thought about it. I do not like to make a suggestion in a casual way. I will be very happy to sit down with anybody and express my idea and try to work out something, relating to this provision, or any other provision of the bill.

We would like to have you feel we are here to be helpful, if you want to use us.

Mr. KENNEY. Mr. Chairman

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. You referred to bad practices which the committee had uncovered or found out. Do you know of any other bad practices? Mr. HANCOCK. Yes, sir.

Mr. KENNEY. That have not been uncovered?

Mr. HANCOCK. Yes, sir.

Mr. KENNEY. Are you prepared to state what they are now? Mr. HANCOCK. Well, I am not prepared to do it completely right now. I have and will be very glad to give you a memorandum about them. I have a memorandum but I do not have it here. I can tell you what they relate to and maybe that will cover your point.

I do not know how you happened to overlook the prohibition against bucket shops in the bill.

Mr. MERRITT. Against what?

Mr. HANCOCK. Bucket shops, the most vicious thing that you could find.

Mr. KENNEY. Well, are they not taken care of by State legislation?
Mr. HANCOCK. Effectively?

Mr. KENNEY. They are taken care of by State legislation.
Mr. HANCOCK. I do not think that they are effectively.

Mr. HUDDLESTON. May I ask a question?

Mr. HANCOCK (continuing). May I answer that question, just 1 minute so I will not be diverted then.

Mr. HUDDLESTON. Yes.

Mr. HANCOCK. The problems relating to the manner of presenting the facts to stockholders in annual reports, and in earning statements, surplus accounts, statements of reserve, in that field particularly, there is a chance for a lot of very good work to be done. I do not want to see accounting practices poured into a mold, because they will not stay there; but there are certain things that are done, and are condoned that should not be done, and should not be condoned.

Now, it would be a matter, I am sure, of not less than an hour's discussion, if we went into these problems in detail. I have no desire to take up so much time. I could give you a memorandum of my whole views in the matter and they are all in a memorandum prepared some time ago.

Mr. KENNEY. Would you mention what occurs to you now, give us some idea of it and then afterward you may file your memorandum. Mr. HANCOCK. Yes. I can return to the proposed provisions of the bill now. We are talking about giving out information. Now, suppose that you have a provision requiring audits at the end of the year, requiring the corporations to give all of the facts. Now, at the end of the year, inventories are customarily priced on the basis of cost or market, whichever is lower. In the last year, with advancing commodity prices, every merchandising concern, certainly the well managed ones have a substantial gain in inventory. That is something that is not shown on the balance sheet. Now, under this law,

if the corporation officers give out a balance sheet that is conservative, although they are governed by the best standards today, they are giving out misleading information. I think that the stockholders ought to know what that so-called hidden profit in the inventory is at the end of the year.

The difficulty is that the average investor may assume that the profits for the coming year will be increased thereby-which is erroneous. Yet if he is not informed of the fact he will surely think he was misled.

I think that the accountants' statements ought to reflect the true normal earnings and not fortuitous events of one particular period; and if there is such an event, it ought to be spelled out.

Reserves should not be used to build up earnings, or to deflect them. Any transfers from reserves or to reserves ought to be spelled out in detail.

If you get me started, I will be talking for a week on that question. Mr. KENNEY. Do I understand that there are other bad practices that ought not to exist?

Mr. HANCOCK. There are. There is no mystery about it. Anybody in my business or position can tell it. We fight with them all of the time, and we are making headway, So far as I know, these abuses do not exist generally; but I do not doubt that there are times when they exist.

Mr. HUDDLESTON. Mr. Hancock, you referred to the matter of bucket shops.

Mr. HANCOCK. Yes, sir.

Mr. HUDDLESTON. Subsection (1) of section 8, on page 15, provides that it shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange

"(1) To effect any fictitious transaction in any security registered on a national securities exchange, or any transaction which purports to be a sale of any such security but involves no change in the beneficial ownership thereof;"

Which would seem, so far as these registered securities are concerned, to be a prohibition against bucket shops.

Mr. HANCOCK. A bucket shop takes the order. It does not do anything about it. A bucket shop merely takes the order and does not execute the order. Nothing is done about it.

