Mr. WHITNEY. It does say that, and please forgive me. I am not merely quibbling.

Mr. MAPES. Is that not all that it says?

Mr. WHITNEY. Oh, no, sir; that is not all that it says.

Mr. MAPES. It does not say that the Commission shall formulate these rules and regulations you are talking about.

Mr. BULWINKLE. If you will pardon an interruption, Mr. Mapes, the basis of this is that no regulation shall be granted first, unless the rules of the exchange provide for the expulsion of a member under certain conditions.

Mr. MAPES. Yes.

Mr. BULWINKLE. That is first, and then, secondly, it declares that any violation of the provisions of the act, or any rules or regulations of the Commission shall be considered as conduct or proceedings inconsistent with just and equitable principles of trade.

It goes back to the registration, because the whole, entire subject, title, is under registration.

Mr. PETTENGILL. What page?

Mr. MERRITT. This is page 34. Paragraph (c), section 18, says that the Commission shall have authority in addition to the pro

visions

Specifically provided in this act, as it may be necessary or appropriate in the public interest or for the protection of investors.

There is unlimited power to make regulations they see fit, whether in the act or not.

Mr. MAPES. I agree with that; but I do not think that subsection (d) is subject to that criticism, personally.

The CHAIRMAN. All right, Mr. Whitney, you may proceed.
Mr. LEA. Mr. Chairman-

The CHAIRMAN. Mr. Lea.

Mr. LEA. Mr. Whitney, I understand from you that the New York Stock Exchange has such a rule already.

Mr. WHITNEY. As to the power of the governing committee, to suspend the members for violation of what the governing committee believe to be inconsistent with just and equitable principles of trade;

yes, sir.

Mr. LEA. So the administration of that rule is left to the discretion of the governing board in your Stock Exchange?

Mr. WHITNEY. Yes; but just as stated here, without any of the ramifications that I believe, and qualifications, that might be interpreted as to that section; yes, sir.

Mr. LEA. Yes; but your board assumes responsibility for determining what are just and equitable principles of trade?

Mr. WHITNEY. It does now.

Mr. LEA. Yes.

Mr. WHITNEY. But, under the act, under the other provisions of it, if we do not find someone guilty of proceeding inconsistent with just and equitable principles of trade, it is in the power of the Commission, as I read it, not only to inflict its own opinion upon the member, but the Exchange as well, for not having met the views possible thereafter determined by the Commission.

Mr. LEA. In other words, this act would give the Commission power to exercise that discretion that is now exercised by your board of governors?

Mr. WHITNEY. Absolutely.

The CHAIRMAN. All right, Mr. Whitney, you may proceed.
Mr. KENNEY. Mr. Chairman-

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. You are objecting to that?

Mr. WHITNEY. I am objecting to that, sir; with the only power and final power resting entirely with the Commission and their findings being final. I do not think it is possible for any exchange— forget the New York Stock Exchange-any exchange to operate in the control of its members under, for instance, these rules, or any rules that may be imposed upon it, unless it is given, its governing body, is given that power and that final power, because if there is to be review in any authority or in the courts, the whole control, the standing of the committee having that control, is washed out, as I see it, completely.

Mr. KENNEY. You believe there should be no appeal?

Mr. WHITNEY. There is no appeal now to any court or anybody, because when a member becomes a member, he signs the constitution, to abide by the governing committee's rules.

Mr. COOPER. Mr. Chairman

The CHAIRMAN. Mr. Cooper.

Mr. COOPER. Mr. Whitney, under the provisions of this act, the governing board has no limitation set upon the extent they can go regarding regulations. There is no limitation as to where they will stop, or the regulations they can adopt.

as

Mr. WHITNEY. The Federal Trade Commission?

Mr. COOPER. Yes.

Mr. WHITNEY. Yes, sir; there is no limitation and we view that

Mr. PETTINGILL (interposing). Mr. Chairman

The CHAIRMAN. Mr. Pettingill.

Mr. PETTINGILL. Mr. Whitney, in view of your capacity and expressed purpose of self-discipline, do you take the position that no regulation by law should be enacted?

Mr. WHITNEY. Not necessarily, sir.

Mr. PETTINGILL. Are you willing to submit to the committee a draft of a bill you think would be desirable in the public interest? Mr. WHITNEY. Yes, sir.

