Commission has over the initial price of the sale of stocks over the counter, and what protection does the public get now, I mean the small investor, the average investor that does not have access to financial information concerning dollar values.

Mr. CARY. Yes, in respect to that, if you take a new issue, which an over-the-counter security normally is

Mr. THOMAS. First, does the Commission pass upon that?

Mr. CARY. It does not pass upon it. The material comes before it, of times in a very crude form, and we try as best we can to develop that into a

Mr. THOMAS. What is your function? Is your function to set the dollar value of that stock originally, or what is your function?

Mr. CARY. Purely disclosure, requiring disclosure of information. Mr. THOMAS. Differentiate between the price it is going to sell for, who is going to set that price, the ramification of that, and what you do on the basis of disclosure. That is your jurisdiction, and beyond that you have none?

Mr. CARY. That is our first and major job-to require disclosure of information. We do not, for example, at the present time have any basic control over situations that are currently arising. I had one brought to my attention in the last week.

A stock came out at $6. It rose to $22 within 2 or 3 days. Now, we at that point do have a certain amount of jurisdiction in the event of finding actual fraud or manipulation.

We are not in a position in every case to examine each of those securities. At the moment we are so pressed

Mr. THOMAS. If I may interrupt, if you had an army and time from here on out, do you have any authority to set the original figure at which that stock is going to sell for?

Mr. CARY. We have no such authority.

Mr. THOMAS. Well, time and 1,000 employees would not cure that, would it?

Mr. CARY. That is correct.

(The following information was supplied later :)

JURISDICTION OF THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO PRICES OF NEW ISSUES

The Commission has no jurisdiction to set the price at which new issues are offered in the over-the-counter market or elsewhere, or to pass upon the reasonableness of such prices. Upon an initial offering, the Commission's jurisdiction and responsibility under the Securities Act of 1933 is to obtain disclosure of the material facts in order that investors and their advisers can reach their own judgment as to whether or not the securities are worth the price which is asked. Many new issues have increased in price very rapidly after the initial offering. The Commission has no jurisdiction to set or limit these prices either, but it does have a responsibility to endeavor to see that such price increases do not result from manipulation or other artificial influences. Once a small overthe-counter issue has been initially offered, the issuer ordinarily is not required to file financial reports and, accordingly, investors lack an adequate basis for determining whether or not market prices for such issues are justified. One of the purposes of the investigation will be to look into this entire subject of just how prices for new issues are determined in the over-the-counter market, as well as to see if more adequate financial information concerning these issues can be made available.

Mr. THOMAS. What is your function?

Mr. CARY. Our function, therefore, is to secure full disclosure and to examine to see if there is actual fraud and manipulation in respect to sales. Those are the two major areas in which we operate.

Mr. THOMAS. After you get through with your routine process of disclosure, if in your judgment the stock is worth $1 a share and if it sells the next day after you issue the certificate for $10, can you control that when you know it is not worth but $1 and it sells for $10?

Mr. CARY. Indeed not. And indeed we sometimes see such issues coming out at the present time and we are amazed.

Mr. THOMAS. What you are interested in is looking behind the scenes and see why that stock sells for $10 when the people who handle it know it is not worth but $1; is that part of your investigation?

Mr. CARY. That is definitely part of it.

Mr. THOMAS. If it is only worth 1 and the investor pays 10 somebody is going to lose the difference between 1 and 10, in all probability.

Mr. CARY. Yes. We would like to find out the reason for this sudden rise in prices occurring in the original distribution of securities which is happening in a number of cases at the present time. That is one major area.

OBJECTIVES OF INVESTIGATION

Mr. JENSEN. Is the Securities and Exchange Commission attempting by this investigation to ward off a financial collapse in the stocks and bonds market such as occurred in the early thirties?

Mr. CARY. I would say that is not the principal objective of our investigation. I would like to have further comment on that point by Mr. Loomis.

