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make it worth while to give an adequate amount of his time and attention to its direction and management, resulting in a form of absentee management that is most undesirable.

The many provisions of the bill fixing penalties and personal liability should be made less drastic and the basis for such liability should be modified. This bill carries the same objectionable provisions imposing the burden of proof upon the defendant in civil litigation and upon the accused in criminal prosecution which have been criticized in the Securities Act of 1933. There is no justification for them and the existing rule of law should be maintained. Consideration should be given also to the impropriety of imposing any such liability upon individuals for misstatements unless made willfully.

The prohibition against the use of unlisted securities as collateral and fixing by statute or by arbitrary action of the Federal Trade Commission of the collateral value of listed securities for bank purposes would prove an unjustifiable hardship upon the owner of such securities and a serious interference with their distribution and subsequent market value.

The seriously inflationary effect of the application of this provision to loans then outstanding and secured by listed and unlisted securities would be sufficient in itself to check recovery during the resulting liquidation, but when coupled with the practical prohibition that such liquidation would have upon the issuance and distribution of new securities, it may be anticipated that no progress toward recovery would be possible during this period. Mr. Dickinson has brought out forcibly in his testimony on this bill before the Committee on Interstate and Foreign Commerce of the House of Representatives that the rigidity of this flat margin provision would check the desirable expansion of security issues during periods of depression just as it would probably check the undesirable expansion speculation in boom periods.

If business needs capital for prosperity, it is in the public interest to not burden the securities issued by business for the procurement of such capital with such stringent regulations with respect to their use as collateral as to interfere with their free issuance, distribution, and retention. The present method of fixing the collateral availability of such securities by the Federal Reserve System appears to be entirely adequate for the protection of the public interest.

The Banking Act of 1933 required the separation of investment banking from commercial banking. This bill proposes to separate brokerage from security distribution. The first step-that is, the separation of investment banking from commercial banking-has forced a reorganization of the largest channels in the country for the distribution of the securities of private enterprise. This second proposed step—that is, the separation of brokerage from security distributionwould force a further reorganization and rearrangement of such facilities. One of the serious obstacles to the marketing of corporate securities is the existing general disruption of the organizations previously engaged in the underwriting and distribution of such securities. Any further disruption of this character would further retard the essential distribution of such securities.

The provisions of this bill which have been criticized are calculated to reform past abuses without consideration of their effect upon present recovery. The abuses sought to be corrected are largely those of uncontrolled speculation upon the securities exchanges. The need for regulation of such speculation is well recognized, but it should be noted that speculation of this character occurs generally after a long period of prosperity and not at the bottom of a great depression or in the early stages of recovery. More than everything else, this country needs encouragement to recovery and to a return to the initiation by private enterprise of new ventures which will restore employment. This cannot be accomplished with enterprise in the strait-jacket created by the Securities Act of 1933 and tightened by this bill.

It is held that adequate regulation of the national securities exchanges can be obtained without interference with industrial recovery, and it is recommended that the scope of this bill be limited strictly to that objective.

GEORGE H. Houston,

Vice President.

STATEMENT OF THOMAS GARNER CORCORAN, COUNSEL WITH

THE RECONSTRUCTION FINANCE CORPORATION, WASHINGTON, D.C.

The CHAIRMAN. Mr. Corcoran is here, who has been interested in the drafting, with a group of gentlemen from the Treasury, the Federal Reserve Board, the Federal Trade Commission, and other interested people, and I have asked Mr. Corcoran to come here this morning and tell us the differences between this bill before us and the original bill.

Tomorrow we hope to have the representatives of the Federal Reserve Board and the Treasury here to tell us what effect they think this bill will have on banks and bank credits, and matters of that sort.

Mr. Corcoran, you may proceed.

Mr. CORCORAN. Mr. Chairman and gentlemen of the committee: This draft, as I understand it, represents a bill on which the staff of the Treasury and the staff of the Federal Reserve Board can agree. It is the result of an attempt to take into consideration every criticism, whether it seemed fair or unfair, of the original bill.

Mr. MAPES. Mr. Corcoran, I did not hear your first statement.

Mr. CORCORAN. Oh, I am sorry. This bill, this draft, represents something on which the staff of the Treasury, the draftsmen of the original bill and members of the staff of the Federal Reserve Board, have sat around the table with Mr. Pecora's group and some others and been able to agree. It represents an effort to take every criticism

Mr. Mapes. You mean by that that the Treasury Department and the Federal Reserve Board endorse this draft?

