is no reason, if the public interest is such that there should be a limitation on margins at all, why these margins should not go into effect as soon as possible. Therefore, with the complete exemption of past accounts from the application of these margin provisions, the effective date for the application of new margins on new accounts has been moved up to August 1.

Mr. PETTENGILL. May I ask a question, Mr. Chairman?
The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. Mr. Corcoran

Mr. CORCORAN. Yes.

Mr. PETTENGILL. Under the bill as written, if it went into effect today, would it require forced liquidations?

Mr. CORCORAN. What is that, sir?

Mr. PETTENGILL. If the bill as changed went into effect today, would it force liquidations?

Mr. CORCORAN. No.

Mr. PETTENGILL. Why not?

Mr. CORCORAN. It would not touch a single existing account.
Mr. PETTENGILL. On the present current market prices?

Mr. CORCORAN. All of those accounts would be exempted under the provisions of subsection (f) we have been talking about for the last few minutes. This bill would not force liquidation of a single account in either the banks or with the brokers.

Mr. PETTENGILL. Under-water accounts, you mean?

Mr. CORCORAN. Yes; it would not force liquidation of any accounts. because of these margin requirements

Mr. PETTENGILL. It might force the closing of accounts.

Mr. CORCORAN. What is that, sir?

Mr. PETTENGILL. It might force the closing of accounts, if there was a slight drop in the market.

Mr. CORCORAN. No.

The CHAIRMAN. What you are trying to say, Mr. Corcoran

Mr. CORCORAN. All present accounts are exempted from all of the provisions of the act. They could be maintained.

The CHAIRMAN. What you are trying to say is that the bill does not, but you cannot tell what the banks would do.

Mr. CORCORAN. You cannot tell what the banks would do.

But let us make very sure about that, sir. If we may go back a moment to page 18, and the provision of the bill that relates to both initial opening of accounts and maintenance of accounts, you will note:

(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.

Now, these margin sections have been worked out so that a borrower can substitute within an account if he keeps it with the same broker, or the same banker, so long as he does not increase the loan, and also that he can transfer an account from a broker who is unreasonably squeezing him to another broker.

Mr. KENNEY. If the security was up to 60 percent at the time this law went into effect, that would probably have the effect of causing some liquidation?

Mr CORCORAN. No, sir. If the security was at 60 percent, the bank could then carry it down to 40 percent before the bank would be compelled to liquidate.

Mr. MAPES. Mr. Chairman, may I ask a question?

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. May I ask you this

Mr. CORCORAN (interposing). I do want to be certain that (f) is very clear, because we worked out these provisions as carefully as possible to make certain that there could not be any deflation through forced liquidations of accounts.

Mr. KENNEY. Suppose the security is 40 percent. Will that result in many liquidations, if the security is 40 percent at the time of the passage of this act?

Mr. CORCORAN. No; not until the security gets up to 60 percent. Mr. KENNEY. I mean, under the law, the bank might be inclined to liquidate?

Mr. CORCORAN. I do not know why it should, sir. It is not compelled by law to dump, and any bank which has a 40 percent margin these days is resting pretty easily. The law requires nothing and puts no pressure on the bank at all.

A loan is not to become subject to these margin requirements until it runs up to a 60-percent margin, and then drops again to 40 percentthat likelihood is very, very small

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. Mr. Corcoran, I did not have an opportunity to look at this bill until we convened this morning, that is the new draft. I notice throughout this section it speaks of listed securities, and also "other than exempted securities."

Mr. CORCORAN. I know what you are thinking, sir. If you will

turn over to

Mr. MAPES (continuing). And the definitions of the term "exempted security" is found on page 8

Mr. CORCORAN. Yes, sir.

Mr. MAPES. That seems to say that an exempted security is a present obligation of the United States Government and some of the agencies of the Government, "and such other securities and instruments as the Commission may by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors."

Mr. CORCORAN. And for specific sections of the act, or for the whole act, as the Commission thinks wisest.

