THE SEC IS UNEQUAL TO THE JOB

PROTECTION FOR INVESTORS

TERRIFIC. The oil is coming out so fast that I have to get a bulldozer to dig ditches to keep it from running all over." Hearing such dazzling reports, 100 Midwest investors recently plunked down $1,500,000 for shares in tiny Keystone Oil Co. As it turned out, Keystone was more talk than oil. Last week the Securities and Exchange Commission, the Government's watchdog over securities markets, filed charges against Chicago Promoter Harry G. Ames, 61, on 14 counts of mail fraud and failure to comply with SEC regulations. The Keystone case,, coming after the collapse of Bellanca stock (TIME, June 25) and indictment of Walter F. Tellier (TIME, May 7), pointed up a growing debate in the U.S. securities industry: Is SEC doing a good job of policing the nation's securities or is it falling behind as markets grow bigger and bigger?

Most experts agree that SEC, under Chairman J. Sinclair Armstrong, does a competent job in the main areas of responsibility outlined by Congress in the Securities Act of 1933. Such evils as rigged markets have disappeared, and Wall Street, which once fought bitterly against Government interference, now stands solidly behind SEC's work. Backed by strict laws, SEC makes sure that all new issues by listed corporations are accompanied by registration statements giving enough financial information to investors.

But to some critics the problem is not so much what SEC does as what it does not do. Originally set up to control an industry marketing about $2.8 billion worth of new corporate securities annually, it must now regulate a booming giant growing at the rate of $10 billion annually. In 1955 some 4.000 stock and bond issues worth an estimated $340 billion were traded on U.S. exchanges, another 3,500 stock issues worth nearly $40 billion on the over-the-counter market. With the new boom in mutual funds and monthly investment plans, there are more shareholders trading more stock every day. But critics argue that SEC is not growing with its job.

SEC draws the heaviest fire in the policing of securities, often highly speculative, which are traded over the counter. The worst problem is in issues of $300,000 or less, which promoters are pouring out at an increasing rate.

In 1955 alone, there were 1,628 such issues worth $296 million, many of them in chancy mining operations.

SEChairman Armstrong himself estimates that one-third of all small issues are "questionable" at best. Yet under current SEC practice, offerings of less than $300,000 are exempt from the full disclosure requirements of standard company issues. Furthermore, unlike the larger companies whose officers are liable under civil law for misstatements of fact, issuers of exempt securities are not held accountable except under federal fraud statutes.

To plug the loophole, Michigan's Republican Congressman John B. Bennett wants to require that issuers of all stock offerings, no matter how small, be liable to civil suits. SEChairman Armstrong argues that such a rule would put too harsh a burden on small businessmen, who often cannot afford to hire experts to prepare a full registration statement. Actually, SEC needs no new law to tighten up on small issues. While investors lost millions, the SEC had administrative power all the time to curb marginal issues. Exemption is not automatic; the law merely permits SEC to grant exemptions up to $300,000. Chairman Armstrong has not used these powers to clamp down on risky issues, because he is worried about angry howls from small business groups--always the darlings of Congress--and about the reaction of Western Congressmen, who know all too well that any such SEC offensive would hit hard at small mining outfits in their home states.

SEC is also hampered by a staff too small to do the job, notably to halt crooked boilershop operations and blitz telephone campaigns to sell stocks. While it suspended 48 small issues from trading in 1955 v. only nine in 1954, it is like trying to clear a landslide with a whiskbroom. In 1955, SEC operated on a budget of less than $5,000.000, had a skeleton staff of only 699 people. In fiscal 1957 SEC will get $5,749,000 from Congress, build up to a staff of 790, but it will still be 25% below its strength immediately following World War II.

Currently, Chairman Armstrong wants Congress to give him a wide range of new powers over unlisted securities, covering companies with assets of $2,000,000 or more. The National Association of Securities Dealers argues that investors in such established firms already get full information; that SEC would do better to concentrate on the laws now on its books than add still more burdens. New powers or not, if SEC is to do its job it needs a far bigger staff and a more aggressive use of the powers it has. With more people owning more securities than ever in history, SEC's policemen have never been more important.

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