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Mr. PETTENGILL. You said that the specialist trading in the stock in which his customer is also interested, takes the chance of intervening orders coming in from other brokers.

Mr. WHITNEY. Or any broker that is standing in the crowd when he bids and offers; sir.

Mr. PETTENGILL. But to what extent has it often happened that specialists in certain stocks, really has a monopoly of all of the orders going into the exchange on that stock?

Mr. Whitney. The specialist has no monopoly as to market orders. He may have the vast majority, and probably has over inactive or semiactive stocks insofar as they are limited to buy and sell; but as to market orders, he does not have a monopoly. It is the normal case, where a broker represents a firm, for the first broker to come in with a market order, and as I have said, in my own experience I have seen it happen thousands of times. If I felt I could not execute that order to the best advantage of my customers, immediately, and then and there, I will give it to the specialists in my belief that the interests of the customers will better be served by him in executing the order, because he is there constantly all of the time, than I can do myself.

I think we must look at this whole thing, sir, with a point of view that at least there are some honest men in this world, or we would not be doing business. I cannot conceive, if I am going to work to the detriment of my customers all of the time, how I am going to keep their business. There are 700 firms, members of the New York Stock Exchange, and if I do something to my customer that is to be detrimental to him, he can go elsewhere readily, and will. Competition is very keen between houses.

Mr. PETTENGILL. It still is not plain to me how the customer out in Dubuque knows whether his transaction has been fairly handled for him or not.

Mr. WHITNEY. He knows it, sir.

Mr. PETTENGILL. When the specialist has what might be called in the nature of a monopoly of the information of that particular stock that is going through his hands. Now, he may pass that on to his broker, but does the broker pass it on to the customer? In other words, is the customer in a position to protect himself?

Mr. WHITNEY. The broker passes it on to his customer through his firm, he tells him to whom he sold that stock and, if the customer believes, because of his watching the ticker, or because of his reading of the newspapers and the transactions the next day that he has not received a fair execution, it is within his entire ability to complain and to get justice, which will be immediately investigated for him.

Mr. PETTENGILL. And you have cases of that sort?

Mr. Whitney. Yes, sir; and in the majority of those cases the complaints are found to be perfectly unjustified insofar as the order is concerned, and that is done by specific reference to time stamps, and the timing of the tape, which is done by the exchange.

Mr. PETTENGILL. You say maybe you find it to be justified?

Mr. WHITNEY. Unjustified. Justified in the execution of the orders.

Mr. COOPER. Mr. Chairman-
The CHAIRMAN. Mr. Cooper.

Mr. COOPER. Mr. Whitney, I do not like to interrupt you at this time. This discussion has been very illuminating to me. For the first time in my life I have heard something about the operation of stock exchanges. I fully appreciate the importance of that matter in this bill; but there are other things in which I am intensely interested, and I am just wondering if we are going to have time for some of your people to touch on the question as to what the effects of this legislation will be upon private capital, industry, and banks.

Now, to me, this is very important, and I am wondering if we are going to get to that this morning. I would like very much to hear you on that, if I can.

Mr. WHITNEY. There is no question about it, sir, but that this bill covers those two points vitally. It has been my understanding that men representing credit banks and corporations would have to appear before this committee, and believing that they know so much more about that than I, it would be presumptuous on my part to try to go into that thoroughly.

Mr. Cooper. I thought I understood you to say that somebody would be here to speak on that.

Mr. WHITNEY. I have something later on in my statement. Mr. COOPER. If you are going to have somebody discuss that part of the bill, all right.

Mr. WHITNEY. Mr. Chairman, it is a quarter to 11, and time being short, I think, if I have your permission, I would like to give way to Mr. Gay, who has just a few words to say with regard to his opinion on the constitutionality of the bill, and I am sure that what he has to say is more important than anything that I will have to say.

The CHAIRMAN. I am wondering if Mr. Gay, in addition to what he has to say, will have a brief that he can file with the committee. I can ask him that when he goes on.

You may proceed, for the next hour, and put on anyone you desire, and your statement, what you do not read, will be, of course, put in the record.

Mr. COOPER. Mr. Chairman
The CHAIRMAN. Mr. Cooper.

Mr. COOPER. Please pardon the interruption, but I am so interested in this bill, and its effect upon capital and industries, that I just wanted to make that statement.

Mr. WHITNEY. Well, if I may skip, Mr. Chairman, a portion of my statement here and put it in the record, I will skip the particular part that I have here with regard to sections 11, 12, 13, 14, 15, 16, and 17, and come to section 18, which I think is what you refer to.

