Before elaborating further on our unlisted securities, I desire to call the attention of the committee to the fact that there are dealt in on the New York Curb Exchange a great number of so-called "American Depositary Receipts" for shares of stock in foreign companies. There are outstanding upward of 7,022,785 of such receipts. In the year 1933 nearly 4,414,953 shares represented by such receipts. were dealt in on our exchange. Each of these stocks is listed on the London, Amesterdam, Paris, Berlin, or Milan Stock Exchange. It is inconceivable that the companies whose stocks are thus held in the form of receipts in this country would file the information required by the bill, or any information. Corporate reports and information are on file with the exchange as well as with the American depositary. In foreign bonds in 1933 upward of 74 million dollars worth were dealt in on our exchange. It would hardly be the purpose of Congress to force such securities from dealings on an exchange which represents the market therefor and to throw the holders of the American receipts and bonds into such outside market as might develop. It is respectfully submitted, accordingly, that in any event an exception should be made for such receipts for foreign stocks and for such foreign bonds as may be already outstanding.

I shall now read such paragraphs from my memorandum as will bring to the committee, I hope, a general understanding of unlisted exchange markets.

Mr. PETTENGILL. Do you not think the American public is entitled to a little better information for its protection than it has had with reference to dealing in foreign bonds and stocks?

Mr. GRUBB. Well, we have gone into that very thoroughly, and I think you will see at the bottom of their unlisted, our requirements for unlisted trading, the points that you bring up with reference to the foreign bonds and securities, those stocks, I believe, are all formally listed on all foreign exchanges.

Mr. PETTENGILL. Well, I do not want to interrupt you further, except that your argument is that you should do nothing with reference to foreign stocks or bonds. But my observation is that the American public has taken a sufficient burning in those matters, and ought not to have to again, and are entitled to a certain amount of honest information and protection which ought to be given to them. I cannot yield to you on the point that they are not entitled to any protection.

Mr. GRUBB. Well, there is one point, sir; that I might bring out. I believe that there is one explanation. When England went off of the gold basis, we had certain foreign securities on our exchange. Of course, when they went off of the gold basis, since they have gone off of the gold basis we have not listed any securities since that time.

Another point is that foreign securities in this country are not put on here in this country until fully, as we think, distributed among the investors in this country before they are listed.

Mr. PETTENGILL. How is distribution made in this country?
Mr. GRUBB. Not until they are thouroughly distributed.

Mr. PETTENGILL. By investment houses, before they get on the curb?

Mr. GRUBB. Yes, sir.

Mr. PETTENGILL. The curb does not help in the distribution?

Mr. GRUBB. Only when we see the possibility that a market can arise and should be there, for the purpose of the investing public. Mr. WADSWORTH. Do these foreign securities include foreign government and municipal securities?

Mr. GRUBB. Yes. I think that the answer to that is yes.

Mr. WADSWORTH. Like the city of Bordeaux or the city of Aisnes? Mr. GRUBB. They are on the stock exchange; most of those are on the stock exchange.

Mr. WADSWORTH. They are on the stock exchange?

Mr. GRUBB. Yes, sir.

Mr. WADSWORTH. But you do include municipal issues?

Mr. GRUBB. I think so, yes; some.

Mr. HUDDLESTON. May I ask, Did you say that all securities traded in on the exchange must be listed?

Mr. GRUBB. Yes, sir. One form of the securities is formally listed, according to our requirements, and our requirements in that respect are very similar to those of the stock exchange.

Mr. HUDDLESTON. You say one form?

Mr. GRUBB. Yes. Another form is what we call unlisted securities, which I explain very fully in this brief that I am coming to.

The question is often asked, "What are 'unlisted securities'; what does it mean when a security is 'admitted to unlisted trading'?" The purpose of this review is to attempt to answer these questions in an endeavor to bring about a more accurate understanding of certain of the functions of the New York Curb Exchange and particularly of its so-called "unlisted department."

The officers and governors of the exchange are frequently surprised at the amount of misinformation or the entire lack of any information which exists with respect to this important department. This is not the result of anything inherently difficult about the unlisted department or of any concealment of the facts by the exchange; but is due, so it is believed, in part, to a general impression on the part of the public that there is something mysterious in the technical machinery and operation of security markets, and, in part, to lack of interest, particularly in good times.

