As between members, the commission rate is a flexible one. It should be fixed to eliminate harmful competition. The interest rate should be fixed. Stock-exchange houses should pay no interest on credit balances. Now I come to a point, on which I find myself at variance or out of step with most stock-exchange people: I think that the minimum amount with which a margin account may be opened should be fairly substantial. Most stock-exchange people seem to think that the establishment of such a rule would be rather unpopular, because it would make it appear that the exchange were a place of business for big people only. That is all nonsense. A man with, say, two, or three, or four hundred dollars cannot operate in real estate, and there is no reason why he should. If he has no more money than that, he should put it in a savings bank. I used to think that building and loan associations were all right, but they don't seem so good now. But, at any rate, it would better not be in a margin account.

I think that I could go on at considerable length, but I do not believe it would be advisable at this time. If you would like for me to follow this up, as I think one or two have suggested, I will be very glad to do so.

The CHAIRMAN. We will be very glad to have any suggestions you may wish to make as to such regulation as you, out of your experience, think should come. We will be very glad to have it as an addition to the remarks you have made today.

Mr. PIERCE. Shall I continue?

Mr. BULWINKLE. Mr. Chairman

The CHAIRMAN. Mr. Bulwinkle wants to ask a question.

Mr. BULWINKLE. I want to ask you, Mr. Pierce, have many of the so-called abuses, or abuses of the stock exchange, been corrected during the last few years?

Mr. PIERCE. I think, and I feel, just as confident as I am that I am standing here, that whenever the stock exchange recognizes an abuse, it does the very best it can to correct it. It has made its mistakes. Who has not? There can be no doubt about that.

Mr. BULWINKLE. A great many have been corrected in the last few years, have they not?

Mr. PIERCE. Well, my dear sir, developments since 1929 have disclosed many conditions that would not have been disclosed under ordinary circumstances.

Mr. BULWINKLE. And a great part of your corrections have been made within the last 6 or 8 months?

Mr. PIERCE. I would not think so.

Mr. BULWINKLE. All right, sir; go ahead.

Mr. PIERCE. Now, in respect to this section 6, on lending on unlisted securities, does it not seem incongruous that members of the New York Stock Exchange, or others, could lend money on old rubber boots if they cared to, but they cannot lend on such stocks, we will say, as Holyoke (Mass.) Water Power 12 percent stock, selling at around 180. I happen to have here a list that I picked up day before yesterday of high grade stocks, of utilities, insurance companies, industrials, banks, that are dealt in somewhat largely around Boston. The list contains probably 200 issues, mostly good stocks; seasoned stocks. I find that a prominent house over there will advance money on 39 of them. That is nearly 20 percent, and yet not one of them would be eligible under section 6.

Mr. WADSWORTH. Because they are not listed?

Mr. PIERCE. Because they are not listed. Some of the good old insurance stocks, some of the good bank stocks in Boston, some of the good water power companies down through New England, seasoned stocks.

Mr. PETTENGILL. As against the advantages of being eligible for collateral and disadvantage as to the cost of being listed, it is not plain to me which outweighs the other.

Mr. PIERCE. The cost of being listed?

Mr. PETTENGILL. Yes. You have said many listed stocks will become unlisted if this bill passes.

Mr. PIERCE. That is my opinion.

Mr. PETTENGILL. And lose their collateral value.

Mr. PIERCE. Yes.

Mr. PETTENGILL. Which, as Mr. Lea pointed out a while ago, is certainly worth something to somebody.

Mr. PIERCE. Yes.

Mr. PETTENGILL. Now, why is it, in your opinion, that the disadvantage of listing is greater than the advantage of being on the list and being available to collateral?

Mr. PIERCE. The trouble and expense of listing. As I understand it, this bill calls for quarterly audited reports. My firm has an audit and questionnaire return prepared twice a year, once by outside accountants and once by our own auditor. Our audit last June cost us $68,000, and $68,000 in these days is a plenty of anybody's money. Our audit in December would have probably cost us slightly more. I would say that the two audits would have run something over $140,000.

We are one stock-exchange house. What would it cost some of these big corporations to prepare quarterly reports, if it would cost us $140,000 a year to prepare semiannual reports?

Mr. LEA. Mr. Pierce, would you see any reason for requiring an independent audit quarterly in the absence of any new issue of stock of the corporation which is already listed on the exchange?

