STATEMENT OF HOWARD BUTCHER, JR., PHILADELPHIA, PA., VICE PRESIDENT OF THE PHILADELPHIA STOCK EXCHANGE

The CHAIRMAN. You may proceed. State your name, residence, and occupation.

Mr. BUTCHER. My name is Howard Butcher, Jr., Philadelphia. I am vice president of the Philadelphia Stock Exchange.

The CHAIRMAN. Do you wish to be heard on this bill, S. 2693, Mr. Butcher?

Mr. BUTCHER. If you please, sir. The CHAIRMAN. Very well. You may proceed in your own way. Mr. BUTCHER. Mr. Chairman and gentlemen of the committee, the Philadelphia Stock Exchange desires to cooperate to the fullest degree in any proper effort to prevent any abuses affecting the stock market and to restrain unwise or excessive speculation.

Its governing committee believes, however, that this proposed legislation imposes regulations, restrictions, and prohibitions, which vitally affect the existence of exchanges throughout the country, which gravely injure the business of a vast number of brokerage houses in every section of the country, which impair the credit facilities of individuals and of industry everywhere, and which tend by reason of their severity and the limitations placed upon Federal authority, to defeat many of the purposes of the Act.

The act as drawn gives to the Federal Trade Commission complete domination of every stock exchange in the country, through powers of management affecting every single activity of a stock exchange, including the admission, supervision, and expulsion of its members, the election of its officers, the appointment of its committees, its rules for the conduct of business, and all its brokerage practices.

The domination the act gives to the Commission, the manner in which the regulatory power of the Commission is made effective and the penalties imposed by the act upon an exchange, its officers and its members for violations of the rules and regulations of the Commission must inevitably weaken the authority of the governing bodies of security exchanges, discourages all initiative and substantially impair the functioning of an exchange in the marketing of securities.

The requirements of the act with respect to accounts, records, reports, and examinations of members of national securities exchanges impose undue burdens, including the exercise of inquisitorial powers which are capable of grave abuse.

The requirements with respect to registering of securities upon a national security exchange, the obligations imposed upon the issuer of a registered security and the penalties imposed upon officers and directors of corporations whose securities are registered on a national security exchange, make registration prohibitive in the case of many corporations, and unduly burdensome in respect of all issuers of securities.

The prohibition upon members of an exchange with respect to the extension or maintenance of credit to or for a customer on any securities not registered upon a national securities exchange, making all unlisted securities ineligible as collateral in margin accounts is an unreasonable limitation upon investors in connection with their

margins in brokerage accounts, and unfairly discriminates between brokers and other lenders of money in the amount of credit which can be advanced upon unlisted securities.

The minimum margins established in the proposed act are unsound in principle and unworkable in practice. They attempt to set up a rigid formula for a subject which requires a very flexible rule.

The act imposes unnecessary restrictions and arbitrary limitations. upon borrowing by members of national security exchanges.

The provisions of the act which prohibit any member of an exchange and any person who as a broker transacts a business in securities through a member of the exchange from acting as a dealer in or underwriter of securities would in effect deprive purchasers and sellers of listed stocks in amounts of less than 100 shares of the benefits of a market on the exchange; would eliminate methods of trading which have become an essential part of every important market for securities; and in respect of many brokers and brokerage houses throughout the country would compel them to cease business. The provisions of the act with respect to "over-the-counter" market activities in unlisted securities, giving to the Federal Trade Commission power to control all dealings in unlisted securities, would in conjunction with other provisions of the act, practically destroy the market for unlisted securities insofar as the control of the Commission is applicable, and stimulate to an enormous degree the business of the completely unregulated "over-the-counter" markets.

The penalties both civil and criminal provided in the act are excessive and unreasonable.

The enactment of the bill in its present form will gravely affect the entire credit system of the country, and will seriously prejudice not only all stock exchanges and brokers and dealers in securities, but all banking institutions, industry, and all investors.

Such regulatory legislation as is deemed necessary should provide for a regulatory body or authority conversant with the technical problems connected with the operation of stock exchanges, with power to require within reasonable limitations the adoption by stock exchanges of rules and regulations for preventing practices which unfairly influence the price of securities or unduly stimulate speculation.

