The CHAIRMAN. But you say stock-exchange tenants. What do you mean by that? Mr. BABBAGE. Well, I mean persons connected with the stock exchange. The CHAIRMAN. Those who are members of the stock exchange, and persons of that sort? Mr. BABBAGE. I mean brokerage firms and their brokerage offices throughout the city of New York. Senator KEAN. The New York Stock Exchange does not own any building that is rented to brokers for their offices, does it? Mr. BABBAGE. Except their own exchange building, for their purposes. I was merely speaking to show you gentlemen that anything that would affect the stock exchange as an industry would have very grave effect on innumerable other people who have built up their lifework around it. The CHAIRMAN. The stock-exchange building itself is owned by a realty company, as I understand it. Mr. BABBAGE. Well, I am not familiar with that. It is probably owned by some company connected with the New York Stock Exchange. Senator KEAN. But in that particular building there are no offices of brokers, as I understand. Mr. BABBAGE. Well, I know that there are certain firms of brokers in the stock exchange building. There are several buildings there, whether you take the New York Stock Exchange or not, that there is an office building, a sort of annex to it at the corner. And I know there are a number of brokers there. But I am not familiar with the details. I was not so much concerned with the people who may be in the stock exchange, because that building is largely occupied by stock-exchange tenants. But if you should diminish the tenancy of those connected with the stock exchange, brokers for instance, say, by 50 percent, it would mean that a building which is now productive would then become unproductive. The CHAIRMAN. That would depend on whether or not the New York Stock Exchange continued to do business as it has heretofore done. Mr. BABBAGE. Yes, sir. They are all closely related. Senator KEAN. It is also true that stock exchange firms have many branch offices all over the city. Mr. BABBAGE. Yes; and that is included in my figures. The CHAIRMAN. Well, I think there is no idea of abolishing the stock exchanges. Mr. BABBAGE. Well, sometimes we can do a thing unintentionally, I mean by indirection, which we would not do directly, and it is to guard against the committee doing anything that might indirectly bring this around that I take the privilege of appearing before you. The CHAIRMAN. And we are very glad to hear from you. Mr. BABBAGE. I feel that we ought to speak up in these matters in case we have anything to say. The CHAIRMAN. That is entirely right. (Thereupon, Mr. Babbage left the committee table.) Senator GOLDSBOROUGH. Mr. Chairman, with the consent of yourself and the committee I should now like to offer a letter from Mr. Michael S. Haas, president of the Associated Mutual Savings Banks of Baltimore. And I might say that these banks are entirely mutual, and have no stock issues whatever, and have deposits aggregating approximately 20 million dollars. The CHAIRMAN. The letter will be made a part of the record. Hon. PHILLIPS LEE GOLDSBOROUGH, METROPOLITAN SAVINGS BANK, United States Senate, Washington, D.C. MY DEAR SENATOR GOLDSBOROUGH: As you are fully aware, the mutual savings banks of Baltimore enjoy a long and outstanding record of useful service to the people of Baltimore. They have afforded a means for safekeeping the savings of people of small means and at the same time furnishing an available supply of funds for investment in mortgage loans for the building of homes. In order to adequately protect and diversify the investment of their depositors' savings, these Mutual Savings Banks for many years have also been purchasers of large amounts of high grade investment bonds. Many of these bonds are the public securities of states, counties, and municipalities, as well as large amounts of equipment trust certificates and underlying railroad and public utility obligations, which are not listed on any exchange for obvious practical reasons. The purchase and sale of such bonds are made through recognized security dealers, many of whom in order to render better facilities to their clients are also stock-exchange members. These dealers through their knowledge of investment conditions and through their contacts with other dealers and institutions in different parts of the United States are enabled to locate and determine whether their customers are best served in the execution of such transactions on the stock exchanges or through the over-the-counter markets. Frequently it is much more advantageous to institutions such as our mutual savings banks to deal with such security dealers when they are acting directly as principal in the transactions. Our experience is that it is decidedly to the interest of institutions such as ours, and therefore our many depositors, to be able to handle such transactions through recognized security dealers whose combined facilities enable them to render either dealer or broker service. Naturally the mutual savings banks are not interested in fostering speculation in securities, and unquestionably practices have developed that justify correction and a regulation of these speculative activities, but it is certainly obvious that serious consideration should be given to the effects of that portion of the Rayburn-Fletcher bill which provides for segregation of the