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NATIONAL SECURITIES EXCHANGES—H.R. 7852

SATURDAY, FEBRUARY 24, 1934

HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

I see we have this morning the Association of New York Stock Exchange Firms. The first witness is Mr. Hope.

STATEMENT OF FRANK R. HOPE, PRESIDENT OF THE ASSOCIA

TION OF STOCK EXCHANGE FIRMS, NEW YORK, N.Y. The CHAIRMAN. Mr. Hope, will you qualify by giving the reporter your full name and address?

Mr. HOPE. Frank R. Hope, President of the Association of Stock Exchange Firms, New York.

Mr. Chairman and gentlemen of the committee: I speak on behalf of the Association of Stock Exchange Firms, a voluntary association of substantially all member firms of the New York Stock Exchange. Any legislation or regulation of the New York Stock Exchange directly and immediately affects our members as we are bound in the conduct of our business by all of the rules and regulations of the exchange, and anything which affects the exchange obviously affects us. Our members, although not the actual floor operators, nevertheless are the house partners and therefore the persons in the New York Stock Exchange business who are in constant and immediate contact with the customers and the investing public.

It is for this reason we are so particularly concerned with this bill which is so fundamental in its effect upon practically all existing financial and corporate practices and so drastic and far-reaching in its effect upon the entire banking, credit, and investing structure of the country, to say nothing of its immediate effect upon the operation of the New York Stock Exchange as such and all transactions cleared thereon.

In order to save your committee's time, I will not rediscuss any matter already fully presented by Mr. Whitney but will rather concisely invite your specific attention to certain salient features of the bill from the point of view not so much that of the stock exchange itself but rather that of the member firms and their relations with their customers and the investing public. I desire, however, leave to file with your committee the analysis which our association has made of the bill.

I particularly desire at the outset to heartily endorse on behalf of the Association of Stock Exchange Firms the proposal made by Mr. Whitney on behalf of the New York Stock Exchange as to the creation of a Stock Exchange Coordinating Authority. This proposal has been submitted to the board of governors of our association and I am authorized to say to you that they join in the making of this proposal as a sound, workable, and efficacious way to regulate the stock exchange should regulation be deemed in the public interest. I have every reason to believe that this proposal meets with the hearty approval and will receive the full cooperation of all.

I will not have presented any discussion of the constitutional aspects of the bill, as Federal Trade Commissioner Landis has already presented to your committee the brief on this subject prepared by Mr. R. E. Desvernine, counsel for our association, which I understand is in the possession of each member of the committee.

The only definition in section 3 to which your attention has not been called, which requires your special consideration, is subsection 10 of section 3, pages 6 and 7 of the bill.

The only securities which are exempted from the bill are “direct obligations guaranteed as to principal or interest by the United States." It is not clear from this language if it is intended to only include guaranteed obligations and to exclude direct obligations. Furthermore, State, municipal, and bonds of quasi-governmental bodies, such as Port Authorities, and so forth, are not exempted, which will result in an impairment of the value of these obligations and will result in the forced sale of many of such securities now held as collateral.

Section 5, on page 9 of the bill, is entitled "Registration of National Securities Exchanges."

The most outstanding characteristics of the proposed form of regulation is that the Federal Trade Commission is to to granted detailed and complete supervisory power over all the transactions on the exchanges and that as a condition of registration, an exchange must agree to abide by any future rule or regulation made by the commission. In this connection it should be pointed out that the Roper report contemplated that the governmental agency exercising supervision over security exchanges would primarily have power to interfere with the exchange only in the event of certain improper conditions arising in respect to the operation of the exchange and the conduct of its members. Until such conditions arose the operation, control, and management of the exchange, and the responsibility therefor would be primarily that of the exchange itself and its officials and governors. The present proposal gives the Federal Trade Commission power from time to time to change all rules and requirements, including the power to prescribe regulations for the election of officers and committees of the exchanges; for the suspension or disciplining of members, and so forth, thus substituting itself to the fullest extent in the place of the private management of the several exchanges.

This is a real problem because it renders the present exchanges absolutely impotent to effectively and efficiently act; it deprives them of all self-government and implies the principle that the Government will in fact run, not alone supervise, the exchanges.

Most careful consideration should be given as to what body should be given such powers and to the special and expert knowledge and

technical skill of the personnel. The Roper report signalized the importance of this.

Control of the Federal Trade Commission would tend to centralize the financing and management of all security investment in the Federal Trade Commission without reference to the other governmental departments and agencies having similar and concurrent jurisdiction. Confusion and conflict in policy and regulation would result. It would seem that some means of coordination with the Treasury Department and the Federal Reserve System would be indispensable. The broad powers over the entire credit and financial system of the country given, directly and indirectly, by the provisions of this bill must be self-evident.

Subdivision 4 (d) of this section, on page 11 of the bill, should be considered for it appears to require the expulsion of a member of an exchange for any infraction of the rules. No discretion is apparently granted to the exchange or to the Commission and there are no provisions for reinstatement or other adjustments of penalty or variation taking into consideration the relative gravity of the offense. This is particularly arbitrary in view of the fact that violations of the rules may occur through mistakes without any wrongful intent or any gross negligence on the part of the member. It is difficult to conceive of why a person should invest substantial amounts in a business from which he may be arbitrarily expelled permanently and without recourse or the right of reinstatement.

Mr. LEA. Mr. Chairman
The CHAIRMAN. Mr. Lea.

Mr. LEA. Mr. Hope, in reference to the language of section (d), or paragraph (d)

Mr. HOPE. Yes, sir.

Mr. LEA. Do you think your statement is quite accurate in that connection, that this would require expulsion for violation, or for conduct not just and equitable?

Mr. HOPE. On the meaning of the words.

