remove their securities from listing on exchanges in smaller financial centers, thus aggravating the situation. The drastic and rigid margin requirements under section 6 (b) would in all likelihood prompt further substantial liquidation of securities. Those responsible for the writing of this bill, no doubt, were largely influenced by the revelations made before the Banking and Currency Committee of the Senate, and, as is often the case, when concentrating upon abuses and their correction the suggested remedy may do an incalculable harm. Will the commission at all times in the future be better able to regulate the amount that can be safely loaned on a given security than broker-dealers and the banks from whom they in turn borrow?

We believe that the volume of credit used by stock exchange members can be regulated under the banking act of 1933; the effective curb to undue speculation is the curtailment of credit. Prices of stocks cannot be advanced inordinately unless the purchases can be financed. Officers of banks with their knowledge of security markets who pass upon collateral loans, when acting solely in the interest of the depositors and stockholders, are able to place proper loan values on collateral offered. Thus unwise and destructive speculation can be better regulated. It is our belief that the reasons for regulating stock exchanges and their members arose from the disclosures developed by the investigations of the Banking and Currency Committee of the Senate in the past 2 years. We believe that the overwhelming majority of the members of the New York Stock Exchange are in whole-hearted sympathy with your desire to eradicate any practice detrimental to the best interests of the public and believe if the governors of the New York Stock Exchange had been more fully advised of the feeling in different parts of the country toward practices that some regarded as detrimental to the best interests of the public, that remedial measures would have been adopted sooner.

If, as we recommend, the management of the exchanges is to be left to the exchanges with such regulation as Congress decrees, we believe the opinions of the various parts of the country should be expressed through representation on the board of governors of the New York Stock Exchange by members located in various parts of the United States.

We are convinced that the day to day management of the New York Stock Exchange must be conducted by governors available for immediate decisions. For that reason it may be inadvisable to enlarge the governing committee to a point where it would be difficult to obtain a quorum, but the out-of-town members selected could be formed into an advisory committee to meet frequently with the governing committee.

Following our belief that the proposed regulations are suggested as a result of the disclosures of certain practices on the New York Stock Exchange, we presume the regulations suggested are for the purpose of eliminating such practices and respectfully suggest that the regulations be confined thereto and not extended to affect other functions of broker-dealer business to the detriment of the general public.

With that in mind we suggest changes in several sections under the heading "Definitions." Section 3, subdivision 4, to read, "The term 'broker' means any person engaged in a business of effecting transactions in securities for the account of others, for which service a commission is charged. The definition as given in the bill could be interpreted to include banks and trust companies who buy securities for the account of others.

Section 3, subdivision 5 to read, "The term 'dealer' means any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise, the chief purpose of which is to give investors a service that will enable them to buy or sell securities, whether listed or not, which cannot be purchased or sold to better advantage on a national securities exchange. A dealer also may be an underwriter and distributor of securities." We urge the elimination of section 6 for reasons given previously.

We urge the elimination under, "Restrictions of members borrowing" section 7 (a).

To prohibit a member of a national securities exchange from borrowing from any person other than a member bank of the Federal Reserve System would work an extreme hardship on broker-dealers located outside of the principal financial centers. In the ordinary conduct of business broker-dealers find it necessary to carry open accounts with their correspondents in the financial centers where the larger stock exchanges are located. If broker-dealers are denied the privileges of carrying such accounts with their broker correspondents, they could only use a member bank of the Federal Reserve System to clear their transactions. Even if practical, this would naturally incur another charge to be passed on to the public.

We suggest a change in the heading, “Segregation and limitation of the funetions of broker, specialist, and dealer", on page 21 to read "Segregation and limitation of the functions of broker and specialist.

It has been stated before your committee that the segregation of “broker" and "dealer" was to give greater security to the clients of brokers, reciting the failure of four New York Stock Exchange firms, chiefly because of their "dealer" commitments. Compare the remarkably low percentage of failures of private banking firms to other failures and we believe you will agree that their is no apparent need to prescribe such stringent regulations as would destroy the necessary part of our financial structure as would be the result of the proposed segregation of broker and dealer.