Of late, much criticism has been leveled at security markets, including markets on the recognized exchanges. No doubt some of this has been justified, although, so far as affects the exchanges, it may be noted that most of the charges, in connection with recent disclosures have been against outsiders who have attempted to misuse exchange or other markets, rather than against the exchanges or their members as such. The exchanges have made mistakes, but it is a matter of comment that with all the evidence of dishonesty or of overreaching disclosed, no proof has been brought forth of misconduct by the exchanges themselves.

This exchange, in common with others, has been criticized for certain practices; but, for the most part, these criticisms apply to alleged manipulation, pools, and trading practices generally and are not affected by any differences between "fully" listed and "unlisted" securities. So far as the unlisted department or securities therein is concerned, practically no criticism has come from the investing public. The objections received respecting this department, very generally, have been from competitor markets, or, in some instances, from

officials of certain companies whose securities have been admitted to unlisted trading.

These objections are considered in this review, the primary purpose of which, however, is to state the origin, purpose and activities of the unlisted department and to show the need which it fulfills.

Mr. Chairman, with your permission, I am going to skip this paragraph on page 2, and all of page 3, down to the second paragraph on page 4, because it is merely a repetition of what I have already said in the first brief.

The government of the exchange is vested in a board of gover

nors

The CHAIRMAN. I want to call your attention to the fact that you have 1 hour and 45 minutes, and if you undertake to read all of this paper, I doubt whether you will get through, if the members want to ask any questions; but you may proceed in your own way.

Mr. GRUBB. I am sorry, but this is all very vital to us, sir, and I would like to proceed as far as I can go.

Mr. HUDDLESTON. May I say this in that connection?

Mr. GRUBB. Yes, sir.

Mr. HUDDLESTON. You are reading so rapidly that we do not follow you.

Mr. GRUBB. I will endeavor to read more slowly, sir.

The officers of the exchange consist of a president, a vice president, and a treasurer, each of whom must be a member of the board of governors and a secretary, a first assistant secretary and such other assistant secretaries as the board of governors may see fit to appoint. The work of the exchange is carried on under the supervision of 14 standing committees of the board of governors and by two subsidiaries, the New York Curb Exchange Realty Associates, Inc., and New York Curb Exchange Securities Clearing Corporation. Among the standing committees is the committee on listing, consisting of 20 members. The work of this important committee in turn is divided among 5 subcommittees, consisting of 5 members each, as follows: Special subcommittee on foreign securities, special subcommittee on formal listing, special subcommittee on investment trusts, special subcommittee on unlisted securities, and special subcommittee on bonds.

The exchange maintains a listing department under the supervision of the secretary of the exchange and two assistant secretaries. This department has a staff of employees whose duty it is, among other things, to assist the committee on listing and the subcommittees in the examination of applications for admission of securities to "full" or formal listing and to "unlisted" trading. The department also has the assistance of a firm of certified public accountants.

As heretofore indicated, two major classes of securities are traded in upon the exchange-"fully listed" securities, which are admitted. upon the application of the companies issuing the same, and "unlisted" securities, which are admitted upon the application of a regular member of the exchange; himself a stockholder of the company in question.

It is not the intention here to consider at any length the securities falling in the first category. An application of a company for formal listing is accompanied by a full disclosure, over the official signature of the company, of facts deemed pertinent for a study of the securities

sought to be fully listed. The requirements for full listing call for substantially all the information specified in the requirements of the New York Stock Exchange.

The New York Curb Exchange is, generally speaking, a primary market in respect to its "fully" listed securities. These securities largely represent new companies in which there is the hope, based upon the nature of the enterprise, the personnel of its officers and its capital structure, of successful development.

The so-called "unlisted securities" with which this review deals primarily are admitted upon an entirely different theory and fulfill a somewhat different economic need. Such securities are never those of new or newly formed companies, but are of companies which have been in existence for a substantial number of years and with respect to which there exists a public record of their history and financial condition and a public market.