May I say a few more words informally, Mr. Chairman?
The CHAIRMAN. Yes. You may proceed."

Mr. BUTCHER. It is estimated that there are approximately 200,000 employees of stock-exchange firms or of securities dealers in the United States, with an estimated pay roll of probably well in excess of $300,000,000. Many of these men, of course, are paying income taxes, and many other taxes, including State, city, county, and otherwise. If this bill is enacted in its present form, it is my very definite opinion, and I should like to express it politely, of course, but as firmly as I may, that these men would become unemployed almost immediately. It would immediately, or almost immediately, certainly within less than 30 days, produce a frozen condition in the matter of securities that would perhaps be even worse than now exists in the case of real estate.

It is estimated that there are about 11 million citizens, men and women, who hold stocks and/or bonds in the United States; and that there are probably another 15 million people who are directly interested through life-, fire-, and accident-insurance companies in the liquidity of the securities market. There are 25 million people, therefore, it is estimated, and in my opinion many more, who would be very seriously affected by the passage of this bill in its present form.

It is furthermore my opinion that no one act could be done at this time by Congress which would more seriously slow down, if not stop, recovery, which we are all anxious to have brought forward as rapidly as possible, as would the passage of this bill.

This bill contemplates, apparently, the inclusion of most directors of the larger corporations, and their officers, the holders of 5 percent of their securities, and the brokers, in a group against which it is proposed to apply penalties. It is proposed to put these men, many of whom have honorable records over two generations, into a special class, an unholy class, so to speak. It would be a serious reflection upon those men and upon their integrity. It would mean that a majority of those men having honorable records would be placed in a group of men who are to be considered as undeserving the confidence and respect of the Nation. The very fact that this bill is being considered by this committee and a committee of the House of Representatives has already had a very serious effect in slowing down a great many actions that those men would otherwise have taken.

It seems to me that the bill does not take into consideration what President Roosevelt has repeatedly said, that we must go forward in a united group, that we must fight the depression, that we must make a united effort toward recovery. And I do not believe there has been any group of men who have responded more readily and more thoroughly than stockbrokers to that desire expressed by the President. It is certainly our earnest wish to help, but if we are going to be deprived of the officers down to the rank of sergeant, in this army that is expected to go forward in the fight against depression, and ask the army to go forward without those officers, there will be, I am afraid, very little motion. If you are going to eliminate those men I have mentioned, the officers and directors of the larger corporations from reasonable and just consideration, and I want to say to you very firmly that I feel this bill is unjust, a very grave and serious set-back to recovery must inevitably follow.

Mr. PECORA. What are those directors to be eliminated from that you are now speaking of?

Mr. BUTCHER. It seems to me that a man who is now a director of any corporation would, in event of the passage of this bill, of necessity have to resign his position prior to the passage of the bill. Mr. PECORA. Why?

Mr. BUTCHER. Because if he did not, then through the inadvertence of some clerk somewhere, he would become immediately subject to a $25,000 fine and/or a 10-year jail sentence.

Mr. PECORA. For doing what?

Mr. BUTCHER. For violating, perhaps entirely unwittingly, some provision of the rules and regulations of the Federal Trade Commission, which is to have authority under this bill.

Mr. PECORA. What provisions do you find in the bill that such director might violate unwittingly?

Mr. BUTCHER. I should think that any one of probably 12 or 14 different provisions-well, I haven't them by heart, of course, but any one of probably 12 or 14 different paragraphs of the bill would bring a man under very serious penalty, or might very readily do so. Mr. PECORA. I wish you would be more specific about it.

Mr. BUTCHER. Any unintentional misrepresentation of fact, even to a very slight degree, would bring a man under the penalties of the bill. Now, I have been a governor of the Philadelphia Stock Exchange for many years, and certainly I would not act as a gov ernor of that exchange nor as a director of a corporation if this bill were enacted. And I think you will find, with all due respect, it would compel a group of men to act as directors very similar to the men who now act as straw men in connection with real-estate mortgages.

Mr. PECORA. To act as what?

Mr. BUTCHER. As straw men in connection with real-estate mortgages.

Mr. PECORA. What do you mean by that?

