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exercise of this power it will no doubt find it necessary to require of the issuers of unlisted securities some form, of reports or statements at least analogous to those required in the case of the listed securities.
At the present time there are 1,367 separate issuing corporations whose securities are listed on the New York Stock Exchange. The Analyst's annual supplement for 1934 shows 3,500 issuers with securities listed on other stock exchanges than the New York Stock Exchange. Doubtless there is some duplication between these two lists, but on a conservative estimate, it would seem likely that there are at least 4,000 corporations in the country with securities now listed on some exchange. If it is contemplated that all corporations, so far as possible, whose securities are now traded in without being listed, shall be registered under the provisions of the proposed act, we must look beyond the concerns which have issues that are listed now, and I would suppose that if we turn to Moody's Investment Service, that series of volumes that you are all familiar with, we would probably not find that service giving space to corporations in whose issues there was not likely to be some public trading. The number of corporations listed and analyzed in the various departments of Moody's Manual are as follows: Industrials, 14,000; public utilities, 6,300; railroads, 2,300; banking and finance, 11,400; municipal and local governments, which I repeat, come under the listing and registration requirements of this bill, 10,000, approximately; making a grand total of 44,000 corporations, listed and unlisted, in the various volumes of Moody's Manual.
All of these classes of corporations are potentially subject to the jurisdiction of the Federal Trade Commission 'as defined in the bill, if they wish to have their securities listed, and they have to have them listed if they are to be used as collateral for brokers' loans.
Assuming, however, that not over half of these would be brought under the jurisdiction of the commission, either in connection with the registration requirements, or even in connection with its authority with over-the-counter trading, nevertheless, the task of the Federal Trade Commission in not merely receiving and passing upon the initial registration statements, but also in receiving and making available the periodical monthly and quarterly reports, is seen to be of very great magnitude, if it is to extend more than 20,000 corporations,
This figure, for example, is to be compared with the 2,300 railroads or less, which are subject to the jurisdiction of the Interstate Commerce Commission.
It is to be noted, also, of course, that the Federal Trade Commission under the terms of the bill is not limited to the purely ministerial and clerical function of receiving and making publicly available the returns to be received from the corporations subject to its jurisdiction, but the bill obviously contemplates that it shall examine these for purposes of regulation.
This more clearly appears in connection with the provisions of section 18 (b), which, as already referred to, confers upon the Commission power to prescribe the accounting system of the various corporations, including the valuation of assets and liabilities, I am quoting from the bill—
The determination of depreciation and depletion, the differentiation of investment and operating income, and the preparation, where the Commission deems
it necessary or desirable, of consolidated balance sheets or income accounts of any person directly or indirectly controlling or controlled by the issuer or under common control with the issuer.
This attempt to provide at a single stroke for a uniform accounting system for all the industries of the country, or what is perhaps even more difficult to provide at a single stroke, namely, separate uniform accounting systems for each industry adapted to the special needs of that industry, is one of the outstanding features of the bill and one of the tasks of very great magnitude which, under the bill, the Federal Trade Commission would be called upon to perform,
It is no doubt true that a uniform accounting system in a particular industry would do a great deal to regularize and facilitate the comparison of earnings and property values as between different concerns engaged in that industry, and which without such a uniform accounting system might keep their books on a different basis so that it would be very difficult to compare them.
It is likewise true that if it should become possible to establish in all of the different industries of the country, accounting systems which are comparable and which yield results that may be readily translated from one line to another, that also would facilitate the comparison of values and earnings of securities in different industries. The desirability of developing a uniform accounting system for a particular industry has come more and more to be recognized in recent years, but for any given industry the task is one of great magnitude, which apparently can proceed only by a long course of special development and of education of the persons in the industry.
Efforts have been made for a number of years by trade associations in various industries to develop uniform accounting methods and this effort is being fostered under the N.R.A. The success of such effort depends, as I have said, largely upon the process of gradually educating the members of the industry, not merely to the special accounting problems peculiar to their industry, but also to the meaning and need of uniform accounting.
