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The Commission is given power in section 3 (a) (13) to exempt securities by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors.” The power thus to grant exemptions is no more difficult to sustain than the power to make affirmative regulations. The Supreme Court has upheld the validity of the delegation of power to a commission to grant exemptions from a zoning ordinance, and it does not appear that the standards for such exemption were prescribed by the statute with as much definiteness as in the present bill. Coriab v. Fox (274 U.S., 603).

In any case, moreover, regardless of the language of the statute, an exercise of power by the Commission may be subject to review in the courts. If the exercise of power is found to be arbitrary or capricious, the language of the statute will not save the action from reversal. Likewise, a reasonable exercise of power will he upheld even though the statute might not in terms forbid an unconstitutional exercise by the Commission. When the constitutionality of a law or an administrative act is challenged, the complainant must show not only that he is affected by it, but that as applied to him in the case at bar it is unconstitutional. It is not enough that it might possibly be unconstitutional in other circumstances or as applied to other persons. See Albany County v. Stanley (105 U.S. 315, 514); Roberts & Co. v. Emmerson (271 U.S. 50, 54, 55); Liberty Warehouse Co. v. Burley Tobacco Growers' Cooperative Marketing Association (276 U.S. 71, 88).

In short, the delegation of power to the Commission is valid because adequate standards are prescribed for its action. And the constitutionality of particular regulations promulgated by the Commission must depend upon their reasonableness in a given set of circumstances; a statute cannot control in the decision of such questions.

It is well settled, moreover, that violation of an administrative regulation may be declared by statute to be a crime. See United States v. Grimaud (220 U.S. 506).

VI. PARTICULAR PROVISIONS OF THE BILL

A number of provisions in the bill necessarily go beyond the regulation of transactions immediately on the exchanges. Many of these provisions may be sustained, as has been shown, by virtue of the power of Congress over the mails and other instruments of interstate commerce. This is true of the sections, for example, on proxies and over-counter markets. But there is an independent ground upon which all these provisions must be held constitutional. The test of their validity is the appropriateness, in the reasonable judgment of the legislature, to accomplish the principal purposes sought to be achieved by the bill as a whole. The underlying purpose of the bill is to assure a sound, fair, and honest market for securities. , This purpose, as we have seen, is within the legitimate powers of Congress. It remains to indicate the appropriateness of specific provisions to this central end.

Certain of the provisions are necessary in order to prevent simple evasion of the central requirements in the bill. Thus, for example, the provision in section 6 (a) against loans by brokers on unlisted securities is essential in order that the margin requirements on list securities can be effectively enforced. Section 6 (a) prevents the confusion of collateral on a loan, which would enable a broker to lend more than the maximum amount on listed securities under the guise of partial collateral in the form of unlisted securities. In addition, section 6 (a) tends to prevent a trend away from the listing of securities and so away from the salutary listing requirements. Similarly, the application of margin, segregation, and borrowing requirements to persons doing business in securities through the medium of an exchange member closes what would otherwise be an easy avenue of escape from the regulations imposed on exchange members themselves.

Section 6 (e) requires every lender to observe uniform margin requirements for loans on registered securities, where the credit is extended or maintained in contravention of regulations prescribed by the Federal Reserve Board to prevent the excess being used for the purchase or carrying of any security. This provision is necessary to prevent evasion of the credit limitations imposed on loans made by brokers themselves. Again, the power given to the Commission in section 14 to regulate over-the-counter markets will tend to prevent a diversion of business from the exchanges to such markets, with a corresponding weakening of the effects of the bill. The provision tends to assure the maintenance of the sound, fair, and honest market in securities which the bill seeks to attain.

Another group of provisions turns upon the necessity of making effective the limitations on the volume of credit which can be absorbed in the speculative market. Section 6 (e), referred to in the preceding paragraph, imposing margin requirements upon all lenders on registered securities, is essential in order to 137

control the volume of speculative loans by banks. A prolific source of funds for the call market has been the nonmember banks, which send funds to member banks in exchange cities for use in the call market.