We strongly urge the elimination of the first sentence of section 10.

We appreciate the opportunity you have given us to appear before you and express our views on the pending legislation.

WILLIAM G. Baker, Jr.,
JOHN C. LEGG, JR.,

ELLICOTT H. WORTHINGTON,

Representing 18 broker-dealers of Baltimore, Md.

THE MERCHANTS' ASSOCIATION OF NEW YORK,

March 12, 1934.

Hon. SAM RAYBURN,

Chairman Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C. MY DEAR CONGRESSMAN: In response to your letter of March 10, concerning an opportunity to be heard on the bill proposing to regulate stock exchanges, we regret that time will not permit us to be heard directly, but in accordance with your suggestion we are enclosing to you a copy of the statement presented by us to the Senate Committee on Banking and Currency concerning the same subject. We request that you will make this statement a part of the record before your committee and that it be considered by the committee when the bill is taken up in executive session.

Sincerely yours,

L. K. COMSTOCK, President.

STATEMENT OF MERCHANTS' ASSOCIATION OF NEW YORK, CONCERNING THE FLETCHER-RAYBURN BILL TO REGULATE SECURITIES EXCHANGES

MARCH 1, 1934.

The Merchants' Association of New York, representing some 4,500 business enterprises and touching almost every branch of business and industry in the Nation, is profoundly disturbed by some of the provisions of the Fletcher-Rayburn bill to regulate security exchanges (H.R. 7852; S. 2693).

It is disturbed primarily by the extent to which the terms of these bills would subject all business and industry, both large and small, in this country to arbitrary bureaucratic control, and secondarily to the restrictions which would be placed upon the open market for corporate securities.

The association frankly recognizes that the period of economic depression which we are now experiencing has emphasized faults and abuses in the financial system under which we were operating in the preceding period of prosperity. It has no desire to condone the abuses nor to perpetuate the faults, but it does insist that in the effort to remedy these faults and abuses we should not cripple legitimate business, stifle initiative, destroy the liquidity of securities or place our private business at the mercy of bureaucratic inquisitors operating under blanket authority.

As business men, we believe that under any sound, advanced form of financial organization, we are entitled to a market to supply our needs for long-period capital and to an organization capable of transferring ownership rights in already existing securities properly and efficiently.

The Federal Securities Act, through its too drastic restrictions, liabilities, and penalties, has to a dangerous extent deprived us of the opportunity to obtain new long-period capital on reasonable terms. The Federal Banking Act of 1933, by requiring the divorce of banking affiliates from our large commercial banks, has greatly restricted the organizations engaged in or capable of carrying on investment banking. This association approves of the divorce of banking affiliates, but

it desires to point out that this proper act, taken in connection with the restrictions of the Federal Securities Act and the provisions of the Fletcher-Rayburn bill prohibiting the exercise of the functions of broker and underwriter by the same persons or companies, will so greatly restrict the capacity to perform the functions of investment banking as to make unnecessarily difficult the supply of long-period capital which is absolutely essential for the return and maintenance of industrial and business prosperity.

We are also mindful of the fact that labor is indirectly concerned with this aspect of the matter because when there is insufficient capital available to a company it cannot employ as many workers as it otherwise would.

METHOD OF CONTROL

Lodging the control over the securities market in the hands of the Federal Trade Commission is open to very serious objections. Since its creation over 20 years ago the Federal Trade Commission has been given various duties from time to time. The most important of these duties were imposed by the Federal Securities Act of 1933. These duties are sufficiently important to require all the time and ability which the members of the Commission may possess without adding thereto the task of supervising and preparing regulations for the conduct of an extremely technical, delicately adjusted business with manifold ramifications into every part of the world.

We respectfully submit that if a Federal regulatory body is to be set up at all it should be set up for the sole and specific purpose of regulating security exchanges and that a large majority of its members be men thoroughly familiar with the problems of security markets.

We also urge, inasmuch as by far the greater part of the securities exchange business is concentrated in New York City, that the office of whatever regulatory body is set up should be located in New York City, the business capital of the country, in order to relieve business men from the expense and delay inseparable from transacting business with a regulatory body located in Washington.