Mr. PIERCE. No, sir; I do not see how much damage could be done in 3 months.

Mr. LEA. If that requirement was eliminated from this bill, you think it might meet the approval of corporations that might not otherwise list their stocks?

Mr. PIERCE. It might.

Under subparagraph (b) of section 6, brokers are limited to the lending of 40 percent on listed securities. I take it that you gentlemen are interested in the possible deflationary feature of this bill or proposed act.

In our New York office the total number of margin accounts is 2,412 in our New York office, mark you. The operations of our various other offices are largely cleared through or centered in New York-so when I speak of 2,412 accounts here, and have spoken of 45,000 hitherto, there is not necessarily any inconsistency involved.

In the 2,412 margin accounts in New York the total value of the listed securities is $39,857,000. The approximate values of securities to be sold to bring the equity in line with the related provision of the bill would be $13,132,560. In other words, about a third of the total.

Why, one can borrow in normal times, 40 percent on second-class real estate, which generally is difficult to move and sometimes quite impossible.

The idea of applying a rule of thumb method to the fixing of margin limits is really incongruous.

For instance, 2 or 3 days ago, one of our customers, a man of large means in the West, at that time in Washington, telephoned me to the effect that his sister-in-law was about to be sold out by a Chicago bank. The account had a debit balance of about $8,500. In it was $15,000 Chicago & Eastern Illinois 5-percent bonds, for which there is a good market; 100 Sears, Roebuck, for which there is a good market. The total value of those issues was about equal to the amount of the loan. That loan had been carried for months and the minute it got up where the value of the securities approximated the amount of loan, the bank informed that woman that she had to sell out her position or take up her loan before 12 o'clock the following day or they would sell her out.

The banks, some of the banks, at least, have been pretty awful during these 4 years, and some

Mr. CROSSER. What?

Mr. PIERCE. Pretty awful, and some brokers as well.

Mr. KELLY. What do you mean by that?

Mr. PIERCE. I think they have been pretty raw.

Mr. KELLY. Was the bank doing a brokerage business?

Mr. PIERCE. No; the bank was carrying the loan.

Mr. KENNEY. Practically, they are doing a brokerage business, under your statement.

Mr. PETTENGILL. They are accessories after the fact.

Mr. PIERCE. Well, they are pretty good competitors, or pretty bad ones, as you will have it.

Now, if you will pardon me, the fact is that many banks have been very fine all through this period, and many brokers, but I maintain that, so far as the family doctor business is concerned, the broker has been a bit more sympathetic than the bank.

Now, if you had these rigid margin requirements, we could not have done a thing for that woman. We could not have taken a bit of chance. Knowing her family as I do, and knowing her problem, and knowing that she will, within a week or two, or something like that, put that account in shape, and that if she doesn't, the man who asked me to take it over will do it for her-her brother-in-law-I did not hesitate.

The stock exchange requires, under the rules its business conduct committee administers, that a minimum shall be maintained at all times, but they obviously are in a position to exercise some degree of flexibility. If we had been operating under a statutory rule, we could not have taken care of that account.

Mr. KENNEY. What do you say is the rule of the stock exchange with respect to margin?

Mr. PIERCE. Fifty percent or thirty percent of the debit balance, according to the size of the account.

Mr. KENNEY. Would you be violating any rules of the stock exchange in acting as you did in that case?

Mr. PIERCE. Yes, sir. Just therein lies the advantage of a personal flexible management.

Mr. KENNEY. In other words, that departure from the rules is in the nature of a white lie or minor infraction?

Mr. PIERCE. I would not say that at all. Representatives of the business conduct committee visit our office two or three times a year and go carefully over every account we have.

Mr. KENNEY. What do they say when thay meet a situation like that?

Mr. PIERCE. They would say that we did just right, "Pierce, get the account in shape just as soon as you can.'

Now, whatever of risk we are taking on that account, it could not amount to more than about $8,000. And the action certainly, as the account stood, was justified. Whatever of temporary risk was involved, the capital of our firm was not jeopardized in any real degree. The worst that could have happened, if the account turned out to be worthless, would have been that we would have lost $8,000, provided somebody did not make good. If the client did not made good, I am quite sure her brother-in-law would. He has been on our books ever since 1918 and is a man of large means.

Mr. KENNEY. What would you do if the client did not make good? Mr. PIERCE. I should go to my friend, her brother-in-law.

