with this subsection, however, is that it may cover perfectly honest statements as well as fraudulent ones. In effect, it may mean that no person and I ask you to note that it is not only members of exchanges and brokers who are subject to this provision but every citizen of the United States-no person can make any statement in regard to any listed security unless he shall have first made an investigation and exercised reasonable care to determine that what he says is entirely accurate.

Subsection 6 prohibits any payment being made to any person for the purpose of procuring the dissemination of information to the effect that the price of any security is likely to rise or fall because of the activity in the market of any one or more persons. The New York Stock Exchange has a rule prohibiting its members making any payment to secure inspired publicity. This section, which accomplishes substantially the same result, would simply carry into the criminal law and make general a rule which the exchange has already put in force in regard to its own members. I hesitate to express any opinion in regard to the feasibility of enforcing this provision.

Subsection 7 prohibits any person engaging in a series of transactions intended to peg or stabilize the price of any listed security, unless the details of such operation shall have first been reported to the Federal Trade Commission and, presumably, approved by it. Transactions aimed at maintaining a certain price or at stabilizing the price of a security have heretofore been considered legitimate when connected with the distribution of securities and the maintenance of a fair market for securities. This subsection would apparently make such operations illegal unless they were first submitted to and approved by the Federal Trade Commission.

In spite of the critical comments that have been made about stabilizing security prices, no one can doubt that such practices have been considered legitimate in the past. They were generally indulged in by our own Government when the Liberty bonds were being sold during the war and, more recently, it has been the custom of our Federal Reserve banks to intervene in the Government bond market to maintain and stabilize prices in anticipation of new Treasury issues. The ethical character of such operations cannot, therefore, be questioned.

It is, at least, doubtful whether any restriction should be placed upon purchases and sales made to support a market in connection with the distribution of securities. The maintenance of a price having some reasonable relation to the offering price through the medium of actual purchases and sales in the market, really operates to the benefit of investors in that it allows them to freely buy and sell while the process of distribution is still in progress. Many people believe that when such operations terminate, the market necessarily recedes and that the existence of such stabilizing orders must operate to mislead the public. These people overlook the fact that a distributor of securities, who undertakes to stabilize the market price of the security he is selling, is backing his judgment with his money that the price at which he is offering the security to the public is a fair one. If he is mistaken and the security has been offered at too high a price, the net result of the stabilizing operation will be an accumulation of securities by the issuer and this may, in some instances,

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result in his repurchasing the entire issue which he has offered to the public. If, on the other hand, his judgment is justified and the public is willing to pay the price at which the security is offered, the only result of the stabilizing operation will be the maintenance of a fair market while distribution is being effected. Certainly, this question is one which deserves greater study before it is condemned by being included among the criminal provisions of the bill.

There is one other normal and useful practice which would seem to be within the scope of this subsection. I refer to arbitrage transactions which frequently play an important part in the market. Arbitrage is possible between different markets and, likewise, between different securities. For example, a security like the stock of the American Telephone & Telegraph Co. is dealt in in Boston as well as in New York. If there should be more buyers than sellers for this stock in the Boston market there would be a tendency for the price of this stock to rise on that exchange. At the same moment, however, there might be more sellers of this stock than buyers on the New York Stock Exchange, so that, in effect, the price of the same stock might be rising in Boston at the very moment that it was declining in New York. The function of the arbitrageur is to bring the two markets into relation with each other and, in the example which I have cited, he would buy in New York and sell in Boston, with the result that the price in New York would not decline and the price in Boston would not rise. This, as I see it, is a beneficial service which creates a better market for the public on both exchanges. The example which I have cited between two exchanges in this country is commonly called "domestic arbitrage." Similar transactions frequently take place between our markets in this country and the great European financial centers, and these international transactions are usually called "foreign arbitrage." Of the two different types, the latter is infinitely more important, because it brings together the supply and demand of international centers and, at the same time, plays a stabilizing role in foreign exchange rates. I appreciate that this subject is a highly technical one and will not elaborate upon it unless the committee desires me to do so. Foreign arbitrage is, however, generally recognized as a legitimate and useful activity, and even during the last year, when restrictions were placed upon foreignexchange transactions, every means was used to facilitate the business of foreign arbitrageurs.

