Mr. KENNEY. As a broker, would you take a man's account on that basis? Let us say that a man wanted to buy $10,000 worth of stock, would you accept his $6,000?

Mr. O'BRIEN. Certainly.

Mr. KENNEY. And the next day if the price of the stock went down a point, under this law, he would be immediately sold out?

Mr. O'BRIEN. You would not sell it all out.

Mr. KENNEY. Would you not have to sell it out?

Mr. O'BRIEN. No.

Mr. KENNEY. Or violate the law?

Mr. O'BRIEN. He would not have to sell it all out. All you would have to have would be 60 percent of the account.

Mr. KENNEY. Suppose that the customer did not want to sell. Mr. O'BRIEN. Then he would have to protect, or we, under this act, as I read it, would have to bring his account to a 60 percent basis. Mr. KENNEY. Now, under the act, or even under the 30-percent rule, the trader is trading against the legal margin, rather than the market price of the stock; is not that so?

Mr. O'BRIEN. I do not understand that question. I wish you would repeat it.

Mr. KENNEY. All right. A man buys $10,000 worth of stock.
Mr. O'BRIEN. Yes.

Mr. KENNEY. He puts up $6,000 and gets credit somewhere else for the balance, which is carried on the margin.

Mr. O'BRIEN. Yes.

Mr. KENNEY. Now, he has an equity of $6,000 in that stock which ought to entitle him to carry that stock some distance, at any rate; but even though he has $6,000 up, under this section, with such a margin requirement, if the stock fell a point, he would be required to unload, even thought the market price of the stock were still up around 90 and he had $6,000 in the stock; is not that so?

Mr. O'BRIEN. Well, he could not have $6,000 in the stock if the price had declined, if he put up $6,000.

Mr. KENNEY. Suppose it fell 5 points, he would have $5,500 in there and yet he would be sold out, would he not?

Mr. O'BRIEN. In using the term "sold out", you mean all or in what manner?

Mr. KENNEY. Would his broker carry him?

Mr. O'BRIEN. Under this law, he could not carry him except under a 60-percent basis, so what he would have to do, unless the customer put up additional money would be to bring that up to a 60percent basis. It would be liquid enough if the securities were put on 60.

Mr. KENNEY. In other words, nobody would ever be safe unless he put up about 85 percent of the stock; is not that so, under that law?

Mr. O'BRIEN. No, sir.

Mr. KENNEY. It is not so?

Mr. O'BRIEN. I do not think so.

Mr. KENNEY. Well, how much do you say that he would have to put up over the legal margin?

Mr. O'BRIEN. Sixty percent.

Mr. KENNEY. That does not protect him. You say that you have got to sell a part of his stock if the market goes down.

Mr. O'BRIEN. I know; but when a man buys on the margin, he expects that he has got to keep that margin good, whether a 60-percent or a 30-percent margin.

Mr. KENNEY. In other words, you simply mean that if a man puts up $6,000 and the stock goes 2 points down, tomorrow he has got to come back and put up $200 more?

Mr. O'BRIEN. Under the law.

Mr. KENNEY. And keep coming back?

Mr. O'BRIEN. Under the law.

Mr. KENNEY. If a man wanted to buy stocks and did not want to be troubled to keep coming back with more margin every time the market fell 2 or 3 points, he would have to put up a margin considerably in excess of 60 percent?

Mr. O'BRIEN. That is correct, and we believe-

Mr. KENNEY. Does it not occur to you that he might have to go as high as 85 percent?

Mr. O'BRIEN. He could go to whatever he thought necessary, whatever his judgment was as to what was necessary to prevent his receiving a call. I would not want to guess as to that.

Mr. KENNEY. Would there not be a greater danger under that rule than where no margin was required, because he would be gambling against this margin requirement every day.

Mr. O'BRIEN. I believe that.

That is the objection we have to that, it has no flexibility, and we think it is excessive.

Mr. KENNEY. And the stock might go down 2 or 3 points, and you would call upon him immediately.

Mr. O'BRIEN. Yes.

Mr. KENNEY. In any part of the day?

Mr. O'BRIEN. Any part of the day. However, I do not think that it would be figured that close. I think that you would take the close of the day as the basis for your 60 percent, rather than the fluctuations previously.

