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In order to live, however, he has got to have properly constituted departments in his business to handle the various kinds of fundamental investments which are desirable.

Therefore, in my own business, we felt it necessary to create a municipal department, a stock department, a corporation-bond department; and when I first went downtown-it sounds an awful long while ago—my firm was dealing in all of those things, and also commercial paper. It has been so far back as that. Now, that gives you an idea of what I have in mind by saying at the beginning of this thing, testing markets, in wide distributions, is what I think is the desirable thing to a well-rounded investment dealer's advice to his customer.

Now, in a bank, coming back to what you said, in a bank, I thinkI do not like to hit anybody-but, I think that the recommendation of securities to customers, unless the bank is marvelously well equipped to do it, is an excrescence on the banking business. We know, however, that in foreign countries it is a regular and usual thing, and yesterday, in the Senate hearing, I heard it suggested by one of the members of the Senate committee, that the small man, man of limited means, who seeks to speculate, ought to do it through his bank.

I am not in favor of that, unless the bank has as its first business giving investment service, and I do not believe that any bank can be run on that basis.

From our view, our first concern is to see that the customers are well handled, if for no other reason that if they are not, we will lose their business, and that follows what you asked.

. Mr. PETTENGILL. I want to pursue that with one more question.

You have impressed me very splendidly, sir, and I am asking you for a very honest answer to this question.

I see the distinction that you make between the dealer and the banker, that the banker does not have the wide background or the experience that the broker does, and so forth. But still is not the dealer, who has in his portfolio securities that he wishes he had not bought, is not he under the same temptation to deal those out to his customers who come to him for advice as a banker would be?

Now, that is a question that I would like to have answered.

Mr. NEWBOLD. Well, I must say I had not thought of this line of questioning, when I came here, about what a bank could do in connection with these investments. I had made my mind up years ago, but I will come to this

Mr. PETTENGILL. Everybody pursues his selfish interest in this world within certain limits.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. Here is a dealer who bought a lot of securities, 30 days ago, or 60 days ago, and they are beginning to turn a little sour and he wishes he had not bought them.

Now, what is his temptation; actuated by the ordinary human motive, what would he do except push them out on his customers?

Mr. NEWBOLD. I want to ask you, if I may

Mr. PETTENGILL (continuing). Unless he is a man of the highest degree of honor and will disclose all facts known to him to his customers.

Mr. NEWBOLD. I want to say here and now that I think the seasoned investment dealer, one who has been doing it for a time, is high-minded. I really think that to be so, and I have met a very, very small percentage of those who were not actuated by highmindedness; but, let us go back to this thing: You say, or you propose a problem, where a man, or a firm, has got some stocks that he bought.

Mr. PETTENGILL. It happens, does it not?

Mr. NEWBOLD. It may be happening in my office at this very moment. I do not know. I am not there to watch them.

But, supposing he has these things.

Mr. PETTENGILL. All right; what would he do with them? Now, supposing that he has no way of disposing of these things, except to a customer; the only way that he can get rid of them is to a customer, or to another dealer. Is not the temptation going to be strong for him to pass them on to a customer?

Mr. NEWBOLD. Given that there is that temptation, which I say I think is much exaggerated in the public mind, is he not going to have a greater temptation to do that if he has nothing else that he can sell that man, out of which he can make a profit?

Mr. PETTENGILL. Yes.

Mr. NEWBOLD. In my business, I say, if I get stuck, I do not have to sell the thing that I am stuck with I can keep that. I never bought it without believing that it had merit, and that at some time I would get out of it. I can switch and sell municipal bonds, or other bonds. I happen to have moderately adequate capital for my business. That is, as compared with a very small business, where the capital is restricted, and that is something, gentlemen, I wish to really dwell upon that if the dealers have to confine themselves to owned securities the list of offerings that they can put before their customer will be so inadequate that the investor is going to suffer. The dealer cannot list more than 25 or 30 items if he has a limited capital.

You are going to be driven to make your customers select from that; that is, the customer is going to suffer. Mr. PETTENGILL. Going to suffer?

