Mr. MARLAND. And you recognize the necessity for that?
Mr. WITHINGTON. Absolutely.

Mr. MARLAND. Then, I would like to ask this question, why have not the exchanges prepared some bill to submit to Congress to cover the necessities that they themselves recognize?

Mr. WITHINGTON. You mean since these hearings?

Mr. MARLAND. Or before. You have recognized the necessity for some time. Why have you not prepared the bill?

Mr. WITHINGTON. Mr. Marland, I have only come into this since this bill was presented. I think a mistake, and a very bad mistake, was made on the part of the exchanges, that they did not recognize that President Roosevelt had written regulation of exchanges as a plank in his platform, and that they should not have had prepared some bill for regulation that was a reasonable and sound one and present it to Congress. I think that was a fundamental mistake. Mr. MARLAND. Can you not get together and do that now? Mr. WITHINGTON. Mr. Marland, since I have been down here, for 3 weeks, I got in contact with the different representatives, different classes of business, New York, Boston, Chicago, Buffalo, and other exchanges, we discussed it, and strange to say, out of all of the differences of opinion, we all came down to one fundamental conclusion, and we sat down and I was delegated to outline the sections of a bill. I did outline that bill, and I do not say that by reason of pride of authorship, but simply because it was not an accident that representatives of the exchanges came to the same conclusion with regard to desirable legislation.

When that bill was drawn, I realized I knew nothing about exchanges, practices in New York City, or in the larger exchanges. I could only speak for Boston or Chicago, and I insisted that I should have the advice of men who for years have been in the most intimate contact with the largest exchange of the world, that was, the representatives of the New York Stock Exchange, and I submitted that outline to them, and, strange to say, I found that it fitted in more or less with their ideas, and we sat down and we worked days and nights, and we hoped that we might have an opportunity to present a bill, but we feared that, if we presented a bill, it would be looked upon with disfavor, and we could not present such a bill as a bill from the New York Stock Exchange, and if some outside exchange submitted that bill, and it was found that it had the approval of the New York Stock Exchange, we feared it might so prejudice it in the consideration of the matter of a reasonable regulation that it would do more damage than good.

The CHAIRMAN. You put a very low estimate on this Committee and Congress in general.

Mr. MARLAND. Mr. Chairman, would there be any objection to having a bill of that sort put in the record?

The CHAIRMAN. No objection on my part.

Mr. WITHINGTON. I apologize, Mr. Chairman; I should not have said that, and I realize that it has prejudiced my case.

The CHAIRMAN. It is all right. We are very much obliged to you. We have got to hear another witness this morning. We hold these hearings because we want information.

Mr. WITHINGTON. Yes, Mr. Chairman, I realize that, and I want to say that the general feeling is that the exchanges have been treated fairly before this committee.

The CHAIRMAN. They have had about two thirds of the hearings, or at least two thirds of the time up to now. We are very much obliged to you.

Mr. WITHINGTON. Thank you.

The CHAIRMAN. We will hear Mr. Thompson.

STATEMENT OF EUGENE THOMPSON, PRESIDENT OF THE ASSOCIATED STOCK EXCHANGES

Mr. THOMPSON. Mr. Chairman and members of the Committee: My name is Eugene E. Thompson. I am president of the Associated Stock Exchanges representing 18 exchanges throughout the country who are our members, and in addition 3 other exchanges that are not members, as follows:

They are: Hartford Stock Exchange, Hartford, Conn.; Baltimore Stock Exchange, Baltimore, Md.; Philadelphia Stock Exchange, Philadelphia, Pa.; Washington Stock Exchange, Washington, D.C.; New Orleans Stock Exchange, New Orleans, La.; Buffalo Stock Exchange, Buffalo, N.Y.; Cleveland Stock Exchange, Cleveland, Ohio; Pittsburgh Stock Exchange, Pittsburgh, Pa.; Columbus Stock Exchange, Columbus, Ohio; Cincinnati Stock Exchange, Cincinnati, Ohio; St. Louis Stock Exchange, St. Louis, Mo.; Minneapolis-St. Paul Stock Exchange, Minneapolis, Minn.; Salt Lake Stock Exchange, Salt Lake City, Utah; Los Angeles Stock Exchange, Los Angeles, Calif.; Los Angeles Curb Exchange, Los Angeles, Calif.; San Francisco Stock Exchange, San Francisco, Calif.; San Francisco Curb Exchange, San Francisco, Calif.; Detroit Stock Exchange, Detroit, Mich.

