Franklin D. Roosevelt

Statement on Signing Two Statutes to Protect Investors.

August 23, 1940

I have just signed the Investment Company Act of 1940 and the Investment Advisers' Act of 1940; legislation which both houses of Congress passed unanimously. These Acts give the Securities and Exchange Commission power to regulate investment trusts and investment counselors. They mark another milestone in this Administration's vigorous program—begun in 1933 and supplemented in 1934, 1935, 1938 and again in 1939-to protect the investor. As the pressure of international affairs increases, we are ready for the emergency because of our vigorous fight to put our domestic affairs on a true democratic basis. We are cleaning house, putting our financial machinery in good order. This program is essential, not only because it results in necessary reforms, but for the much more important reason that it will enable us to absorb the shock of any crisis.

There is no necessity of reviewing in detail the many unhealthy practices which this legislation is designed to eliminate. It is enough to point out that the investment trusts have themselves actively urged that an agency of the Federal Government assume immediate supervision of their activities. This attitude on the part of the investment trust industry and investment advisers is most commendable.

It is a source of satisfaction that business men have at last come to recognize that it is this Administration's purpose to aid the honest business man and to assist him in bringing higher standards to his particular corner of the business community. In the case of this legislation, it deserves notice that the investment trust industry insisted that the Congress grant to the Securities and Exchange Commission broader discretionary powers than those contemplated in the original regulatory proposals. Not only is this a tribute to the personnel of the SEC and an endorsement of its wisdom and essential fairness in handling financial problems, but it serves well to indicate that many business men now realize that efficient regulation in technical fields such as this requires an administering agency which has been given flexible powers to meet whatever problems may arise.

This in itself is enough to demonstrate that we have come a long way since the bleak days of 1929, when the market crash swept away the veil which up to then had hidden the "behind-the-scenes" activity of our high financiers and showed all too clearly the sham and deceit which characterized so many of their actions.

The Securities and Exchange Commission has been established to protect the investor. Looking back at the various Acts which have been passed and placed under the jurisdiction of that Commission, the breadth of this Administration's program is apparent. In 1933 the Securities Act was passed, preventing misrepresentation and fraud and requiring full disclosure by those who wished to sell securities. In 1934 the Securities Exchange Act was passed, regulating stock exchanges, preventing market manipulations, and placing curbs on excessive speculation. In 1935 the Public Utility Holding Company Act was passed. In 1938 the bankruptcy Act was amended to enable the SEC to participate in corporate reorganizations in order to act as technical adviser to the court and advocate for the best interests of the small and inarticulate security holders. Finally, only last year additional legislation was passed requiring corporate trustees under indentures to assume true fiduciary obligations.

No better example of the true meaning of this program can be found than in the legislation regulating public utility holding companies. During the 1920's these corporate monstrosities had been permitted to pyramid stock holdings on top of stock holdings until a few men at the top, with only a microscopic investment of their own, could control the smallest action of those who ran the far-flung operating companies at the base of the pyramid. Watered stock and high rates to consumers signified holding company management. Those at the top juggled · corporations for selfish purposes. This situation was contrary to the American way of life and, had the holding companies not been checked, they would have threatened the very existence of our democratic processes. The Public Utility Holding Company Act of 1935 is designed to break down these top-heavy structures to the end that local operating managements will come back into their own and be given an opportunity to serve the immediate community without being subjected to the direction of an absentee and dictatorial holding company management.

In every direction a conscientious and successful effort has been made to require the investment banker, the broker and the dealer, the security salesman, the issuer, and the great financial institutions themselves to recognize the high responsibilities they owe to the public.

We will continue to push our program for the protection of the investor on all fronts because we are convinced of its essential soundness. I have great hopes that the Act which I have signed today will enable the investment trust industry to fulfill its basic purpose as a vehicle to diversify the small investors' risk and to provide a valuable source of equity capital for deserving small and new business. enterprises which the investment bankers have been unable to finance.

Franklin D. Roosevelt, Statement on Signing Two Statutes to Protect Investors. Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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