ing in 1963 at 92% and interest. These debentures bore non-detachable option warrants conferring upon the holder of each 1,000-dollar debenture the right to purchase 15 shares of Cities Service Company common stock at prices which, commencing at $72 per share, advanced $2 per share each 6 months. Again, in March, 1929, when the market price of this stock was about $126 per share, that company sold to the same wholesale investment bankers at 921⁄2 and interest, $50,000,000 face amount of 5% debentures maturing in 1969; and these debentures bore non-detachable option warrants whereby the holder of each 1,000-dollar debenture had the right to purchase 10 shares of Cities Service Company common stock at prices which increased at halfyearly intervals commencing with $122 per share if the option were exercised within the first six months. Subsequent to the issuance of these debentures the market quotations for the stock rose to such heights that sale of it at the debenture warrant prices was not advantageous to the issuing company, but at the same time the differences between the market prices of the debentures with warrants and ex-warrants were so narrow that more proceeds could be realized by purchasing the debentures with warrants, exercising the warrants and re-selling them ex-warrants. The Securities Company purchased these debentures in large volume, paying high premiums. It exercised the warrant options on $10,818,000 face amount of the Debenture 5's of 1963 and on $18,328,000 face amount of the Debenture 5's of 1969, thereby making them available for re-sale as debentures ex-warrants. Of their total cost, $20,996,193.19, representing the difference between their cost and their market value ex-warrants, was treated as a part of the cost to the Securities Company of the common shares obtained in the exercise of the warrants. Some of the ex-warrants debentures were re-sold, some were transferred to Cities Service Company, and, at last accounts, some were still being held by the Securities Company.

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Importance of The Securities Company's Chief Function.-The chief function of Cities Service Securities Company was variously designated as providing a ready resale market for securities ", "facilitating the marketing of securities", "supervising the market" and sole handling of the market" for securities. Another name commonly applied to this function is sponsoring."

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Inasmuch as the Securities Company is wholly owned by Cities Service Company, its performance of this function with reference to the parent company's stock virtually amounts to Cities Service Company's trading in its own stock. Such activity is regarded with disfavor by the governing body of the New York Stock Exchange. However, the securities of Cities Service Company are dealt in, not on the New York Stock Exchange, but on the New York Curb Exchange. Even in the case of many companies whose securities are listed on the New York Stock Exchange, however, the trading is nevertheless carried on by the company's Financial Agent, or by pools gotten together by the Financial Agent, or by a securities company owned by the Financial Agent.

These trading activities are not of mere minor and incidental importance in modern finance. They are of major importance, because of their volume and of the effects produced through their volume. While the practice of " sponsoring" stocks has been a matter of common report over several decades, the volume of trading involvid in it, the great proportion of the demand for securities on the organized exchanges that is provided by these company purchases. the extent to which funds supplied by the investing public are used for this purpose, and the extent and public importance of the effects are probably little realized. The description in this report of the activities of Cities Service Securities Company in connection with campaigns to market common stock of Cities Service Company and Class A common stock of Arkansas Natural Gas Corporation furnishes outstanding illustrations that may convey such realization.

When the Securities Company took over this function from Henry L. Doherty & Co. on April 1, 1927, an operation to distribute Cities Service Company common stock was drawing to a close, and the sale of another 250,000 shares under a special offering to dealers was under way. In the performance of its function during the remaining 9 months of 1927, the Securities Company spent nearly $45,851,000 in market purchases of 936,104 shares of this stock, its sales during the same period amounting to 938,910 shares for $45,880,759.38. By "market purchases" is meant not only purchases on the New York Curb Exchange but also purchases "over the counter". The latter did not, on the whole, exceed one-sixth of the total. These market purchases amounted to 92.4% of the total number of Cities Service Company common shares traded

on the New York Curb Exchange during the same period and they exceeded the number traded on the Curb in four of the nine months. During that period, the closing Curb price of this stock, after sagging from $51% to $44 in April, followed a fluctuating rise to $55% at the year end.