Mr. HUDDLESTON. Yes.

Mr. HANCOCK. If the market goes down, the customer loses. If the market goes up, the proprietor vanishes.

Mr. HUDDLESTON. Do they not take

Mr. HANCOCK (interposing). That is fictitious, I suppose.

Mr. HUDDLESTON. That is a fictitious transaction.

Mr. HANCOCK. That is not a transaction. There is no transaction at all.

Mr. HUDDLESTON. Any fictitious transaction is no transaction, of course. It does not have a reality.

Mr. HANCOCK. No.

Mr. HUDDLESTON. It occurred to me that that section would apply to them. I confess that I do not know just what a bucket shop is. Mr. HANCOCK. You are lucky, sir.

Mr. HUDDLESTON. I have a vague idea that it is a transaction in which you give an order to a purported broker, and instead of his sending the order in for execution he drops it in a bucket.

Mr. HANCOCK. That is fairly accurate.

Mr. HUDDLESTON. And later on he reports that there was a loss, so that the customer is out of pocket.

Mr. HANCOCK. Yes.

Mr. HUDDLESTON. Well, he could not do that under this provision. Mr. HANCOCK. I doubt that you are right, sir. However, I am willing to defer to you on that.

Mr. HUDDLESTON. I am submitting it, whether it is correct or not. Mr. HANCOCK. Well, there is another question beyond dispute, the matter of accounting, which obviously

Mr. HUDDLESTON. Now, if the bucket shop is a place where as the participants know no real transaction is intended to be consummated and a man is merely betting with a bucket shop operator that the stock will rise on tomorrow's market, this perhaps would no touch that sort of a situation.

Mr. HANCOCK. People do not know what happens in a bucket shop, sir. I only know about it by reputation and what I read in the papers.

There is another matter that seems to me of moment for your consideration and that is the question that flows from what we have been talking about in general terms. It seems to me there is a great risk in trying to build up such a powerful supervisory organization with such tremendous powers as you are giving the Federal Trade Commission in this case. I am not half so much concerned about the character of supervision that they will give it, and give the Securities Act, but I am concerned over this point: We start with the Securities Act of 1933; with this one now, as soon as it becomes a law, the people are going to have a pretty fair warrant for believeing that securities have Government approval.

Mr. PETTENGILL. Have what?

Mr. HANCOCK. Have Government approval. I would not give authority without giving responsibility.

The CHAIRMAN. Just a moment

Mr. HANCOCK (continuing). I doubt that you are going to be able to do so. I doubt you are following the wise course, to give such tremendous power as you propose here to the Federal Trade Commission, because you are going to leave outside of any power of government, any power of law, those major factors that affect securi ies values.

Let me illustrate. I believe that if every stockholder of every company had all of the facts and understood them in all of the registration statements and all of the quarterly reports that you are talking about, you still could not stop fluctuation and violent fluctuation. in securities prices. Every tangible fact that one gets leaves out the major factor in a security value, which is the character of the management, its health, if you will, its ability to immediately meet a situation, the position of the company in the industry, the position of the industry in the country and the position of our country in the world. Those are major factors. The political question vitally affects security values, far more than any set of facts that you can put on paper regarding any business today.

The CHAIRMAN. Mr. Hancock, you stated that you did not think you could escape the belief in the public mind that there was some guaranty about these regulations.

Mr. HANCOCK. I doubt that, sir, and I think that you will be taking the responsibility.

The CHAIRMAN. We had that same question up in 1914 when this committee passed section 20 (a) of the Interstate Commerce Act. Mr. HANCOCK. Yes, sir.

The CHAIRMAN. Not only for the registration of railroad securities, but stating specifically that no security could be issued without the approval of the Interstate Commerce Commission.

Mr. HANCOCK. Right.

The CHAIRMAN. Do you think that the public has taken that as a guaranty?

Mr. HANCOCK. No; I do not, sir. I do not know that they have; today, certainly not.

The CHAIRMAN. And that is more specific, the power of the Interstate Commerce Commission, with reference to the issuance of securities by railroads, certainly goes further than the mere registration of securities with the Federal Trade Commission.

