ÆäÀÌÁö À̹ÌÁö
PDF
ePub

The CHAIRMAN. I have here a memorandum regarding this act, submitted on behalf of the Investment Bankers Association of America by Mr. Robert E. Christie, Jr., president, together with a proposed fair practice provision of American Bankers Code, submitted by the Investment Bankers Code Committee to all employers assenting to the Code of Fair Competition for Investment Bankers; and a statement by Mr. Oliver J. Troster, which will be incorporated in the record.

(The matter referred to is as follows:)

MEMORANDUM REGARDING THE PROPOSED NATIONAL SECURITIES EXCHANGE ACT OF 1934

SUBMITTED ON BEHALF OF THE INVESTMENT BANKERS ASSOCIATION OF AMERICA, BY ROBERT E. CHRISTIE, JR., PRESIDENT, MARCH 8, 1934

The Investment Bankers Association of America on whose behalf this memorandum is filed is composed of investment bankers who handle in origination and distribution the great majority of all securities offered in the United States. Under the Investment Bankers' Code as filed under the National Industrial Recovery Act transactions on stock exchanges are excluded. The investment banking business even exclusive of stock-exchange transactions, represents a highly important segment of the securities business of this country.

For the country's economic welfare, for the protection of the credit of States and municipalities and of industry, generally, and in behalf of the rights of the investing public and of financial institutions, the Investment Bankers Association begs to present to the Congress this memorandum in relation to the proposed National Securities Exchange Act of 1934.

While certain parts of the proposed act are admirable in content and purpose, certain other provisions are inimical to the public interest. If the act should be adopted in its present form the inevitable result will be a resumption of further drastic deflation and the destruction of sound and established values. Further restrictions on credit will retard if not reverse the progress of business recovery. Three fundamental qualities determine the value of an investment security. They are: (1) Safety of principal; (2) dependability and amount of income yield; and (3) marketability.

These three enter into the valuation of a security in varying degrees, but if you destroy or impair any of them in whole or in part to that extent the value of the security is injured. The proposed act would destroy or impair a material part of the marketability, and therefore of the value, of a vast amount of securities, including both public and corporate securities of the highest grade amounting to many billions of dollars. In particular, this would be the inevitable effect of sections 10, 6, 7, and 19 of the act.

Section 10, by its proposed segregation of brokers and dealers, would not only impair the marketability and value of listed securities, but would break down the efficient and economic marketing machinery that has been built up throughout the years as the means by which the States and their taxing subdivisions obtain and maintain economically the credit demanded by public necessities and advancement. There are approximately $19,000,000,000 of our State and municipal obligations, which, with many other types of securities such as insurance stocks and equipment trust issues, are not listed on any securities exchange. They are dealt in on the so-called "over-the-counter" market which is maintained by dealers and brokers who may or may not be members of any securities exchange. Neither the over-the-counter market nor any organized securities exchange exists as a separate, isolated and independent unit. They are all interrelated, interdependent, and integral parts of one whole, financial structure.

Section 10 of the act which segregates the functions of broker and dealer is very vital to those engaged in the investment banking business. The result of this segregation would inevitably be a consolidation of the security business into very few hands. Its operation in financial centers other than New York must be considered if its true significance is to be appreciated. There is not a city in the United States of any substantial importance that does not contain conscientious and honest investment bankers who try to the very limit of their ability to advise customers accurately in connection with the purchase of securities. If the duty of the investment banker is considered to be solely that of selling

securities, and if he considers the transaction permanently terminated when he has received payment from his customer, then his situation would be very simple. Such, however, is not the case. The conscientious investment banker recognizes the duty of continuously observing the market and advising the person to whom he has made sale of securities. It is impossible to conduct this type of business in most of the smaller cities upon the income derived either from the brokerage business or the dealer business. In order to operate, the investment banker in the smaller centers must combine the two functions. The customer is, of course, entitled to know exactly the basis upon which he is conducting his transaction. No investment banker who mistreats the confidence of his customer can build a substantial and profitable business.

The investment bankers under the fair practice provisions of their code in article VI have spelled out clearly the methods in which the information shall be given to the customer and the limitations to be observed by the investment banker in connection with all retail sales and purchases. It will be of great value to the security business that there will be a set of uniform rules to the end that the customer may know exactly how and where he will receive the information as to whether he is purchasing a security from a dealer or availing himself of the services of a broker.