On March 9, 1928, when the market price was about $58 per share, Cities Service Company offered its common stockholders a 10% pro rata subscription for additional shares at $45 per share. In the process of supervising the market for the stock and the rights during this operation, the Securities Company and Pearsons-Taft Company formed a syndicate distributing group for the purpose of effecting sales of 300,000 shares at current closing Curb prices plus point; and the syndicate participants sold 466,755% shares for $27,327,762.25. The purpose of this distributing group was to provide a channel through which to sell such shares as the stockholders failed to take; but, the stockholders having taken the entire 10% offering, the syndicate sales were utilized along with sales effected by Henry L. Doherty & Company's organization as channels through which to dispose of the shares obtained by the Securities Company in its market purchases to dispose of 100,000 additional shares of original issue and to dispose of approximately 51,892 shares held by Gas Securities Company. Preparatory to making voluminous market purchases in its process of supervising the market, the Securities Company guarded against excessive loss in the resale of such shares by forming a Put Syndicate and paying it a commission of $300,000 for the privilege of selling to the Put Syndicate not to exceed 200,000 shares obtained in such market purchases and in the exercise of rights purchased in the market, the put" price to be $50 per share or cost, whichever should be the lower. The privilege was exercised to the extent of 55,000 shares, of which 29,300 shares were repurchased. The Securities Company also purchased at a cost of $2,220,219.55 the rights to subscribe for 210,897 shares and exercised most of the rights. Also during the nine months, January to September, 1928, the Securities Company's market purchases of this stock totalled 1,451,890 shares, which fell short of the total number of shares of this stock traded on the Curb Exchange by only 18,810 shares or by less than 1.3%; the Securities Company's market purchases exceeded the number traded on the Curb in five of the nine months. During these nine months, the Securities Company's sales amounted to 1,867,254 shares. And the closing Curb quotations for this stock continued their upward progress from $554 on January 1st to $68% on September 30, 1928.

Up to September 30, 1928, the Securities Company's market purchases of Cities Service Company common stock frequently exceeded the total number of shares of that stock traded on the Exchange, indeed exceeded the totals in 9 out of the 18 months. Thereafter the proportion of the Securities Company's market purchases to the total trading on the Exchange was less than 100% and, with exceptions, grew progressively less--not, however, through diminished volume of the market purchases (which increased, instead) but through a greater increase in the volume of purchases on the Curb Exchange by the investing and speculating public. It is probable that the spectacle of the continuous and rapid rise in the market quotations for this stock attracted speculators who purchased in larger and larger volumes, doubtless on margins to a large extent, for the purpose of reaping large profits in the resale.

On December 17, 1928, Cities Service Company announced to its common stockholders another offer of common stock for pro rata subscription at $65 per share to the extent of 10% of their record holdings on January 8, 1929. The Securities Company undertook supervision of the market for the rights and for the stock during this operation. It formed another Put Syndicate and paid it a fee for the privilege of putting to it not to exceed 200,000 "market shares" at $75 per share or cost, whichever should be the less. In order to provide channels through which to dispose of any shares that should not be taken by the stockholders, it joined with Pearsons-Taft Company in the formation of another syndicate distribution group, which was to obtain orders at retail for 300,000 shares at the current closing Curb price plus point. In its market "supervising" activities the Securities Company purchased in the market at a cost of nearly $2,489,000, rights to subscribe for 110,880 shares. Also, during December, 1928 and January, 1929, it spent over $56,900,000 in market purchases of approximately 649,087 shares. Its sales during the same two months amounted to 890,068 shares with contractual proceeds of $75,079,805.64. The closing Curb quotations rose from $73 on December 1, 1928 to $89% by January 10, 1929, and to $91 by February 1. The number of shares offered to and subscribed by stockholders was 552,8422.

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Although, including the Securities Company's subscriptions, the pro rata subscription offer to the stockholders was a complete success, extensive sales had been effected by the syndicate distributing group and by Henry L. Doherty & Company's organization. These sales were sufficient not only to cover the Securities Company's market purchases but to leave a margin to which could be applied more shares. With market quotations approaching and attaining $120 per share, the Doherty Management continued the marketing campaign; also Mr. Doherty decided to sell 200,000 shares of his personal holdings. Steps were also taken whereby he reinvested $1,000,000 in Cities Service Company's newly created noncumulative stock in such manner as to increase his voting power from 144,813 votes or 6.19% of the total voting power to 1,104,813 votes or 33.11% of the total. The company's representatives averred that there was no connection between these two transactions. With such high prices for a 20dollar par stock, steps were also taken to change the common stock to the nonpar variety and split it four shares for one, which became effective on May 2, 1929. A new selling campaign was launched in April, 1929, and was carried on through a dealers' special offering and through the Doherty organization until the end of September. While the market quotations held at about $120 per share from about March 19th to the date of the split-up, their upward movement resumed after the split-up and continued to a maximum of $68% for the new non-par stock (equivalent to $272.50 per share of the 20-dollar par stock) which was attained on October 15, 1929.

