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Secondly, that same section does give the Commission exhaustive power over the handling of margin accounts, How shall they be closed out? How shall they be kept up? That is set forth there in section 6 (d).
If we turn to section 7, we again find a wide discretionary power given. There in section 7 (b) of the act, there is a flat limitation placed upon the amount which any member of the exchange can borrow with reference to his own capital; namely, that they shall not exceed 1,000 percent, or 10 times his capital; but the power to narrow that, the power to bring that down, is granted to the administrative authority
Section 8, paragraph (7), contains requirements of publicity for what might be called stabilizing pool operations, which is left within the control of the Commission.
In section 9 some of the most important powers granted to the Commission are set forth, namely, the power over short selling. Instead of dealing with that by arbitrary requirements, one way or another, the question was left to the discretion of the Commission. Subsection (b) of the same section places the use of stop loss orders within the control of the Commission, and section (c) gives the general power to the Commission to prescribe the rules and regulations governing any other manipulative devices.
Section 10 again gives the Commission considerable power over specialists. The powers the specialists now exercise on the Exchange are very greatly curtailed by the act.
Section 11 deals with the registration requirements of securities as distinguished from exchanges. In other words, with listing. The conditions of listing, the type of information to be supplied, is set forth generally in the section, but the details are to be worked out by the Commission.
Section 12 deals with current information that is to be supplied by issuers whose securities are listed on the exchange, requiring them to furnish certain current types of information and the type of information is again within the discretion of the Commission.
Section 13 deals with proxies, requiring the submission of certain facts to the Commission prior to the solicitation of proxies. The nature of the facts to be stated and made of public record are again largely within the control of the Commission.
Section 14 gives very wide discretionary powers, and in section 14 deals with the problem that disturbs nearly everybody and that is how can you control the over-the-counter market? Well, section 14 puts that control practically wholly within the Commission.
Mr. MERRITT. Mr. Chairman, may I ask a question? Is it proposed at some time to explain to the committee the dangers that are guarded against by these sections?
Commissioner LANDIS. Yes.
Mr. MERRITT. For instance, what is the trouble as to stop-loss orders.
Commissioner LANDIS. Yes, Mr. Merritt; if I may say this, the gentlemen who will follow me will take up each one of those. They know much more than I do about the economic validity of the conclusions that are arrived at in this bill.
Mr. MERRITT. I am hoping that our darkness will be illuminated at some point.
Commissioner LANDIS. Well, I am sure it will.
And, that is the idea of presentation, to have those questions answered by those who have some knowledge on them.
Section 16 of the act again puts the accounting of members of the exchanges, dealing in over-the-counter markets, brokers who deal with members of the exchange under the control of the Commission. It gives the right to surprise examinations.
Section 18 gives large powers to the Commission. Subsection (a) of it is a general section which sets forth powers to make rules and regulations. Section (b) deals with powers to try and work to some form of uniform accounting in our various corporate industries. And section (c) of that section is what the New York Times the other day called a “bundle of happy thoughts”, I think; but the powers that are granted in section (c) are wide and extensive.
Now, that makes me want to interject this consideration, namely, that the objection may well be raised that large powers, as I say, are granted, large, wide, and discretionary powers are granted to the Commission. Is not that an enormous step to take? I think we ought to recognize this fact that these powers, these large powers are today being exercised not by the Government, but these powers are being exercised by the governing boards of the exchanges, and the fact that the Government steps in to assume or exercise those powers which work for the public good or public detriment, is not unusual.
Section 20 of the bill-I may briefly comment upon that in this way: That sets forth the powers which the Commission has to enforce, the regulations as set forth. In other words, it can suspend an exchange from the right to do business by canceling or suspending its registration, Moreover, it can under another subsection of that paragraph suspend members of the exchanges for violating either the provisions of the act or the rules or regulations of the Commission.
A number of other sections of a more technical character, or powers of the Commission are given here, but there is one that I would like to call your specific attention to. That is section 28, dealing with foreign exchanges. In this section an effort is made to try and reach attempted violations of the act by transactions on foreign exchanges, and by the listing of American securities on foreign exchanges. The conditions under which contracts to buy and sell those securities can be made in this country are largely left to the discretion of the Commission.