Arbitrage takes place not only between markets but also between securities. For example, a corporation like the American Telephone & Telegraph Co. may offer its stockholders rights to subscribe to additional stock. These rights may be valuable and some stockholders may wish to exercise their rights while others may decide to sell them. It is obvious that the value of the rights should bear a very direct relation to the price of the stock in connection with which they were issued, but at any given moment there may be more people who wish to sell rights than there are buyers of rights and therefore the price of the rights might decline even if the price of the stock should remain stable. The arbitrageur by buying the rights and selling the stock keeps an equilibrium between these two securities, just as the domestic arbitrageur maintains an equilibrium between markets within this country. This is an important function and there are many instances where arbitrage is necessary to prevent unfair markets. I have used

as an example a case involving rights to subscribe, but arbitrage applies also when stock dividends are declared or stocks are split up, in cases of merger and consolidation and also when part-paid certificates are issued at a time when full-paid certificates are already being traded in.

There is no evidence that the different types of transactions falling under the ban of this subsection 7 have operated to the disadvantage of the public. On the contrary, we know that they have been of real benefit to investors. Certainly, it would be most unwise to outlaw such useful practices.

Section 8 prohibits any person acquiring substantial control of the floating supply of any listed security for the purpose of increasing the price by means of such control. There is no definition of what constitutes the "floating supply" of a security. If the real intention of this subsection is to prohibit corners, I would like to point out that the best means in our opinion of preventing a corner is not to make it a criminal act but to provide that contracts in the security which has been cornered may be settled by the payment of a fair cash value rather than by actual delivery of the security. Such a provision makes corners unprofitable and prevents them more effectively than any criminal penalty. The stock exchange adopted such a rule in the general revision of its constitution in 1925.

Subsection 9 prohibits all forms of option contracts. The purpose of including such a sweeping prohibition was undoubtedly the prevalent belief that options have customarily been used as a means of unfairly influencing market prices in connection with manipulative pools. This does not justify, however, an arbitrary prohibition of all forms of option contracts. Options which are used for manipulation might well be prohibited, without preventing the use of options for legitimate and proper purposes.

The balance of section 8, subdivisions (b), (c), (d), and (e), contain provisions imposing severe civil penalties upon persons who violate the specific prohibitions which I have just discussed. I am advised that these civil penalties introduce a new and vicious principle into our law. While the enforcement of the criminal law has sometimes been made more effective by granting to persons who have been injured by the criminal act a right to recover penal damages, there is not, I am told, any known case in which civil penalties of a punitive nature have been granted to persons who have not suffered direct injury from the criminal act.

In substance, these provisions allow any purchaser or seller of a security, the price of which may have been affected by any one of the prohibited transactions, to bring suit to recover the difference between the price at which he bought his security and the lowest price at which the security sells during 90 days before and 90 days after the date of purchase, or, in the case of a sale, the difference between the sales price and the highest price at which the security sells during 90 days preceding and 90 days following the sale. These amounts can apparently be recovered irrespective of whether the person has suffered actual damage or not, and it is obvious that these sections will result in allowing any purchaser or seller of a security, the price of which may have been affected by a prohibited transaction, to recover vastly greater damages than he could have suffered. In fact, it is even conceivable that a person might buy a security and sell it

again at an insignificant loss and then claim, as a buyer, the difference between the lowest price at which the security sold within a 6-month period and the price that he paid for it, and, as a seller, the difference between the highest price reached within the 6-month period and the price at which he sold it. An illustration will make the example even clearer. Suppose I should buy 100 shares of Allied Chemical & Dye at 121 and should sell it again at 120, thereby losing $100; and, that within 90 days before and 90 days after my transaction this stock had sold at a low of 105 and a high of 155. If I should discover that somebody had engaged in one of the numerous transactions prohibited by section 8, I could sue him for $1,600, as the difference between the price at which I bought the stock and the lowest price at which it had sold. I could, likewise, sue him for $3,500 as the difference between the price at which I sold the stock and the highest price at which it had sold. In the aggregate I could recover $5,100 as my damages, although, in fact, my actual loss was only $100.

It is obvious that provisions of this character will be productive of endless litigation and innumerable blackmail or "strike" suits.