It would be an unnecessary hardship to a very large number of men who have given a lifetime to the creation of goodwill in the security business, to force a segregation of these functions. Such a segregation would produce a result diametrically opposed to what is needed and desired at this time for the reestablishment of an active market in securities to the end that American business men may again secure capital funds at a reasonable price.

The direct effect of segregation on State and municipal bonds and on other securities, which cannot be listed, as a matter of public policy or for other reasons, would be less efficient support in the markets for these securities, with the consequent loss to investors and ultimately lower prices for public credit and increased burdens on taxpayers. The success of the business-recovery program requires that private capital should gradually take over the heavy burden that the Government assumed in its emergency financing of industry. How can this be done by crippling the established credit machinery and by depreciating the value of seasoned securities?

Section 6 of the proposed act would forbid a member of a national securities exchange to accept an unlisted security as collateral for a customer's loan. There are several hundred thousand corporations in the United States. Of these, only 788 have securities listed on the New York Stock Exchange. Not only would section 6 bar the securities of these thousands of corporations, as collateral in brokerage transactions, but it would also forbid any person "who transacts a business in securities through any such member" to accept such securities as collateral. This has been interpreted that a bank which executes customers' orders by buying or selling securities through a stock exchange would automatically be barred from accepting as collateral any unlisted securities.

The adoption of any such provision would do immeasurable harm. Unlisted securities, barred from use as collateral both in broker and in bank loans would depreciate in value. Both investors and issuers would lose thereby. By what right, rule of reason or economic necessity could such uneconomic and unwise discrimination between listed and unlisted securities be justified? Under this section a bank might find the purchase of certain municipal and corporate bonds highly desirable or sound investments for its own funds, yet be forbidden to make a much-needed and worthy loan to a productive enterprise on the same securities. Loans already in existence and considered worthy and desirable by sound banking standards would have to be liquidated under section 6 of the proposed act. The resulting restrictions of credit would have a disastrous effect on the credit structure of the entire country.

It is deemed a public duty by the Investment Bankers Association that the attention of the Congress be called to the aforementioned sections of the proposed National Securities Exchange Act and to other provisions therein relating to transactions not on an organized exchange, in order to indicate how vitally the act may affect others than members of securities exchanges. The apparent purposes and applications of the act should be viewed by the Congress in the light of the fact that the investment banking business has already submitted to the National Recovery Administration rules of fair practice designed to accomplish some of the same purposes as the National Securities Exchange Act, and without jeopardizing the processes of business recovery. A copy of the rules of fair practice for the Investment Bankers Code is attached hereto. Of approximately 1,250

investment bankers who assented to the code and were, therefore eligible to vote on the fair practice rules, 888 out of 1,005 who voted approved the rules, while only 117 disapproved.

The majority of those disapproving did so because of certain specific sections, but indicated their approval of the provisions in general. The rules are the product of 4 months' of incessant work by a great many investment bankers, and they embody a renewed hope and confidence that the Investment Bankers Code will be the means of abolishing abuses and restoring their business to a greater usefulness and esteem than ever before. The rules of fair practice are also significant of a conviction among investment bankers that in the Investment Bankers Code and its proposed rules the National Recovery Administration has provided the means for the sound economic and equitable development of investment banking. We therefore submit that the provisions of the proposed National Securities Exchange Act should apply only to the regulation of transactions on organized security exchanges.

Section 7 of the act covers the restrictions of "members" borrowing. It would seem important that the language in the first paragraph of this section which reads "person who transacts a business in securities through the medium of such 'member'" be clarified. It is submitted that the limitations of this section should not in fairness be applied to persons or firms, the major part of whose business is other than through members of stock exchanges, and certainly should not be applied to that part of the business of such persons which has no connection with the stock exchange.

