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own stock, which they have acquired in the open market or otherwise. They have been including securities which are not marketable, and should not come under this caption at all. Most investors regard marketable securities as the equivalent of cash.

I think that all companies should be required to have their annual reports certified by an accredited public accountant. I think that is particularly important. There are a number of concerns today which do not have their reports audited by outside, disinterested public organizations.

I do not think that the investor or the prospective investor in a company wants anything that is unreasonable in the way of reporting, because anything prejudicial to the interests of the company would be prejudicial to the interests of himself as the stockholder. I think that what he wants simply is an honest and true statement of the earnings and the sales and other associated information of the company at quarterly intervals. In other words, he wants a trustworthy historical record periodically of that company. He does not want to know future plans, new developments, contemplated acquisitions which might prejudice the interests of that company. And I do not think that anyone expects such information to be reported to the stockholders.

A great many concerns today are not reporting sales, largely because they do not want to show their margin of profit. They fear that it will invite competition and reduce prices, and that is just about the best reason in the world why they should report their sales and net profits.

I could go on indefinitely on reporting policies of corporations. I would just like to say in a word, that the small investor is entitled to just as much information as the large investor on any basis of reasoning. The company by giving the stockholders and the public a trustworthy record of progress is not prejudicing its interests, and that if such information is made available, I think it will place a curb in certain directions on excessive credit expansion; will operate to discourage pools; will make short selling less profitable.

I regard pools and short selling as effects rather than as causes.

Insofar as margin requirements are concerned any figure, any percentage that you might name is naturally arbitrary and it is subject to controversy, whether 40 percent of the loan value, or 70 percent.

Insofar as the investing public is concerned, it has been pretty well demonstrated in this depression, as in all other depressions of which we have a record, that the investor is not capable, either by his training or his contacts, to protect himself, and that very heavy losses and very substantial percentages of investors, even intelligent investors and informed investors, operating on borrowed money in 1929 were wiped wiped out in subsequent years.

I personally believe that a loan value of 40 percent of the current market value of common stocks is altogether ample if this bill is intended to protect the individual who has not been able to protect himself. · In respect to collateral loans outstanding, a substantial part of which were made at much higher price levels than now prevail, I think that individuals under such circumstances should be dealt with leniently. I think that a loan value of 40 percent of the market value of securities might impose quite a hardship on individuals,

who contracted this debt at substantially higher levels than now obtain, and that those individuals should be given an opportunity, with the cooperation of the banks, which in the main hold such collateral loans, to work out their situation over a fairly long period of time, similar to the protection which is being provided for the farmer who contracted debts at much higher price levels.

Insofar as new loans are concerned, I think that a 40 percent loan value is altogether adequate.

Mr. MARLAND. Mr. Chairman, I would like to ask a question.
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. Have you any reason in connection with these quarterly reports that you are suggesting, do you see any reason why those reports should not show the number of shares owned by the officers and directors of the corporation at the end of each quarter?

Mr. PRESLEY. Not at all.

Mr. MARLAND. Would not that be very valuable information to the public, to show whether the men in charge of their corporation are increasing or decreasing their holdings?

Mr. PRESLEY. It might. Such information at certain junctures might be quite significant.

Mr. MARLAND. Are you familiar with the practice of short selling by directors in some corporations, against the box, as it is called?

Mr. PRESLEY. In a very general way.
Mr. MARLAND. You know that is done, do you not?
Mr. PRESLEY. I know it exists.

Mr. MARLAND. The directors knowing that a forthcoming corporation report will be unfavorable will sell short against securities they actually possess.

Mr. PRESLEY. There is no question about the existence of the practice.

Mr. MARLAND. A sworn statement of their ownership of shares at the end of each quarter would stop that practice, would it not?

Mr. PRESLEY. No; not necessarily.
Mr. MARLAND. How could you stop it?

Mr. PRESLEY. By legislating short selling out of existence, and I think it should be legislated out of existence, for the simple reason, sir, if I may give you my reasons, that I do not think that the proponents of short selling can demonstrate that it is a stabilizing influence on the market; certainly when the market is on the down side in a period of declining business, it intensifies the decline of stock prices. At the same time I do not think that the opponents of short selling have a very good case in establishing that short selling is

a significant matter. It is simply cheap, undignified, and of no importance, in my opinion.

