order to sell at 90 comes, the specialist matches them and makes the sale.

The difficulty has been, of course, that the system gives the specialist an inside look at all orders. He knows at every minute just exactly what the buy orders and the sell orders on the books are. Because therefore he plays poker with the privilege of looking at all of the cards, he has been in a very advantageous personal position with respect to the securities for which he is specialist and he has been a very important cog in any pool operation. If you could get a specialist to run your pool for you, it was very much easier. The specialist would also be a good fellow occasionally and pass his book around to his friends for a look at it, and anybody who is operating in a particular stock who knows what the general public will do, at what point it is willing to buy and at what point it is willing to sell, has a very, very easy

game.

Now, the New York Stock Exchange

Mr. MARLAND. Mr. Chairman, if I may interrupt.

The CHAIRMAN. Mr. Marland.

Mr. CORCORAN. Yes.

Mr. MARLAND. Do you think that it would be an advantage to have publicity?

Mr. CORCORAN. Decidedly; yes.

Mr. MARLAND. The rule that was passed or the order that was made by the stock exchange was to the effect that a specialist could not show his books.

Mr. CORCORAN. It has just been made, unfortunately.

Mr. MARLAND. Is that beneficial to the public?

Mr. CORCORAN. That he cannot show his books?

Mr. MARLAND. Yes.

Mr. CORCORAN. It is.

Mr. MARLAND. Do you want that information to be held exclusive? Mr. CORCORAN. Yes.

Mr. MARLAND. To the operator?

Mr. CORCORAN. No. He should not be permitted to operate, either. I mean, as this bill is drawn, the specialist not only cannot show his books, but he cannot act as anything except a broker. He cannot trade for his own account.

Mr. MARLAND. Why, Mr. Corcoran, if a customer is in the market for stock, for a large block of stock, why should he not be permitted to ask his brokers to ascertain what there was on the books for sale, and why should not the broker be able to find from the specialist, what there is for sale? It is done in every other business. Why should the specialist be prohibited from telling what orders he has for certain stocks?

Mr. CORCORAN. Well, it would not be so bad if he had to tell everybody.

Mr. MARLAND. That is what I mean, to tell everybody.

Mr. CORCORAN. We have a provision in here that says practically that. It says the specialist cannot disclose to any other person information in regard to orders placed with him that is not available to all members of the exchange. That is the way the bill now reads.

Mr. MARLAND. Well, that is very good so far as it goes, but why not provide that the specialist must upon request furnish information to

the public as to the orders to buy, and to sell; why should it not be perfectly open and aboveboard?

Mr. CORCORAN. It all depends upon whether you think the public is willing to have its offers to buy and sell known to everybody else. On European exchanges, all of these things are cleared through a clerk of the exchange. There is nothing mysterious about them.

If you think that the American people want to have their orders made public to buy and sell, it certainly will make for better publicity if all of the orders are published.

Mr. MARLAND. And more intelligent trading, will it not?

Mr. CORCORAN. Yes. You will shatter all of the traditions of the stock market practices, if you do.

Mr. MARLAND. But, the public would be able to more intelligently buy and sell stock.

Mr. CORCORAN. That is true.

Mr. MARLAND. If what the specialist knows they are permitted to know.

Mr. CORCORAN. That is, if they knew what bid and asked prices in addition to the last sale?

Mr. MARLAND. That is right.

Mr. CORCORAN. That is true.

One of the most amazing things about the stock exchange management is that the specialist rule which they announced the other day is just about four years late. It is an amazing thing that it was only the other day the stock exchange ruled that a specialist could not trade in options in stocks in which he was a specialist, and that he could not show his books to anybody except the governing committee. Now, if we may go over to the particular problem, of which you hear so much discussion, the registration of securities, in which you are particularly interested, Mr. Cooper.

These provisions are a part of the protection against the naked speculation and unwarranted and destructive speculation the President condemns in his message. The rest of the provisions of this bill, apart from those providing for administration, relate to the protection of corporate outsiders from the corporate insiders. One of the factors that will prevent speculation from being as bad as it is or has been, is the assurance that the average investor who buys into the market has at least a chance to know what he is buying into and has some protection after buying from being double-crossed on the inside by men who know more about the stock than he does.