Subsection 5 of section 8 is drawn in language that is almost impossible to determine the extent of its application in individual cases. What matters are "sufficiently important to influence the judgment of an average investor" are, to put it mildly, difficult to ascertain. In trying to understand this language in order that one may be guided by it in the transaction of his business, it must not be assumed that one's difficulty will arise from a desire to misstate any fact. The difficulty is in knowing what is "misleading in the light of the circumstances under which it was made.' The unintentional but actual results of provisions of this type is to deprive investors of the advice of dependable brokers and dealers. The provisions are so vague and the penalties so severe that responsible dealers will not risk incurring "strike" suits.

Paragraph (i) of subsection 9 of section 8 would seem to prevent exchange trading in warrants in securities with warrants, and in converticle securities. It is important to the investment banker in the distribution of new securities not to have any possible doubt thrown upon the right to issue convertible securities where it seems necessary or wise to do so.

It is submitted that the implications of this legislation are so vitally important to the dealer in securities as well as to the owner of securities and to the public at large that the act should be so drawn that it will not hinder and embarass transactions not contemplated to be within its scope. It is in no sense the purpose of this memorandum to be narrowly critical, but to place this criticism on a basis of public interest and mutual helpfulness. The nigh objective which the investment bankers have striven to attain in the fair practice provisions of their code is that of greater usefulness in advancing the productive enterprises of industry and government. In no other way can the investment banking business advance its own interests except it first advance the Nation's interests.

PROPOSED FAIR PRACTICE PROVISIONS OF INVESTMENT BANKERS CODde, SubMITTED BY INVESTMENT BANKERS CODE COMMITTEE TO ALL EMPLOYERS ASSENTING TO THE CODE OF FAIR COMPETITION FOR INVESTMENT BANKERS

Chicago, Ill., Feb. 23, 1934

ARTICLE I. ADOPTION AND INTERPRETATION

The following provisions are adopted as supplementary provisions to the code of fair competition for investment bankers, as approved November 27, 1933, by the President of the United States, and the provisions of articles IV, V, VI, VII, VIII, and IX hereof are established as rules of fair practice for investment bankers pursuant to the provisions of article IV of said code.

These supplementary provisions shall become effective on the thirtieth day after approval hereof by the President of the United States. They shall continue in effect as long as said code shall be in effect, and shall in all respects be subject to said code and the National Industrial Recovery Act, approved June 16, 1933. They may be amended in the same manner as is provided in said code for amendment of said code.

The rules shall be interpreted in such manner as will aid in effectuating the policy of title I of said National Industrial Recovery Act, and so as to require that all practices in connection with the investment banking business shall be just, reasonable, and nondiscriminatory.

The rules are grouped for purposes of convenience under several general headings, but such grouping and headings shall not be construed as limiting the application of any rule.

The rules shall not apply to contracts made prior to the effective date of the rules.

ARTICLE II. DEFINITIONS

As used in these supplementary provisions

(a) The term "code" shall mean the code of fair competition for investment bankers, as approved November 27, 1933, by the President of the United States, under the provisions of title I of the National Industrial Recovery Act, approved June 16, 1933.

(b) The term "rules" shall mean the rules of fair practice for investment bankers as established in articles IV, V, VI, VII, VIII, and IX hereof, or as the same may be hereafter amended or supplemented.

(c) The term "investment banking business" shall mean the business of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer therein, or of purchasing and selling securities upon the order and for the account of others; provided, however, that the term "investment banking business" shall not include transactions on regularly organized exchanges, but such terms shall include all business relating to such transactions to the extent that such business is not conducted by a member of such exchange or by any person or organization having the privilege of any such exchange for itself or any of its partners or executive officers.

(d) The term "investment banker" shall mean any person engaged in the investment banking business but shall not include an employee.

(e) The term "registered investment banker" shall mean any investment banker registered pursuant to the provisions of article X of these supplementary provisions.

(f) The term "investment bankers code committee” shall mean the investment bankers code committee established as provided in article III of the code. (g) The term "regional code committee" shall mean any regional code committee established as provided in section 2 of article XI of these supplementary provisions.

(h) The term "security" or "securities" shall mean any note, share of stock, bond, debenture, evidence of indebtedness, voting trust certificate, certificate of deposit, interim certificate or interim receipt, or, in general, any instrument commonly known as a security, or any certificate of interest or of participation in, or warrant or right to subscribe to or purchase, any of the foregoing.