Mr. MARLAND. You are very doubtful of whether short selling is of value?

Mr. PRESLEY. I am doubtful.
Mr. MARLAND. Very doubtful about the value of short selling:
Mr. PRESLEY. I am extremely doubtful about the value of short
selling as a stabilizing influence; yes, sir.

The CHAIRMAN. Any further questions?
Mr. CROSSER. You think it should be stopped?
Mr. PRESLEY. I think it should be legislated out of existence.
Mr. LEA. Mr. Chairman.

The CHAIRMAN. Mr. Lea.

Mr. LEA. I wish you would simplify your statement in reference to short selling. I think it would be useful if you would briefly describe how short-selling operations are conducted for the information of those who are unskilled in these questions.

Mr. PRESLEY. I am not a broker and only in a general way do I know the technic of the brokerage business, and the operation of the organized exchanges. Therefore, I think I am probably not competent to explain clearly the technical operations of short selling beyond the bare statement that it is, of course, a ficticious transaction.

Mr. LEA. Would you amplify that by a concrete illustration?

Mr. PRESLEY. I am reluctant to undertake to explain something which I am not completely certain of the technique of, but in principle. You give your broker an order to sell 100 shares of a stock short. The broker, according to my understanding, takes this stock from a customer account or borrows it from some other broker and sells it in the open market. When you decide to cover your position, that is complete the transaction, the broker buys 100 shares of the stock in the open market and returns it either to the account from which it was taken or to the broker from whom it was borrowed.

Mr LEA. Is that sale ordinarliy made with the consent of the man who really purchased the stock?

Mr. PRESLEY. I am not competent to answer that question; as I said, I am not a broker and do not know; but I think, without being certain, that he is not consulted.

Mr. LEA. That he is not consulted?
Mr. PlinsLEY. That he is not conscited.

Mr. LEA. What do you take to be the effect upon the market of such transactions?

Mr. Presley. The answer to that question depends upon the phase through which the market is moving. In the early stages of a business depression short selling usually is heavy and contributes to the intensity of the decline in general prices. And I disagree with those who contend that short selling is a stabilizing influence,

because speculators who operate on the short side of the market usually cover their position on the way down and without any real effect on the general behavior of prices. There are exceptions, naturally, and that is where the short seller is caught unawares overnight or over the weekend, by significant news.

Mr. LEA. Now, does the short seller profit by his transactions?

Mr. PRESLEY. Of course, when he sells short he is forecasting a decline in prices. Short selling operates to accelerate the decline, If he covers his position at a lower price level, he makes a profit, but if he closes out his position at a higher price level, he incurs a loss.

Mr. LEA. Is the short seller transaction commonly made for the purpose of reducing the price of stock; the ordinary short seller transaction?

Mr. PRESLEY. I do not think that that can be demonstrated. It is purely conjectural. In all probability in the early stages of a decline in stock prices there will be junctures where the decline will be intensified by short selling; but on the whole I do not regard short selling as an important influence one way or the other on stock prices, and no influence whatever on the major movement of stock prices.

Mr. LEA. Well, what, then, is the main evil of it?

Mr. PRESLEY. As I previously stated, I think it is a matter of pretty small consequence insofar as the fluctuations or movements in prices are concerned. It is, in my opinion, however, a destructive rather then a constructive operation.

Mr. LEA. Is it a method commonly used to get the control of any particular stock?

Mr. PRESLEY. I had not thought of it in that light.
Mr. Lea. At favorable prices?

Mr. PRESLEY. I had not thought of it in that light. I know of no examples in my experience.

Mr. LEA. This bill, as I understand it, prevents the use of unlisted stock as security or collateral.

What is your opinion as to the necessity of provisions of that character?

Mr. Presley. I have not thought out that aspect of the bill any too carefully. Of course, unlisted securities, generally speaking, and with exceptions, do not enjoy as good a market as securities listed on organized exchanges.

