Regulation Ahead

In turn securities flotations, stock exchanges, utility holding companies, corporate reorganizations, trust indentures have been subjected to regulation by the Securities & Exchange Commission. Last week the turn of investment trusts grew measurably close. Into the hoppers in the Capitol were popped drafts of the bill for their proposed regulation.

A twelve-volume, 6,000-page bookshelf comprises all the knowledge that SEC has been able to gather about investment trusts in four years of study. It was assembled and mentally digested by Republican SECommissioner Robert E. Healy--onetime muckraker for the Federal Trade Commission--with the aid of 45 research workers, lawyers and statisticians. The bill which embodies their conclusions was drafted by SEC Attorney David Schenker, a 40-year-old, smart, cigar-masticating, witness-softening lawyer.

They did not have to look far to find plenty of faults with U. S. investment trusts in general. Launched in the careless 208 (prior to 1921 there were only 40 in the U. S.), they had more than $7,000,000,000 of assets in 1929 and managed by 1932 to have only $2,800,000,000 left. Of 1,022 trusts founded, fewer than 600 survive today.

Some of them had loaded capital structures so arranged that those who founded them were able to keep control of the voting stock although they put in little capital and the public put in huge amounts. Some were set up in such a way that insiders, by means of management fees, collected much of the gravy from the earnings of the public's money. Some were used by their managers as an unloading ground for undesirable securities.

Many are of the leverage type--have quantities of bonds and preferred stock outstanding ahead of their common stock so that with every swing of market prices the value of the common fluctuates wildly. Their founders hoped the swing would be up, but Depression swung them down so far that even with Recovery few recovered far. By the end of 1937, the average dollar invested in leverage type investment company stocks was worth 5-c-, against 48-c- for trusts with simple capital structures.

One horrible example was Continental Securities, acquired in 1937 by a gang of speculators, most of them now behind the bars, for whose skulduggery Continental's bankruptcy trustee is asking $3,300,000. Stephen Paine, of Wall Street's reputable Paine, Webber & Co., lent the sharpers $580,000 to buy the voting stock of Continental, grab control of Continental's $3,371,000 portfolio. This they liquidated, replaced good stocks with securities of paper investment companies.

Some investment trusts have been honestly and competently run, and still are. But since a great many of them were launched in the 1927-29 boom, few of them have brought profit to their original investors. Against such a business record, it is easy to make out a case for very stiff regulation. But no death sentence for any existing trust capital structure is contained in SEC's bill. Nonetheless, investment men have already cried out that it is too drastic. Long hearings are ahead for it in Congress, and it may well be modified before it ever comes to a vote. Its chief provisions:

> Leverage trusts need not revamp their capital structures, but henceforth no investment trust, new or old, may issue more than one class of securities: common stock.

> Investment trusts may do no more margin trading, no more trading in joint accounts, which often leads to juggling.

> To separate underwriters and traders from investment trust control, a majority of each directorate must be independent of brokers, of managers for trusts, of distributors of investment trust securities.

This file is automatically generated by a robot program, so reader's discretion is required.