In addition to our membership and for purposes of these hearings as I have stated, I am representing the following: Louisville Stock Exchange, Louisville, Ky.; Seattle Stock Exchange, Seattle, Wash.; Richmond Stock Exchange, Richmond, Va.

I desire to make a brief statement, Mr. Chairman. As I have been absent from the city and have not had an opportunity to review the amendments as closely as I would like, with your permission, I would be glad, if you would allow me to, to file a statement tomorrow.

In the meantime, may I take this opportunity to say that the statement which has been made this morning by Mr. Whitney has the hearty approval of the Associated Stock Exchanges and the other exchanges which I represent.

It is not possible for me to get all of those exchanges here to speak for themselves, but insofar as I have the power to speak for them, it is my purpose to endorse the statement as made by Mr. Whitney.

I would like to add, however, that section 10, dealing with segregation, in the memorandum that I will file, I am going to deal with the question of the smaller exchanges, the odd-lot dealer and the specialist, because I feel that the amendment as now worded has not given fair consideration to the business on the small exchanges.

I would say that 75 percent of the business that is done upon the local exchanges is in odd lots, and for that reason I fear that in the wording of the amendment due consideration of the damage that will be done to the members of the local exchanges has not been given. With your permission, I would like to file that statement tomorrow, Mr. Chairman.

The CHAIRMAN. We are much obliged to you, Mr. Thompson.

Mr. COLE. Mr. Chairman, may I ask the witness a question?
The CHAIRMAN. Yes.

Mr. COLE. Are you familiar with the bill which Mr. Withington has prepared?

Mr. THOMPSON. I beg your pardon, I did not hear you.

Mr. COLE. Are you familiar with the bill that Mr. Withington has prepared?

Mr. THOMPSON. I am not.

Mr. COLE. Have you ever seen it?

Mr. THOMPSON. I have not.

The CHAIRMAN. We are much obliged to you, Mr. Thompson.

Mr. THOMPSON. Thank you, Mr. Chairman.

(The statement above referred to is as follows:)

STATEMENT OF EUGENE E. THOMPSON, PRESIDENT, ASSOCIATED STOCK EXCHANGES, MARCH 21, 1934

Mr. Chairman and gentlemen of the committee, my remarks will be directed to H.R. 8720. On the occasion of a former recent appearance before this committee, I ventured to assert, in behalf of the Associated Stock Exchanges, of which Í am the president, that the then pending bill to regulate the securities exchanges of the country was unworkable; that it would operate to destroy the usefulness of the essential market places for corporate capital; that it would retard materially if not actually prevent the realization of the President's recovery program; that it would tend to turn the corporate securities business of the greatest industrial country in the world into the hands of racketeers and bootleggers, and that instead of being a measure for the protection of the investor it likely would prove to be the most damaging legislation of its character ever enacted by the Congress.

Now, a new securities bill has been prepared, or rather the old bill has been rewritten in some of its particulars; but in all the essentialities and insofar as original intents and purposes are concerned, the measure remains as it was at the beginning. The form only has been slightly disguised; the substance is apparent and unchanged.

Those of us who have devoted years to deep and earnest study into the problems of the stock exchanges and the securities business have not felt that the bill as drawn in the first instance met, or came anywhere near meeting, the requirements of rational legislation. We do not consider that the amended bill is better or worse than the original. If we should admit for the sake of argument that the stock exchanges are wholly bad, then we should still be compelled to say in candor that the legislation which is proposed here furnishes only an easy means of jumping the corporate securities business of the country out of the frying pan and into the fire.