Although the Glass-Steagall Act prohibits member banks from acting as agents for nonbanking corporations in making loans to brokers, that act does not expressly forbid member banks from acting as agents for other banks for such purposes. It therefore remains necessary to control the amount of credit ma available by nonmember banks for loans to brokers. This the bill is intended to do, in section 6 (e). The restrictions on borrowing by members of the exchanges included in section 7 are necessary to make effective the control of the Federal Reserve Board over credit available for the securities markets. Section 7 (a) provides that no member of an exchange or broker or dealer in securities may borrow except from or through a member bank of the Federal Reserve System.

The Federal Reserve Board is given the power, however, to permit limited borrowing between members and brokers or dealers in securities and to permit loans by or through nonmember banks to such members, brokers, and dealers in localities where there are no member banks. Since the Federal Reserve Board has no effective control over the activities of nonmember banks, the Federal Reserve Board could not regulate loans by and to members, brokers, and dealers if such members, brokers, and dealers could borrow without limitation from other brokers or from nonmember banks. Although this provision may appear superficially to discriminate in favor of member banks of the Federal Reserve System, the provision is essential in order to make effective one of the chief purposes of the bill, i.e., the control of credit used in the securities markets. That Congress has power, independently of any connection with securities market regulations, to reserve essential credit functions to banks which are a part of the national banking system or the Federal Reserve System, can hardly be doubted in view of the case of Veazie State Bank v. Fenno (8 Wall. 533), in which the Supreme Court held valid a Federal statute which placed a prohibitory tax upon money issued by state banks in order to drive such money out of circulation.

Another group of provisions deals with corporate issuers. These provisions all tend to make available accurate and adequate knowledge which is essential to the maintenance of a sound market for investors. Thus the registration requirements in section 11 comprise such information as is necessary to an intelligent understanding of the value of a security and its future prospects. The reports required by section 12 are designed to keep this information up to date. The requirements in section 13 concerning proxies are designed to make available to the investor reasonable information regarding the possibility of control of the corporation, or of a class of securities, by an individual or a group of individuals. Such information will help to assure a sound market.

Competent authorities have pointed out that the operation of pools is made possible by the fact that uninformed people afford a market for the stock in which a pool is being conducted; and that short selling likewise depends upon the existence of uninformed investors who unwittingly help to lift the price of a stock to an unreasonable and untenable level from which it will fall, or be made to fall, to the benefit of the short sellers. Adequate information about the true position of the company will go far to prevent the occurrence of these practices. The requirements in section 15 concerning transactions by officers, directors, and principal stockholders in securities of companies registered on licensed exchanges are designed both to give information to investors and to prevent manipulation and profits derived from knowledge gained in a fiduciary capacity. The effect upon public confidence in the securities markets of Mr. Wiggin's operations in the stock of his own companies is a matter of common knowledge.

The legal justification for all these provisions is clear. The Supreme Court on numerous occasions has upheld the power of the legislature to regulate or prohibit even acts which are in themselves innocent, where control over them is necessary to the effective control of abuses. These cases go further than does the bill, since the practices which the bill regulates have a substantial effect upon the condition of the market, which is the primary object of regulation. They are not isolated transactions. But even if they were unrelated in fact to the exchange markets, they might be regulated if deemed necessary for effective administration of the measure.

Thus, for example, it was not unconstitutional for a State, in forbidding the manufacture and sale of oleomargarine because it was considered unwholesome, to apply the prohibition to a product which was itself wholesome and nondeceptive (Powell v. Pennsylvania, 127 C.S. 678). Compare also the statement of Mr. Justice Holmes in Westfall v. United States (274 U.S. 258, 259), in which the law was upheld making it a crime to misapply funds of a State bank which is a member of the Federal Reserve System:

“Moreover, when it is necessary in order to prevent an evil to make a law embracing more than the precise thing to be prevented it may do so."