dealerbroker business and its effect on the investment transactions of the mutual savings banks, which are truly representative of the thrifty people of small means. Very truly yours, MICHAEL S. HAAS, President Associated Mutual Savings Banks of Baltimore. The CHAIRMAN. We will now hear Mr. Frank R. Hope. STATEMENT OF FRANK R. HOPE, PRESIDENT OF THE ASSOCIATION Mr. Hope, you want to be heard on S. 2693, I take it? The CHAIRMAN. You may proceed. Mr. HOPE. Mr. Chairman and gentlemen of the Committee: I speak on behalf of the Association of Stock Exchange Firms, a voluntary association of substantially all member firms of the New York Stock Exchange. Our members are the house partners and therefore the persons in the New York Stock Exchange business who are in constant and immediate contact with the customers and the public. It is for this reason that we are so particularly concerned with this bill which we have analyzed particularly from the point of view of our relations as brokers acting on behalf of our customers in executing their orders on the exchange. The stock exchange, as such, is the place and instrumentality through which we operate and which is necessary for the clearance of our transactions and, therefore, we are fundamentally concerned with any regulations of stock exchanges to the extent that they may limit or interfere with our ability to render efficient service to our customers. In order to save your committee's time, and as requested by your chairman, I will not again discuss matters already fully presented to you but desire leave to file with the committee the analysis which our association has made of the entire bill as introduced. Further more, representatives of the various phases of the stock exchange business have appeared or will separately appear to present the peculiar problems incidental to the particular phase of the business in which they are engaged and, therefore, I will not specifically discuss their separate problems. Mr. Whitney made a proposal to the House Committee on Interstate Commerce, on behalf of the New York Stock Exchange, suggesting the creation of a stock exchange coordinating authority; and, on behalf of the Association of Stock Exchange Firms, I endorsed that proposal. Mr. Whitney's proposal conceded the principle of governmental regulation. The regulatory body which he suggested seems to us a sound, workable, and efficacious body which could as a practical matter exercise efficient and effective supervision over the stock exchanges, especially because it provides for coordination with the other branches of the Government having jurisdiction over finance and credit. The very nature of the brokerage business makes such coordination essential. The entire credit and financial structure of the country is fundamentally involved and affected. Without presuming to urge upon Congress the selection or creation of any particular body, as the regulating body, we must clearly point out that whatever regulatory body might be selected it should, as a matter of its basic structure, be equipped with a personnel experienced in matters of credit and finance. Although some form of regulation of stock exchanges might be deemed in the public interest, we must particularly point out that no such form of regulation can be considered except one which will permit the efficient functioning of the stock exchanges and the brokerage business as a means of supplying a broad market place where the public can freely deal in securities. We wish to express our desire to cooperate in any effort to develop a form of regulation which will correct alleged abuses which have arisen in stock exchange business without so restricting that business that much of its usefulness as a means for facilitating legitimate business in securities will be lost. With that in mind, the analysis of the bill which we have submitted must be considered, for, although the bill is entitled and is intended primarily to regulate the stock exchange business, it would seem not to be limited to that matter but to have three fundamental parts of almost equal importance. They are: 1. To regulate certain stock-exchange practices. 2. To restrict and control the granting of credit on investments. 3. To control many of the practices of the corporations themselves, their officers, directors, and stockholders. Any bill, such as the one before you, which embodies fundamental provisions respecting these three phases of business goes far beyond the express purpose of stock-exchange regulation; and in fact becomes by its far-reaching provisions, a vehicle for the regimentation of credit and corporate practices. The effects of the bill are so fundamental upon existing financial and corporate practices and so drastic and far-reaching that every consideration must be given to its content and possible consequences. The direct supervisory control given to the Federal Trade Commission by the bill should be carefully considered in connection_with the so-called "Roper report." In that report it was contemplated that the governmental agency exercising supervision over security exchanges would primarily have power to interfere with an exchange only in the event of certain improper conditions arising in respect to the operation of the exchange and the conduct of its members or because of an exchange's failure to adequately prescribe and effectively carry