Now, if we may make the order a little easier to follow, before we take up the registration requirement for securities, jump over to section 15, to "Transactions by Directors, Officers, and Principal Stockholders." A principal stockholder is defined as a person who owns more than 5 percent of any class of stock.

On page 28, section 15 (a), requires every director, officer, or principal holder of any securities listed on an exchange to file with the exchange and with the commission a statement of how many shares he owns and to file that statement at the end of each month to show whether there has been any change in his position during the month. That is to prevent the insider from taking advantage of information to sell or buy shares ahead of the release of information to the public about the company.

(a) Requires him to show what his holdings are.

(b) Forbids him to carry on any short-term specualtions in the stock. He cannot, with his inside information get in and out of stock within six months. If he does, the profit goes to his company.

That is simply an application of an old principle of the law that if you are an agent and you profit by inside information concerning the affairs of your principal, your profits go to your principal.

Down further on the page

Mr. MAPES. May I ask a question?

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. Is there any reason why that should not apply to all directors, officers, and owners of stock?

Mr. CORCORAN. There is no reason, sir. The bill is not very well drawn there. It ought to read to cover every director, every officer, and every stockholder who owns more than 5 percent of the stock. That is the way it was intended to read.

Mr. MAPES. That is not the language there now.

Mr. CORCORAN. It is not. It is not properly worded as to the 5 percent.

Mr. MAPES. It ought to read "and/or beneficially more than 5 percent" followed by "is a director, or officer."

Mr. CORCORAN. It is badly drawn. We slipped on that. It ought to read "every director and every officer" and then "every big stockholder."

Mr. MAPES. You admit that it is not that way?

Mr. CORCORAN. I quite admit that.

Mr. MARLAND. Mr. Chairman

The CHAIRMAN. Mr. Marland. I did not know that Mr. Mapes was through.

Mr. MAPES. Yes.

Mr. MARLAND. Mr. Corcoran, in most of the large companies, through stock traded in in the New York Stock Exchange, the officers and directors own nothing like 5 percent.

Mr. CORCORAN. That is quite true, sir.

Mr. MARLAND. Of the stock.

Mr. CORCORAN. That is true.

Mr. MARLAND. In all probability, the director of a corporation owns less than 1 percent of the stock.

Mr. CORCORAN. That is true.

Mr. MARLAND. I wanted to know if you agreed with that.
Mr. CORCORAN. I agree with that.

So, 15 (a) he must report his holding of stock, to show whether he is getting in and out of the stock on a long-term basis.

(b) says he cannot trade in the stock on short-time speculative swings-that is a 6-month swing. He has to give profits on such swings to the company.

Subsection (b) (1), (2), (3), over on page 29 says that if the director or officer is a big stockholder, he cannot sell short, and cannot sell against the box.

Selling against the box, sounds complicated, but like all other securities mechanisms, it is assentially perfectly simple. Suppose you are a director of a company and you have a hunch that the stock is going down. You are afraid to sell the actual shares you held because you would be criticized if it were ever found out that you had sold your stock. Instead of selling outright or of selling the

stock short and making the difference between the 100 and the 80, to which the stock drops, you sell an equivalant number of shares but hold your own shares to deliver later on. Although you may not make the profit between 100 and 80, you are in a position where you certainly do not lose if the stock you are holding drops in value. You have hedged, by reason of the fact that you always held the shares to cover. You may not make a short sale profit, but you certainly do not suffer the drop in the value of the stock.

Mr. MARLAND. And during that operation, of necessity, the director instructs his broker to borrow stocks.

Mr. CORCORAN. To cover.

Mr. MARLAND. To make delivery.

Mr. CORCORAN. Yes.

Mr. MARLAND. Which has a tendency to further depress the value of the stocks.

Mr. CORCORAN. Oh, it has all of the effects of a short sale.

Mr. MARLAND. And assures a profit.

Mr. CORCORAN. Yes. Now, (b) (3)

Mr. MERRITT. Of course, what you are doing here is going to have the same tendency that the securities act has, prevent any responsible man from being a director in any big company.