The power of the legislature to regulate or prohibit acts which are in themselves innocent, as a complement to the regulation or prohibition of evils, was fully discussed and sustained in Purity Extract Co. v. Lynch (226 U.S. 192). Mr. Justice Hughes delivered the opinion of the Court:

“It does not follow that because a transaction, separately considered, is innocuous, it may not be included in a prohibition the scope of which is regarded as essential in the legislative judgment to accomplish a purpose within the admitted power of the Government (Booth v. Illinois, 184 U.S. 425; Otis v. Parker, 187 U.S. 606; Ah Sin v. Wittman, 198 U.S. 500, 504; New York ex rel. Sils v. Hesterberg, 211 U.S. 31; Murphy v. California, 225 Ú.S. 623). With the wisdom of the exercise of that judgment the court has no concern; and unless it clearly appears that the enactment has no substantial relation to a proper purpose, it cannot be said that the limit of legislative power has been transcended. To hold otherwise would be to substitute judicial opinion of expediency for the will of the legislature, a notion foreign to our constitutional system.

“Thus, in Booth v. Illinois (184 U.S. 425), the defendant was convicted under a statute of that State which made it a criminal offense to give an option to buy grain at a future time. It was contended that the statute, as interpreted by the State court, was 'not directed against gambling contracts relating to the selling or buying of grain or other commodities, but against mere options to sell or buy at a future time without any settlement between the parties upon the basis of differences, and therefore involving no element of gambling. The argument was that it directly forbade the citizen ‘from pursuing a calling which, in itself, involves no element of immortality. This court, in sustaining the judgment of conviction, said: 'If, looking at all the circumstances that attend, or which may ordinarily attend, the pursuit of a particular calling, the State thinks that certain admitted evils cannot be successfully reached unless that calling be actually prohibited, the courts cannot interfere, unless looking through mere forms and at the substance of the matter, they can say that the statute enacted professedly to protect the public morals has no real or substantial relation to that object, but is a clear unmistakable infringement of rights secured by the fundamental law.' It must be assumed, it was added, that the legislature was of opinion that an effectual mode to suppress gambling grain contracts was to declare illegal all options to sell or buy at a future time;' and the court could not say that the means employed were not appropriate to the end which it was competent for the state to accomplish (id. pp. 429, 430).

“The same principle was applied in Otis v. Parker (187 U.S. 606), which dealt with the provision of the Constitution of California that all contracts for the sale of shares of the capital stock of any corporation, on margin, or to be delivered at a future day, should be void, and that any money paid on such contracts might be recovered. The objection urged against the provision in its literal sense was that the prohibition of all sales on margin bore no reasonable relation to the evil sought to be cured; but the court upheld the law, being unwilling to declare that the deep-seated conviction on the part of the people concerned as to what was required to effect the purpose could be regarded as wholly without foundation (id. pp. 609, 610).”.

Mr. Justice Hughes then discussed with approval the case of New York et rel. Silz v. Hesterberg (211 U.S. 31), involving a New York statute which prohibited the possession of certain game during the closed season. The defendant was in possession of game which had been lawfully taken outside the State during the open season and had been brought into New York. It further appeared that the game were wholesome and could be distinguished from domestic game of the forbidden varieties. But the Court held that the legislature was the judge of the necessity or expediency of the measure adopted, pointing out also that the law tended to prevent the passing-off by dealers of domestic game under the claim that they were taken in another State.

Mr. Justice Hughes continued, in the Purity Extract case:

“It was competent for the legislature of Mississippi to recognize the difficulties besetting the administration of laws aimed at the prevention of traffic in intoxicants. It prohibited, among other things, the sale of malt liquors. In thus dealing with a class of beverages which, in general, are regarded as intoxicating, it was not bound to resort to a discrimination with respect to ingredients and processes of manufacture which, in the endeavor to eliminate innocuous beverages from the condemnation, would facilitate subterfuges and frauds and fetter the enforcement of the law. A contrary conclusion, logically pressed, would save the

nominal power while preventing its effective exercise. The statute establishes its own category. The question in this court is whether the legislature had power to establish it. The existence of this power, as the authorities we have cited abundantly demonstrate, is not to be denied simply because some innocent articles or transactions may be found within the prescribed class. The inquiry must be whether, considering the end in view, the statute passes the bounds of reason and assumes the character of a merely arbitrary fiat.”

