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New YORK PRODUCE EXCHANGE,
New York, March 10, 1934. Hon. Sam RAYBURN, Chairman House Interstate and Foreign Commerce Committee,
House Office Building, Washington, D.C. DEAR SIR: There is enclosed herewith a copy of a printed statement entitled, “Statement of Samuel Knighton, president of the New York Produce Exchange in respect to exchanges which maintain a market for trading in unlisted securities as affected by S. 2693 and H.R. 7852 entitled 'National Securities Exchange Act of 1934.'11
I am sending also, under separate cover, 50 additional copies of this statement.
I trust that the members of your committee will give this statement careful consideration. Respectfully yours,
Samuel KNIGHTON, President. NOTE.—The statement above referred to is in the form of a printed brief and will be found in the committee print.
NATIONAL AssociaTION OF MUTUAL Savings BANKS,
New York, N.Y., March 9, 1934. Hon. SAM RAYBURN, Chairman Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D.C. DEAR SIR: The National Association of Mutual Savings Banks has directed the undersigned to communicate to your committee the views of the association on H.R. 7852, proposed National Securities Exchange Act of 1934.
The association represents 567 mutual savings banks doing business in 18 States of the Union. Their combined resources are $10,856,000,000, their total deposits $9,594,000,000, something like one fourth of the total bank deposits of the United States, and the total number of their depositors is around 13,400,000. These banks are not stock institutions but are organized and operated solely for the benefit of the depositors, and the officials of the banks, as well as the banks themselves, are acting in what is essentially a fiduciary capacity.
The only object of mutual savings banks is the safekeeping and provident investment of the funds of depositors who are generally the small savers of the country, accumulating funds for old age or special purposes. These total savings represent an average deposit of $715.32 for approximately one out of every nine people in the country.
By limitation of statute as well as by force of the very nature of the business in which they are engaged and of their relations to their depositors, the security holdings of these banks are confined almost exclusively to those of the soundest and most conservative investment type, as contrasted with speculative issues. Typically and generally, their investments in securities of the character dealt in over the exchanges are bonds, and not stocks. Their test of desirability is stability and dependability, to the subordination of measures of return or of capital profit.
The organized savings banks have no comment to submit regarding what they conceive to be the primary purposes of the proposed measure. They leave that discussion to those who are engaged in the activities which the bill, as we understand its general tenor, purports to regulate. This communication is confined to what we deem to be departures from the policy which the bill, as we read it, is intended to embody, and to particular provisions which appear especially to threaten the proper and just interests of investors such as savings banks.
Our criticisms of the bill may be summarized as follows: 1. It fails to differentiate between stocks and bonds.
2. It forbids the combined services of dealer and broker in bonds, frequently valuable to the holders of conservative investment securities.
3. Even outstanding bonds of municipalities, States and their political subdivisions, and railroad bonds, would be excluded from the exchanges except under burdensome conditions with inevitable impairment of values.
4. In the matter of loans on bonds, the bill unjustly discriminates against mutual savings banks in favor of member banks in the Federal Reserve System.
5. Frequently, the registration requirements for bonds already issued would not affect the interests of the issuer of the security, but would penalize the holders thereof.
It is in the above order that we shall discuss our objections to the bill.
1. We take it that in large part the bill is the outgrowth of disclosures during the recent and continuing stock-exchange investigation. So far as we have observed, that investigation accorded very little or no attention to the characteristics of transactions in bonds of the type required by savings banks and trustees institutions, or to the practices of those who specialize in transactions in high grade investment bonds. It seems plain that the principal evils to which the bill is directed have to do with corporation control, or are associated with the practice of conducting transactions in stocks on margin.
Throughout the bill there are provisions which in terms include bonds and bond dealers and brokers but which the policy of the bill makes applicable only to stock and stock-handling houses. Consider section 15 (a), it is difficult to perceive the justification for requiring tedious reports, with monthly supplements of reflect changes, from owners of 5 percent or more of a company's bonds. Bondholders as such exercise no control over the management of the issuer and its policies. In fact, that it was the holders of the stock and not of the bonds who are in contemplation is suggested by the fact that the title of the section reads “Transactions by directors, officers and principal stockholders."