In this connection the Company's representatives urged that the advance in market price of this stock during 1927 and the greater part of 1928 lagged noticeably behind the upward trend of the general market for stocks. They also point out that on December 4, 1928 one of the Cities Service Company subsidiaries brought in the discovery well in the now famous Oklahoma City oil pool; and they claim that this discovery attracted public interest and focused attention of investors and speculators upon Cities Service common stock, that this interest was stimulated as other wells in this pool came in later; and they point out that it was during this period from November, 1928 to October, 1929-particularly from July to October, 1929-that the market price of Cities Service common stock had its spectacular rise. They point out that during the period the management was engaged in raising a large amount of new capital with which to develop its holdings in this oil field. However, that may be, it is a fact that during the 11 months and 6 days from October 31, 1928 to October 5, 1929, during which large additional amounts of new capital were sought, the management spent nearly $389,250,000 in the purchase of the equivalent of nearly 12,072,000 non-par shares of Cities Service Company common stock over the counter and on the Curb Exchange, with which to fill sales orders from customers.

The extent to which the Securities Company's market activities influenced and contributed to that spectacular elevation of the market quotations for Cities Service Company common stock and to the general market condition that was attained by the beginning of October, 1929, and that culminated in the stock market crash of that month, may be judged from the following summary of significant facts. The records of Cities Service Company show that, from November 1, 1928 to October 5, 1929, that company issued, exclusive of stock dividends, new original issues of common stock to the extent equivalent to 5,763,850 shares of the present non-par variety, for proceeds amounting to $86,789,125. During identically the same period, the Doherty Management, as agent for the Securities Company, spent $389,248,248.77 in the purchase, mostly on the Curb Exchange, of the equivalent of 12,071,692.812 non-par shares of Cities Service Company common stock. Of course, all of the shares so purchased and several millions more were resold over the counter, by Henry L. Doherty & Company's stock salesmen and through other channels. During that period, the market quotations for the stock rose from the equivalent of about $17.69 to $61.75 per share. The contribution of those market activities to that price elevation may be inferred from the fact that those purchases amounted to 73.5% for the entire reported demand on the Curb Exchange. Any percentages are subject to quali. fication because not all transactions on the Curb Exchange may have been reported-in fact, particularly in the early years (1927 and 1928) numerous discrepancies occurred between quantities reported by different agencies.

Prior to September 30, 1928, the Securities Company's market purchases of Cities Service Company common stock frequently exceeded the total number traded on the Curb Exchange. The last statement in the preceding paragraph shows the proportion from November 1, 1928 to October 5, 1929 at 73.5%.

The proportion from October 1, 1928 to October 5, 1929 was about 74.4%. Even this is a very large proportion, and indicates that the public market demand of investors and speculators for this stock was a very small proportion of the total market demand expressed on the Curb Exchange. It also indicates, however, that the general public had been attracted to this stock. Probably these purchases by the general public consisted in large part of margin purchases by speculators for the purpose of reaping large profits in the re-sale at still higher prices.

In September, 1929, the Doherty Management planned another 10% pro rata subscription offer to Cities Service Company common stockholders of record November 7th, 1929. In order to provide an alternative channel in case the stockholders did not respond fully, another syndicate distributing group was arranged, and marketing commenced on October 1st. The Securities Company undertook supervision of the market.

The market condition was exceedingly precarious, however. Doubtless stimulated by the sustained upward trends of market prices of stocks which in turn were doubtless stimulated by the large and sustained volumes of market purchases by "sponsors such as Cities Service Securities Company, there was a very large volume of margin holdings of stocks-10 to 12 billions of dollars-as was evidenced by brokers loans which stood on October 3, 1929, at the stupendous total of $8,549,383,979 and which had increased during the preceding tour months to the extent of nearly $1,868,000,000. Call loan rates were high. The prices of many stocks were so high that the income accruing to them represented yields of 2% or less on those prices, a fact that would naturally precipitate investment selling. Speculators would have to sell in order to realize their paper profits in cash. These facts invited short selling raids by bear" cliques in the hope of producing sufficient drops' in market quotations to precipitate a large amount of forced selling by the margin specuulators, which would enable the "bear" operators to cover their short sales at a profit. Once such forced selling was commenced there was not necessarily any stopping point until the last speculator was squeezed out.

During the first half of October, 1929, the Securities Company spent vast sums of money in withstanding the selling pressure on Cities Service Company common stock; and it was so successful that the market quotations actually advanced from a closing $604 on September 30 to a high of $68% on October 15th. However, on Monday, October 21st, in a panic that was precipitated on the preceding Saturday, 936,500 shares of Cities Service Company common stock were hurled onto the market. The Securities Company, in an endeavor to allay the panic, spent more than $48,886,000 in the purchase of 784,644 of those shares. It was only partially successful, however, the price having broken from $66% to $59. This price break was followed by even heavier selling pressure-1,151,900 shares on October 24th, 976,700 shares on October 28th and 1,105,900 shares on October 29th. During the whole course of the stock market crash in the latter half of October, 1929, the Securities Company spent more than $138,000,000 in the purchase of 2,372,101 shares of Cities Service Company common stock; but, as these amounted only to about two-fifths of the total quantity of that stock thrown onto the market, they were not sufficient to uphold the market price, which broke to a low of $20 on October 29th. During October the Securities Company sold, exclusive of the shares taken by warrant-exercising debenture holders, 3,401,462 shares, the contractual proceeds of which, after certain adjustments, amounted to $180,314,663.10 as against purchases during October of 3,080,392 shares at a cost of $181,825,808.