Tested by these considerations, the regulation of transactions off the exchanges, being necessary and proper to assure the maintenance of a fair and honest market. are clearly constitutional.

RESOLUTION PASSED BY CLEVELAND COMMITTEE, ON FLETCHER-RAYBURN BILL,

FEBRUARY 23, 1934 Resolved, That it is the considered opinion of the undersigned committee, appointed at a meeting of Cleveland business interests for the discussion of the proposed Fletcher-Rayburn bill purporting to regulate the activities of stock exchanges, but also containing many ill-considered and very drastic provisions for the regulation of industry itself, that the enactment of such legislation would directly so injuriously affect industry under the guise of stock exchange regulation that it would be very detrimental to industry as a whole, to the recovery of business, and to the reemployment of normal working forces; further

Resolved, That a committee of not less than three members authorized to speak for Cleveland industry be sent to Washington to protest vigorously against the enactment of this bill.

COMMITTEE ON THE FLETCHER-RAYBURN BILL
George M. Humphrey, chaiman, president, M. A. Hanna Co., 12,000 employees.
J. O. Eaton, chairman, Eaton Manufaturing Co., 4,962 employees.
E. B. Greene, president, Cleveland-Cliffs Iron Co., 4,000 employees.
J. E. Rogers, president, Addressograph Multigraph Corporation, 3,200 em-

ployees.
Adrian D. Joyce, president, The Glidden Co., 5,100 employees.
Elton Hoyt, II, Pickands-Mather & Co., 5,000 employees.
Fred A. Chapin, president, National Acme Co., 2,140 employees.
Hiram S. Rivitz, president, Industrial Rayon Corporation, 3,400 employees.
Myron A. Wick, Republic Steel Corporation, 25,000 employees.

The undersigned endorses the foregoing resolution:
The Aetna Rubber Co., president, 500 employees.
S. T. Campbell.
The Akron Rubber Reclaiming Co., J. B. Huber, president, 120 employees.
Allen Industries, Inc., S. J. Allen, president, 500 employees.
The American Fork & Hoe Co., A. W. Ferguson, secretary-treasurer, 2,000

employees. American Ship Building Co., W. H. Gerhauser, president, 1,500 employees. The Apex Electrical Manufacturing Co., Geo. W. Kelsey, treasurer, 2,000 em

ployees. The Atlas Bolt & Screw, and the Atlas Car & Manufacturing, S. D. Wright,

president, 400 employees. The Austin Co., G. A. Bryant, Jr., vice president, 1,000 employees. The Bamberger-Reinthal Co., S. Reinthal, secretary-treasurer, 350 employees. The Bassett Co., L. B. Bassett, president, 18 employees. The Bender Body Co., H. Bender, president, 500 employees. The Brown Fence & Wire Co., M. B. Sackheim, treasurer, 275-350 employees. The Bryant Heater Co., E. P. Bailey, Jr., secretary, 50-125 employees. The Byers Machine Co., C. J. Fulweber, assistant secretary and treasurer, 75

employees. The Canfield Oil Co., J. A. Jackson, treasurer, 508 employees. The Champion Rivet Co., W. J. Reiley, secretary-treasurer, 150 employees. The Chandler & Price Co., D. W. Frackelton, vice president, 250 employees. Chicago Pneumatic Tool Co., W. S. Callan, vice president, 450 employees. The City Ice & Fuel Co., H. W. Dunkle, secretary, 3,500 employees. The Cleveland Automatic Machine Co., A. L. Patrick, treasurer, 500 employees. The Cleveland & Buffalo Transit Co., P. J. Swartz, general manager, 600

employees. Cleveland City Forge Co., Ralph M. Coe, president, 250 employees.

ees.