Mr. PETTINGILL. I, personally, would like to see it, very much. The CHAIRMAN. All right, Mr. Whitney.

Mr. WHITNEY. Section 6 of the bill deals with margin requirements on long accounts and deserves careful consideration.

Subdivision (a) prohibits any member of an exchange or-and I draw your particular attention to this fact-"any person who transacts a business in securities through the medium of any such member, directly or indirectly," to extend or maintain credit to any customer on securities not registered upon a national exchange.

The immediate effect of this provision will be to make all unlisted securities ineligible as collateral in margin accounts. While it is true that the most important companies in the United States usually have their securities listed on one or more exchanges, it is, likewise, true that the securities of thousands, if not hundreds of thousands, of perfectly sound business enterpri es are not listed on any exchange. Few people realize what a relatively small number of corporations are

listed on our most important exchanges. For example, there are about 800 American companies which have stocks listed on the New York Stock Exchange. The number listed on other exchanges throughout the country is surprisingly small, because only securities issued by corporations of substantial size which have secured a reasonable distribution among investors are commonly dealt in on exchanges.

Mr. MAPES. Mr. Chairman, may I interrupt?

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. What percentage of the business of brokers on the New York Stock Exchange, is confined to listed securities, and what to unlisted securities?

Mr. WHITNEY. Mr. Mapes, that varies tremendously with each and every broker. If I may speak for myself, I may say that my business was approximately half on an exchange and half off.

There are some houses whose business is almost entirely a commission business done on the exchanges, but there are so many different types and phases of business done by our members that it is impossible, sir, to answer you.

Mr. MAPES. So that this provision would be a real limitation upon the right of brokers to borrow when it is confined to listed securities? Mr. WHITNEY. Oh, a tremendous limitation; yes, sir.

Mr. MAPES. Would it be a tremendous limitation on the average member of the New York Stock Exchange?

Mr. WHITNEY. There, again, it would vary tremendously, but the point I think is most important there is the effect it would have upon those that owned these securities, not listed on national securities. exchanges. There would be the great detriment, as well as affecting the business of members, in that case.

Mr. MAPES. Perhaps I have not made the point I have in mind very clear. Is it a natural assumption to assume that the business of a member of the New York Stock Exchange, to act as a broker, for securities listed on the exchange, that his business is limited to the handling of the securities listed on the exchange? In other words what has he to do with the nonlisted securities?

Mr. WHITNEY. Well, again, I must answer you very generally, because of the different phases of many members' business; but a commission or a wire house-the term is almost the same having branch offices in various financial centers and, again, having wires to correspondents in other financial centers, may in the very usual conduct of his business be given orders and execute them in unlisted securities. It is the natural course of business. It is the business flowing through those wires from financial center to financial center; but under this rule he may not do that. That is one phase only.

Mr. MAPES. Well, the membership on the exchange does not give him any more ability to find a market for a nonlisted security than somebody who is not a member of the exchange; is that not true? Mr. WHITNEY. That might very well be true.

Mr. LEA. Mr. Chairman

The CHAIRMAN. Mr. Lea.

Mr. LEA. If we are going to adopt a system of regulating the stock market, would it not be logical then that the unlisted securities should be placed within public control and regulation?

Mr. WHITNEY. By being listed, sir?

Mr. LEA. Well, not necessarily that. I was asking the general question, if we are going to adopt the policy of regulation of stock exchanges, and the sale of securities, would it not be desirable for the unlisted stocks to pass within that control?

Mr. WHITNEY. It would be. The answer is, yes, sir, but-and, I am not competent to give an opinion in that regard, and counsel, Mr. Gay, will if you desire it--but I am advised there is a distinct question of the constitutionality with relation to control over intrastate business, and a large proportion, sir, of that business is intrastate. In other words, it is over the counter market; very little of it, with reference to each other

Mr. LEA. Of course, I assume that the legislation that we pass must be constitutional, to be effective.

Mr. WHITNEY. Naturally.

Mr. LEA. And, therefore, we must measure the value of this law within its constitutional limits, and what I had in mind, assuming that we go to the general policy of stock regulation, then all stock offered to the public should be within that regulation.

Mr. WHITNEY. Yes, sir.