Mr. KENNEY. But you might be compelled to go to your lawyer? Mr. PIERCE. No, sir; in this instance I would not have to go to my lawyer.

As a matter of fact, many brokers know their customers as well as the family doctor knows his patients.

Mr. KENNEY. But you sometimes fall out over debit balances. Mr. PIERCE. Sometimes there are good reasons. If there are no good reasons, we do not generally fall out.

Now, the business conduct committee would never permit the accumulation of any considerable aggregate of such uncovered debits. I am not speaking as a representative of the exchange. There is one here. But I think Mr. Mason will agree with me on that argument, and I cannot see why we are not serving the public, at no material risk to ourselves, if we take care of a case like that, which we could not do if we were operating under a statutory regulation. That is, Federal statute regulation.

Mr. KENNEY. Under this bill, what would happen?

Mr. PIERCE. Well, under this bill, after it had been running 3 months, I would say that, selfishly, I could be very happy. It would probably put 85 percent of my competitors out of business, and if I were not outside of Leavenworth, or Atlanta, for having told somebody that Canadian Pacific paid a one-dollar-and-fifty-cent dividend instead of saying a dollar and a half, I would be sitting pretty.

Mr. KENNEY. Would this bill tend to keep you in Atlanta?
Mr. PIERCE. Would it keep me there?

Mr. KENNEY. Would it tend to keep you there?

Mr. PIERCE. I would rather be there than anywhere else I know of, if this bill goes through. It would mean that I would be sure of three meals a day.

Mr. HUDDLESTON. Mr. Chairman

The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. Mr. Pierce, do you understand that if you had carried out that transaction with this bill in effect, you would have

been subject to the penalties provided by section 24 of the bill, on page 43?

Mr. PIERCE. Yes; I think I would have to pay a $25,000 fine, if I had that much left.

Mr. HUDDLESTON. And suffer an imprisonment of not more than 10 years?

Mr. PIERCE. I probably could stand that better than I could the $25,000 if the bill were in effect.

Mr. LEA. Mr. Chairman

The CHAIRMAN. Mr. Lea.

Mr. LEA. Mr. Pierce, what is your suggestion as to what the rules as to the margin requirement should be?

Mr. PIERCE. I think that could be quite properly left to the New York Stock Exchange. Or there could be, if it were any source of satisfaction to the public or the Government set-up, some official agency which could establish maximum loan values on stocks. I do not mean on individual stocks, save in isolated cases.

In July of 1929, when the market was booming, I sent a message to all our branch offices to the effect that until further notice, we would carry no Chicago Stock Exchange stocks on margin. They were bringing them out at 20, and running them up to 40 or 60 in a few months. When I say "they", I mean the public, and it looked to me like a danger spot.

Next morning at 8 o'clock I was called up by the executive vice president of one of the big Chicago banks, and asked to rescind the rule. I recall that one of the prominent Chicago Stock Exchange members advocated that Pierce be expelled from the exchange.

Two or three times, during 1928 and 1929, we increased our margins on our wire accounts, running them up from 25 gradually to 35 percent, running up our margins gradually on our individual accounts in some cases as high as 60 percent, and in many cases refusing to carry certain stocks altogether.

It is my thought if at that time the stock exchange had adopted the policy of fixing a maximum loan value on stocks as the market progressed, there would have been no such debacle as there was. We were all to blame, the banks, the brokers, the public, everybody.

Mr. LEA. If we were going to establish a regulatory body for the control of exchanges, the rules of course, would have to apply to all of the exchanges of the country; that is, the authority of the regulatory body would necessarily have to be defined some place in this law. Now, what kind of authority should the regulatory body have, in your judgment, as to margin requirements?

Mr. PIERCE. You know, sir, attempting to fix a margin schedule to apply all over the country, is a good deal like telling the Interstate Commerce Commission to bring into being a law that would compel an engineer seeing an open switch ahead, to pick up a manual and see who to telephone to to find out what he should do. I am not attempting to be funny. That is, to my knowledge, a perfect parallel. A condition might obtain in a certain stock that warranted a margin of 100 percent, which would not mean margin, that is, that warranted refusing to permit members to carry it at all.

Mr. LEA. Now, those variable conditions might require a flexible margin requirement, but, nevertheless, would it not be necessary to, for the regulatory body to have power to make such provisions?