REPORTS TO REGULATORY BODY

It is common knowledge that the reports required by the Interstate Commerce Commission impose a tremendous cost upon the public utilities now under its regulation. It is also common knowledge that the Federal Trade Commission had from time to time required corporations to expend huge sums gathering information for that body from which little or no constructive results are discernible.

We are fearful that, if the body charged with the regulation of security exchanges and of securities listed thereon is given the blanket authority proposed in the Fletcher-Rayburn bill to require information of the issuers of all securities listed on exchanges, it will result in great waste and extravagance for the compilation of information which will have little or no real value when submitted. Our great railroad corporations find the expense of filing information for the Interstate Commerce Commission a serious item. Compilation of similar records for the Federal Trade Commission would be a very serious burden upon businesses of ordinary size and might be particularly burdensome if called for in periods of seasonal activity. The tendency to require too voluminous and repetitious information would be particularly strong if the regulatory body were made the Federal Trade Commission and the Commissioners themselves were so preoccupied with their many other duties that the actual work of investigating and analyzing reports on business organizations was left to subordinates.

We, therefore, strongly urge that the power of the regulatory body to demand information be sharply restricted.

CREDIT RESTRICTIONS

The very broad definitions of "member", "broker", and "dealer" contained in section 3 make the requirements of section 6 unnecessary restrictive of credit on the securities of companies not listed on an exchange.

While New York is, of course, the headquarters for very many large companies as the most important center of commercial business and is the largest manufacturing center in the country, it is also the home of an even greater number of comparatively small and medium-sized companies whose securities are not listed

on any exchange, but which are thoroughly sound and profitable. Their securities are certainly entitled to some credit facilities from persons who are acquainted with their worth. This criticism is even more pertinent if the definition of a "member" includes a bank buying or selling securities for its own account or as agent for its customers.

The weaknesses and limitations of the margin requirements proposed in subdivision (b) of section 6 have been thoroughly discussed by others, and the Merchants' Association, in this respect, will merely record its concurrence in the objections already raised, except that it particularly objects to the adoption of any restriction which would lead to a wave of deflation through forced liquidation of loans.

We are strongly inclined to believe that the present margin restrictions of the New York Stock Exchange are sound and reasonable, and that the control of margin requirements should be left in the hands of this body on the ground that it is thoroughly conversant with past experiences in this field and able to act quickly and effectively to remedy faults in the situation as they arise because of its intimate acquaintance with daily developments. Certainly if any margin requirements are to be written into law they should only be of the most flexible nature.

ODD-LOT BUSINESS

The provisions of sections 7 (c) and 10, which prohibit a broker from acting as a principal, apparently would so restrict his activities as to make impractical the odd-lots business which is the only means by which many thousands of legitimate investments can be made. We cannot see any legitimate objection to a man investing in less than 100 shares of high-grade stocks nor any reason for penalizing him other than the small premium required by the rules of the New York Stock Exchange for purchasing less than a round lot. A purchase of 90 shares of American Telephone & Telegraph Co. stock, for example, involves over $10,000, but if the odd-lot business is practically destroyed, as is reasonably argued it would be under the terms of this bill, a man would be practically prohibited from making use of such an investment to finance his business and he would be thereby encouraged to invest in lower-grade stock. We are firmly of the opinion that any advantage which may be gained by separating completely the operations of a broker and of a dealer would be more than offset by the penalty placed upon millions of legitimate investments, particularly those of men and women of small means or businesses of moderate size.

PROXIES

We believe that the provisions of section 13, which require any person soliciting a proxy to send to the person solicited, the names and addresses of persons from whom similar proxies are being solicited, is another instance in which the disadvantages outweigh the possible advantages. The necessity for printing a stockholders' list every time a stockholders' meeting was held would be a considerable item of expense without conpensating advantage in a great majority of cases. We recommend that this provision be eliminated.