Mr. CORCORAN. No. We are simply saying to these men, "If you are going to sell and get out, be honest about it. Say that you are getting out, because you think that the stock is going to go down, but do not conceal the fact from your stockholders that you are selling out the company.

"You cannot sell your own stock short. If you know from your information that the company is in a bad way, be honest and sell your stock and get out and do it publicly; but do not fool your stockholders, by making them think that you are still with them because shares still stand in your name, while as a matter of fact you jumped ship about 2 months before they had a chance."

That is all this section means. should act as Mr. Wiggin did. section 15.

Mr. MERRITT. I do not see that. he does not own at all, is it not? Mr. CORCORAN. Yes.

We do not think that the director
This is an anti-Wiggin bill, this

Short selling is selling stock that

Mr. MERRITT. Now, you are talking about selling against the box. Mr. CORCORAN. Selling against the box.

Mr. MERRITT. Selling short?

Mr. CORCORAN. Against the box.

Mr. MERRITT. He cannot sell his own stock short.

Mr. CORCORAN. What I am talking about is a practice that many directors have followed. If you sell short, you sell stock you do not

have.

Mr. MERRITT. I understand that.

Mr. CORCORAN. When you sell against the box, you sell stock that you have, but you get your broker to find some stock somewhere else to deliver against your sales so that in effect you have sold short and you have protected yourself from a fall in the stock. Suppose the stock is at 100, and you think that it is going to 80. You sell 100 shares at 100. The stock goes to 80. You arrange to have your broker, with some other stock, cover it. In the meanwhile, you have

kept your shares. They are registered in your name. The stock is registered in your name in the stock books. You still have these shares, although you have carefully hedged yourself against a drop in the stock and possibly make a short-sale profit.

Mr. MERRITT. Well, of course, as a matter of fact, as a matter of actual practice, if I sell my own stock, the stockholders are not going to know whether I sell or not.

Mr. CORCORAN. No; but the stockholders ought to be in a position where they can know, and under section 15 (a) they would be.

Mr. MERRITT. Any time a director sells some stock, he does not send a notice to all of the stockholders that he has sold his stock? Mr. CORCORAN. No; not every one; but once a month the bill would require him to report what his stock changes are. Otherwise the insider is at a decided advantage. In perfectly honest small companies the evil may not exist. The evil is usually on the bigger scale. It is not related to the smaller companies. But in large companies you find directors who are shuffling in and out of their own stock all of the time. It is the problem of Mr. Wiggin and the Chase stock. Mr. MERRITT. I agree that there is a problem, and I agree that it is objectionable, and you have a perfect right to object to it, but my feeling is in connection with this bill, that we are doing what we did in the national securities act, that you have overdone it as to the penalties.

Mr. CORCORAN. Well, all we have said to the director, sir, is that he cannot sell your own stock short, or make a turn in his own stock within 6 months. Certainly that is not too much to ask of a man who is on the inside, who is a director or officer of the company, or one of the big stockholders who really run the board of directors. Mr. MERRITT. That is all I have.

Mr. CORCORAN. Now, on page 29, subsection (3), an insider tips off somebody with his inside information, somebody to whom he makes an unlawful disclosure of the secret condition of the company, and the person tipped makes a short swing profit on the stock. The company can sue him for cooperating with the director or with the officer or the stockholder for participating in the profits of the company.

That is, the director cannot evade having to turn over his own profit under section 15 by tipping off somebody else to do the job for him, nor can he tip off a friend, or friends, and let them make a killing on inside information at the expense of other people. Mr. WOLVERTON. May I ask a question?

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. How are you going to find that out?

Mr. CORCORAN. It is going to be a hard thing to do.

Mr. WOLVERTON. It is not only going to be hard, but how is it going to be possible to ascertain that?

Mr. CORCORAN. Oh, there have been cases in which it has been found out. You learn of it once in a while. For instance suppose Mr. Wiggin tipped off somebody. I am using him just as an example. It is true that you cannot catch everybody, sir. But because you cannot catch everybody there is no reason why you should not catch those you can.

Mr. WOLVERTON. Well, that is what I am getting at; how are you going to catch anybody?