Mr. BUTCHER. Men would have to act only if they had no means and might not be unduly perturbed about a possible jail sentence. Mr. PECORA. Are you referring to the provisions of section 15 of the bill, entitled: "Transactions by Directors, Officers, and Principal Stockholders"?

Mr. BUTCHER. That is certainly one of the sections.

Mr. PECORA. Don't you think the practices aimed at in section 15 are harmful practices?

Mr. BUTCHER. Mr. Pecora, I believe if you and I were to sit down together for a very few minutes we would arrive quite quickly at a conclusion as to the undesirable things which now exist.

Mr. PECORA. Well, take the undesirable things referred to in section 15 of the bill, or the things which are sought to be prohibited by section 15 of the bill, would there be any dispute between you and me in regard to the proposition as to whether or not the practices there aimed at are unwholesome, undesirable and unethical?

Mr. BUTCHER. Mr. Pecora, I am not familiar with this thing by heart. I have read the bill several times carefully but have not got it by heart. I will say that am in accord with you very largely, if not perhaps entirely, as to what should be eliminated. But I am very much opposed to the manner in which it is sought in this bill to eliminate those things. As a matter of fact I have devoted a very material part of my working life, for the past 12 or more year, trying to eliminate some of the very things mentioned in paragraph 15 of the bill. At the same time I think the bill defeats itself. I offer that thought very respectfully, but I fear the bill as framed would defeat itself.

Mr. PECORA. Section 15 is the one that seeks to prohibit certain specific acts or transactions by directors, officers, or principal stockholders. If you can find anything there that you think should not be prohibited, I wish you would point it out instead of making a blanket attack upon the provisions by saying it would cause directors to resign. Furthermore, let me call your attention to section

24, which prescribes penalties for violations. You are fearful that directors may be sent to jail for unwitting violations. Section 24 of the bill specifically says:

Any person who wilfully violates any provision of this act or any rule or regulation made thereunder

becomes subject to the penalties prescribed in the bill. That is something far different from an unwitting or innocent violation, isn't it?

Mr. BUTCHER. That is what that language appears to say, but

Mr. PECORA (interposing). It not only appears to say it, but it does say it, because the word "wilfull is in there, and it has a very definite meaning and connotes something that is done wilfully. Mr. BUTCHER. Don't you yourself think that if you were a director in a corporation you would resign if this bill were enacted into law?

Mr. PECORA. I will say to you that I think this: That directors would find it convenient to resign in event their sense of duty to their stockholders involved a betrayal of their trust by means of which such directors might profit. We have had many notable instances during our hearings here of directors doing that, including transactions by bank directors and/or officers.

Mr. BUTCHER. Mr. Pecora, I want to say that I am heartily in accord with you in the fact that a great many of those actions were what I would call, in the vernacular, entirely out of bounds. I have no sympathy with a great many of those actions, and I feel that I am very much in accord with you in what you wish stopped along that line, but I do want to say as to this bill

Mr. PECORA (interposing). Well, what we wish to have stopped is set forth in section 15 of the bill so far as they may be applied to officers and directors of corporations.

Mr. BUTCHER. But I very respectfully feel that you will be defeating the very thing under that section that you are attempting to reach.

Mr. PECORA. You are now merely making a dogmatic statement to that effect. How would the purpose of the bill be defeated? First let me ask you: Do you admit that these evils should be exterminated; I mean the evils referred to in section 15 of the bill?

Mr. BUTCHER. I believe that every one I can now recall should be prevented.

Mr. PECORA. All right. How are we going to exterminate them? Mr. BUTCHER. I do not believe that you can ever legislate 100-percent honesty in human beings.

Mr. PECORA. No; that is admittedly impossible until the millenium arrives or until human nature entirely changes, but that same argument would apply to any legislation that is designed to prevent crime. The fact that our laws against kidnaping has not prevented kidnaping is no argument for repealing the laws.

Mr. BUTCHER. Not in my opinion; no.

Mr. PECORA. And the fact that our laws defining murder to be a crime has not succeeded in preventing all murders is no reason for repealing those acts, is it?

Mr. BUTCHER. Not in my opinion, but as to this bill