Mr. LOOMIS. We do not see a general situation such as existed in the late twenties which was built up to a crash. On the other hand we do see a number of situations which while they may not have that tremendous potential nevertheless bear looking into and correcting before they become dangerous.

Mr. JENSEN. The present situation does have the earmarks of a condition that did exist in the late twenties, does it not Some of the earmarks?

Mr. LOOMIS. There are a few resemblances, perhaps, the principal one being the point that the chairman referred to, a lot of people thinking they can get rich in the stock market. But I think the underlying conditions are not the same as a result of both the growth of the economy and the various regulatory measures that have been taken. Mr. JENSEN. Do you feel that this investigation may ward off and possibly put a stop to a similar condition as happened in the stock markets in the late 1920's?

Mr. CARY. I don't think we can have such a sanguine hope for it, sir. I don't believe we really feel that our investigation can have that broad an impact. I do feel that we can, through this investigation, examine abuses which are occurring at the present time in a more thorough fashion than we have time for with our present personnel, and try to bring about a tightening of rules and increasing the restrictions where that seems to be necessary.

Mr. JENSEN. Let me say this, in closing: I can see where this investigation would be worthwhile if by going into the workings of the traders in stocks and bonds who have very few scruples and little con

science that you might scare off and head off the bad practices which have occurred in the past in the securities market. I hope that that will be the effect of your investigation.

Surely your investigation will attempt to disclose and bring to light any unfair practices in the securities markets, will it not? Mr. CARY. We will attempt to do so; yes, sir.

Mr. JENSEN. That is all I have. Thank you.

TOTAL COST OF INVESTIGATION

Mr. Bow. Mr. Chairman, what do you anticipate this total investigation will cost?

Mr. CARY. The amount allocated for it under the resolution is $750,000. We hope to live within that, sir.

Mr. Bow. When this bill was before the House I made some inquiry about the staffing and was referred to a chart similar to the one that you have attached to your statement here. Very frankly, I had in mind at that time offering some amendments to reduce this. I discussed it with Mr. Harris, the chairman of the committee. He told me that he had a letter from you saying that this could be done at considerably less than the $750,000. Do you recall that letter?

Mr. CARY. No, I do not, sir. Perhaps Mr. Donaty can speak to it. Yes, I recall it.

Mr. Bow. Do you have the letter here?

Mr. CARY. No, but we can send it to you. It is the letter with respect to the allocation for this fiscal year only. That was $450,000 of the $750,000 and I think that was the point that was made.

Mr. Bow. That letter kept you from having an amendment to reduce this considerably, because I was lead to believe at that time and I so stated to the gentleman from Iowa, Mr. Gross, who also had in mind some reductions that there had been a commitment made that there could be reductions that could be taken care of by appropriations. I am now rather startled to find that we did not reduce it, and I think the House was probably in the mood at that time that they probably would have made a reduction.

Do you feel you will have to use the full $750,000 to make this investigation?

Mr. CARY. I believe that the amount is necessary, sir, because we are covering a variety of things. We are covering

PROPOSED STAFF

Mr. Bow. Well, I think so too, but I think you have certainly done a staffing job here. This is the thing that disturbed me when the legis lation was before the House. It just seems to me you have too much personnel to really do the job you intend to do.

Mr. CARY. The magnitude of an over-the-counter study, sir, cannot be overemphasized. Furthermore, we are going to have to make a study of the exchanges at the present time. As of now, we are making a private investigation of the American Stock Exchange based primarily on the Re case which was widely publicized and was the result of very substantial abuse by certain specialists on that exchange. Other studies to be made involve investigation of the entire overthe-counter market and determination of credit restrictions and controls.

If you will couple these with a study of certain distribution practices and marketing matters that are being handled I think the total number of 60 people (or 65 in total, which would include administrative personnel) is really relatively small.

Mr. Bow. That is 61 in the areas you are talking about and then 4 additional, for administrative, tabulating operators, messengers and file clerks, and so forth.

Mr. CARY. That is correct.