Mr. NEWBOLD. Going to suffer. If, on the contrary you can buy a half a dozen different types, then you can have them, and if on examination of your list, or his list, you find that he has those things, or something like them, in the same locality, same neighborhood, subject to the same business conditions or trade conditions, or something of that kind, then if you happen to be a broker, you can say, “Why don't you buy A. T. & T. bonds or stock? You can get those on the exchange and keep your money in that particular stock for 6 or 8 months, until things are more satisfactory or until we find something that we think is absolutely appropriate for you."

If you are a broker, you can do that. You can engage in commercial business, but I maintain if you are limited, if you are only a broker, you are limited to what a broker can do, and you lose sight of the investor's necessities in the permanent value. You tell him something as a broker which has a temporary or evanesecnt value, because that is what is identified in this country with brokerage commission businesses. I do not know whether I have made it clear.

Mr. PETTENGILL. I think that you have quite answered my question, even with respect to a house that has a large capital, and a large diversification.

Let us assume that situation, and let us assume that even a house has bought some securities which it wishes it had not bought. What is it going to do with them?

Mr. NEWBOLD. Well, in the first place, one marks it down on one's books to what is one of two things, either what you believe the intrinsic value of the security is, and which it will realize when sold perhaps a year from now, or else if that is difficult, you mark it down to a market price which is established by what somebody else in the business will give you, another dealer will give you, and you sell it.

Mr. PETTENGILL. You sell it.
Mr. NEWBOLD. You sell it, if you think you should.
Mr. PETTENGILL. Who do you sell it to?
Mr. NEWBOLD. To another dealer.
Mr. PETTENGILL. Or, your customer?

Mr. NEWBOLD. The best thing I ever did in my life, was once we had to lighten our load. This was long before the war. My partners and I decided that we would mark everything down and take quite a considerable loss to well, a little bit below what the market price was, and then I said, “Gentlemen, I do not think it is fair that just because we have customers they should be deprived of what we consider is a bargain sale, and before we sell these things to dealers I want to call up our customers and offer these bonds to them.” Well, they took them, and they all made a great deal of money. They were bonds, very high-grade bonds. It was just a case where we had to lighten.

Now, that is what happens. You either sell them to your customers when you think

you

should sell to them. Of course, you cannot sell to your customers at a higher price than you can sell them on the outside.

I do not think it is necessary for me to dwell on that. It is the market price that is the thing that you determine is your price to your customers. Of course, if it is an obscure security, it is often hard to find a market price, and in that obscurity, I think, lie a good many of the things that seem to be crooked on the part of the dealer. It is difficult, sometimes, to express it; but I am answering you. When you sell, first you mark down to ascertain your losses, and you decide then whether you are financially able to carry that, and not fool yourself at all about the value. You have got to mark it down. You have the market price. Your accounts are all right to be carried on until you decide whether you will sell it to the world at large, through dealers, or to your customers, on the basis that it is a bargain; but at the price that you could sell it elsewhere.

Does that answer that? You asked me where the things were sold.
Mr. PETTENGILL. Yes.
Mr. MERRITT. Mr. Chairman-
The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. If you separate the functions of broker and dealer, so that the dealer cannot act as broker, you increase the temptation of the dealer to sell what he owns?

Mr. NEWBOLD. You have stated just what I meant to say, sir. Now, I would say, Mr. Merritt

Mr. PETTENGILL. Excuse me, right there.
Mr. NEWBOLD. Yes.

Mr. PETTENGILL. When a man is acting only as a dealer with customers in the transactions, then they deal as two principals at arm's length, I would say.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. But when the relationship of broker and customer, principal, and agent lasting over a period of months or years is established

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. Then, there is a fiduciary relationship that creeps in between the two.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. A trust relationship, and it seems to me then that the situation is a little different than it would be in the case of a man who has something to sell like a hardware merchant and his customer.

Now, when people go to banks, and they have got a little money to invest, they are not dealing at arm's length. They think that the bank is giving them disinterested advice, in a quasi-fiduciary capacity.

Mr. NEWBOLD. Could I ask you a question?
Mr. PETTENGILL. Yes, sir.