The rapid changes in market quotations during this period resulted in numerous price adjustments to the customers for Cities Service Company common stock. By the end of the year these amounted to $10,605,811.52 on sales effected through the syndicate and to $2,168,658.55 on sales effected by Henry L. Doherty & Company's organization.

As a result of the relatively low-market quotations prevailing for Cities Service Company common stock after the stock-market crash of October, 1929, the pro rata subscription offer to the stockholders was abandoned, and modifications were made in the syndicate distribution group agreement. A new special offering to dealers was announced in February, 1930. During 1930, the sales of this stock through all channels amounted to 7,382,696.16 shares, with a gross invoice value of $210,441,088.86. The company made market purchases aggregating 7,337,156% shares at a cost of $218,803,730.37. There was a period of upward trend in the market price of the stock-from a low

of $25 on December 20, 1929 to $41% on May 1, 1930. But during this period, the Securities Company's market purchases exceeded its total sales through all distribution channels. A market decline set in, in May, 1930, during which the sales exceeded 1,000,000 shares and exceeded the market purchases by nearly 279,000 shares; and a fluctuating decline continued throughout the remainder of that year, the market price at the very end being $14% per share.

On January 17, 1930, Cities Service Company provided the Securities Company with 600 000 common shares with which to make deliveries to customers. Although the market price at the time was about $28 per share, the gross proceeds available from accumulated sales averaged only $15.91 per share to be provided; and the price to the Securities Company for these shares was $12.50, which left the latter a margin of about $3.41 per share with which to cover commissions and expenses. As of December 31, 1930, Cities Service Company provided the Securities Company with another 633.879,206 shares at $10 per share. This price left the Securities Company with a margin of about 53.82 cents per share with which to cover commissions and expenses. The Securities Company's accounts represented that company as selling, to the holders of Cities Service Company debentures, the common shares that were issued to them when they exercised the warrant options carried by their debentures, and as obtaining the requisite shares from the issuing company at prices from $5.50 to $7 per non-par share less than the prices paid by the debenture holders. As the Securities Company had no function to perform in the issuance of these shares, this resulted in counting for it a gross profit of $18,429,723.23 for which it did not render service. However, this made no difference in the ultimate proceeds to Cities Service Company because the Securities Company's net deficits from these operations were charged back to it.

As of December 31, 1929, the Securities Company wrote down the book cost of its "Trading Purchases" of Cities Service Company common stock, $21,121.097.98. This was not an inventory adjustment, as the company had no unsold shares, its aggregate sales up to that time having exceeded its aggregate purchases by 1,946,941 shares. Such bookkeeping enabled the Securities Company a year later to count on certain classes of sales of this stock a gross profit of $99,642.39 instead of an actual gross less of $21,021,455.29. Profits and losses made by trading in securities are not, however, taken into earnings but are treated as more or less capital proceeds from the securities of new original issue. which treatment is represented on the company's bocks by carrying them, not to Surplus, but to an account called "Reserve for Cost of Distribution ".

After counting profits and losses on December 31, 1930, the Securities Company emerged with a deficit in its "Reserve for Cost of Distribution" of $1.956.775.71. This was charged back to Cities Service Company, as also was $12,518,998.55 of uncollectible balances of breached partial payment contracts.

MEMORANDUM CONCERNING THE POWER OF CONGRESS, UNDER THE COMMERCE CLAUSE, TO REGULATE SECURITY EXCHANGES

This memorandum is concerned with the basic question whether Congress, by virtue of the commerce clause, has power to regulate security exchanges. Its purpose is to show that a constitutional foundation exists upon which may be built a statutory structure for the regulation of such exchanges. For if this power can be established, as in my opinion it can, then it becomes largely a question of fact and of administrative judgment whether and how far the regulation shall be extended beyond the exchanges themselves and applied to related and collateral activities.

I. REGULATION OF SECURITY EXCHANGES IS A NATIONAL PROBLEM

The national character of the problem of the regulation of security exchanges is shown by the facts. Some of them are subject to judicial notice. Others have been brought out by the Congressional investigations or have been gathered as a result of independent studies. A few of the broader aspects may be noted here as bearing on the national interest.

Transactions upon the security exchanges may have a direct effect upon the ability of the instrumentalities of interstate commerce to perform their functions. New security flotation is difficult if, because of manipulation or loss of public confidence, existing securities have shrunk to abnormally low