Financial History Issue 118 (Summer 2016) | Page 20

By Jerry W . Markham
The Securities Act of 1933 is commonly viewed as the first statute that required review by the federal government of stock and bond issues before their sale to the public . That claim is not entirely justified .
A Capital Issues Committee ( CIC ) that was created by Treasury Secretary William G . McAdoo during World War I conducted prior reviews of new securities offerings . Initially , the CIC ’ s reviews were for the purpose of assuring that capital was not diverted into activities unnecessary for the war effort . However , after operating for only a few months , the CIC became aware of widespread fraud schemes that were inducing investors to exchange government-issued Liberty bonds for worthless securities . The CIC then began acting as a modern day Securities and Exchange Commission ( SEC ) by expanding the scope of its review to include a determination of whether new offerings were fraudulent .
The conclusion of World War I ended the role of the CIC , but the committee remained concerned with ongoing Liberty bond fraud schemes . Before disbanding , the CIC recommended that Congress enact legislation that would have required a federal regulator to review new securities offerings with the goal of preventing fraud . Congress ignored that request . Such legislation would have to await the excesses in the securities markets during the 1920s and the onslaught of the Great Depression that led to the enactment of our current federal securities laws .
Secretary McAdoo Creates the CIC
McAdoo became a prominent financial figure during World War I . The son-inlaw of President Woodrow Wilson , McAdoo had assumed his position as Treasury Secretary shortly before the creation of the Federal Reserve Board . McAdoo oversaw the Fed ’ s development , and he served as its ex officio chairman .
As Treasury Secretary , McAdoo closed the New York Stock Exchange for four months when hostilities commenced in Europe . That closing was thought to have forestalled a panic that would have resulted from a massive stock market
Previous page : Treasury Secretary William G . McAdoo , creator of the Capital Issues Committee . sell-off . The concern was that foreign investors would convert their extensive US securities holdings into gold for export . McAdoo also headed the War Finance Corporation , which oversaw financing of America ’ s war effort . With the aid of the Fed , McAdoo ’ s Treasury Department issued some $ 21 billion in Liberty bonds that were used to fund the war .
Germany , France and Great Britain imposed governmental controls over private sales of securities after war broke out in Europe in 1914 . The private issuance of such securities in those countries was variously regulated to assure that new offerings would not divert capital from war-related needs . The United States followed that same path after it declared war on Germany in 1917 .
Secretary McAdoo asked that new stock and bond offerings be submitted to the government for a review of their necessity and compatibility with the war effort . He then directed the Federal Reserve Board to form the CIC to review new private securities offerings for that purpose . This CIC was modeled after an English committee of the same name that was created by the Chancellor of the Exchequer when England entered the war . The English CIC was tasked with reviewing and recommending to the Chancellor whether new offerings of municipal and privately-issued securities should be allowed . Approval was not given unless the securities were deemed essential for war-related needs .
The American CIC was composed of three members of the Fed , and Paul M . Warburg was appointed to chair the committee . He had been instrumental in the creation of the Fed and was the Fed ’ s first vice chairman . Aiding the CIC was a three member Executive Advisory Committee composed of private bankers : Allen B . Forbes of Harris , Forbes & Co . in New York ; Frederick H . Goff from the Cleveland Trust Company ; and Henry C . Flower of the Fidelity Trust Company in Kansas City .
The CIC appointed subcommittees in each of the 12 Federal Reserve districts to assist its review process . Those subcommittees were headquartered in the offices of the Federal Reserve banks , and they included the chairmen and governors of those banks . Three private bankers with expertise in investment banking were added to each of the district subcommittees .
The CIC generally made the determination of whether an offering was consistent with war-related needs or economically essential . However , in doubtful cases , applications were referred to the appropriate district subcommittee for recommendations on whether approval should be granted . The CIC and its subcommittees did not pass on the “ intrinsic merit ” of any offering . Rather , the CIC limited its review to determining whether a new issue was compatible with the war effort . Action by the CIC on applications for new offerings took on average only about four days .