That proper differentiation be made in this respect between bonds and stock is a matter of material importance to the savings banks. It is by no means unusual for a savings bank to hold in excess of 5 percent of a particular class of securities of a particular issuer.
The burdensome provisions in other sections of the bill looking to the furnishing by issuers of voluminous data as a condition to listing securities for trading on exchanges in most instances plainly reflect the desire that complete information regarding corporation control be disclosed to the public. Bond ownership does. not ordinarily mean an opportunity to participate in management.
Section 6 (b), dealing with margin requirements is also plainly aimed at stocks, as there can be no sound reason to require margins such as are there specified to carry high-grade honds.
2. As stated above, purchases of securities by members of this association are almost wholly limited to those of the soundest and most conservative investment type. The same thing is true of all institutions of a like fiduciary type. Chiefly because of the low yield which goes hand in hand with their high degree of stability, such securities are often, perhaps usually, held in comparatively large blocks by investment institutions, and change hands so seldom that there is no active market for them. Consequently when an institution, such as a savings bank, desires to sell or buy a large block of such securities, there may not be bids to buy, or offers to sell, in quantities sufficient to complete the transaction without undue delay.
Investment houses handling high-grade bonds have therefore developed and have acquainted themselves with the selling and the buying needs of institutional investors of the kind mentioned. They must be prepared to purchase large blocks of these securities with the view of disposing of them to other investors, perhaps a number. Taking the other side of a transaction, it is often necessary for an institutional investor desiring to purchase a block of seasoned securities to depend upon a security house which had acquired the securities previously, perhaps by gradual accumulation.
A dealer in bonds cannot carry in his inventory all issues of the kind of bonds in which he deals, and cannot carry issues which he possesses in quantities sufficient to satisfy every demand of his customers. Consequently, it is desirable for the customer that the dealer be permitted to handle some transactions in part or in whole on a brokerage basis, going in behalf of his customer to the exchanges, or, as it usually is done, to over-the-counter markets to complete or to effect the transaction. The alternative to either to force the customer to resort to other sources of supply, or to compel the dealer to endeavor to sell the customer “something just as good. A situation similar in principle is presented where the customer desires to sell an issue which a security house is not in a position to acquire on its own account, or to acquire in the quantity in which offered.
In short, the savings banks have found that they require the services of dealers in high-grade securities who are also empowered to act as brokers. This combination service will be denied to them if the provisions of section 10 of the bill become law. The restrictions there proposed should be removed as to security houses dealing in bonds of the type held by savings banks. It may well be that such dealer-brokers should be subjected to some regulation by the Federal Trade Commission, including perhaps a requirement that they make known to their
a violation of the provisions of this Act, or of any rule or regulation prescribed under authority thereof, it may in its discretion bring an action in any district court of the United States, United States Court of any Territory, or the Supreme Court of the District of Columbia to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond. The Commission may transmit such evidence as may be available concerning such acts or practices to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this Act. Any such criminal proceeding may be brought in the district wherein the violation complained of occurred.
(d) Upon application of the Commission the district courts of the United States, the United States courts of any Territory, and the Supreme Court of the District of Columbia shall also have jurisdiction to issue writs of mandamus commanding any person to comply with the provisions of this Act or any order of the Commission made in pursuance thereof.
HEARINGS BY COMMISSION
SEC. 21. Hearings may be public and may be held before the Commission, any member or members thereof or an officer or officers of the Commission desig. nated by it, and appropriate records thereof shall be kept.
RULES AND REGULATIONS
Sec. 22. The Commission, the Comptroller of the Currency, the Federal Re. serve Board, and the Interstate Commerce Commission shall, respectively, have power to make such rules and regulations as may be necessary for the execution of the functions granted to them under this Act and may for that purpose classify issuers, securities, exchanges, and other persons or subject matters within their jurisdiction. Their rules and regulations shall take effect at such time after publication as they, either by order in special cases or by rules or regulations of general application, shall prescribe.