(The portion of the statement above referred to is as follows:) Sections 11, 12, and 13 of the bill deal primarily with questions which affect listed corporations. Section 11 requires, among other things, every corporation listing securities on the exchange to file a registration statement with the Federal Trade Commission. Section 12 specifies the current information which a listed corporation must furnish to the commission, and section 13 deals with proxies in connection with the securities of any corporation listed on an exchange. I am advised that the officers of a number of corporations have asked for an opportunity to appear before this committee and they will undoubtedly point out to you the burdens which these requirements would place upon listed corporations. I might point out, however, the fantastic result which section 13 would have in the case of a large corporation. This section requires every person soliciting a proxy to file a statement with the Federal Trade Commission which shall include a list of the name and addresses of the persons from whom proxies are

being solicited and then requires that a copy of this statement shall be included as a part of every solicitation of a proxy. In effect, therefore, a corporation sending proxies to its stockholders would have to accompany the proxy with a complete stockholders' list. Insofar as these provisions seem to affect the listing requirements of exchanges, Mr. Altschul, chairman of the committee on stock lists, is here and will deal fully with these questions.

Section 14 of the bill purports to make it illegal for any person to use the mails or any means of interstate communictaion or transportation for the purpose of making a market in any security whether listed on a national exchange or not, without complying with such rules and regulations as the Federal Trade Commission may prescribe. This is an attempt to regulate the "over-thecounter” markets which exist in every financial center of the country. I am advised by counsel that the constitutionality of this section is extremely doubtful. Even if it should be constitutional, “over-the-counter” markets can exist without the use of the mails or of any means of interstate transportation or communication. The bill, therefore, would not effectively regulate the entire security business of the United States and I am fearful that the penalties which the bill imposes upon brokers and listed corporations would result in stimulating to an enormous degree the business of the completely unregulated “over-thecounter” markets. In this connection, I should perhaps remind you that some of the manipulative pool operations, disclosed by the investigation carried on by the Senate Banking and Currency Committee, which received the greatest degree of public criticism, involved securities which were not listed on the exchange, but which were dealt in “over-the-counter.” In at least two striking instances, these securities have been listed on the stock exchange before the manipulative transactions took place but were removed from listing by formal action of the directors and stockholders of these companies.

Section 15 of the bill deals with transactions by directors, officers and principal stockholders of corporations whose securities are listed on a national exchange. The provisions of this section affect primarily listed corporations and will undoubtedly be discussed by the company officials who have asked for an opportunity to appear before you. To the extent that these provisions seek to prevent dishonest acts, they are undoubtedly sound, but regulations of this character have no proper place in a bill regulating stock exchanges and stock exchange practices. They belong in the laws governing the incorporation and management of companies. The New York Stock Exchange has long realized that many of the bad practices connected with the management of corporations have been due to loose provisions of State laws governing the incorporation of companies. It is generally recognized that these laws have in some instances been drafted for the express purpose of making incorporation easy and attractive to large enterprises. In spite of the fact that the dangers inherent in such policies have been publiely discussed for years, no perceptible improvement has resulted. The New York Stock Exchange has long been aware of these evils and, despairing of effective amendments to the laws of all States, we have urged that this situation be cured by the passage of a Federal law governing the incorporation of companies. I am firmly convinced that this step is not only desirable but is really necessary to prevent abuses of the kind referred to. The United States is today the only great commercial country which has no national corporation law.

While I appreciate that the provisions of the bill dealing with officers, directors and principal stockholders of corporations may be a first step toward such a law, I am convinced that they go too far in some directions and do not effect real reforms in many others. Furthermore, the bill attempts to do indirectly what should be done directly, if at all. There is no logical reason for imposing criminal penalties on certain practices when indulged in by officers, directors, and stockholders of corporations listed on a stock exchange and allowing similar practices of officials of unlisted corporations to go unpunished. What is wrong in one instance should be made wrong in another and unless this is done, corporations may hesitate to list their securities on an exchange and thereby subject their officers directors and stockholders to penalties both civil and criminal which they would avoid entirely by removing their securities from listing.

Section 16 of the bill requires every member of an exchange and every person transacting business through such a member to keep such accounts, books and records as the Federal Trade Commission may require. It also gives the Federal Trade Commission unlimited power to examine these records. While we are in hearty sympathy with the requirement that brokers should keep adequate books and records and have, in fact, adopted a rule to that effect, the provisions of this section are objectionable because of the unlimited powers vested in the Federal Trade Commission. Not only may the Federal Trade Commission prescribe the nature of every record which a broker shall keep, but it may make such examinations as in its unrestricted discretion it may determine. All expenses of these examinations, including even the compensation of the persons employed by the Commission itself, must be paid by the exchange or the member whose records are examined. There is no requirement limiting the extent of these examinations or their expense to what is reasonable or necessary and, in effect, therefore, the Federal Trade Commission can arbitrarily dictate the extent and scope of these examinations and compel the person examined to pay whatever expense may be incurred. An inquisitorial power of this kind is of course capable of abuse and, if abused, would be equivalent to a power to destroy.

Included in this section, which purports to deal with reports and examinations, there is a provision giving any representative designated by the Federal Trade Commission the right to attend any meeting or proceeding of an exchange or any committee thereof. As I will point out in a minute, section 18 gives the Federal Trade Commission power to make rules and regulations in regard to every aspect of exchange management, and also to make such investigations as the Federal Trade Commission may deem necessary or proper. Apparently not satisfied with these powers, it was thought necessary to include this extraordinary provision which would allow any person designated by the Federal Trade Commission as its representative to actually supervise and, by his personal presence, influence every act taken in the management of exchanges.