Submissions of securities offerings for approval by the CIC were voluntary . The CIC also brought state and municipal governments into the approval process on a voluntary basis . Even though its review process was not mandatory , the CIC ’ s standards for approving new offerings were strict . The committee asked that the construction of all new roads , drainage and irrigation projects be halted unless strategically or economically important to the war effort . The CIC also requested that the construction of churches , schools and non-essential industrial and residential buildings be stopped .
The War Finance Corporation Act
Compliance with the CIC ’ s voluntary review process was widespread and was formalized by the War Finance Corporation ( WFC ) Act of 1918 . The enactment of the WFC Act came only a few months after the founding of the original CIC . It reconstituted the CIC into a seven member body whose members were appointed by the President with the advice and consent of the Senate .
Three of the new CIC members were required to be members of the Fed . The Fed members appointed to serve on the new CIC were : Charles S . Hamlin , the first chairman ( then called “ governor ”) of the Fed ; John Skelton Williams , who was also the Comptroller of the Currency ; and Frederic A . Delano , the uncle of Franklin D . Roosevelt . Delano and Hamlin had served on the original CIC . Private members of the new CIC were : Henry C . Flower and Frederick H . Goff , who had both served on the prior CIC ’ s Executive Advisory Committee ; James B . Brown , a banker from Louisville ; and John S . Drum ,
18 FINANCIAL HISTORY | Summer 2016 | www . MoAF . org
By Jerry W. Markham The Securities Act of 1933 is commonly viewed as the first statute that required review by the federal government of stock and bond issues before their sale to the public. That claim is not entirely justified. A Capital Issues Committee (CIC) that was created by Treasury Secretary William G. McAdoo during World War I conducted prior reviews of new securities offerings. Initially, the CIC’s reviews were for the purpose of assuring that capital was not diverted into activities unnecessary for the war effort. However, after operating for only a few months, the CIC became aware of widespread fraud schemes that were inducing investors to exchange government-issued Liberty bonds for worthless securities. The CIC then began acting as a modern