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Consideration should not be overlooked of the fact that corporations in raising new capital must frequently issue rights to their shareholders to purchase new securities, in order to provide the corporations with increased capital. Under the language of this provision it could readily be construed as a violation of the law where corporations have engaged themselves only in the legitimate function of increasing their capital.
Section 8, subsections (b), (c) and (d): We are unalterably opposed to subsections (b), (c), and (d) of this section because they provide penalties, over and above fines for violations of the law, which we feel have no place in a regulatory measure. The liability for losses is too arbitrarily fixed to meet the demands of fair play and justice, and the opportunity for blackmail is too apparent for safety. The thing established by this wording will subject every broker to continued, unlimited and unjust liabilities and will weaken the entire structure of the brokerage business.
Section 9, subsection (a): We believe that short selling occupies a proper and legitimate place in the securities market, and unless the commission shall be directed to prescribe rules and regulations that will permit short selling we are opposed to this subsection. Under any circumstances a short sale should be more clearly defined than at present in the bill. The powers given to the commission under the present working cannot but be the means of regulating the course of the market.
Section 9, subsection (b): Stop-loss orders are essential in order to limit losses and as a protection against further losses not only to the broker, who may be carrying the account under the required margin, but to banking institutions having loans upon the stocks and bonds as collateral and wishing to protect themselves against a loss. If the subsection is to remain in the bill, we should like to suggest that in line 19 after the words “stop loss" there be inserted the words, “which does not close out an existing commitment."
Section 9, subsection (c): This subsection is so vague and inadequate for the purpose it evidently is intended to accomplish that it should be stricken out in its entirety. To allow it to remain leaves in the hands of the commission a weapon with which that body might determine that anything or everything is detrimental to the public interest or to the proper protection of investors.
Section 10: We are particularly directing your attention to this section because it will destroy the means of livelihood of hundreds of brokers, members of local exchanges, who now act both as broker and as a dealer is or underwriter or distributor of securities. The amount of business done by brokers on local exchanges is not always, in fact very rarely, sufficient alone to enable them to maintain their organizations, and to deprive them of this privilege or right which they have always enjoyed of acting also as a dealer in or underwriter or distributor of securities would be treating them most unfairly with no compensating benefit to the public at large.
Quite a few of the smaller stock exchanges undoubtedly will be forced to close if the harsh treatment provided in this section is meted out to their broker-members. It is impossible to be a strictly local broker and not handle local investments. This section would paralyze the local markets. As brokers we insist that we have a
right-an inherent right, a moral right, a perfectly legitimate rightto operate as brokers and dealers. The regulations of all of the local exchanges are, we believe, ample to prevent a broker from acting as a dealer in the execution of any orders wherein the broker is required to act as agent on a commission basis. Not only do the stock exchanges have stringent rules covering this matter but most of the States have laws on agency and principal. The function of dealers and brokers is easily differentiated in the conduct of business. This clause, if enacted into the law, will drive business from the protection of the regulated national stock exchange member to the unregulated unlisted dealer, with damage to the national stock exchange member and the investor alike.
Should the section be permitted to stand we direct your attention to lines 14 to 16, inclusive, page 21 of the bill, wherein it is stated that it shall be unlawful for any member of a national securities exchange to act as a specialist unless registered as such. If it is possible to do business under this bill, we submit that it is essential to have specialists to conduct the business of brokers on the exchanges. Specialists have a peculiar and particular function which, we believe is not generally understood and is usually misunderstood. We fear that this prohibition against specialists was drawn without due consideration of the problems of local exchanges. In line 20 of page 21 it seems to us that the words, "fixed price orders,” should be more clearly defined as to what is actually meant.
The language as now used would appear to require that after rules and regulations are prescribed by the commission, specialists will then be prohibited from making a transaction except on an order giving a definite fixed price. Such a restriction as this will prevent the investor from giving what is commonly known as a market order and will restrain the investor from making a purchase at anything except a definite price. One of the important functions of a specialist is that he must execute stop-loss orders. Stock exchange regulations covering the operations of specialists are very stringent and can be quickly invoked.
Mr. MERRITT. Mr. Chairman, may I ask the witness a question on section 10?
The CHAIRMAN. Mr. Merritt.
Mr. MERRITT. It has been suggested that this prohibition against acting as broker and specialist, and a dealer, if it is put in at all, should apply only to places over a certain population so it would not hit the smaller cities.
Do you think, with that limitation, that any considerable objection would be removed as to that section?
Mr. THOMPSON. Well, I am very glad to answer that in this way, that so far as the local exchanges are concerned-I am referring to those outside of New York—I feel that there would be very few if any that would come within the classification. For instance, if you take Boston, and Chicago, and Philadelphia, San Francisco, we have very large centers of population there. I assume from what you refer to, that you would mean something like 100,000, 200,000, or 300,000, or something of that kind.
Mr. MERRITT. Yes.
Mr. MERRITT. With that limitation, you still would be opposed to this section?
Mr. THOMPSON. Yes, we would.
Mr. MERRITT. That is all. That would not help, then, in cities like Boston, Baltimore, and cities of that type?
Mr. THOMPSON. No, sir.
Section 11, subsection (a): This provision makes it unlawful for any person
Mr. BULWINKLE. Mr. Thompson, before you proceed.
Mr. BULWINKLE. When were the rules adopted on the exchanges as to specialists, and as to brokers trading with themselves?
Mr. Thompson. I did not refer to brokers. I referred to specialists.
Mr. THOMPSON. I assume that we have had specialists on the local exchanges for many, many years in the past. It is nothing recent at all.
Mr. BULWINKLE. Yes, sir; but the rules controlling specialists; when were they adopted?
