Mr. SMITH. Yes, sir. Mr. PECORA. Mr. Smith, I understood after our first conference, which was held as I recall it a week ago Tuesday, that the gentlemen assigned by the Treasury Department to the consideration of this bill, as well as the gentlemen assigned by the Federal Reserve Board to a similar duty, desired to make a further independent study and analysis of the entire bill for their own information, and for that reason further conferences were deferred from Tuesday of last week until Friday of last week. I, frankly, was under the impression that the intervening time was spent by the gentlemen representing the Treasury Department, as well as those representing the Federal Reserve Board, to such an independent study and analysis of the entire bill. Apparently I was in error so far as the Treasury Department was concerned. Mr. SMITH. The entire bill? Mr. PECORA. Yes, sir. Mr. SMITH. No, sir. Of course, you were not at the final conference, Mr. Pecora. Our position was very clearly stated at that conference where you asked Messrs. Cohen and Corcoran to represent you. Mr. PECORA. The final conference was held last Sunday? Mr. PECORA (interposing). I did not know the conference had been fixed for that time or I would have made arrangements to be present. Senator GORE. Were there any Senators or Congressmen in that conference? Mr. SMITH. Congressman Rayburn was there. Senator GORE. Any others? Mr. SMITH. Congressman Rayburn, Mr. Corcoran, Mr. Cohen, and Mr. Landis. Senator WALCOTT. Do you think Mr. Cohen had anything to do with the drafting of the bill? Mr. SMITH. I have heard him mention that he did. Senator WALCOTT. And Mr. Corcoran? Mr. SMITH. Yes. Senator WALCOTT. All right; as to section 10, is that a section on which you were allowed to speak? Mr. SMITH. Yes, sir; a section we studied as far as its effects onSenator KEAN (interposing). Then this bill is not the Treasury bill? Mr. SMITH. No, sir; it is not a Treasury bill. Senator KEAN. Nor is it a Federal Reserve Board bill? Mr. SMITH. I could not answer that. Mr. PECORA. But whatever recommendations for revision were made by the Treasury Department representatives had been incorporated in this revised bill, isn't that so? Mr. SMITH. We studied certain sections of the bill, made recommendations concerning those sections, and you adopted them. Mr. PECORA. Yes, sir. Mr. SMITH. Concerning those sections. Senator KEAN. Did they adopt your words, or were they words of their own? Mr. SMITH. We did not attempt to put words in their mouths. In some of these cases it is principles. Senator TOWNSEND. Were all of your recommendations incorporated in the bill, Mr. Smith, from the Treasury? The CHAIRMAN. I will state that S. 2693 was referred to the Treasury and other departments for report. Senator TOWNSEND. Were the Treasury recommendations all incorporated in the bill? Mr. SMITH. In all material respects. Senator WALCOTT. Do you approve in section 10 of this provision to this end, that it shall be unlawful for an odd-lot dealer to act as a broker? Mr. SMITH. That is the part of the technique of the New York Stock Exchange about which we were not supposed to make any investigation or study, and I do not know whether it is sound or not. Provisions there as to the separation of the broker and dealer do meet with our approval. Senator WALCOTT. Then on the next page you take that back by saying that it may be allowed, provided it meets with the approval of the Federal Trade Commission. One contradicts the other. Mr. SMITH. The principle of that section as far as we are concerned is that it permits the broker-dealer to continue to act as long as he discloses his position in regard to a security and does not extend credit on his own underwritings for a period of 6 months after they are offered. We felt that the dealer-broker was necessary in the Government interest and that he should be allowed to continue in business for that purpose. Senator WALCOTT. And would you approve of the exemption under exemptions of leaving out municipal bonds, State bonds, and others? Mr. SMITH. The clause regarding exemptions gives the Federal Trade Commission full power to extend those exemptions. Senator WALCOTT. If you were a broker dealing in municipal bonds almost exclusively outside of some of the large cities would you be satisfied with taking that risk? Mr. SMITH. We felt, as far as it affected our study, that the provision was satisfactory. Senator KEAN. And all your study was in United States bonds? Mr. SMITH. We were studying it from the Government's