day Securities and Exchange Commission (SEC) by expanding the scope of its review to include a determination of whether new offerings were fraudulent. The conclusion of World War I ended the role of the CIC, but the committee remained concerned with ongoing Liberty bond fraud schemes. Before disbanding, the CIC recommended that Congress enact legislation that would have required a federal regulator to review new securities offerings with the goal of preventing fraud. Congress ignored that request. Such legislation would have to await the excesses in the securities markets during the 1920s and the onslaught of the Great Depression that led to the enactment of our current federal securities laws. Secretary McAdoo Creates the CIC McAd X[YHHZ[[[[X[Y\H\[ܛ\KHۋZ[]و\Y[[ۋXYY\[YY\][ۈ\X\\BXܙ]\HܝHYܙHHܙX][ۈوBY\[\\H\ XYݙ\]HY8&\][Y[ [H\Y\š]^ٙX[Z\X[\X\\HXܙ]\KXYYH][ܚ^[H܈\[۝[[]Y\[Y[Y[]\K][\Yš]Hܙ\[YH[X][]B\[YHHX\]HX\]][\YNX\\HXܙ]\H[X[H˂XYܙX]܈وH\][\Y\[Z]YK[ [ٙHۘ\\]ܙZYۈ[\ܜ[۝\Z\^[]HTœX\]Y\[[܈^ܝ XY[XYYH\[[Bܜܘ][ۋXݙ\][[[ق[Y\Xx&\\Yܝ ]HZYقHY XY&\X\\H\\Y[\YYYH H[[ۈ[X\Hۙ]\H\Y[H\\X[K[H[ܙX]]Z[[\Yݙ\Y[[۝ݙ\]]H[\وX\]Y\Y\\H][]\H[ NLM H]]H\X[BوXX\]Y\[H[Y\\\[\HY[]Y\\H]]›ٙ\[[]\\][B\\[]YYYˈH[]Y]\Y][YH]Y\]X\Y\ۈ\X[H[ NLM˂Xܙ]\HXY\Y]]˜[ۙٙ\[HXZ]YBݙ\Y[܈H]Y]وZ\X\]B[\]X[]H]H\Yܝ B[\XYHY\[\\H\™ܛHHP]Y]]]]HX\]Y\ٙ\[܈]\K\P\[[YY\[[\[Z]YBوH[YHH]\ܙX]YHB[[܈وH^\]Y\[[[[\YH\H[\P\\Y]]Y][[X[Y[[H[[܈]\]ٙ\[›و][X\[[]][KZ\YYX\]Y\[H[Y \ݘ[\][[\HX\]Y\\HY[YY\[X[܈\\[]YYY˂H[Y\X[P\\YقYHY[X\وHY [][K\\\\[YZ\H[Z]YKHYY[[[Y[[[BܙX][ۈوHY[\HY8&\™\XHZ\X[ZY[HP\BYHY[X\^X]]HY\ܞH[Z]YH\Yو]]H[\Έ[[ܘ\و\\ܘ\ ˈ[]–[ܚY\X ٙHH][[\\[N[[Hˈ\قHY[]H\\[H[[\]KHP\[YX[Z]Y\[XXوH LY\[\\H\X\\]]Y]\ˈHX[Z]Y\\HXY]X\\Y[BٙX\وHY\[\\H[[^H[YYHZ\Y[[ݙ\ܜوH[ˈYH]]H[\]^\\H[[\Y[[[\HYYXXوH\XX[Z]Y\˂N8 8 SSPSTԖx 8 [[Y\ M 8 ˓[Qܙ‚HP[\[HXYHH]\Z[][ۈو]\[ٙ\[\ۜ\[]\\[]YYY܈XۛZX[B\[X[ ]\[X[\\\X][ۜ\HY\YH\X]H\XX[Z]YH܈X[Y[][ۜۈ]\\ݘ[[Hܘ[Y HP[]X[Z]Y\Y\ۈH8'[[XY\]8'Bو[Hٙ\[ˈ]\HP[Z]Y]]Y]]\Z[[]\H]š\YH\\]XH]H\Yܝ X[ۈHHPۈ\X][ۜ܂]ٙ\[ۈ]\YHۛHX]\^\˂XZ\[ۜوX\]Y\ٙ\[܂\ݘ[HHP\H[\KBP[Y]H[][X\[ݙ\Y[[H\ݘ[\ۂH[\H\\ˈ][Y]]Y]œ\\X[]ܞKHP&\œ[\܈\ݚ[]ٙ\[\HX H[Z]YH\Y]BۜX[ۈو[]YZ[YB[\Y][ۈڙXH[Y[\œ]YX[H܈XۛZX[H[\ܝ[H\Yܝ HP[\]Y\Y]HۜX[ۈو\\[ۋY\[X[[\X[[\Y[X[Z[[HY H\[[Hܜܘ][ۈX\X[H]HP&\[\B]Y]\\Y\XY[\™ܛX[^YHH\[[Hܜܘ][ۈ ѐHXو NLN H[XY[وHѐX[YHۛHH][۝˜Y\H[[وHܚY[[Pˈ]Xۜ]]YHP[H][Y[X\HHY[X\\H\[YHH\Y[]HYXH[ۜ[وH[]KYHوH]PY[X\\B\]Z\YHY[X\وHY BYY[X\\[Y\HۈB]P\N\\ˈ[[[B\Z\X[ [[Y8'ݙ\ܸ'JBوHY[ۈ[X[\\[H\\وH\[N˜[Y\XK[[H[Hق[[ ][ [[[[[[Y\YۈHܚY[[Pˈ]]BY[X\وH]P\N[H˂\[Y\X ٙY\YۈH[܈P&\^X]]BY\ܞH[Z]YN[Y\ۋB[\HZ\ݚ[N[ˈ[K