Mr. LEA. As I construe this language, it makes it possible to expel a member for that reason, but does not require him to be expelled. Would that not be your interpretation?

Mr. HOPE. You are probably correct. My impression was that it said that was required. I would have to take some time to look into it and to check that. You have it in front of you. I just cannot remember. I thought it said "required."

Section 6, on page 12 of the bill, is entitled “Margin Requirements on Long Accounts."

Subdivision (a) of this section makes it unlawful for any person who transacts a business in securities through the medium of a member of an exchange to extend credit on securities unless the securities are registered on an exchange. Banks throughout the country, particularly outside the city of New York, extend the service to their depositors of forwarding orders for the purchase and sale of securities and to that extent engage in the business of securities through the medium of a member of an exchange. This section would, therefore, prohibit any such bank from making any loans on unregistered securities.

The effect of this on the banking business, the extension of credit, and the people as a whole is tremendous for they would either lose

I particularly desire at the outset to heartily endorse on behalf of the Association of Stock Exchange Firms the proposal made by Mr. Whitney on behalf of the New York Stock Exchange as to the creation of a Stock Exchange Coordinating Authority. This proposal has been submitted to the board of governors of our association and I am authorized to say to you that they join in the making of this proposal as a sound, workable, and efficacious way to regulate the stock exchange should regulation be deemed in the public interest. I have every reason to believe that this proposal meets with the hearty approval and will receive the full cooperation of all.

I will not have presented any discussion of the constitutional aspects of the bill, as Federal Trade Commissioner Landis has already presented to your committee the brief on this subject prepared by Mr. R. E. Desvernine, counsel for our association, which I understand is in the possession of each member of the committee.

The only definition in section 3 to which your attention has not been called, which requires your special consideration, is subsection 10 of section 3, pages 6 and 7 of the bill.

The only securities which are exempted from the bill are "direct obligations guaranteed as to principal or interest by the United States." It is not clear from this language if it is intended to only include guaranteed obligations and to exclude direct obligations. Furthermore, State, municipal, and bonds of quasi-governmental bodies, such as Port Authorities, and so forth, are not exempted, which will result in an impairment of the value of these obligations and will result in the forced sale of many of such securities now held as collateral.

Section 5, on page 9 of the bill, is entitled "Registration of National Securities Exchanges."

The most outstanding characteristics of the proposed form of regulation is that the Federal Trade Commission is to to granted detailed and complete supervisory power over all the transactions on the exchanges and that as a condition of registration, an exchange must agree to abide by any future rule or regulation made by the commission. In this connection it should be pointed out that the Roper report contemplated that the governmental agency exercising supervision over security exchanges would primarily have power to interfere with the exchange only in the event of certain improper conditions arising in respect to the operation of the exchange and the conduct of its members. Until such conditions arose the operation, control, and management of the exchange, and the responsibility therefor would be primarily that of the exchange itself and its officials and governors. The present proposal gives the Federal Trade Commission power from time to time to change all rules and requirements, including the power to prescribe regulations for the election of officers and committees of the exchanges; for the suspension or disciplining of members, and so forth, thus substituting itself to the fullest extent in the place of the private management of the several exchanges.

This is a real problem because it renders the present exchanges absolutely impotent to effectively and efficiently act; it deprives them of all self-government and implies the principle that the Government will in fact run, not alone supervise, the exchanges.

Most careful consideration should be given as to what body should be given such powers and to the special and expert knowledge and

technical skill of the personnel. The Roper report signalized the importance of this.

Control of the Federal Trade Commission would tend to centralize the financing and management of all security investment in the Federal Trade Commission without reference to the other governmental departments and agencies having similar and concurrent jurisdiction. Confusion and conflict in policy and regulation would result. It would seem that some means of coordination with the Treasury Department and the Federal Reserve System would be indispensable. The broad powers over the entire credit and financial system of the country given, directly and indirectly, by the provisions of this bill must be self-evident.

Subdivision 4 (d) of this section, on page 11 of the bill, should be considered for it appears to require the expulsion of a member of an exchange for any infraction of the rules. No discretion is apparently granted to the exchange or to the Commission and there are no provisions for reinstatement or other adjustments of penalty or variation taking into consideration the relative gravity of the offense. This is particularly arbitrary in view of the fact that violations of the rules may occur through mistakes without any wrongful intent or any gross negligence on the part of the member. It is difficult to conceive of why a person should invest substantial amounts in a business from which he may be arbitrarily expelled permanently and without recourse or the right of reinstatement.

Mr. LEA. Mr. Chairman
The CHAIRMAN. Mr. Lea.

Mr. LEA. Mr. Hope, in reference to the language of section (d), or paragraph (d)

Mr. HOPE. Yes, sir.

Mr. LEA. Do you think your statement is quite accurate in that connection, that this would require expulsion for violation, or for conduct not just and equitable?

Mr. HOPE. On the meaning of the words.

Mr. LEA. As I construe this language, it makes it possible to expel a member for that reason, but does not require him to be expelled. Would that not be your interpretation?

Mr. HOPE. You are probably correct. My impression was that it said that was required. I would have to take some time to look into it and to check that. You have it in front of you. I just cannot remember. I thought it said "required.”

Section 6, on page 12 of the bill, is entitled “Margin Requirements on Long Accounts."

Subdivision (a) of this section makes it unlawful for any person who transacts a business in securities through the medium of a member of an exchange to extend credit on securities unless the securities are registered on an exchange. Banks throughout the country, particularly outside the city of New York, extend the service to their depositors of forwarding orders for the purchase and sale of securities and to that extent engage in the business of securities through the medium of a member of an exchange. This section would, therefore, prohibit any such bank from making any loans on unregistered securities.

The effect of this on the banking business, the extension of credit, and the people as a whole is tremendous for they would either lose

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