PUBLIC CHARACTER OF INFORMATION
Sec. 23. The information contained in any application, report, or document filed with the Commission may be made available to the public whenever in the judgment of the Commission a disclosure of such information is in the public interest, and copies thereof, photostat or otherwise, may be furnished to any applicant at such reasonable charge as the Commission may prescribe.
COURT REVIEW OF ORDERS
SEC. 24. (a) Any person aggrieved by an order issued by the Commission in a proceeding under this act to which such person is a party may obtain a review of such order in the Circuit Court of Appeals of the United States, within any circuit wherein such person resides or has his principal place of business, or in the Court of Appeals of the District of Columbia, by filing in such court, within sixty days after the entry of such order, a written petition praying that the order of the Commission may be modified or be set aside in whole or in part. A copy of such petition shall be forthwith served upon the Commission, and thereupon the Commission shall certify and file in the court a transcript of the record upon which the order complained of was entered. No objection to the order of the Commission shall be considered by the court unless such objection shall have been urged before the Commission. The finding of the Commission as to the facts, if supported by evidence, shall be conclusive. If either party shall apply to the court for leave to adduce additional evidence, and shall show to the satisfaction of the court that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence in the hearing before the Commission, the court may order such additional evidence to be taken before the Commission and to be adduced upon the hearing in such manner and upon such terms and conditions as to the court may seem proper. The Commission may modify its findings as to the facts, by reason of the additional evidence so taken, and it shall file such modified or new findings, which, if supported by evidence, shall be conclusive, and its recommendation, if any, for the modification or setting aside of the original order. The jurisdiction of the court shall be exclusive and its judgment and decree, affirming, modifying, or setting aside, in whole or in part, any order of the Commission, shall be final, subject to review by the Supreme Court of the United States upon certiorari or certification as provided in sections 239 and 240 of the Judicial Code, as amended (U.S.C., title 28, secs, 346 and 347).
(b) The commencement of proceedings under subsection (a) shall not, unl specifically ordered by the court, operate as a stay of the Commission's order.
Sec. 25. Any person who willfully violates any provision of this Act or any rule or regulation made thereunder, or any undertaking filed thereunder, or any person who willfully and knowingly makes, or any person, including a director, officer, accountant, or other expert thereof who willfully and knowingly is responsible for any statement in any application, report, or document required to be filed under this Act or any rule or regulation thereunder or in any communication, oral or otherwise, subject to the provisions of section 8(a) (5), which statement is, in the light of the circumstances under which it was made, false or misleading in any matter sufficiently important to influence the judgment of an average investor, shall upon conviction be fined not more than $25,000 or imprisoned not more than ten years, or both, except that when such person is an exchange, a fine not exceeding $500,000 may be imposed.
JURISDICTION OF OFFENSES AND SUITS
SEC. 26. (a) The district courts of the United States, the United States courts of any Territory, and the Supreme Court of the District of Columbia shall have jurisdiction of offenses and violation under this Act and of all suits in equity and actions at law brought (otherwise than against any agency charged with the administration of this Act, or any officer or employer thereof) to enforce any liability or duty created by this Act. Any such criminal proceeding may be brought in the district wherein any act or transaction constituting the offense or violation occurred. Any such civil suit or action may be brought in any such district or in the district wherein the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections 128 and 240 of the Judicial Code, as amended (U.S.C., title 28, secs. 225 and 347). No costs shall be assessed for or against the Commission in any proceeding under this Act brought by or against it in the Supreme Court or such other courts.
(b) In case of contumacy or refusal to obey a subpena issued to any person, any of the said United States courts within the jurisdiction of which said person guilty of contumacy or refusal to obey is found or resides, upon application by the Commission may issue to such person an order requiring such person to appear before the ('ommission, or one of its examiners designated by it, there to produce documentary evidence if so ordered, or there to give evidence touching the matter in question; and any failure to obey such order of the court may be punished by said court as a contempt thereof.