OFFICE OF CHIEF COUNSEL

Mr. Bow. Take your Office of the Chief Counsel here, a total of five. Then you have a Branch of Exchange Study, a Branch for Over-the-Counter and a Branch for Reports and Analysis, each with their own attorneys-except the Branch for Reports and Analysis. You have the Office of the Director set up with a pretty heavy group of people and then you have Directors in each one of these. Then you have that broken down into additional parts with attorneys in each one of these Branches and then a big Chief Counsel's Office. It seems to me you have some pretty heavy staffing in here.

Mr. CARY. In respect to the Chief Counsel as distinguished from the respective Branches, one must remember there will be substantial hearings involved and therefore the Chief Counsel will be thoroughly occupied. In addition, there will be counsel that will be necessary, for example in respect to the over-the-counter study and exchange study just to analyze the existing rules and see whether or not those rules are presently being enforced and whether or not they need to be broadened.

Mr. Bow. Do you presently have a Chief Counsel's Office?

Mr. CARY. We have a General Counsel's Office; yes, we do, sir. Mr. Bow. How many people are employed in the General Counsel's Office?

Mr. CARY. Seventeen attorneys in addition to secretarial personnel. Mr. Bow. You have 17 attorneys in that office and they have been doing some of these things up to that time to find out whether or not your rules and regulations have been enforced? Is there any reason why they cannot do the work of the Chief Counsel?

Mr. CARY. They are very heavily burdened right now, sir. Mr. Bow. That is true with all of us, but we all have to take on a little additional burden once in a while.

Mr. CARY. We have two cases in the Supreme Court at the present time and an infinite number of cases in the courts of appeals. We also have a large number of actions in the form of injunctions which we are bringing.

Mr. Bow. I understand what the offices do, but I am simply asking the question whether or not some of these responsibilities that you have referred to here couldn't be handled in the office of your General Counsel and cut down this large staffing of an Office of the Chief Counsel which I understand will be disbanded at the end of a year; is that right?

Mr. CARY. It will have to be; yes, sir.

AVAILABILITY OF QUALIFIED PERSONNEL

Mr. Bow. Do you think you will be able to find a GS-17 lawyer at $16,536 who is capable and will take that job over, knowing he is going to be through at the end of a year and a half?

Mr. CARY. I have hopes we can find such a man because this study will give him an opportunity to understand a whole field of securities which might ultimately be of great value to him.

Mr. Bow. You are going to bring him in and educate him.

Mr. CARY. No, sir. We hope first of all to have somebody who has some knowledge of the field. This will simply enhance his expertise. We also hope that we can keep some of these people that is our ultimate objective—and bring them in as we lose personnel, because we are constantly a training ground for persons going into private practice and we always have to have people on hand who are available to fill in those spots as they open up.

Mr. Bow. I will say very frankly that this experience has taught me hereafter when I think an amendment should be offered to a bill on the floor I am going to offer it there and not count on doing it down here. Because that letter that Mr. Harris showed me left with me the impression that you voluntarily said you could get along with less than the $750,000.

Mr. THOMAS. Mr. Taber.

Mr. TABER. No questions.
Mr. THOMAS. Mr. Kirwan.

OBJECTIVES OF INVESTIGATION

Mr. KIRWAN. In other words this investigation is to determine whether the rules are adequate and whether they are being properly enforced?

Mr. CARY. Yes. Whether or not present rules are being adequately enforced on the one hand or whether or not the rules themselves need to be tightened.

Mr. KIRWAN. There is something wrong somewhere along the line. Either the laws are not right or are not being enforced. And you want more money to study these problems?

Mr. CARY. Yes, sir. We are at an all-time high in our registration of securities. We are at an all-time high with respect to criminal cases. We are at an all-time high with respect to investigations. Our personnel is being entirely used for those investigations and new problems are arising. We need funds to step back and see what our problems are, and determine objectively whether or not they are being adequately enforced and whether or not new rules need to be made. Mr. KIRWAN. That is all, Mr. Chairman.

Mr. THOMAS. Thank you, gentlemen, very much. We have been delighted to have you.