Mr. LEA. Otherwise, there would be an injustice as to the stock that is subjected to the control.

Mr. WHITNEY. Yes, sir; without question.

Mr. LEA. If this section were adopted, would not one of its effects be to draw the unlisted stocks to the exchanges?

Mr. WHITNEY. No, sir; I think just the opposite. If this particular section and no other section existed in the bill, perhaps, but with the other sections, the effect I believe would be this, sir, just as sincerely as I can express it to you; will be to drive listed companies off of the exchanges.

Mr. LEA. Well, what will become of the unlisted stock in your judgment if this bill should be enacted?

Mr. WHITNEY. They will remain where they are and be traded in locally and not through exchanges.

Mr. LEA. They will be subject to control, as I understand, in the over-the-counter market under this bill?

Mr. WHITNEY. Under this bill; yes, sir.

Mr. LEA. You think that that would be desirable, do you not? Mr. WHITNEY. As I said, in answer to your other question, if there is to be regulation in this regard, of listed securities, certainly there should be of unlisted.

Mr. LEA. Would there not be an advantage to the stock to be listed, if this bill should become a law?

Mr. WHITNEY. No, sir.

Mr. LEA. Why not?

Mr. WHITNEY. There are certain restructions put upon corporations, which I will go into a little later, as well-but, many, many corporations being of a certain small size, are even now incapable of meeting the requirements of the New York Stock Exchange and other exchanges, because of the costs to them. Under this bill, the costs of quarterly, independently audited reports would be absolutely prohibitive.

I am told that even in the case of the average sized corporation, of, let us say, $5,000,000 capital stock, it might cost approximately from a half a million to a million dollars a year to be independently audited

quarterly if inventories had to be taken which would be vital to arrive at a correct audit.

Mr. LEA. I did not intend to get off of the question of the expenses of those reports, at the present time.

Mr. WHITNEY. That is a vital element, sir, in this bill, for a listed corporation.

Mr. LEA. But, a corporation when it lists is required to give all of the information that this bill requires, is it not?

Mr. WHITNEY. No, sir.

Mr. LEA. Does not the National Securities Act require information as complete as this bill requires?

Mr. WHITNEY. The Securities Act does not apply to a corporation's listing upon an exchange, unless it happens to be a new issue.

Mr. LEA. That is what I mean, on the original issue, the corporation would be compelled to give as much information as is required to be given by this bill.

Mr. WHITNEY. I would believe so, sir, though I am not prepared to talk in details of the Federal Securities Act, because I truly do not know them in such details.

Mr. LEA. So, after it is once registered under the new law, it is a question of bringing the information up to date, under this bill. Mr. WHITNEY. Yes, sir.

Mr. LEA. Now, do you think it would be so difficult for a corporation to report? As a matter of fact, would not the normal business concern carry this information on its books anyway?

Mr. WHITNEY. In certain details; but, I must go back to the point of the independent audit demanded under this act, crarterly, and the other provisions of this act, which give to the Fedevi Trade Commission complete right as to further rules and regulations with reference to reports of every kind demanded, that may be demanded, by it, and also with regard to the way corporate accounting shall be set up as set forth in this act, and also allowed in further rules and regulations at the discretion of the Commission.

Now, I think this in many ways, sir, to the best of my knowledge, goes far beyond what is specifically now stated in the Federal Securities Act with regard to corporate reporting.

Mr. LEA. Possibly this bill may require reports more frequently than would be necessary; but you believe that if we are to have a regulatory system, that corporations whose stocks are on sale on the stock exchanges, should give reports from time to time?

Mr. WHITNEY. Of course, sir, and we demand them, but we advocate in that regard a Federal incorporation law that would be superimposed on State law.

Mr. LEA. I mean, a report to the Commission, assuming that we establish the regulatory system.

Mr. WHITNEY. If I understand you, I see no reason why the reports of such frequency should not be given to a commission as well, of course, as to the public.

Mr. LEA. How frequently do you think should be the practical length of time between reports required?

Mr. WHITNEY. Quarterly, sir; but not independently audited, because then they would be perfectly, in my opinion, worthless [to have them independently audited]. If I may use it in the degree of an example, the American Telephone & Telegraph Co.-and on this I speak author