(C) No person shall be excused from attending and testifying to or from producing books, papers, contracts, agreements, and other records before the Commission, or in obedience to the subpena of the Commission or any member thereof or any officer designated by it, or in any cause or proceeding instituted by the Commission, on the ground that the testimony or evidence, documentary or otherwise, required of him may tend to incriminate him or subject him to a penalty of forfeiture; but no individual shall be prosecuted or subject to any penalty or forfeiture for or on account of any transaction, matter, or thing concerning which he is compelled, after having claimed his privelege against self-incrimination, to testify or produce evidence, documentary or otherwise, except that such individual so testifying shall not be exempt from prosecution and punishment for perjury committed in so testifying.
EFFECT ON EXISTING LAW
SEC. 27. (a) The rights and remedies provided by this Act shall be in addi. tion to any and all other rights and remedies that may exist at law or in equity. Nothing in this Act shall affect the jurisdiction of the securities commission (or any agency or office performing like function) of any State over any security or any person insofar as does not conflict with the provisions of this Act or the rules and regulations of the Commission thereunder.
(b) Nothing in this Act shall be construed to modify existing law with regard to the binding effect on any member of any exchange of any action taken by the authorities of such exchange to settle disputes between members or with regard to the binding effect of such action on any person who has agreed to be bound thereby or with regard to the binding effect on any member of any disciplinary action taken by the authorities of the exchange as a result of violation of any rule of the exchange, insofar as the action taken is not inconsistent with the provisions of this Act or the rules and regulations of the Commission thereunder.
VALIDITY OF CONTRACTS
Sec. 28. (a) Any condition, stipulation, or provision binding any person to waive compliance with any provision of this Act or of any rule or regulation made thereunder, or of any rule of an exchange required thereby shall be void.
(b) Every contract, including any contract for listing a security on an exchange, made in violation of any provision of this Act or of any rule or regulation thereunder and every contract heretofore made the performance of which involves the continuance of any relationship or practice prohibited by this Act or any rule or regulation thereunder shall be void as regards any cause of action arising after the effective date of such provision, rule, or regulation. This section shall not afford any grounds for defense to any suit brought to enforce the collection of any evidence of indebtedness by any person who acquired the same in good faith for value without actual knowledge of such illegality.
FOREIGN SECURITIES EXCHANGES
Sec. 29. It shall be unlawful for any broker or dealer, directly or indirectly, to make use of the mails or of any means or instrumentality of transportation or communication in interstate commerce for the purpose of effecting on an exchange situated in a place not subject to the jurisdiction of the United States any transaction in any security the issuer of which is a resident of, or is organized under the laws of, or has its principal place of business in, a place subject to the jurisdiction of the United States in contravention of such rules and regulations as the Commission may deem necessary or appropriate in the public interest or for the protection of investors or to prevent the evasion of this Act.
SEC. 30. Every national securities exchange shall pay an annual registration fee for the privilege of doing business as a national securities exchange during the preceding calendar year or any part thereof. Such fee shall be paid to the Commission on or before March 15 of each calendar year. Such fee shall be an amount equal to one five hundredths of 1 per centum of the aggregate dollar, amount of the sales of securities transacted on such national securities exchange during the preceding calendar year.
JURISDICTION OF OTHER AGENCIES OF THE UNITED STATES
SEC. 31. All powers given and duties imposed hereunder to or upon the Commission insofar as they apply to national banking associations or to a receiver, conservator, or other liquidating agent thereof shall be exercised or performed by the Comptroller of the Currency, and all applications, reports, and documents to be filed by such associations or persons shall be filed with the Comptroller of the Currency; and all powers given and dutieg imposed hereunder to or upon the Commission insofar as they apply to state member banks of the Federal Reserve System shall be exercised and performed by the Federal