Is a 1940 securities law too old to be enforced?

WASHINGTON — Companies routinely request a special waiver from the Securities and Exchange Commission by arguing that a tough enforcement law written in 1940 shouldn't apply to them.

The firms contend that the mutual fund business of the day was run by "relatively small partnerships" — reflecting a far different time.

True, Wall Street firms are bigger than they were 70 years ago. But lawmakers didn't only have tiny businesses in mind.

Congress passed the Investment Company Act of 1940 after hearings that detailed major abuses by the investment companies of the day — what today are known as mutual funds. Nearly every Section 9 waiver application cites the same passage from those hearings, quoting a then-commissioner of the SEC as saying that the intent of the law was to rid the industry of unsavory characters.

However, a reading of the 1940 congressional hearing transcripts shows that the same official had plenty to say about the size and scope of the nation's mutual fund industry.

"Many individual investment companies have total assets equal to those of the larger savings banks," Commissioner Robert Healy testified in April 1940. "These investment trusts and investment companies . . . are a most substantial factor in our securities markets."

Too often, Healy testified, they were run to benefit company insiders "at the expense of and to the detriment of their stockholders."

The SEC even highlighted one firm, called the Founders group, which was anything but a "relatively small partnership."

At its height, Founders rivaled all but the nation's largest banks and life insurance companies, the SEC said. It was an "imposing edifice" with 90,000 stockholders in 44 states.

Almost all its money evaporated during the Great Depression. The Founders group was the subject of an enormous SEC investigation that helped inspire the law that's still cited today.

Despite that, waiver applications still use the same language to argue that Congress was thinking of small partnerships when it wrote the law.

As a unit of one of today's Wall Street behemoths, Goldman Sachs Group, wrote in a 2005 application: "It could not have been foreseen that investment advisers and other service providers to investment companies would in the future be part of large financial service organizations like Goldman Sachs."


On April 9, 1940, an SEC attorney told a Senate subcommittee about a company that had grown so huge that it owned big pieces of several companies — and possibly had allowed its trading operation to help its banking operation.

The SEC lawyer even brought a chart to show the company's varied tentacles. The chart, introduced as evidence in the congressional hearing, was titled "The Goldman Sachs Trading Corporation."


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