standpoint. It affects other Government bonds. Senator WALCOTT. You evidently do not consider it important, then, to keep brokerage houses throughout the country, to have a ready market for these securities, like municipals, for instance? Mr. SMITH. Well, a broker-dealer will feel that need. Senator WALCOTT. But not if he is denied the privilege of selling- Mr. SMITH (interposing). We did not see that the broker-dealer was not protected in no. 10. It was our impression that he was protected. Senator ADAMS. You were not concerned with the securities and obligations of States? Mr. SMITH. We felt that the provision giving the option to the Federal Trade Commission was sufficient protection. Senator ADAMS. That is, you thought it was sufficient to give the Federal Government the right to determine whether State securities should be marketed or not? Mr. SMITH. Well, you are giving the Federal Trade Commission certain powers here over government that the option to exerciseSenator ADAMS (interposing). I am asking you, Why did you make the distinction in bonds between a Federal bond and a State bond? Mr. SMITH. Because of a perfectly obvious reason; you must distinguish between securities of the United States Government in these days and those of States. You cannot draw any general conclusions. Senator ADAMS. I am unable to see that it is so obvious, if you theoretically were representing the people generally, not merely the department. That is, the bill was being drawn for the benefit of the people as a whole, not merely for the benefit of one particular class of securities. Mr. SMITH. You could not exempt State bonds in their entirety at the present time, Senator. Senator ADAMS. Why not? Mr. SMITH. Because they do not all fall in the same class. Mr. SMITH. Because they are not all the same. Some States of our Union are in default at the present time. Senator ADAMS. Therefore you would exclude all of them? Mr. SMITH. You would have to exclude them from an action of this sort. Senator WALCOTT. But you exclude them all. Mr. SMITH. Well, you give authority to the Federal Trade Commission. I am not arguing for the provision. Senator WALCOTT. In other words, you want to put in the hands of the Federal Government an agency Mr. SMITH (interposing). No; I beg your pardon, Senator. The bill as submitted to us puts that power there and gives an option We were not asked to state whether that was satisfactory but it is satisfactory to us. Senator WALCOTT. You, as an American citizen, are willing to have a special board of the Federal Government have absolute authority as to the credit of a State or a municipality. You must be. You must take that position, if you take the position you do. Mr. SMITH. I am sorry, I cannot agree with you. Senator KEAN. I think the position that he took was a position that he was an officer of the Treasury and was not acting in any other capacity, and therefore, as long as the United States bonds were excluded, why, that was the extent that he went. Senator ADAMS. I suppose if he had represented district 20 from your county, all he would want would be the bonds of district 20. Senator KEAN. Absolutely. Senator ADAMS. But that would not help this committee. Senator TOWNSEND. What have you to say as to whether the authority should be lodged in the Federal Trade Commission instead of the Treasury or the Federal Reserve Board? Mr. SMITH. We were asked whether the arrangement as submitted was satisfactory, and we said, "Yes; it is." We were not asked any preference at all; just, is the section as submitted satisfactory? The CHAIRMAN. Mr. Smith, may I ask you, outside of your official position, without regard to speaking for the Treasury or anybody else, but as a banker and as a citizen, do you see any objection to including in the exemption State and municipal bonds? Mr. SMITH. Mr. Chairman, if you please, I prefer not to express a personal opinion, but as we considered that subject in our studies and felt that there should be some distinction between the State issues as such. Senator GORE. Mr. Chairman, I move we excuse Mr. Smith from further testifying and strike his statement from the record. Senator TowNSEND. I want to ask one question: Mr. Smith, you state that you were asked to approve this set-up. Who were you asked by ? Mr. SMITH. Asked to approve what? Senator TOWNSEND. To approve the set-up as given to you. Who submitted it to you? Mr. SMITH. The bill was submitted to us by Messrs. Corcoran, Cohen, and Pecora. Senator GOLDSBOROUGH. Finally, so that I may get it, I understand