Mr. CORCORAN. They worked this draft out with us. I am not going to put words in anyone's mouth. They will be before you tomorrow, I understand, to tell you their position on this bill. We have worked on this bill for 8 days and nights. Mr. Rayburn stepped in on the final conference.

I understand that Mr. Tom Smith, representing the Treasury, and Governor Black, of the Federal Reserve Board, will appear before you on this draft. I understand that the staff of the Treasury and the staff of the Federal Reserve Board feel they can recommend this bill.

As I say, every criticism of the first bill, both those that seemed fair and those that seemed unfair, have been honestly weighed by a group that has sat around a table in the Federal Reserve Board room for over 8 days, trying to evaluate those criticisms and trying to fit them into the frame of a bill.

We have also had, of course, the benefit of two additional bills that have been floating around town, particularly a draft written, as I understand, by Mr. Desvernine, counsel of the Association of Stock Exchange Firms, which follows the original bill in skeleton and in chapter headings.

The principal changes made in this bill have been outlined for you very carefully in a mimeographed statement distributed to you last evening

If we should try to pick out the two features most important in the light that they have been changed the most, they would be the margin provisions and the provisions relating to the segregation of brokers and dealers.

I think we would probably best start with an explanation of the changes made in the margin provisions to show you how carefully the attempt has been made to work out all of the difficulties that were represented to be inherent in the first bill.

You will remember that one of the things most worried about in the margin provisions by those who opposed the first bill, was the possibility that it would bear down unduly on the banks, and that it would force the banks to liquidate loans that were already under water by the test of the new margin requirements.

To consider that problem, first, I would suggest that you turn to page 18 (f) in the new bill:

(f) The provisions of this section shall not apply on or before January 31, 1939, to any loan, renewal, or extension thereof made on any security or securities prior to the enactment of this Act, or on any exempted securities and/or securities registered on a national securities exchange substituted therefor: Provided, That at no time shall the amount by which the loan exceeds the maximum loan which may be maintained under subsection (c) or (e) of this section VI be increased by any substitution or withdrawal: And provided further, That when and after the market value of securities registered on a national securities exchange securing any such loan, extension, or renewal, would permit an initial extension under this section VI of the amount of credit represented by such loan, extension, or renewal, the provisions of this section Vì shall apply to the maintenance of such credit.

The margin provisions have now been divided so that different percentage requirements are made for the initial opening of a margin account and for its maintenance. On the initial opening of the account, the broker can lend only 40 percent of the market value of a speculative security; but he can carry that security down to the point where he is lending 60 percent before he has to close the security out.

Now, this subsection (f) fixes a deadline date at January 31, 1939. That deadline was fixed as the result of consultation between representatives of the Federal Reserve Board and representatives of the Comptroller of the Currency to warn banks that at some definite time they will have to have cleaned out these hangover accounts, so that the banking system will not be carrying over bad loans for 10 or 12 years. At the end of 5 years present loans have to meet the new margin requirements, but nothing happens to them for 5 years. Any charges therefore that any deflationary liquidation of accounts will be necessitated by the margin provisions of the bill are now I think thoroughly evaporated.

You will notice at the very end of that section a provision that if a loan now under margin gets above water to the extent where it could meet the 60 percent initial margin requirement, that is, gets to a point where the value of the securities is high enough so that the banks or brokers could initially open the account as it then stands, the margin requirements become applicable insofar as the maintenance of that loan is concerned. That is, the value of the securities have to get up to a 60 percent margin, but once they reach that 60 percent margin, the loan becomes subject to the margin rules of the bill insofar that the bank or the brokers cannot carry the account after it drops 20 points more. That avoids creating a situation where a bank will carry an undermargined account only up to the point where the account just gets its head above water and then clip it off. The bank is allowed to carry the account down another 20 points.

Mr. KENNEY. Is that all in (f)?
Mr. CORCORAN. That is all in (f).

Mr. KENNEY. Would there not be a disposition on the part of the banks to sell stock now under water if it should get up to the point where it net the legal margin requirement and then began to sag off and drop again.

Mr. CORCORAN. There will be no compulsion on the bank to call a loan, sir, until it gets away down again below the point at which a loan may be maintained, which means in the case of 40 percent speculative securities a 20 percent drop.

Mr. KENNEY. They would not carry that loan down 21 points? Mr. CORCORAN. Not once it gets above water again.

Mr. KENNEY. They cannot carry it down to 39 percent when it gets above water again?