Oh, well, some of you might say, this witness and those whom he represents would be antagonistic to any kind of a regulatory law. That would not be an accurate assumption at all. We are not opposed, but would rather welcome a law of practical design that contemplates and takes into account only those features and phases of the business of handling corporate securities which are in need of and which are susceptible of regulation. Naturally, we would not favor a law which we believe would destroy the stock exchanges as institutions; and when I mention stock exchanges in this sense you will understand, of course, that I am speaking only for those located outside of New York City. We would not favor à law which places in the hands of a Federal agency, as this bill does the power and the means for controlling, absolutely and minutely, the business of the country.

Statements have been made to the effect that the general business of the country will not be retarded or affected adversely by the passage of this legislation. Such assertions can only come from those who are ill-advised or ignorant. The stock exchanges are the economic barometers-the business pulse of the country. Those of us who by the circumstances of our lives have been thrown intimately into touch with the stock exchange do not merely think that general business will be hit hard-we know it will be. There will be an immediate recession of business with the advent of this legislation. There will be deflation and there will be credit chaos. You gentlemen at this moment verily sit in a position of exceedingly grave responsibility. Even a favorable report by you on this

measure as it is now written is a matter fraught with dangers of a nature the Nation can ill afford to have thrust upon it at this critical period.

The attempt at control of corporations through the medium of a stock exchange regulatory bill cannot be judged otherwise than misplaced legislation. If there is to be control of that kind, then surely it should be out in the opena frank measure providing for such control as may be deemed advisable and proper under a national incorporation act; and that is where it belongs if it belongs anywhere.

We have already had a forerunner of what may happen as a result of this proposed law. Cabled solicitation for American orders in securities already have come from London, and Paris advices are to the effect that recently, in anticipation of what is expected to be done here, there has been an increase of listings in the Paris market. You have all read in the papers that within the last few days stock exchange memberships at Montreal and Toronto, in Canada, have increased in value, while seats on the New York and other exchanges in our own country have been quoted on a basis of a greatly reduced valuation.

May I say that these facts are not to be dismissed as propaganda. If they represent propaganda, then they are the propaganda of serious truths which cannot be overlooked or treated lightly by any citizen, whatever his position may be in the country's affairs, who has the good of the United States at heart.

In a general sense-because I do not care to dwell again upon those points which were covered in my previous appearance here the proposed legislation attempts to reach too far. It seems to grope about in the maze of its own complications and in the darkness of its own confusion. As a layman, I should say it needs to be a simpler law and a shorter one.

Let me single out just a few of the provisions changed in the rewriting of the bill which are still, in our opinion, objectionable.

PAGE 8, PARAGRAPH 13

This exempts only such securities as are direct obligations of or obligations guaranteed as to principal or interest by the United States; such securities as are issued or guaranteed by corporations in which the United States has a direct or indirect interest and which shall be designated for exemption by the Secretary of the Treasury, and such other securities as the Commission, by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors, may exempt from the operation of any one or more of the provisions of the act.

The placing in the hands of the Federal Trade Commission of authority over the securities of States and their political subdivisions which, if the provision is actually enacted into law as worded in the bill, may have far reaching results, and in addition may force the States and their political subdivisions to pay much higher prices for borrowed funds than they have been in the habit of paying, this being due to the uncertainty which will be created as to the qualifications of the securities as "exempt securities."

PAGE 13, SECTION 6, ITEM (A)

This item, while amended in several particulars, still makes no change over the old bill with respect to loans upon securities, other than exempted securities, which are not listed upon a national securities exchange. We submit that this item would work an undue hardship upon those owning the securities of many small corporations which are entirely solvent and have satisfactory ratings.