Mr. MAPES. I was wondering what you and the others responsible for this draft had in mind that that would include. How general is the class of exempted securities to be, or how limited is it to be?

Mr. CORCORAN. It is not possible at this time, sir, to tell just what classes of securities and what grades within those classes the Commission would find wise to exempt. The difficulty with exempting securities by classes, sir, is that at the present time there is so tremendous a variety of gradations within securities of different classes. Mr. MAPES. Would it include the securities of local companies, for example, that were seasoned and had a well-defined valuation in the local communities?

Mr. CORCORAN. And are listed?

Mr. MAPES. And were not listed on the stock exchanges.

Mr. CORCORAN. Well, sir, the only real control that the Commission would have over those unlisted securities would be in connection with its attempt to control the so-called "over-the-counter" market.

Mr. MAPES. The old draft seemed to limit the right of a business man to go to the bank and make a loan on perfectly good collateral if it was not a listed security.

Mr. CORCORAN. There was no limitation of that kind, sir, in the old draft, unless the proceeds of the loan were to be used to buy or to carry other securities, and in this draft the

Mr. MAPES (interposing). There was, unless a person had owned the securities for 30 days.

Mr. CORCORAN. That has all been stricken out.
Mr. MAPES. That has all been stricken out?

Mr. CORCORAN. Yes. That ties up with the problem that was bothering Mr. Wadsworth when I was last here about a man's going into a bank with securities he had owned for 30 days and arranging on them a loan which he did not intend to use for the purpose of carrying other securities. You will notice that in this draft that situation has been left completely to the regulations of the Federal Reserve Board, which may lay down rules and regulations to make sure that in such cases the amount by which the loan exceeds that which might have been extended for the purpose of purchasing and carrying securities is not used for such purposes.

You will see that, sir, back here on page 18.

Mr. WADSWORTH. I wish that you would develop that a little further.

Mr. CORCORAN. I am between two fires, just now.

Mr. WADSWORTH. Excuse me, Mr. Mapes.

Mr. MAPES. Just for a minute.

Mr. CORCORAN. Yes.

Mr. MAPES. Suppose that a customer of a stockbroker approached him for a loan and offered to put up good collateral, but unlisted. What I am trying to get at is: Would that come under this exemptedsecurity definition?

Mr. CORCORAN. I should not think so.

Mr. MAPES. Just what is security contemplated by the term "exempted security"?

Mr. CORCORAN. It is contemplated to cover, first of all, Government bonds. Then, there may be other classes of securities that for the purpose of particular sections should not be included within the purview of those sections.

Mr. MAPES. Under this language you do not enumerate securities or bonds of municipalities?

Mr. CORCORAN. For a perfectly good reason, that at the present time, municipals are running very unevenly. The fact that the Senate has already passed a municipal bankruptcy bill, and there is now pending before your House a municipal bankruptcy bill, argues that you can no longer put all municipals in the same exempted grade as Government bonds.

Mr. MAPES. I assume that you do not put municipal bonds in at all?

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Mr. CORCORAN. Probably in many cases some grades of municipal bonds would be exempted, but I do not think the Commission would feel that it could exempt all municipals.

Mr. MAPES. I assume that as long as municipals are not included, that it is not intended to include the bonds or stocks of private corporations; is that right?

Mr. CORCORAN. I am quite sure that is true, sir.

Mr. MAPES. Do you think that the Commission would exclude all securities of all private corporations from this exemption class?

Mr. CORCORAN. I cannot answer that question, sir. The purpose of leaving the exemption provision as broad as it has been left, is to leave the matter to the Commission to handle it as needs develop in a very flexible way, without tying the Commission's hands by too many specifications in the bill. I cannot answer the question you have put to me, sir, as to what the action of the Commission would be in a particular case, because that action would be determined by the specific circumstances under which the case came to the Commission in good time.

Mr. MAPES. I am wondering if the drafters of the bill thought that those all ought to be excluded.