Mr. CORCORAN. No. But the bill gives lots of leeway, so far as the law is concerned. What the banks will actually do in practice, I do not know.

Mr. KENNEY. Once it gets above water, the loan is outside of this deadline, if it again drops down to 39 percent, one point under the 40-percent maintenance requirement?

Mr. CORCORAN. When a loan once gets above water, it is outside of the protection, and if it drops down to 39-percent margin it cannot be maintained. That is taking a 60-percent margin, which is the correlative of 40-percent loan value, once a loan gets up to 60-percent margin if it drops from that 60 percent to 40 percent again, the bank would have to call the loan.

Mr. KENNEY. And are you not of the opinion that there would be a tendency on the part of the banks to call those loans, once they get, as you say, above water?

Mr. CORCORAN. No more, sir, than there is now; there will be no legal requirement for them to clip the heads off those loans. I mean, the banks

Mr. KENNEY. While there is not any requirement, that would in all probability happen?

Mr. CORCORAN. Well, the bill cannot prevent the banks doing what most of them will do, anyway. I do not think that you can hope to have the bill include a moratorium to prohibit the clipping of the accounts by the banks.

Mr. MARLAND. These people have suffered so much, particularly during the last 4 years, that they ought to have 5 years to get out. That is the thought I had in mind.

Mr. CORCORAN. So far as the law is concerned, this bill gives the banks all of the leeway in the world.

Mr. MERRITT. If the banks want to get out, they can get out.

Mr. CORCORAN. The law cannot stop them from doing that, Mr. Merritt. The minute a bank gets a loan above water, it is going to take something more than leniency in a law to prevent the bank from snipping the loan off.

Mr. LEA. What is to be gained, from the public standpoint, in interferring with a loan that has long since been made?

Mr. CORCORAN. It is substantially the same point that the Comptroller of the Currency made, sir, on the 5-year limitation—that there must come a point at which for the benefit of their own depositors the banks will have to put their houses in order. Although

you should be completely lenient with loans at present under water, until they reach a point where they are perfectly safe and very, very highly margined, there is no reason why, since substitutions are permitted that after they once reach a 60-percent margin, the same consideration as to public policy should not apply as those applying to the carrying of margin accounts which had never been under water.

Mr. MARLAND. That is regarded as beneficial to the customer, or the bank, or the broker?

Mr. CORCORAN. To both, sir.

Mr. MARLAND. Did the Treasury Department and the Federal Reserve agree as to the provisions of this margin provision?

Mr. CORCORAN. Yes.

Mr. MARLAND. That represents the united judgment, and you all egreed to this compromise?

Mr. CORCORAN. Yes. But I do not want to put words in anyone's mouth. You had better ask them about it. But so far as I understand; yes.

The CHAIRMAN. I can make this statement: Sunday night Mr. Smith, who is the Assistant Secretary of the Treasury, and who was acting in that capacity when we finished this bill, said that he would recommend to the Treasury that the bill as drawn be recommended to Congress. Said that as the bill was drawn at that time, as a result of the agreement which was reached, he would recommend to the Congress, that it be passed, and it was the view of the Treasury, so far as he was individually concerned.

Mr. Mapes. Does that include the Secretary of the Treasury, Mr. Chairman?

The CHAIRMAN. I think whatever Mr. Smith says here will have the approval of the Secretary of the Treasury.

Mr. CORCORAN. Mr. Smith is the Assistant to the Secretary to whom the Secretary deputed the handling of this job.

Mr. Mapes. Has the draft had the final approval of the Secretary of the Treasury, or are you not able to make that statement?

Mr. CORCORAN. I just do not know, sir.
The CHAIRMAN. How is that?

Mr. Mapes. I asked whether or not the draft had the final approval of the Secretary of the Treasury.

The CHAIRMAN. We will just have to wait for 24 hours and find that out. I thought that that might shed some light on the subject for the benefit of the members of the committee, and I am just repeating his words; but I believe that we can make time if we go along, and ask him when he comes tomorrow.

Mr. CORCORAN. Shall I proceed?
The ChairMAN. All right.

Mr. CORCORAN. Now, if we may go through the margin provisions again, on page 13.

Mr. Mapes. Let me ask you another question while we are on this. Mr. CORCORAN. Certainly.

Mr. Mapes. In brief, subsection (f) means that after the securities on loans now existing get, as you say, above water, those loans will come within the provisions of the law the same as though they were made after the enactment of this act?

Mr. CORCORAN. Where they reach the point, sir, where they are far enough above water so that a broker or a banker could then make

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