Section 17 of the bill deals with the liability of any person who shall make or be responsible for making any statement in any report or document filed with the Federal Trade Commission, which was “in the light of the circumstances under which it was made, false or misleading in respect of any matter sufficiently important to influence the judgment of an average investor.” The penalties provided for a violation of this vague and indefinite provision are both criminal and civil. The civil penalties permit any person, who, without knowledge that the statement was false or misleading, shall buy or selí “a security the price of which may have been affected by such statement" to sue and recover damages which shall be the difference in price between the amount paid and the lowest price at which the security shall have sold during 90 days before and 90 days after the purchase or, in the case of a sale, the difference between the am 'unt realized and the highest price at which the security shall have sold during 90 days before and 90 days after the sale.

The person sued shall be liable unless he can sustain the burden of proof that he acted in good faith and in the exercise of reasonable care had no ground to believe that such statement was false or misleading. In view of the unlimited character of the information which the Federal Trade Commission has the right to require exchanges and persons transacting business in securities, as well as all corporations listed on a national exchange, to file with it, it will be humanly impossible to determine what facts may, in retrospect, be deemed to be sufficiently important to influence the judgment of an average investor. posing the best of good faith and the exercise of all care which would seem reasonable at the time a statement or document is prepared, some subsequent event may make some part of the statement appear to be misleading. We all know that hindsight is easier than foresight. The really objectionable feature of this provision is that the civil penalties may be recovered by persons who have not relied upon the inaccurate or misleading statement and the amount which can be recovered will not be the actual damage but a penal sum which will far exceed any damage which they may have suffered. If any civil penalties are deemed necessary, then they should be limited to the actual damages suffered by persons who have been misled by the false or inaccurate statement. The imposition of a criminal penalty upon mere mistakes of judgment likewise seems indefensible.

Mr. WHITNEY. Section 18 of the bill grants certain special powers to the Federal Trade Commission. Subdivision (a) of this section grants broad powers to the Commission to adopt rules and regulations and apparently contemplates that in prescribing the form and contents of registration statements and reports the Federal Trade Commission may discriminate between different classes of exchanges, members, securities, and corporations whose securities may be listed on national exchanges. Subdivision (b) gives the Federal Trade Commission power to prescribe the form of the financial statements which will be submitted to it and in this connection allows it to specify the

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items and details which must be shown and the accounting principles which must be applied. Without going into detail it is sufficient to say that this right to compel corporations to use such methods of accounting as the Federal Trade Commission may arbitrarily select will, in effect, deprive the officers and directors of corporations of the power to manage their companies. A variation in the method of valuing assets or determining depreciation or in the amount of recurring and nonrecurring income and other similar matters may vitally affect the accounts of corporations. In each case matters of this kind essentially involve the exercise of the discretion of management, and while it is proper to require that management should adopt and apply a consistent policy in regard to accounting methods it is impracticable to vest in one administrative body the power to prescribe rules and regulations of universal application.

Subsection (c) gives the Federal Trade Commission authority to adopt rules and regulations in regard to exchanges, their members, and persons transacting a business in securities through such members. This long section, which specifies in detail some of the powers which the Federal Trade Commission may exercise, clearly is not a regulation of stock exchanges and the brokerage business, but, in fact, gives the Federal Trade Commission power to manage exchanges and dictate brokerage practices. There is no single activity of a stock exchange from the admission of members to their suspension or expulsion that may not be controlled under this subsection. The election of the officers of an exchange and the appointment of its committees are likewise within the control of the Federal Trade Commission. This is not regulation but domination.

Subsection (d) makes the rules and regulations of the Federal Trade Commission effective upon publication, in such manner as the Commission shall prescribe. This, in effect, might result in rules and regulations, the violation of which is a criminal act, becoming effective without any proper notice. It is another instance of the arbitrary character of the powers vested in the Federal Trade Commission by this bill. Subsection (e) gives the Federal Trade Commission broad power to subpena witnesses and compel the production of books and papers for any investigation which in its opinion is necessary or proper. These investigations can apparently be carried out not only by the Federal Trade Commission or any member of it but also by any officer or officers designated by it, and the power to subpena witnesses and compel the production of books and papers may be exercised by these subordinate officials as they see fit. The final sentence of this subsection makes it a misdemeanor for any officer participating in such an inquiry and also for any person examined as a witness to disclose to any person other than a member or officer of the Commission any information obtained upon such inquiry, except as directed by the Federal Trade Commission or one of its officers. The purpose of this extraordinary provision is apparently to make all investigations by the Federal Trade Commission secret proceedings and, in addition, to impose a criminal penalty upon any witness who might disclose, even to his own attorney, what had transpired during such an inquisition.

There are other matters covered here in the statement, which I will put in the record.

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