To undertake to apply uniform accounting by fiat over the entire field of industry in one great effort rather than by gradually, by gradual growth within each industry over a period of years, is a task which would obviously require the expansion of the Federal Trade Commission to very large proportions.
The point which I have last made suggests the primary point of distinguishing between the theory upon which the report of the Roper committee was constructed and the theory of the present bill.
The Roper committee report went on the theory that if governmental regulation attempts to do too much directly and to control and intervene directly in the first instance over the whole field which it covers, it is in danger of breaking down under its own weight and proving ineffective. In the report of the Roper committee, therefore, the action of the Government through the proposed stock exchange authority—which incidentally was to have no other duties than to be a stock exchange authority and was to be free to devote its entire time to the task of exchange regulation--nevertheless the functions, the regulatory functions of this governmental agency were held in reserve and were employed only to supplement and supervise what in the first instance was self-regulation of the exchanges.
No doubt the exchanges will frequently fail to do a good job of regulating their members, but even so, it seemed to the Roper committee during their deliberations likely that Government regulation was likely to be more effective and less unwieldy it it was applied to the exchanges in an effort to make them do their own job and to come down on them like a ton of bricks if they did not do their job, rather than for the Government itself to take over from them that job of direct regulation and attempt to perform it from the very beginning and in the first instance by governmental policing methods.
In framing a regulatory measure, the practical problem of administration has always to be faced and when regulation gets beyond a certain point the sheer ineffectiveness of attempting to exercise it directly through government on a wide scale counterbalances the fact that possibly the exchanges might not be as dilligent as we would wish them to be about regulating themselves or as diligent as the Government would be if the task were compact enough to fall within the limits of effective governmental performance.
Now, it may be said, of course, cynically-and. I think that there is a good deal in it, and of course we have to recognize the weakness of human nature—it may be said that the idea of selt regulation is just a device to avoid regulation and so in some instances it no doubt is; but self regulation in the first instance, with the Government holding its power in reserve to see that that self-regulation is exercised, is after all a necessary recourse in view of the mere physical limitations in time and in personnel, which operate on the direct exercise of the powers of government as the task of regulation becomes more and more extensive over a wider and wider field.
Now, in what I am saying, I hope I will not be regarding as speaking in any attitude of negative criticism of this bill. I believe that regulation of the stock exchanges by Federal legislation should be enacted at this time by the present Congress; that it is demanded by the conditions which exist and by the pledges of the party platform.
I do not, however, believe that those demands will necessarily be satisfied by any or every type of bill that might be adopted irrespective of its provisions. I envisage a type and method of regulation which will be effective because it does not go beyond the limits of what is feasible and necessary in order to accomplish its objective.
I can conceive a type of Federal regulatory authority which will not undertake to burden itself by dividing the control of banks and bank credit with the established financial agencies of the Government and which will not be swamped by an attempt to exercise drastic control over thousands of corporations and municipal bodies.
If stock-market regulation is to be effective and not a mere peg upon which to hang other regulatory activities, the Federal agency which is charged with such regulation should be free to devote itself to that task which is a large enough one to require the full attention of any governmental agency if it is to be successfully performed.
I conceive the effective performance of such a task as consisting primarily in the guidance and supervision of the disciplianry activities of the exchanges themselves.
An exchange should not be licensed unless its rules and regulations provide adequate prohibitions against unfair and improper practices and against practices tending to the overstimulation of speculation.
Its listing requirements should be provided against certain familiar types of improper conduct by the listing corporations and their officers and directors.
Its rules and regulations should provide adequate procedure for disciplining refractory members and its machinery should be adequate to enforce these rules and regulations promptly and summarily.
If an exchange fails adequately to enforce its rules, its dereliction, in view of the relatively small number of exchanges that the Federal authority would have to oversee, would be relatively easy to discover and disciplinary action could be applied promptly by the Federal agency to the extent, if necessary, of placing all of the members of that exchange under Federal licenses, for the time being, and keeping them there until conditions on that exchange were improved.