Technically speaking, "unlisted securities" are those which are not listed upon any exchange. As pointed out by Mr. J. Edward Meeker in his instructive book, The Work of the New York Stock Exchange, many brokerage and investment firms operate extensive "unlisted departments", dealing in securities whose only market is "over-the-counter" in New York or by arbitrage in outlying cities. The number of securities traded in in this way, or in less organized markets, is difficult to estimate, but it is safe to say that the volume of trading in securities off or outside any exchange has been and still is very considerable.

All securities traded in upon the New York Curb Exchange are officially listed by sanction of the governing authorities whether traded in "fully listed" or so-called "unlisted." In the case of "fully listed" securities, the admission to the list is upon the application of the company issuing the same, while in the case of "unlisted" securities, the listing is upon the application of a regular member of the exchange.

Even in the years when the members of the New York Curb Exchange were still functioning on Broad Street, or on "the curb", the practice prevailed of admitting to dealing; that is, to unlisted trading, securities for which a market existed in New York other than on the New York Stock Exchange. There were then and always have been sound securities in which an active market existed in New York which were not, for one reason or another, listed upon the New York Stock Exchange. These were, generally speaking, issues which were all distributed. Market quotations accordingly were, as a rule, immaterial to issuing companies and there existed no reason for the company itself ot incur the trouble and expense of obtaining formal listing. There were, however, a public ownership and interest and the need to owners of a market. Such securities, therefore, came to be traded in upon the curb exchange which became even then the recognized market for the securities dealt in there.

At the present time 355 stocks and 19 bonds are fully listed and 1,069 stocks and 620 bonds are traded in "unlisted" upon the New York Curb Exchange. The trading in these latter securities constitutes the most important business of the exchange.

The name "unlisted securities" is somewhat misleading as from it many persons imply that the securities referred to are selected without any care or investigation whatsoever. The requirements

for admission to unlisted trading will be referred to hereafter but at this point it is desired to call attention to the fact that, as a whole, this group of securities compares favorably with those listed upon any other exchange. The bond list, particularly, which is almost entirely made up of unlisted bonds, is deserving of critical comparison. On July 1, 1929, out of a total number of 476 bond issues admitted to unlisted trading, three issues were in default on interest payments. On November 1, 1933, out of a total of 643 bond issues admitted to unlisted trading, only 83 issues (including 18 certificates of deposit representing underlying bond issues in default) were in default. A study has been made of the stocks which were admitted to unlisted trading on July 1, 1929. At that time there were 1,509 issues, excluding bonds admitted to unlisted trading. Of these 981, or 65 percent, were dividend-paying. On December 31, 1933, there were 1,144 stocks admitted to unlisted trading of which 477 were dividendpaying, or 42 percent.

The major market in so-called "unlisted securities" which exists today upon the New York Curb Exchange came into being for the most part, not because of any artificial stimulation, but because a real need existed for such a market. Indeed, the tremendous development of the New York Curb Exchange would have been impossible had the need not existed and if the need had not adequately been fulfilled by the service rendered by this market. No doubt this growth was aided by the fortunate location of the exchange in the largest financial center of the country and by the extraordinary growth and expansion of business activity which took place in the years following the World War. But more important than all else was the fact that there was a need for such a market which was met by the facilities afforded by this exchange.

The facilities of the New York Curb Exchange are exceeded only by those of the New York Stock Exchange itself. The quarters occupied by the exchange are modern in every particular. Its trading room, which extends five stories in height and which has an area of 20,023 square feet without a supporting column to break up the space, is one of the largest in the world. The ticker service, equipped with modern high-speed tickers, is Nation-wide and its Clearing Corporation, modeled on that of the New York Stock Exchange, provides the latest and most efficient facilities for the clearing and settlement of security transactions. Moreover, the exchange has had the cooperation of the New York Clearing House banks, many of which make their funds available at the money post on the floor of the exchange and of the financial community in general, which has come to recognize the substantial position it occupies in our national

economy.

As stated earlier, the securities admitted to "unlisted trading" are seasoned securities; that is to say, they are securities of companies which, for the most part, have been in existence for a substantial number of years and whose financial career is a matter of public record. It is not pretended that the information available to the exchange is as detailed or complete as the information obtained in the case of fully listed securities.

Mr. HUDDLESTON. Mr. Grubb, may I interrupt to get a situation clear?

Mr. GRUBB. Yes, sir.