Mr. CORCORAN. No. We had no feeling one way or the other way upon it, sir. We simply felt that the only safe complete exemption you could make at the present time was United States Government. Then as necessities arose and the flexibility and the workability of the act required, the Commission could make such other exemptions as it chose.

Mr. MAPES. You would leave the matter entirely within the discretion of the Commission without any yardstick to guide it?

Mr. CORCORAN. We have given it one yardstick, sir, in Government securities.

Mr. MAPES. But outside of that?

Mr. CORCORAN. Outside of that, sir, the securities situation at the present time is so jumbled up that it is not advisable to give specific directions as to exemptions. The municipal situation is one indication of that.

Mr. MAPES. But you have no idea of restricting the Commission in its judgment to Government or

Mr. CORCORAN (interposing). No.

Mr. MAPES (continuing). Or municipal bonds?

Mr. CORCORAN. No. This is a loophole to let the Commission give the act such lubrication as it needs to avoid its application to situations where its application is unnecessary in the public interest. Mr. MERRITT. Mr. Chairman

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. I would like to know how this bill affects the situation in the part of the country I come from-New England. Mr. CORCORAN. I come from New England, also.

Mr. MERRITT. Where there have been, as you know, great numbers in all the States of small corporations which have existed for generations; a good many of them are family corporations.

Mr. CORCORAN. Yes.

Mr. MERRITT. Now, they are not of a size that warrants their listing on an exchange, very often, and yet the banks in that vicinity know that their stocks are good and reliable.

- Under the old bill there was a provision which apparently prohibited that stock from being put up as a collateral at all.

Mr. CORCORAN. Those stocks could not have been put up, sir, in brokers' accounts. But they could have been put up in banks'

accounts.

Mr. MERRITT. Well, there was a provision to the effect that unlisted stocks could not be used as collateral.

Mr. CORCORAN. No; that was not true. Brokers were not permitted to lend on unlisted collateral, but banks were permitted to lend on both listed or unlisted collateral.

But

Mr. MERRITT. Under the old bill. I do not care to argue it. a bank that dealt with a broker got in the class of a broker after all. Mr. CORCORAN. To be very careful about that, you will notice that the new bill expressly excludes banks from definitions of brokers and dealers.

Mr. KENNEY. What section?

Mr. CORCORAN. May I continue for just one second? You will notice that, sir, in (7) on page 6. It also excludes from the definitions of broker and dealer a man who just buys securities for his own account and is not in the business of making a profit by merchandising them, like an ordinary dealer.

Mr. MERRITT. There is something that I want to clear up in my mind. Under the new bill, how far can the Commission go in interfering with or controlling the banks in New England, for instance, in loaning money on stock of corporations that they have been dealing with for years?

Mr. CORCORAN. So far as loans to the corporations are concerned, the bill does not interfere at all, except as to corporations intending to put up securities of other corporations as collateral. So far as loans to others on the collateral of stock or other securities of those corporations are concerned, they cannot go into brokers' accounts. Mr. MERRITT. What?

Mr. CORCORAN. They are not eligible collateral for brokers' ac

counts.

Mr. MERRITT. No.

Mr. CORCORAN. But they are eligible collateral for bank loans, and as collateral for bank loans they are eligible for any amount of loan, so long as the excess over what might be lent for the purpose of carrying securities, is lent under such conditions as the Federal Reserve Board prescribes to make sure there will be no evasion.

Mr. MERRITT. I should say that a prudent man would not interfere with them at all.

Mr. CORCORAN. No. I am coming to that bank-collateral situation in just a moment, sir.

There was among members of the Federal Reserve staff, as you will find in many places, a very distinct feeling that the brokers should be taken out of the lending business completely, and the control of credit put completely in the banks; that a broker should be only an agent to execute orders, and should not be a banker, a lender, who by his willingness to lend money tempts a customer into buying more than the customer wants to buy, or can buy without that assistance of speculative credit. That feeling that all lending functions ought to be in the hands of the banks, which require a borrower to make an adequate proof of credit standing to get a loan on securities, rather