I can see no particularly good reason, subject to further study as to this aspect of the bill, for unlisted securities not enjoying the same position as listed securities, provided the companies come within the scope of this act in their reporting.

The ChairMAN. Are there any other questions?

Mr. PRESLEY. Otherwise, I do not think they enjoy the same position.

Mr. LEA. That is all. The CHAIRMAN. Mr. Mapes. Mr. Mapes. In view of the fact, as you say, that to fail to make a full and complete report has the effect largely of deceiving the stockholders and no one else, and that the managers of the big corporations are simply representatives of the stockholders and are not to any great extent the owners of the corporation, what, in your opinion, is the motive or the purpose in putting out reports that do not mean much or anything?

Mr. Presley. I am very glad you asked that question. I do not think that in a very high percentage of the cases there is any motive to deceive or mislead. It is simply a custom that has been handed down for generation after generation, to tell as little as possible.

Mr. Mapes. Referring to the questions that Mr. Marland asked about the managers of the corporations anticipating unfavorable reports. Is there any difference in principle between that and their , anticipating favorable reports, and purchasing stocks?

Mr. PRESLEY. No, sir; no difference whatsoever, and that is why I suggested that quarterly reports be put in the hands of the stockholders promptly at the end of each period.

Mr. Mapes. În your judgment, would it be feasible to put any limitation upon the right of managers of corporations to invest or speculate in stocks of their own companies?

Mr. PRESLEY. I will answer that in the way that I answered my position toward short selling. It should be legislated out of existence as a practice. Insofar as an officer or director buying the stock and selling it later at a higher price is concerned, I do not think that that freedom should be removed.

Mr. MAPES. Well, those two statements seem to be inconsistent.
Mr. PRESLEY. They sound inconsistent.

Mr. MAPES. If that should be legislated out of existence, then their right to buy and sell at higher prices is interfered with. How would you reconcile those two statements?

Mr. PRESLEY. I qualify that this way: Directors or officers of corporations, for some personal reason wholly aside from the rise in the market, or realization of a profit, may be required to dispose of a part of their holdings in the company, but as a matter of practice, directors and officers buying or selling their own stock in anticipation of favorable or unfavorable current earnings is a pretty common practice.

Mr. Mapes. Your position, then, as I understand it, is you think this right should be denied except in certain cases of necessity or with certain exceptions?

Mr. PRESLEY. I would not take precisely that position for the simple reason that I do not believe a high percentage of officers or directors of responsible companies operate on their own stocks for current turn-over profits, but the suggestion that the holdings of officers and directors be published quarterly could go far toward taking care of the small percentage which do.

Mr. MAPES. Of course, your remarks, as I understand them, are directed to corporations only whose stocks are listed upon the stock exchanges.

Mr. PRESLEY. Any corporations with stock outstanding that can be reached by this or any other legislation.

Mr. Mapes. That would take in the small corporation that might not have a very large list of stockholders.

Mr. PRESLEY. That is correct, yes.

The CHAIRMAN. If there are no further questions, we are very much obliged to you, Mr. Presley.

Mr. MARLAND. Mr. Chairman, I would like to clarify a point I made a while ago, and that Mr. Mapes has asked about.

A director of a corporation possessed of quarterly information unfavorable to the company, not known generally to the stockholders, and he sells his stock in that company in advance of the publication of such a report. Frequently is that not the case?

Mr. PRESLEY. Yes, sir.

Mr. MARLAND. Now, should not the fact that he had diminished his holdings in that company be made known to his stockholders so that they could know that he had sold his shares in anticipation of an unfavorable report? That is one of the things.

Mr. PRESLEY. I think that that is a very excellent point, which I have not given real, careful consideration to, but which certainly should be taken under consideration.

Mr. MARLAND. He is a paid servant of the stockholders, and as a paid servant, he is possessed of information, and he sells his stocks, possibly, to a stockholder, and that stockholder would not have bought, is he had had the information. I am simply asking whether it would not be proper to obtain a statement of his stock holdings at the end of each period.

Mr. PRESLEY. I think it is a very excellent point, and I can see no good reason why the report should not include such information.

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