When Joseph Kennedy resigned as Chairman, Landis recommended to Roosevelt that he appoint Douglas to fill his seat as a SEC Commissioner. After Roosevelt’s nomination and the Senate confirmation of Douglas to the Securities and Exchange Commission on January 23, 1936, he continued to actively recruit a staff that could rationally establish policy, issue legal opinions, and enforce SEC orders through subpoena power and if necessary, legal action.
Seeking to build administrative competence and intent on creating a staff of lawyers comprising America’s best and brightest legal minds in the SEC, Douglas turned to America’s elite law schools to staff this emerging agency. He realized that legal talent would be necessary to draft the rules, consider the myriad of requests from business as to the enforcement of the Securities Acts and the Exchange Act, and to continue the efforts to fairly enforce the law that were occurring during the chairmanship of James Landis.
Douglas brought Abe Fortas, his prize student at Yale, with him as his chief assistant on the Protective Committee study, and began a long and close relationship with Fortas at the SEC. Correspondence between Douglas and Fortas discloses their hand in the remarkable construction of the legal framework for SEC administrative action and, as the economy demanded, for SEC expansion. He would later entice Yale Professor Thurman Arnold, who would become a Douglas acolyte at the SEC, and Dean Charles E. Clark, along with Jerome Frank, to join the Protective Committee’s investigative work.
Congress substantially increased the administrative responsibilities of the SEC. These increasing legislative responsibilities, such as the passage of the Public Utility Holding Company Act, correspond to the growing power of the SEC. Between 1934 and 1941, the personnel of the SEC expanded from 696 to 1,678. Its budget increased from $1.5 million annually to $5.3 million. Regional offices were established from Boston to San Francisco and eight other cities. Its jurisdiction covered twenty stock exchanges and over 4,000 listed securities. Registration statements required under the Securities Act averaged 450 annually, and nearly 7,000 brokers and dealers engaged in over-the-counter trades fell under the SEC’s authority. From 1935-1941, the SEC instituted 312 lawsuits in federal courts, obtained 657 permanent injunctions, and referred an additional 158 cases to Justice Department attorneys for criminal prosecution.(1)
These remarkable young lawyers who litigated these cases formed the core of a growing body of administrative experts at the SEC. Congressmen wrote hundreds of letters to Douglas on behalf of constituents seeking employment on the SEC; even more letters came independently to Douglas from recent law school graduates across the United States seeking government employment in what was fast becoming the most interesting job in town. Yale graduates got immediate attention. Douglas also paid special attention to job applicants from his home state of Washington, but in every instance, his main focus was the quality and intellectual competency of the applicants.
Douglas knew that the SEC faced enormous challenges from its Congressional mandate, but also from a growing range of anti-New Deal critics, and wanted his agency manned with the best legal talent in America. His experience as a law professor allowed him to mine those close academic contacts for the premier young lawyers to staff the growing agency. This talent would become important as the Supreme Court considered cases challenging the legal authority of the SEC.
Douglas and his staff also professionalized the Commission by establishing preliminary rules, seeking wide public and industry comment, and formally adopting regulations to implement SEC responsibilities. Francis Thornton Greene, an SEC attorney hired in 1934 through the friendship of his father with famous New Deal insider Tommy Corcoran, described his first task of preparing a memorandum of law on the meaning of "public offering."
Greene answered hundreds of inquiries from lawyers and securities businesses about the SEC’s interpretation of the law through "opinion letters," which eventually numbered in the thousands. The SEC developed a record and opinion issuing system where they were published in a book called "The Bible." He also prepared informal written opinions from the trial examiners so that the Commission could make reasoned and rational decisions in the thousands of cases that came before them.(2)
SEC employees recount the unbridled enthusiasm of the new agency. Milton Freeman, who worked at the SEC during that period called it "a remarkable place." "We were always ready to learn." Freeman was proud of the harried efficiency of the SEC. "I was in charge of operations," he said, "and I required that every letter we received be answered within three days." Although some people were disappointed the SEC couldn’t help, many were "glad to have a government agency that gives a prompt answer." Despite the strong feelings of hostility on Wall Street to this upstart agency, Freeman recalled that "none of us resented the people on Wall Street... We listened to their arguments."(3)
Upon completion of its investigation, the Protective Committee published an eight volume study of its findings and made recommendations to Congress for changes in Chapter 10 of the Federal Bankruptcy Act of 1938 and the Trust Indenture Act of 1939. The Protective Committee investigation, led by Douglas, increased the role of the SEC in the examination of a broad range of corporate governance issues that ultimately resulted in broad Congressional reform of the bankruptcy system.
(1) Parrish, 183-184; see also Securities and Exchange Commission Annual Reports, in the Papers section.
(2) Katie Louchheim, ed., The Making of the New Deal: The Insiders Speak (Cambridge: Harvard University Press, 1983), 145-6.