out the principles established by law. Until such conditions arose, the operation, control, and management of the exchange and the responsibility therefor would be primarily that of the exchanges themselves and their officials. The bill, however, would subject the exchanges to such rigid and minute direction in its management and affairs that the discretionary control and immediate responsibility which would remain in the exchanges under the Roper report would be lost. The governmental regulatory body, as well as an exchange itself, must have elasticity and discretion, even if somewhat restricted, so as to practicably meet situations as they arise. This is a serious consideration when the nature of the functions of exchanges and the requirements for prompt action is considered. The bill has many desirable purposes. To the extent that it establishes uniform practices corrective of alleged abuses and elevates the trading standards of all exchanges and all members of exchanges to the highest practicable level, requires full disclosure to the public of all material facts necessary to a reasoned judgment as to value and outlaws manipulative practices against the public interest, it must be sponsored. But, as pointed out in our brief and as here discussed, it unnecessarily and dangerously exceeds these necessary objectives and for all practical purposes attempts to regiment credit and business generally and in many respects is impracticable and unworkable. The desired objects can be attained without unintentionally destroying a useful and necessary business if a full consideration of the technique and operations of the business is relied upon. The Association of Stock Exchange Firms, a voluntary association of substantially all the members and member firms of the New York Stock Exchange, respectfully submit to the Committee on Banking and Currency of the Senate the following memorandum which is an analysis of the proposed "National Securities Exchange Act of 1934 ", as set forth in Senate Bill No. 2693. This memorandum is only intended as a brief analysis and explanation of the possible effect of the bill entitled "National Securities Exchange Act of 1934." It does not challenge the advisability of regulation nor is it to be understood as an attack on the bill as such. The bill is, however, so fundamental in its effect upon existing financial and corporate practices and so drastic and far-reaching that full consideration must be given to its contents and possible consequences. To help make these clear is the sole purpose of this memorandum and it must be so interpreted. The two bills presented in Senate and House are identical and are designated as bills to provide for the registration of national securities exchanges operating in interstate and foreign commerce and through the mails and are to prevent inequitable and unfair practices on such exchanges and for other purposes. The references to sections will therefore refer to each bill. Section 1 is entitled "Short title" and merely gives the name of the bill as the "National Securities Exchange Act of 1934." Section 2 is entitled "Regulation of Exchanges Using the Channels of Interstate Commerce and the Mails Necessary in the Public Interest." This section attempts to set forth conditions purporting to sanction and justify regulation of stock exchanges primarily under the power of Congress to enact regulations for interstate and foreign commerce and through the use of the mails. It is more in the nature of an argument than a statutory enactment. The conditions recited primarily tend to describe a national interest; but they are fundamentally different from those that have heretofore been relied upon to describe an interstate commerce transaction. In other words, national interest and interstate commerce are not synonymous; and the fact that the matters regulated affect the public as a whole is itself not sufficient to justify regulation of such matters as interstate commerce. For a discussion of the organization, functions, and place of stock exchanges in the financial structure and their relation to and effect upon interstate commerce and all related legal problems we refer to the study entitled "The Extent of Federal Power to Regulate Stock Exchanges and Stock Exchange Firms" and the supplement thereto prepared by Mr. Raoul E. Desvernine, counsel for the Association of Stock Exchange Firms. The bill, however, exceeds its express purposes of exchange regulation and investor protection and in fact becomes by its far-reaching provisions a vehicle for the regimentation of credit and corporate practices through the medium of stock-exchange regulation. To illustrate, it vests in the Federal Trade Commission the power to control collateral loans and interest rates; to prescribe the forms of reports, balance sheets and earning statements and methods of accounting in the appraisal or valuation of assets and liabilities, and in determining depreciation, and so forth, to be employed by corporations whose securities are registered on any exchange; it dictates the conduct of officers, directors, and stockholders of corporations; it requires annual and quarterly reports, balance sheets and profit-and-loss statements (certified by independent public accountants), as well as monthly reports and statements of sales or gross income of all corporations whose securities are registered on |