Mr. BULWINKLE. Mr. Chairman

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Mr. O'Brien, in the last part of your statement

you say:

Let the Government assist us by legislation to prohibit unethical practices and control unethical individuals whom we cannot reach.

What unethical practices now continue on any stock exchange? Mr. O'BRIEN. That is just what I was talking about a while ago. There is a difference of opinion as to what is unethical, probably. Mr. BULWINKLE. Well then, let me get down to that. What unethical practices continue on your own exchange?

Mr. O'BRIEN. Personally, we think we are amply covered.

Mr. BULWINKLE. Then, do you know of any unethical practices that continue on any exchange?

Mr. O'BRIEN. No, sir; no; I would not say that I do.

Mr. BULWINKLE. Well, not knowing of that, but just having an idea of it, what legislation would you have the Congress to enact to prohibit unethical practices?

Mr. O'BRIEN. That is rather a difficult question.

Now, if we could put in detail what are unethical practices and who practices those things, what consists of an unethical practice, we

would have some basis to go on. But, on this side, one group says this is unethical, and wrong, and we say it is not unethical.

Mr. BULWINKLE. I know, Mr. O'Brien, but I am sitting here as a member of this committee not knowing a great deal about the stock exchanges. You are an expert, so far as this committee is concerned, and you make the direct statement that you want legislation enacted to prohibit unethical practices.

Now, I am getting at this: What legislation do you want?

Mr. O'BRIEN. Well, I would say, Mr. Bulwinkle, that we would first have to decide among the committee and whoever is appointed to take it over, what are the unethical practices. It is evident that legislation is deemed necessary. If anybody would ask me what is wrong with our exchanges, I naturally would tell them I do not think anything is wrong. We have set up rules. We penalize our members. And, there are lots of practices that are criticized, which happen on the outside of the exchanges.

Mr. BULWINKLE. All right. Let us leave the practices a minute and come down to the individual.

Mr. O'BRIEN. Yes.

Mr. BULWINKLE. You stated that you wanted legislation to control unethical individuals whom you could not reach.

Mr. O'BRIEN. Yes, sir.

Mr. BULWINKLE. What do you mean by that statement?

Mr. OB'RIEN. I mean by that statement, the people that I referred to a while ago as the fellows who are telephone operators, that is, the people using the telephone to solicit, not members of the exchange, and who use our exchange to our detriment. We cannot reach them. We have no authority over them.

Mr. BULWINKLE. What sort of legislation have you in mind to help control those unethical individuals?

Mr. O'BRIEN. Well, I am not enough of a lawyer to say that, sir. I would like to tell you so. I would like to be able to draft an answer to that, but I really cannot do it. I think it can be done, but it can be done by your own minds, which are legal, and not by mine.

Mr. BULWINKLE. Well, I know, but we should have the information from you, when you make the statement.

Mr. O'BRIEN. Now, so far as I am concerned, I would be very glad to discuss it with you and perhaps get a lot of information myself. Sometimes we get in a rut in our business and get the idea that maybe we are all right, and we are partly wrong, and by discussing it with people outside we come to a better conclusion.

Mr. BULWINKLE. Well now, I would suggest this in order not to take the time of the committee, that if you have any recommendations to make along this line, that is contained in that sentence, that you put them into the record with your remarks.

Mr. O'BRIEN. I will be glad to consider it.

The CHAIRMAN. We are very much obliged to you, Mr. O'Brien. The next witness is Mr. Kinnicutt, from a committee of New York investment market or stock-exchange firms.

STATEMENT OF G. HERMANN KINNICUTT, REPRESENTING THE INVESTMENT HOUSE GROUP, DEALERS, BROKERS, AND UNDERWRITERS, NEW YORK, N.Y.

Mr. KINNICUTT. Mr. Chairman and members of the committee. I am simply the spokesman for 18 investment houses, a partner of one of them, the houses being Chas. D. Barney & Co., Callaway, Fish & Co., Cassatt & Co., Clark, Dodge & Co., Field, Glore & Co., Hallgarten & Co., Hemphill, Noyes & Co., A. Iselin & Co., Kidder, Peabody & Co., Ladenburg, Thalmann & Co., Laurence M. Marks & Co., G. M. P. Murphy & Co., Riter & Co., L. F. Rothschild & Co., Edward B. Smith & Co., Spencer Trask & Co., Tucker, Anthony & Co., White, Weld & Co.