Section 9 of the bill contains three subdivisions. Subsection (a) forbids short selling except in accordance with the rules and regulations to be laid down by the Federal Trade Commission. Subdivision (b) prohibits stop-loss orders except in accordance with like rules or regulations, and subdivision (c) allows the Federal Trade Commission to prohibit the employment or the use of any contrivance or device which it shall determine to be detrimental to the public interest.

I have in the last 3 years spoken so often in regard to the necessity and usefulness of short selling that I hesitate to burden you with further statements on this subject. We have consistently maintained that short selling is an essential part of a free and open market in securities. We have collected exhaustive statistics in regard to the short position in all stocks listed on the exchange. These statistics have been widely published and prove conclusively the value and necessity of short selling. In every great crisis covering by short selling has assisted the market to recover. The most recent illustrations of this tendency of short sellers to buy when liquidation is heaviest, occurred in February and March 1933, just prior to the banking holiday, and again in July when the market suffered a very severe and rapid decline. In the 2 weeks preceding the 4th of March 1933, the short interest covered 412,000 shares of stock and it was a notable fact that the stock market remained active and strong right down to the 4th of March, when the closing of all the banks in the country necessitated the closing of the exchange. Last summer a violent break in prices occurred in the latter part of July and in that month the short interest declined by 445,000 shares. This furnished substantial buying power to the market in a very critical period. In the face of this record, short selling should certainly not be prohibited.

The prohibition of stop-loss orders would, in my opinion, facilitate the work of brokers and particularly the work of specialists on the floor of the exchange. However, I think it would deprive persons, who are not in close touch with the market, of a perfectly proper means of having their selling orders executed when certain prices are reached. There is no evidence that the existence of stop-loss orders tends to accelerate a decline or a rise in prices. In any event, the economic value of stop-loss orders should be carefully weighed

and no change should be made until the matter has been given further consideration.

The final subsection, giving the Federal Trade Commission unlimited power to make unlawful any device or contrivance which it may determine is detrimental to the public interest, is a surprising delegation of power, particularly as any violation of the rules or regulations of the Commission would be a criminal act which might result in heavy fines and imprisonment.

Section 10 of the bill purports to deal with segregation and limitation of the functions of broker, specialist, and dealer. In fact it prevents any member of an exchange and any person who as a broker transacts a business in securities through a member of an exchange from acting at all as a dealer in or underwriter of securities. The sweeping character of this prohibition can only be realized when reference is made to the definitions to which I referred when discussing section 3 of the bill. The unusually broad definition given to the words "broker" and "dealer" result, in this instance, in prohibiting a member of an exchange from buying or selling securities for his own account.

Even if some segregation of the functions of members of exchanges may be desirable and I would like to say parenthetically that the New York Stock Exchange has been studying that problem for nearly 2 years there is certainly no justification for such an arbitrary prohibition as the one contained in this section.

Mr. MAPES. I noticed in an article which you wrote that was published in Mr. Moley's magazine Today, you said that the English law required a person to be either a dealer or a broker. What is the reason for that law in England?

Mr. WHITNEY. That is on the exchange, sir, in London. That really relates more to the specialist system. I would be glad to amplify that if you desire me to. In fact, I do refer to it here in my paper, in a couple of pages.

Mr. MAPES. Let me ask you, while we are interrupting, to what extent does the law in England regulate their stock exchanges?

Mr. WHITNEY. So far as I know, it is not regulated, sir, by the law, but that I cannot swear to.

Mr. MAPES. Is not the provision to which you referred, which requires a man to be either a dealer or a broker, a provision of law. Mr. WHITNEY. Not that I know of. It is a rule of the London Stock Exchange.

Mr. MALONEY of Connecticut: Mr. Chairman, I would like to ask Mr. Whitney if the effect of section 10 would not make it difficult for municipalities to dispose of their bonds? That is a part of the bill to which you just made reference Mr. Whitney.

Mr. WHITNEY. Yes, sir; I certainly do. It certainly would not allow members of the exchange to participate in, certainly, in the purchasing of bonds from municipalities and State governments, and unless they were only dealers

Mr. MALONEY of Connecticut. And they do do so to some extent now, do they not?

Mr. WHITNEY. Yes, sir; to a great extent.

Mr. MALONEY of Connecticut. And for that reason you think that part of section 10 will work an extreme hardship upon them?