Mr. NEWBOLD. What could be done in a situation of this kind: A man telephones, a regular customer, an individual, telephones and says, “I have got some money to invest and want you to make some suggestions." I get out his list and look over it and find that possibly at this juncture, in view of his list, that he ought to buy, we will say, a second-class railroad bond, or high-grade railroad bonds, which are going up:

I find he has got enough of them. I think, and I hope you believe it, that it is not until then that I do look over my list as to what we have to sell, and to find out whether we happen to have anything of what I think that he should have. We will say, suppose, we have.

So then I will call him up and say, "I will come to see you, and talk to you about an investment." I take up two descriptions, two lots of bonds of which I have five each, you see, and we talk it over, and he says, “Well, I like that. I like that.” “I think that that is a very wise thing for me to have.” “I do not like this other one at all. We will throw it out." I say, “All right."

And then he says, "I have got $9,000. I would like to buy nine of these bonds." And then I say, "Oh, I am sorry. We can sell you five, but that is all we can do. That is all we have." Then he says, Won't you go out and buy me four more?” I say, “Oh, no; I cannot do that. I am not allowed to do that, on commission."

Now, I think that does not seem to me quite a reasonable way of conducting a business. It gets even worse if we say that he has $6,750. He says, "I will take those five", and then I find I have", he will say, "37 shares of General Motors. Now, supposing you buy some of those. I want to build that up to 50 shares.” And I say, "No." I say, "I cannot invest your $1,750 in General Motors, because I am not allowed to do that. You will have to go to a broker."

And then I let the customer go to a man who has got very little investment interest, who is interested in trading.

I think that that presents a difficulty in keeping your customers, and if your customers slip away, they will not give the same confidence to several people that they will to one.

Mr. WOLVERTON. Mr. Chairman.
The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. If I understand your position correctly, Mr. Newbold, it is this, that you are not objecting to regulation as pro

vided for, or suggested in the Dickinson report, but you do object to a segregation of the business activities of a broker and a dealer.

Mr. NEWBOLD. I do; yes, sir. I am not, may I say, I am not certain that ways cannot be found to accomplish the purpose; but it will take a great deal of study. We have had it before us in our minds for a long time. It will take a great deal of study to do that. To do it with one blow, I think will produce chaos.

Mr. WOLVERTON. So your remarks are not directed to an objection to regulation, but to segregation.

Mr. NEWBOLD. Yes, sir; that is the thing. We have other individual objections. I have other objections to the bill, and I think that all of us have, but that is not the subject. We did not feel that we knew enough about it to tell you anything about that.

Mr. WOLVERTON. What would be the effect of this section, so far as dealing in municipal bonds is concerned?

Mr. NEWBOLD. If--I do not know how to put that—under segregation it were possible to continue with the active lists of the customers that they have, at present under the dual arrangement, I think it would be possible for dealers to buy all of the municipal bonds as they have in the past, but most of us feel it would be just a question of a little time, perhaps 2 or 3 years, if the dealers stood on their own feet entirely when they would begin to disappear and they are the only people who could really handle municipal bond issues, if we are right in considering that the broker is not investment-minded and, nobody buys municipal bonds who are not genuine investors, because the rate of return is so low, you see.

Mr. WOLVERTON. Of course, those of us who live in the vicinity of Philadelphia and know the high class of firms that have been joined together in the brief that you have presented, can appreciate somewhat your position in the matter, but what this bill is seeking to do is to deal with the situation, that exists where the business is not conducted by people as high minded and honorable and whose integrity is as unquestioned as the firms who are represented in your brief.

Now, what do you feel could or should be done with respect to that situation?

Mr. NEWBOLD. Well, it is difficult to say. I think that the more support and help the investment dealers who have high ideals receive, the more they are strengthened, the more they can bring about any reform that you might seek in their own lines, rather than being punished, innocent and guilty alike, by a legislative fiat.

This code to which reference has been made, which will probably come before the President very shortly, is a source of the deepest gratification to those of us who have been in the business longer, because it gives an opportunity of enforcing standards of performance that we have sought for years, by persuasion and blacklisting of people, if you want to call it that. I mean, refusing to deal with certain people because we did not think that they were straight. That code, I think, will accomplish more good by strengthening the hands of the honorable dealers than you could accomplish by, as I say, a legislative fiat, wiping all out, good and bad alike.

Mr. WOLVERTON. Are you prepared to say on behalf of those for whom you are speaking, whether you approve in a general way, the

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