The CHAIRMAN. All New York companies?

Mr. KINNICUTT. All New York firms.

The CHAIRMAN. Are you the gentleman that represents the associations that Mr. Hathaway spoke to me about?

Mr. KINNICUTT. Mr. Hathaway is a partner of one of the firms in this group. I am only the official spokesman for these 18 firms, and what I am about to say is in no sense a legal argument. It is simply a statement written without the aid or advice of any counsel, and without consultation of any other group, by a person who has never been in politics, who knows nothing of them, and who has never appeared before a congressional committee before.

May I say in advance that the time allotted to us is very short and if it is the pleasure of the committee, I would first like to complete our statement and may I also say that while the first part contains some objections to certain clauses of the bill we also have some constructive suggestions to offer. If there is not sufficient time for any questions at this present hearing, if your committee wants to ask any questions, we are always available at the convenience of any member of this committee to answer any further questions to the best of our ability and there are several of my associates here today of the group for which I am speaking.

We are permitted to appear here to express, so far as we can, the views of a group of investment firms who are all members of one or more securities exchanges, who are all members of the Investment Bankers Association, who will all come under the Investment Bankers code now in process of completion. We do a commission business, we act as dealers in investment securities, and at times we act as underwriters of new issues. In the business of no member of this group is any one of these three activities a dominating factor, and our business is approximately divided between these three functions. We do not claim that there are no dishonest persons in the securities business. We do not claim that at times unsound practices may not be used. We do not claim that no improvements can be made. We are all about to subject ourselves to the very stringent detailed requirements of the N.R.A. code for Investment Bankers, which, as a matter of fact, go very far toward eliminating many of the dangers of the unfair or unsound practices this bill aims to cure. We do claim however, that with very rare exceptions the security dealers of this country are honest and maintain standards of practice at least as high as those in other industries, and we definitely believe as to certain sections of this bill that the effort to cure a lesser evil will

create a greater one. In a very different field, the eighteenth amendment honestly sought to cure certain evils and the result we all know. The avowed purposes of this bill are in the interests of the public welfare and the protection of the investor, and we believe there are certain sections of it that will not only fail to accomplish these purposes, but will have a contrary effect. Any clause that merely does damage yet fails to accomplish the desired end, you will not wish to make law.

As member of one or more exchanges, we are, of course, vitally interested in all that affects their activities. What hurts them hurts us. There are a number of clauses in this bill that in our opinion are unwise, as, for example, its deflationary aspects, its effect on corporations and their security holders, which either will not or cannot register on a security exchange, and the destruction of the free market which now exists for these securities, and lastly that the bill goes far beyond its nominal purposes. There are, however, certain specific clauses which are of particular concern to us. In the economy of time, I shall confine myself largely to these, because as a group we know more about them and how they are likely to work. They affect us and they also affect very many others. I mean by "us", the many broker, dealer, and underwriter groups throughout the country, of which we are but a part. They concern us however, more vitally than they do firms engaged exclusively in a commission business.

We wish to demonstrate in the first place that the business of the distributor of securities acting as a dealer and an underwriter, is not only to the benefit of the investor, but also an absolutely necessary function in the financial system of this country and is essential for the economic welfare of the country; particularly so during this difficult period of recovery. If this can be shown, and at the same time it can be demonstrated that this bill will greatly hurt or largely destroy the ability of this group to function, when they are more needed than ever, we cannot be accused of speaking purely from motives of self-interest.

As to the necessity for the dealer; it is an undisputed fact that for many years a very large proportion-probably as much as 90 percent of all the high-grade investment securities of this country have been placed by dealers in every State of the Union, and in their capacity as dealers, though at the same time in other directions they act as brokers.

It is also a safe statement, and one which we wish to emphasize, that by and large the most responsible of these dealers are members of some exchange and each one in his own community does a substantial commission business.

Thirdly, it seems undisputed that an essential and absolutely necessary part of the recovery program is to transfer from the Government to private capital the heavy burden of financing industry which has taken on such staggering proportions of late. The Reconstruction Finance Corporation is today the biggest lender in this country to practically every form of industry-not from choice but from necessity and to avoid a greater calamity. These loans must ultimately be absorbed by private capital-by savings banks, insurance companies, estates, and individuals, as earning power is restored and savings are augmented by means of these very same loans, that the R.F.C. is making.