(i) The term "new issue of securities" shall mean any issue of securities sold or offered for sale in one transaction or in a connected series of transactions as a result of which consideration for such securities is or is to be received directly or indirectly by the issuer thereof. As used in this paragraph (i) the term "issuer" shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

(j) The term ": of securities.

'new security" shall mean any security included in a new issue

(k) The term "issuer" shall mean any person who issues or proposes to issue any security or who guarantees such security either as to principal or income or who assumes the obligation to pay such security either as to principal or income; except in respect to certificates of deposit, voting trust certificates, interim certificates or similar securities, the term "issuer" shall mean the person or persons issuing the securities represented by such certificates of deposit, voting trust certificates, interim certificates, or similar securities; and except that in respect to certificates of interest or shares in an incorporated investment company (sometimes spoken of as investment trust) having a board of directors (or persons performing similar functions) of the fixed, restricted management, or unit type, the term "issuer" shall mean the person performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; and except that in respect to equipment trust certificates or similar securities, the term "issuer" shall mean the person by whom the equipment or other property is or is to be used.

(1) The term "prospectus" used in relation to any security registered under the Securities Act of 1933 shall mean the official prospectus required by said act, and used in relation to any other security shall mean the offering or descriptive circular.

(m) The term "originator" shall mean any person who purchases from an issuer a new issue of securities of such issuer, or who contracts with the issuer to find purchasers for such securities, with a view to the public distribution of such securities, or who contracts with an issuer to act as agent for such issuer for the public distribution of such securities of such issuer.

As used in this paragraph (m) the term "issuer" shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

(n) The term "selling syndicate" shall mean any syndicate formed in connection with a public offering, to distribute all or part of a new issue of securities by sales made directly to the public by or through participants in such syndicate under an agreement which imposes a financial commitment upon participants in such syndicate to purchase any such securities.

(0) The term "selling group" shall mean any group formed in connection with a public offering, to distribute all or part of a new issue of securities by sales made directly to the public by or through members of such selling group, under an agreement which imposes no financial commitment on the members of such group to purchase any such securities except as thay may elect to do so.

(p) The term "manager" used in relation to a selling syndicate or selling group shall mean the person or persons named as manager or managers in the agreement under which such syndicate or group is formed.

(q) The term "person" shall include any natural person, copartnership, corporation, association or other entity.

(r) The term "salesman" shall mean any officer, employee or agent (other than another investment banker) of an investment banker, who offers securities for sale to any person other than another investment banker.

(s) The term "interim certificate" or "interim receipt" shall mean and include and shall be limited to instruments in writing calling for the future delivery of securities and executed and issued by any person who has contracted with the issuer of such securities for the purchase or underwriting of a definite amount of such securities and for the payment therefor.

(A) The term "interim certificate" shall be used to designate such instruments in writing only when the securities called for thereby are delivered in temporary form to the issuer of the interim certificate prior to or concurrently with such issue.

(B) The term "interim receipt" shall be used to designate such instruments in writing only when the securities called for thereby are not so delivered to the issuer of the interim receipt prior to or concurrently with such issue.

ARTICLE III. GENERAL PRINCIPLES

In addition to the rules, the general principles set forth in this article III shall be a guide to the investment bankers code committee in interpreting, administering, and enforcing the provisions of the code and rules, as well as to the investment banker himself in the conduct of his business under such code and rules:

SECTION 1. Standard of business_conduct.-To observe, and to use his best efforts to maintain, high standards of commercial honor in the investment banking business, and to promote just and equitable principles of trade and business.

SEC. 2. Origination of new issues.-(a) If acting as an originator, to make such investigation as may be reasonably necessary to determine the merit of such issue, and to satisfy himself that the business risk of the investors who purchase such securities is reasonable and that there are appropriate provisions to safeguard the interests of such investors. (b) If distributing a new issue of securities originated by another, to satisfy himself that the investigation required by paragraph (a) has been made.

SEC. 3. Information as to all new issues.-Not to originate or to participate in the distribution of any new issue of securities unless there is available to investors, either in a prospectus or from public sources, adequate information with respect to the issuer, the nature of its business, its financial condition, the terms of the .new security, and in addition all other information required by the rules to be contained in the prospectus.

« ÀÌÀü°è¼Ó »