Mr. HANCOCK. Well, I cannot speak with knowledge on that, sir. I mean, on the operations as to railroad securities. But I do say this: You certainly have not prevented fluctuation of railroad securities.

The CHAIRMAN. Oh, no.

Mr. HANCOCK. Even the regulations, as good as the Interstate Commerce Commission is, as we all believe it is, have not prevented fluctuation.

The CHAIRMAN. Not at all. What I am referring to specifically is the public thinking that it is guaranteed. Now, we met that argument in 1914 when the bill was first considered and passed by this committee, and passed through the House, and we met it in 1920, when we went into the law, and for 14 years I do not think that the public has believed that there was any question that the Government was guaranteeing any return or anything about the railroad bonds or stocks.

Mr. HANCOCK. After 20 years, of course, you have the points clear and plenty of time for education.

That question has actually arisen under the present securities law. This is not any figment of the imagination. It has actually happened in a number of cases. I know of a number of cases where that claim has been made, and you are now giving more opportunity to make such claims.

The difference is that this bill is aimed at preventing fluctuation of securities. The Interstate Commerce bill had reference to railroad control in general and only incidentally to railroad securities.

Mr. KENNEY. As a member of the committee, I do not agree with that statement.

Mr. HANCOCK. Pardon me, sir?

Mr. KENNEY. I say, as a member of the committee, I do not think that this bill is intended to prevent fluctuation, if by that you mean change in prices.

Mr. WOLVERTON. It contemplates unnatural fluctuations.
Mr. HANCOCK. I stand corrected, and will put in the word.

Mr. KENNEY. That is different.

Mr. HANCOCK. I will put in the word.

Mr. MARLAND. Mr. Chairman

The CHAIRMAN. Mr. Marland.

Mr. MARLAND. I think you said that you were a director in some 17 corporations.

Mr. HANCOCK. Yes, sir.

Mr. MARLAND. Industrial corporations?

Mr. HANCOCK. Yes, sir.

Mr. MARLAND. Why are you a director in those corporations?
Mr. HANCOCK. I did not speak for myself. I was picked by the
The concerns picked me.

concerns.

Mr. MARLAND. Which concerns?

Mr. HANCOCK. How?

Mr. MARLAND. Which concerns? I mean the industrial corporations or the investment banking houses.

Mr. HANCOCK. By the industrial concerns. And, I am using that in the broad sense, when I say industrial concerns I do not mean necessarily manufacturing concerns.

Mr. MARLAND. I understand that. You represent the interests of an investment banking house on the board of directors of those corporations?

Mr. HANCOCK. Well, the word "represent" may not be proper, but I think I know what you mean. I think that is correct. I am representing myself, primarily. I am not dictated to by my firm. Mr. MARLAND. Are you a large stockholder?

Mr. HANCOCK. Am I, personally?

Mr. MARLAND. Yes.

Mr. HANCOCK. I am not a large stockholder in anything. My firm has large interests.

Mr. MARLAND. Then is that why you are on the boards?

Mr. HANCOCK. No, that is not why. I could go back to the history of it.

Mr. MARLAND. Is it good for 17 corporations that you should be a director?

Mr. HANCOCK. I would prefer to have those corporations answer. They are not required to keep me on there. I would be glad to be free of any one if I could.

Mr. MARLAND. Is it a good general practice for you to be a director of 17 corporations?

Mr. HANCOCK. I do not see any harm in it, sir.

Mr. MARLAND. You, as a director, are called upon to direct those corporations, to pass upon securities that the corporations may desire

to issue.

Mr. HANCOCK. I would not say that. As the need arises; yes, sir. Mr. MARLAND. You have to act then as a representative of the stockholder of the corporation and a representative of your own investment house.

Mr. HANCOCK. No, sir. There have been no new securities issued by these companies.

Mr. MARLAND. Well, you are on those boards, because your investment house has had an issue of those corporations.

Mr. HANCOCK. No. I was put on the boards for the first year, in practically all cases, during the period of distribution. I was chosen