Some weeks ago, Secretary Roper gave to the President of the United States a report of a departmental committee, of which I happened to be a member, which said that the objective stock exchange regulation should be a minimum of specific statutory requirements and a maximum of administrative discretion. I think that criterion is a proper one,
The bill, in my judgment, largely follows that requirement.
The further matter to which I would like to call your attention is this problem of the administrative authority deputed with the administration of this act. It happens to be the Federal Trade Commission. A consideration which should, I think, govern the question of choosing an administrative authority for handling this act is this, namely that the Securities Act, which was passed by the last session of Congress, should be tied up with this act. The administration of those two acts should not be vested in different administrative
agencies. The Securities Act deals primarily with the original distribution of securities. The Stock Exchange Act deals with trading in outstanding securities. Problems of a like character are to be found in both of them. Registration requirements of one will be different, naturally, from the other, and yet there will be a great deal of similarity between the two. In the Securities Act there are certain provisions covering trading in securities as well, inasmuch as it prevents the resort to fraud and deception in connection with the sale of stock, gives power to the administrative authority to enforce by injunctive process or otherwise certain standards of decency in trading in securities, and provides methods whereby the administrative authority should handle that kind of situation.
Now, it may be said, why not take the Securities Act away from the Commission and put it in the hands of whatever administrative authority may be chosen to administer the job of administering this act? It seems to me in a large measure that the answer to that is this—that the Securities Act has been administered and has been developed in the Federal Trade Commission where there is a corps of experts in whom I happen to have confidence. I think they have a morale that I would say is second to none in any Government department. It would be a shame to lose the benefits of those traditions. The building up of a successful, worthwhile efficiency has already been achieved there.
Secondly, I think there is always danger attendant upon the establishment of new commissions. It takes some time for a commission to get started. The Federal Trade Commission, I think, can be credited with efficiency in operation, a tradition of true service, and one of integrity; all qualities demanded by an act of this type, and for that reason, the Commission itself, I think, feels that it would like to undertake zn activity of this type.
One provision in this act, in that connection, which I think deserves particular attention by the committee, is section 30, which is a provision taken in the main from the emergency acts passed in the last session of this Congress, which exempts employees to be employed by the Commission in connection with this act, and the Securities Act, from Civil Service classifications. The reason for that I think deserves real weighty consideration.
The type of men necessary for administering this act are men who come high. You want the best you can get. You have your difficulties. I have never yet mastered all of these job classifications in the Civil Service. You have your difficulties in getting a man and fitting him in the proper job classification required by the Civil Service requirements. We have had our difficulties there in connection with the Securities Act. I do not think they have been too serious there, but I have my doubts as to just how well you can get the type of men that you want to administer this act on the basis of a job classification, of $3,800, or $5,600, or $6,000, or whatever it may be. Frequently, to reach a salary like $6,000, you have to create an assistant chief, or something of that type, and it presents somewhat of a hardship in the administration of an act of this type, where competency is the main thing.
With that, I will have done, unless the committee wishes me to take up another subject, and that is the relationship between this bill and the so-called “Roper Report”, to which I referred some
The CHAIRMAN. I think you might proceed with that.
The CHAIRMAN. I think it might be worth while, Mr. Commissioner, for you to place in the record the personnel of the Roper committee.
Commissioner LANDIS. Mr. Chairman, that committee was composed of Mr. John Dickinson, Assistant Secretary of Commerce, chairman; Mr. A. A. Berle, Jr., professor at Columbia, and I have forgotten his title in the New York City Administration. It is one of those nice titles they have there; Mr. Arthur H. Dean, an attorney with Sullivan & Cromwell; myself; and Henry J. Richardson, an attorney in Washington.
It might be well worth while to examine this relationship between this bill and this report, because of the fact that the report received what might be called editorial praise; and certain provisions of the bill have not received that editorial praise. Whether that is worth anything, I make no comment, but I think it is worth while considering the report and the bill. Where does this bill depart from the recommendations of the Roper report, and why does it depart?