Mr. THOMPSON. Well, that would vary according to what exchange. All exchanges do not have specialists. Some do, but others do not.
Mr. BULWINKLE. What particular exchange are you with?
Mr. Thompson. Section 11, subsection (a): We believe that consideration should be given to the fact that, as this section in requiring registered securities to be issued would of necessity force the initial trading in rights and additional issues of registered securities to be conducted on an unlisted basis, it would seem logical that they should be traded under the control and, therefore, on a national securities exchange where the primary security is traded in. Provision should, therefore, be made for such trading under proper protective provisions.
This section provides certain requirements that must be complied with by a corporation before the securities may be registered with a national securities exchange, and provides a period of 30 days before the same becomes effective after the filing of the required data with the exchange and the commission. These requirements place upon the exchanges the burden of forcing compliance by corporations with
this whole section. We submit that it is not fair to the exchange to make them members of the policing authority of the Federal Trade Commission,
We further submit that this section will cause the delisting of many corporate issues, and as these delistings occur, the public will have no protection from unregulated markets such as they enjoy today.
In particular we direct your attention to article 2 of subsection (c), lines 19 to 23, page 24 of the bill. Corporations here are required to furnish certified independent public audits for preceding years, the number not stated. It may be that corporations applying for listing on the local exchanges have not had certified public audits for previous years, and such audits would be prohibitive because of expense, if not in some cases unobtainable; and then, too, it may be a new corporation.
Lines 21, 22, and 23, page 24, required that such other information be furnished as the commission may by rules and regulations require as necessary or appropriate for the public interest or for the protection of investors. This language makes it impossible to know just what the commission may or may not require. In this same subsection, line 5, page 25, attention is drawn to the authority vested in the commission to make rules requiring the commission's approval for the removal of any security from listing. This might prove a great detriment to the public in case the exchange itself should find it expedient to act forthwith in the suspension of trading in any security listed thereon in order to prevent fraud, misrepresentation, or manipulation, or for various other causes that might arise. The power of removal from trading or listing, or both, should inherently rest with the exchange.
Section 12, subsection (a), article 2: We doubt the ability of many corporations to furnish quarterly balance sheets and profit and loss statements by independent public accountants. Such requirements would mean that corporations whose securities are registered and listed on the exchanges would be compelled continuously to employ independent auditors, and thus there would be placed such a burden and expense upon the smaller corporations listed upon the local exchanges as to cause them to withdraw their securities from listing. The expense for such work would hardly seem to be justified. Referring to article 3, of this subsection, we hold that "monthly reports, including among other things, a statement of sales or gross income may prove exceedingly misleading and the purposes for which the information was intended defeated by the wrong interpretation which could easily be placed upon such monthly figures. If this clause is enacted there should be a clear definition of what is required in the monthly reports besides sales or gross income.
Section 13, subsection (a): This requires that before the solicitation of proxies in respect of any security registered on any national securities exchange there shall be filed with the commission certain information among which shall be a list of the names and addresses of the persons from whom proxies are to be secured. This would mean if the section is literally interpreted, that whenever proxies are sent out by a corporation for the usual annual meeting, the corporation shall furnish a list of its shareholders and their addresses to all stockholders. Attention is directed to the enormous expense burden that will be placed upon some of the larger corporations.
Section 13, subsection (b), line 12, page 27: It might prove exceedingly difficult for corporations to obtain quorums for annual meetings if brokers carrying stock for customers and required to obtain specific authorization for each proxy. If this section should stand, could not the word "specific" be eliminated so that a general written authorization could cover all requirements?
Section 14: If this section is allowed to stand there is a possibility that the market for unlisted securities will be completely destroyed. The designation of power by Congress to the Commission to prescribe whatever may be appropriate in the public interest, or for the protection of investors in what is known as the over-the-counter markets, is so vague, misleading and lacking of definition that it should be removed from the bill.
Section 15, subsection (b), article 2, lines 20 and 21: Restricting the delivery of securities by directors, officers or principal stockholders to within 5 days of sale makes no allowance for Sundays or holidays. In the event of sales in the East from the Pacific Coast or other remote places of the country the five-day limit is too short; also if the owner of securities is out of the country and desires to take advantage of a prevailing market, he is barred from doing so under the five-day clause.
Section 16. We take the position that the expense of examination provided in this clause is unfair. The security business is subjected to a greater taxation on the character of business done than probably any other business in the country. Most of the exchanges and some of the States now conduct examinations.
Section 17, subsection (a), page 32, line 2: The words “influencing the judgment of an average investor”, we submit, is language that is too vague and inadequate to determine just what the judgment of the average investor is. The penalty provision leaves a wide open door for those who are prone to blackmail.
Section 18, subsection (a): The delegation of authority by Congress to the commission to make "such rules and regulations as it may deem necessary or appropriate to carry out and to implement, administer, and enforce the provisions of this act, including the rules and regulations governing the form and content of registration statements and reports for various classes of exchanges, members, securities, and issuers, and defining accounting, technical, and trade terms used in this act" is a power we feel Congress should not take away from itself. To pass this authority on to a commission is to place those doing a brokerage business in a class by themselves where they shall have no rights whatever even to apply to be heard when the commission may conclude to make the rules and regulations which are to become part of this law. We protest the broad powers given the commission with no right of the exchanges to be heard upon rules, regulations, etc. Subsection (b) of this same section, among other things, provides that the commission shall determine the method to be followed in the preparation of accounts, in the appraisal of assets, liabilities, etc., all of which can go a long way toward compelling corporations to give to their shareholders and to the public such statements as may be misleading and in serious conflict with previous practices which have not been shown as unfair and have not been unjust statements. We submit that this subsection should be eliminated entirely.