The Cleveland Cooperative Stove Co., James Mitchell, vice president, 450

employees. Cleveland Graphite Bronz Co., J. L. Myers, secretary, 1,200 employees. The Cleveland Hardware & Forging Co., Thomas R. Robbins, president, 400

employees. Cleveland Pneumatic Tool Co., L. W. Greve, president, 300 employees. The Cleveland Quarries Co., H. M. Caldwell, president, 800 employees. The Cleveland Tractor Co., H. J. Leisenheimer, vice president, 470 employees. The Cleveland Twist Drill Co., Jacob D. Cox, Jr.,

president, 650 employees. The Cleveland Window Glass & Door Co., W. K. Palmer, president, 200-300 em

ployees. The Cleveland Wire Spring Co., J. W. Campbell, president and treasurer, 200

employees. The Collinwood Shale Brick & Supply Co., H. C. Moatz, president, 75 employees. Columbia Axle Co., E. H. Parkhurst, president, 175 employees. The Corrigan, McKinney Steel Co., Donald B. Gillies, president, 3,400 em

ployees. The Cricible Steel Casting Co., M. G. Tielke, vice president, 150 employees. The Cuyahoga Foundry Co., James V. Proshek, president, 90 employees. The Eberhard Manufacturing Co., 650 employees. The William Edwards Co., Charles A. Otis, president, 428 employees. The Elwell-Parker Electric Co., M. S. Towson, president, 350 employees. The Enamel Products Co., Joseph Foster, treasurer, 200 employees. The Fanner Manufacturing Co., J. R. Raible, president, 400 employees. The Faultless Rubber Co., W. H. Balch, vice president, 460 employees. Ferro Enamel Corporation, R. A. Weaver, president, 125 employees. The Firestone Tire & Rubber Co., J. J. Shea, treasurer, 24,855 employees. The Forst City Foundries Co., W. L. Seelbach, treasurer, 462 employees. The Fostoria Pressed Steel Corporation, C. D. Pifer, president, 85 employees. , The Geometric Stamping Co., L. W. Benjamin, secretary-treasurer, 250 employThe H. C. Godman Co., F. A. Miller, president, 2,500 employees. The Grasselli Chemical Co., E. W. Furst, vice president, 4,100 employees. Great Lakes Aircraft Corporation, Chas. F. Barndt, president, 150-200 employThe Grief Bros. Cooperage Co., H. E. Coyle, president. The Guarantee Specialty Manufacturing. Co., R. H. Wright, president, 90 em

ployees. The Halle Bros. Co., Jay Iglauer, vice president and treasurer, 2,000 employees. The M. A. Hanna Co., G. M. Humphrey, president, 12,000 employees. The Wm. M. Hardie Co., Otto Grossenbacher, secretary-treasurer, 700 employees. Harris-Seybold Potter Co., N. L. Daney, treasurer, 534 employees. The Harshaw Chemical Co., W. A. Harshaw, president, 450-500 employees. The E. F. Hauserman Co., R. A. Hauserman, vice president, 225 employees. The Hertner Electric Co., J. H. Hertner, president, 40 employees. The Higbee Co., Asa Shiverick, president, 2,000 employees. The Hill Clutch Machine & Foundry Co., M. G. Firestone, treasurer, 150 em

ployees. The Hende & Dauch Paper Co., Sidney Frohman, president, 2,365 employees. The Joseph & Feiss Co., Paul L. Feiss, president, 1,800 employees. The Kaynee Co., E. C. Seitz, vice president and treasurer, 950 employees. The Keiler Knitting Co., W. A. Keller, president, 75 employees. The Kelly Island Lime & Transport Co., George J. Whelan, president, 1,000

employees. The S. Korach Co., Arthur Korach, secretary, 250 employees. The Lake City Malleable Co., J. H. Redhead, president, 200 employees. The Master Products Co., C. J. Walters, president, 65 employees. Medusa Portland Cement Co., J. B. John, president, 1,500 employees. Arthur G. McKee Co., H. E. Widdel, vice president, 600 employees. Mohawk Rubber Co., C. Borland, president, 650 employees. The Murray Ohio Mfg. Co., C. W. Hannon, president, 340 employees. The F. E. Myers & Bro. Co., J. C. Myers, president, 528 employees. National Malleable & Steel Castings Co., Henry F. Pope, president, 6,200

employees. The National Screw & Mfg. Co., H. G. Alexander, president, 1,291 employees. The National Smelting Co., W. W. Weil, treasurer, 300 employees. The National Tool Co., 0. G. Simmons, president, 250 employees.

ees.

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