The Roper report stressed what I was trying to stress a little while ago, that is, flexibility of administration and efficiency of the administrative authority. It made no specific suggestion as to what the administrative authority should be. It suggested that either a new administrative authority should be created to which both this act and the Securities Act of 1933 should be entrusted, or else the Federal Trade Commission should be entrusted with the administration of this act, and in that event that reorganization of the Federal Trade Commission should be carefully considered; namely, it suggested specifically that two new members might well be added to the Federal Trade Commission.
The need for that I would be glad to take up with the committee. I can speak only for myself, and not for the Commission as a whole, although I think that I express the majority opinion of the Commission. Not that there is any opposition to such a program, but I simply have not spoken of this particular problem with some members of the Commission, due to the press of business.
In the second place, the Roper report sets forth certain substantive regulations. This bill sets forth certain substantive regulations.
This bill contains numerous substantive regulations that are not contained in the Roper report.
As to the treatment of the specific problems raised by the Roper report and raised by this bill, I think I might take them up in order of the Roper report.
Dealing with pools, the Roper report recognizes the difficulty of distinguishing between pools that have no disturbing factor upon the market, and pools for the purpose of “rigging the market; pools for purely manipulative purposes and pools which have a justification, provided that the present mechanics of trading and securities distribution is to endure. It is said that there is a very great difficulty in drawing that line. It is suggested broadly that certain types of pools might be outlawed, and certain publicity with reference to all types of pools should be required.
The bill tries to draw that distinction, which the report does not try to draw. The bill, as I read it, in section 8, paragraph (3), tries to outlaw the manipulative pool or the pool to “rig” the market. In paragraph (7) of the same section, it tries to permit certain types of pegging, fixing, and stabilizing actions, provided that there shall be the type of publicity that the Commission requires. The second thing that the Roper report took up was washed sales and matched orders.
Mr. CROSSER. What?
Commissioner LANDIS. Washed sales and matched orders. Fictitious sales, in other words. It said those should be outlawed. The bill does that. It outlaws those particular transactions.
The third subject of the Roper report was margin trading. The Roper report suggested that there should be no rigid requirement with reference to margin trading, but that the matter should be handled by administrative action, and in that connection that the administrative authority under the act should act in cooperation with the Governor of the Federal Reserve bank of the district in which the exchange was situated. The idea underlying that cooperation was to get the advice and help of men who were perhaps particularly attune to the credit situation in developing just what kind of margin requirements should be imposed.
The bill on the other hand, in section 6, specifically limits margin trading. I do not want to go into the particular desirability of that. There is a gentleman who is to follow me who I think knows something about margin trading and can take up the desirability of that feature.
The bill also says that the Federal Trade Commission can go further on and restrict the margin trading beyond the minimum set forth in the bill. It does not call, as the Roper report does, for cooperation between the administrative authority and the Federal Reserve bank in matters of that type.
The fourth thing that the Roper report does is to suggest that something should be done as to the problem of specialists, particularly with reference to power of specialists to trade for his own account and secondly, that the question of whether he should ever disclose any matters in the specialist's books, should be raised; and thirdly, as to whether or not the specialist should be eliminated and a clerk, or a man of that caliber take his place.
The bill treats the problem of specialists considerably different. Specialists cannot trade on their own account, because no member of the exchange, under the bill, can trade for his own account.
It also prohibits the disclosure of any information on the specialist's books.
I notice that, if I read the newspapers aright this morning, the New York Stock Exchange yesterday put in exactly that rule. The rule heretofore was that information should not be disclosed when the disclosure of such information was detrimental to the market. As I read that rule, and I do not want to presume to know about it on the authority of a newspaper account, the ban against disclosure becomes absolute, except disclosure to a committee of the exchange is allowed.
Fifth.' The Roper report took up the question of short selling. It said in substance that there is much diversity of opinion on just what the effects of short selling are and because of that we ought to gather