the Treasury is not in a position to express any opinion as to the matters of stock-exchange practices? Mr. SMITH. That is correct. It was not submitted for our study Mr. PECORA. Mr. Smith, in order to clear up any possible misun derstanding, from an answer that you made to a question that believe was put to you by Senator Kean about whether or not the Treasury Department approved the provisions of section 6, section is the section that deals with margins, and you said, as I recall it that it might be construed as a statement that the Treasury Depart ment did not approve section 6. Did you mean to say that you ha no opinion to express bout section 6 one way or the other becaus that section was not referred to you by the Secretary for study? Mr. SMITH. Part of it was submitted to us for study and approved and the other part was not submitted, and therefore we have n opinion concerning the other part of it. There is no disagreemen between us about that at all. The CHAIRMAN. Very well; we are much obliged to you, M Smith. Now, Mr. Whitney. Senator ADAMS. Mr. Chairman, I rather think that there is som disclosure in this little memorandum of some things which I do no think the Treasury really wanted to let us know, because they hav discovered one or two things in reference to unfair practice in th stock exchange, and I do not believe they mean to express an opinion even as to the purpose of the bill. The CHAIRMAN. Well, they did express it. STATEMENT OF RICHARD WHITNEY, PRESIDENT NEW YORK STOCK EXCHANGE, NEW YORK CITY-Resumed The CHAIRMAN. Mr. Whitney, you wrote me a letter, which I might put in the record, asking to be heard on this matter; and you stated, I think— I shall be glad to appear before your committee at any time you may designate and state the reasons for my conclusions. I am also prepared to suggest to the committee the changes which would be necessary to make the bill workable without in any way limiting the power to control credit and regulate stock-exchange practices. That is very interesting, and we will be glad to hear from you, Whitney. (The letter is as follows:) Mr. Hon. DUNCAN U. FLETCHER, NEW YORK STOCK EXCHANGE, Eleven Wall Street, March 21, 1934. Chairman Committee on Banking and Currency, Senate Office Building, Washington, D.C. MY DEAR SENATOR FLETCHER: I am informed that the new Rayburn bill, now pending in the House committee, will be considered by your committee. Recalling your statement that when amendments to the original Fletcher-Rayburn bill were prepared persons interested would be given a hearing, I respectfully request that time be allowed to me to state to the committee the objections of the New York Stock Exchange to the new measure. I believe that the new bill will prove unworkable in essential features and will seriously affect security markets and security prices. It differs from the original bill in its treatment of niany important points, but its effects will be almost as destructive as those of the original bill. As this bill is of vital concern not only to stock exchanges but also to all business and industry, it deserves the most serious consideration. I shall be glad to appear before your committee at any time you may designate and state the reasons for my conclusions. I am also prepared to suggest to the committee the changes which would be necessary to make the bill workable without in any way limiting the power to control credit and regulate stock-exchange practices. Faithfully yours, RICHARD WHITNEY, President. Mr. WHITNEY. Mr. Chairman, I haven't a very long statement to make. I do think if it could be made consecutively without adjournment, it would be better for all of us. Would you prefer having me appear tomorrow, or may we have about an hour? The CHAIRMAN. I think we had better go on now, Mr. Whitney. Senator ADAMS. How long a statement have you? Mr. WHITNEY. Depending upon the questions, Senator Adams. The CHAIRMAN. I think you better make your statement without interruptions. Mr. WHITNEY. I am very glad to be interrupted as much as you wish. The CHAIRMAN. We can ask questions afterwards. Senator WALCOTT. I suggest, Mr. Chairman, he be allowed to read straight through and then have the questions asked afterwards. The CHAIRMAN. Yes; that is the proper thing to do, to save time. Mr. WHITNEY. I understand that the bill introduced in the House of Representatives by Mr. Rayburn and numbered H.R. 8720 is being considered by this committee as if it were an amendment to the Fletcher-Rayburn Bill. The New York Stock Exchange is op |