PAGE 19, SECTION 7, ITEM (A)

When the broker or dealer in the course of business is prohibited from borrowing on any security (other than exempted security) except from a Federal Reserve bank, or in accordance with rules and regulations prescribed by the Federal Reserve Board to permit limited loans between members and brokers or between members and dealers who transact a business in securities through the medium of a member, or to permit loans from or through others than member banks in localities where there are no member banks, or to meet emergency needs-under these conditions it is apparent that the broker will be forced to do business with a member bank of the Federal Reserve System unless there should happen to be no member bank in the locality where he conducts his business. It is unfair to force upon a broker or dealer the obligation of borrowing through a member of

the Federal Reserve System; it is likewise unfair to banking institutions which are not members of the Federal Reserve System to take from them the privilege and opportunity of making such loans.

PAGE 21, SECTION 8, SUBSECTION 2, LINES 22, 23 AND 24

Attention is called to the words, "or a false or misleading appearance in respect of the market for such security or securities." In its import and its operation this language is unfair to brokers. A broker may act in the purchase or sale of securities, and in so doing, but not by his design or purpose, there is created a false or misleading appearance in respect to the market. Why, under such circumstances, should the broker be held accountable when he has only been given orders to purchase or sell? In the case of limited markets, there is almost certain to be that which might be described as false or misleading appearances in respect to the market in the minds of many persons. The vagaries of the human mind are not often changed by legislative enactments. In this connection, in the same section, on page 22, subsection 3, line 5, are the words, "for the purpose of raising or depressing the price." It would be exceedingly difficult for a broker, or for anyone else for that matter, to interpret the meaning and the intent of a customer when he has been called upon to execute either a buying or selling order which is bound to have the effect of raising or depressing prices in limited secties markets.

In subsection 5, line 24 on page 22 and lines 1 and 2 on page 23, we read that it will be unlawful to make any statements inducing a securities transaction which is, in the light of the circumstances under which it is made, "false or misleading in respect of any matter sufficiently important to influence the judgment of an average investor." If this language is allowed to remain in the bill, there will be many days of anxiety on the part of brokers and dealers until they can feel that they may do business without this liability hanging over them.

We direct attention to subsection 8, page 29, line 21, which deals with the proposition of "pegging, fixing, or stabilizing the prices of securities in contravention of such rules and regulations as the Federal Trade Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors or without having prior thereto reported to the Commission such information regarding the purpose and nature of such transactions or operations, the details thereof and the person or persons interested therein as the Commis sion by rules and regulations may prescribe as appropriate or necessary in the public interest or for the protection of investors." There is likelihood here of great harm being done, perhaps where not intended, by denying an investor the right to support securities in which he has a particular interest, or against which he may have loans, or in the purchase of which he is moved by a desire to accumulate the securities for investment purposes.

SUBSECTION 9, ITEMS (1) AND (II)

These provisions fail to give to a broker or dealer the right to acquire options for the purpose of liquidating large blocks of securities held, say, by estates, or against bank loans, etc., where the work of distribution involved is considerably greater than if the broker were merely selling stock on the exchange for a commission. Unless proper provision is made to care for such classes of transactions there will be many instances where estates and banks holding large loans will suffer through inability to obtain the services of dealers or brokers in such liquidations.

PAGE 27, SECTION 10, ITEM (B)

This item provides that the rules of the proposed national securities exchange may permit a member to be registered as an odd-lot dealer and as such he will be permitted to buy and sell for his own account so far as may be reasonably necessary to carry on such odd-lot transactions; it also provides that it shall be unlawful for an odd-lot dealer to act as a broker. Evidently in this particular no consideration has been given to the character of business conducted on the smaller exchanges throughout the country and on which nearly every broker does an odd-lot business. As a matter of fact the great bulk of transactions on the local exchanges are in odd lots. This section should be changed or clarified so that the business now transacted on the smaller exchanges will not be taken away from them. Some of the member exchanges already have advised us that if this provision becomes a law they will for forced out of business.

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