Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-02-17
Preventing Fraudulent Securities.

Preventing Fraudulent Securities.
No reputable dealer in securities IN
washington is going to raise a voice
against the intent of laws regulating
the sale of securities. They have been
committed for some time to the need
of a blue sky law or fraudulent secu-
rifles law for Washington. and some OF
their representatives spent considerable
time last year comforting with the Sem
ate District committee on the Capper
fraud bill which was reported but never
passed. The only argument will be over
the phraseology of the law.
Hearings soon will begin in Congress
on two bills that have been introduced
at this session to regulate the sale OF
securities. One of these is the Capper
bill. already Endorsed in principle by
some Of those whom 1t would affect.
The other is the Blaine blue sky bill,
recently introduced.
This latter measure is modelled on
the uniform sale of securities act APP
proved last October by the American
Bar Association in convention at Mem
phis. This model bill Is very thorough
and Is carefully drawn, representing sew
eral years of research by competent
men. For the most part the Blaine
bill follows the wording Of the model
act, but there are noteworthy exceptions.
The Blaine act places the regulation
of securities in the hands Of the Public
Utilities Commission. Certain classes Of
securities are exempt from any super
vision. Other classes Of securities must
be examined by the commission and
approved before they are sold. This
approval is obtained in two ways. The
sale Of some securities requires merely
formal notification to the commission
that they are to be sold. The sale Of
others requires a notification to the
commission and response from the COM
mission that the securities are approved.
The first procedure Is called 'notifca-
ton; the second. qualification"
Among the securities to be approved
before sold are first mortgages. In
way this places first mortgages in the
general class with stock issues Of ques-
tionable worth; at least In the class OF
those securities that, because of the
fact that they are untried, are subject
to examination.
The principal Issues originating in
washington are FIRST mortgages. No
mortgage, under the Blaine bill, unless
it Is q loan on completed building for
not over 30 per cent Of the assessed
value, can be sold here except by quail
fication, unless there Is leasehold that
would amortize the first mortgage dur
ing the period Of the loan.
1t would seem on its face that this
would Immediately curtail building
loans in Washington. The building
must be completed before the securities
representing the first mortgage can be
sold, unless 1t can be shown that the
building is to be used TO produce
through rental q net annual income,
after deducting operating expenses and
taxes, at least equal to the annual in
terest plus not less than per cent Of
the principal of the mortgage indebted
ness. The model law adds, however, "or
will have a fair rental value" The
Blaine bill eliminates this phrase, In
viting the contention from its opponents
that there Is no assurance In advance
that the revenue above described will
be produced. The definite proof can
be furnished only after the building has
been in operation a year.
But an outside financing concern may
loan all 1t chooses on local projects, so
long as it does not sell its securities in
washington, and this can be done Of
course without any supervision. This
is apt to be interpreted as discriminat-
ing against local first mortgage houses
whose building loans must be approved
as described before the securities are
sold here.
Both the Blaine act and the model
law impose minimum fee Of $40 on
every mortgage sold. This will naturally
constitute a tax to be paid by the Dor
rover. The revenue will help defray
the cost Of additional duties assigned to
by the Public Utilities Commission.
There will be objections to the Blaine
act, similar to objection to blue sky laws
in general, because 1t puts the Govern
ment on record as approving certain
securities. This approval viii be capital
lied, and the Public Utilities Commis
sion will no doubt be embarrassed. That
objection, in general, has led TO some
preference for the Capper bill, which
creates a securities commission with
powers to prevent the sale Of fraudulent
securities, but which does not take the
Affirmative action Of approval.
Senator Blaine has stated that his bill
Is merely In tentative form. Features
that actually discourage legitimate busi-
ness will no doubt be removed. Out Of
the intelligent discussion Of these meas
ures there should come the best solution
of a problem that must be solved in the
interest Of the Washington public.
Before he gets through with 1t Col.
Lindbergh may be relied on to show