I should like to quote at this point another sentence from the Roper report:
It is considered fundamental that disciplinary power over the members and over security issues shall be left primarily to each exchange, each to be responsible to the Federal Stock Exchange Authority for the enforcement of its regulations. If this is not done the morale of the exchange may be destroyed and the Stock Exchange Authority overwhelmed with the policing of alleged violations on all the exchanges of the country.
I conceive of such an authority as I have mentioned being, so constituted that it will be able to give proper attention to its task without being overwhelmed by a variety of multifarious duties.
It should include in its membership some representative of the governmental agency charged with credit control and also a person skilled by experience in exchange work.
With regulation in the hands of such an agency I believe there would be no danger of it breaking down in effectiveness and meanwhile laying upon the banks and industries of the country a heavy burden of ineffective control.
That is all I have to offer directly, Mr. Chairman.
Mr. PETTENGILL. You have discussed the matter of the unlisted securities, at the beginning of your statement, but as I recall you did not make a direct recommendation with reference to them; but if I understood your remarks correctly, you think that the bill is unwise in restricting loans only to listed exchanges.
Mr. DICKINSON. Well, sir, when I made those particular statements at the beginning of my remarks, I was attempting to emphasize the nature of the direct control that was reposed in the Commission over the concerns which wished to list their securities. I was not directing myself to the other point. I think that if effective regulation of trading in securities is to be accomplished through regulation of the exchanges, of course, it will be necessary in the regulatory measure to do something to encourage the listing of securities so that they can be bought on the exchanges where trading in them can be subjected to the control that is provided for the exchanges.
Of course, I may say this, that here again we run into one of those difficult problems, particularly in view of the large number of local securities that are dealt in in a local area and where it might be extremely expensive for those concerns to have to comply with all of these requirements that would be necessary in order to get them
registered with the Federal Trade Commission so that banks could loan money upon
them. Mr. PETTENGILL. And you also think it is unwise that loans should be made only by members of the Federal Reserve System?
Mr. DICKINSON. I think that that provision is no doubt put in the bill in order to tighten up the control over credit that the bill contemplates. It is a very tight bill, a bill where logic I think plays a very considerable part and just as it is contemplated that the Federal Trade Commission shall exercise control over the credit which does not come from the Federal Reserve banks, so it provides that other credit shall come only from the Federal Reserve banks where it may be subjected to governmental control.
Mr. PETTENGILL. It is your thought that if the bill stands as written it will require the liquidation of about a billion dollars' worth of securities by next October?
Mr. DICKINSON. That is my personal estimate. Mr. PETTENGILL. That would be destructive not only to the security market, but to the commodities market and the real-estate market as well, would it not?
Mr. DICKINSON. Well, the liquidation of these securities would naturally have the effect which the dumping of any large quantity of property on the market at a given time has.
Mr. PETTENGILL. On the regulatory authority do you think it would be wise to have someone from the Department of Commerce?
Mr. DICKINSON. I would not necessarily regard that as essential. It would seem to me that the essential departments would be the credit departments of the Government: The Treasury, or the Federal Reserve Board.
Mr. PETTENGILL. If we had an independent regulatory authority, either a divisional organization of the Federal Trade Commission or a wholly independent organization, then what groups do you think should be represented? Somebody who has technical experience in stock-exchange businesses?
Mr. DICKINSON. There should be a representative on the board, in my opinion, who was provided with that technical equipment.
Mr. PETTENGILL. Somebody from the Federal Reserve?
Mr. DICKINSON. And somebody from the Federal Reserve, and the other members--we might have three or we might have five. If you have three, you might simply have some outstanding citizen that the President might appoint. If you have five, you might conceivably wish to represent the Department of Commerce and the Federal Trade Commission insofar as the Federal Trade Commission through some of its other activities might tie up with the activities of this regulatory body.
Mr. PETTENGILL. I think you have made a splendid statement, Mr. Dickinson. It would appear to me that, except with respect to the matters with which the bill duplicates existing rules and regulations of the exchanges, there is very little in the bill with which you concur?
Mr. DICKINSON. Well, sir, I do not think I would put it quite as broadly as that. I think that some of the prohibitory features of the bill enact regulations which, perhaps, represent very recent conversions on the part of the exchanges and are provisions that might very well be permitted to stand.