulation should be undertaken only if a pressing need is clearly demonstrated. This need has not been demonstrated. In the process of examination by the States, all records of insurance companies are open, including stock records, board and stockholder minutes and notices, and records of compensation, including pension and similar plans. In annual statements, subjects such as loans to officers, compensation of officers, and conflicts of interest are covered by interrogatories. The financial transactions and condition of individual companies are presented in detail. It is a basic misconception that the financial reporting in the annual statements of insurance companies does not meet the needs of the investors and that the information required by the SEC would meet this need. We are sure that the SEC recognizes that the mass of reporting required by the States provides policyholders great protection and that, collaterally, the reports required by the States also afford protection to the stockholders against questionable business practices and company insolvency. In this regard, it should be noted that the National Association of Insurance Commissioners has appointed a subcommittee of its laws and legislation committee to examine the SEC proposal to determine whether there is any void in State legislation and, if so, what steps should be taken by the State regulatory authorities. Congress should have the benefit of this study before considering regulatory legislation affecting insurance companies. For these reasons, we urge the exemption of insurance companies from the relevant provisions of S. 1642. S. 1642 also would extend disclosure coverage to another heavily regulated business-banks. It is unnecessary and superfluous to add another Federal agency to the group that now regulates banks. S. 1642 should be amended to make it mandatory that the full and final authority for disclosure of information on banks be assigned by statute to the various Federal banking agencies, i.e., Federal Reserve System, Comptroller of the Currency, and Federal Deposit Insurance Corporation. I sincerely hope that you will give these recommendations serious consideration, and will make this letter a part of the record of your hearings on S. 1642. Sincerely, THERON J. RICE, Manager, Legislative Department. (The following material was furnished by SEC:) SECURITIES AND EXCHANGE COMMISSION, Re technical corrections in S. 1642. Assistant Counsel, Senate Committee on Banking and Currency, Washington, D.C. DEAR MR. LOWE: I attach hereto 2 copies of a memorandum, suggesting approximately 21 minor corrections in S. 1642. Most of these are designed to correct typographical errors or to conform language. Most of these suggestions originated within the Commission, but we have included those corrections of this nature which were called to our attention by persons outside the Com-mission; particularly, the Association of the Bar of the City of New York. I think there are only two of these changes which require any discussion.. These are items 13 and 16. Item 13 is a modification of the exemption from sections 16(b) and 16 (c) contained in new subparagraph 16(d) of the act, and found on page 36 of the bill. This change would make it clear that the exemption is available only for a dealer in the over-the-counter market, who is making a market, and avoid any implication that an exemption might be available, either for a transaction on a stock exchange or with respect to transactions by a dealer who is not making a market, but might contend that his transactions were incident to a market made by someone else. Item 16 refers to the amendments to section 15(d) of the act which requires reports of companies which hereafter file registration statements with the Commission. The modifications relate to the circumstances under which the duty to file reports is suspended because the number of stockholders drops below 300. Upon further consideration, we concluded that the existing provisions on this matter, contained in lines 23, 24, and 25 on page 22 of the bill and lines 1, 2, and 3 on page 23 of the bill, were somewhat confusing. These are proposed to be replaced by new language which will clarify the situation and accomplish two substantive purposes. First, reports would, in any event, be required for the fiscal year in which the registration statement is filed, regardless of the number of stockholders. This we think desirable, particularly in view of the fact that the public distribution of the security might not be completed during that fiscal year. In the second place, the duty to file would be suspended with regard to any year, if, at the beginning of that year there were less than 300 stockholders. This would mean that each company, by ascertaining the number of stockholders at the beginning of the year, could determine whether or not it would be obligated to report for that year. We have discussed all of the changes contained in the attached memorandum with Mr. Deane Leonard of the Association of the Bar of the City of New York and we understand that he has no objection to any of them, but he does wish that the last sentence of the explanation for the changes in the market-maker exemption become a part of the legislative history. We understand that the Association of the Bar of the City of New York submitted directly to the committee certain technical comments. All of these are provided for in the attached memorandum except for the proposed amendments to section 12(f) contained in section 3 (b) of the bill and the proposed amendments to section 15(b) (2) (E) contained in section 6(b) of the bill. The proposed amendments of section 12(f) relate to the existing authority of the Commission to exempt securities admitted to unlisted trading privileges on an exchange from sections 13, 14 or 16 of the act, to which they are otherwise subject, since existing section 12(f) provides that such securities are deemed to be registered on a national securities exchange within the meaning of the act. The Association of the Bar suggests that this exemption be made mandatory for any security admitted to such unlisted trading privileges which either is not subject to the Frear-Fulbright proposals because of limited size or distribution or which is exempt therefrom particularly by subsection 12(g) (2) (E) with respect to foreign securities. Without taking any position on the merits of this proposal, we believe that it is a substantive rather than a technical change, since it would modify existing law in a manner not provided for in the bill and not considered by the Commission or anyone else in connection with the drafting of the bill. The proposed amendments to section 15 (b) (2) (E) would make aiding and abetting in a violation a ground for broker-dealer proceedings only if such aiding and abetting was done "purposely" as distinguished from the adverb "willfully" which is in the bill and is used in the corresponding provisions of existing law. This proposal, and various variations thereof, were carefully considered by the Commission in its discussions with representatives of the securities industry prior to the submission of the bill and were rejected by the Commission, with the acquiescence of the industry, on the ground that it would be better to retain the term "willfully" which is a part of existing law and has been interpreted by the courts, instead of inserting an entirely new word. The Commission does not wish to reopen that question at the present time. Sincerely yours, PHILIP A. LOOMIS, Jr., Director. TECHNICAL CHANGES IN S. 1642 1. Page 2, lines 9 and 10-"By" inserted in lieu of "In such". This makes it clearer that there will be a mandate for the Commission appropriately to exclude. Was suggested by Association of the Bar of the City of New York. 2. Page 2, line 12-"hereof" becomes "of this title". This is to make the language consistent with the remainder of the 1934 Act. 3. Page 2, line 15-"term" should be "terms". This would correct a typographical error made in the printing of the bill. |