OVER-THE-COUNTER MARKETS

The Merchants' Association objects, on behalf of the many small companies which are not listed on any exchange, but which within narrow circles are well known, to the provisions of section 14 insofar as they would prohibit dealing in unlisted securities without complying with all the rules and regulations which the Commission might see fit to prescribe.

AUTHORITY OVER ACCOUNTS AND RECORDS AND EXPENSE OF EXAMINATIONS

The Merchants' Association questions the desirability of the provisions of section 16, which would permit the Federal Trade Commission to require the preparation of any accounts and records which it sees fit and to assess the expense of any examinations made by its order against the company examined. This is very broad inquisitorial power bordering closely on deprivation of property without due process of law. It is obviously open to great abuse at the hands of subordinates and could be carried to an extent which would make a given business unprofitable through too great an increase in its overhead.

EMPLOYEES OF THE FEDERAL TRADE COMMISSION

This association further objects to the exemption of the employees of the Federal Trade Commission from the requirements of the Federal civil-service law as provided in section 30. Past experience with newly created Federal agencies has proven that such an exemption provides a large amount of political patronage and that the efficiency of any agency staffed in this manner is greatly reduced. We respectfully submit that any regulatory body set up with broad powers over security exchanges and general business must be as free from political influence and the inevitable inefficiency which goes with political patronage as possible. We, therefore, strongly urge that this section be amended to require that all of the employees of the regulatory body, with the possible exception of a few technically qualified chief subordinates, be recruited under the restrictions of the Federal civil-service law.

CONCLUSION

In conclusion the association believes that unless this bill is substantially modified in the directions outlined above, its enactment would do more harm than good both to the business community and the investment public by causing deflation of sound loans, by unduly restricting the investment market for long-term capital, by unwarranted restrictions upon credit facilities for the securities of small companies and small investments, and in the laudable endeavor to protect the investing public against fraud, will so cramp that same public with bureaucratic methods and control as to destroy or reduce the value of sound securities far more than the sum which may be saved by reducing fraud.

We most earnestly urge that the importance of the question involved is such as to warrant the most careful consideration for every proposed phase of this subject and the enactment of legislation after mature deliberation. Above all whatever statute is enacted should not be punitive in spirit nor intended to substitute Government supervision and control for the initiative and detailed knowledge which can only come from long and intimate acquaintance with the manifold forms of business organization and needs.

NATIONAL ASSOCIATION OF RAILROAD AND UTILITIES COMMISSIONERS, Washington, D.C., March 15, 1934.

Hon. SAMUEL RAYBURN,

Chairman Interstate and Foreign Commerce Committee,

House of Representatives, Washington, D.C.

DEAR SIR: By direction of the chairman of the committee on legislation of the National Association of Railroad and Utilities Commission, I desire to make certain suggestions concerning H.R. 7852; and I request that this letter be made a part of the printed record of the hearing on that bill.

First, with respect to section 18 of the bill. That section gives to the Federal Trade Commission very broad power affecting exchanges and corporations which issue securities listed upon exchanges. The commission is empowered to prescribe accounts and the methods for determining depreciation. Care is taken, however, to guard against conflict between the requirements of the Federal Trade Commission and the regulations imposed by the Interstate Commerce Commission for carriers subject to the jurisdiction of the latter commission. Lines 8 to 13 of the section, both inclusive, on page 34 of the bill as printed, provide as follows:

But insofar as they (the methods prescribed by the Federal Trade Commission) relate to any common carrier subject to the provisions of section 20 of the Interstate Commerce Act, as amended the rules and regulations of the Commission with respect to accounts shall not be inconsistent with the requirements imposed by the Interstate Commerce Commission under authority of such section 20."

This provision has been thought necessary, by those who drew this bill, to protect the authority of the Interstate Commerce Commission to regulate the accounts and depreciation practices of carriers subject to its jurisdiction.

The State regulatory commissions feel that Congress ought to be, and they believe it will be, just as solicitous to protect State regulatory agencies in the exercise of the powers which have been granted them as to public service corporations subject to their jurisdiction under State laws. They, therefore, ask that the following language be added to paragraph (b) of section 18: