undesirable. In my opinion it would be most unfortunate to write in law specific rules as to credit, because conditions are fluid and laws are static. The sound way would appear to be to leave it in the hands of those who, by reason of their position and their connection with the financial and economic conditions of the country, from their experience in extending credit, can best judge as to the proper flow into securities in order to maintain their liquidity and marketability in the light of circumstances as they exist, not only throughout the whole country but in special local sections.

In the last analysis credit is dependent upon both the individual and upon the character of the securities upon which the loan is based. If this is a true statement, there then can be no uniformity applicable to the whole country or to all securities. For this reason my associates are convinced that any limitation, either on the amount the individual should borrow or that banks may loan, should be left to the control of the Federal Reserve Board.

Now, if it be said that the control of the Federal Reserve Board failed in 1929, it should be borne in mind that not only have banks and bankers learned by that experience, but by the passage of the Banking Act of 1933 the powers of the Federal Reserve Board have been greatly increased for the express purpose of preventing the undue diversion of funds into speculative operations. What I have in mind are these powers: The power to deny credit facilities of the Federal Reserve System to any bank making undue use of bank credit for speculative purposes; the power of the Federal Reserve Board to fix for each district the percentage of capital and surplus which may be represented by loans secured by stock or bond collateral; the power of the Federal Reserve Board to remove any director or officer of a member bank guilty of unsafe or unsound practices; the power to increase or decrease the reserve balances required to be maintained against either demand or time deposits; the elimination of all banking affiliates engaged in the securities business; the forbidding of any member bank to act as agent or medium for others making loans on securities. In my opinion and in that of my associates, if further protection or power is needed to control credit in market operations, it should be done through the amplification of that act.

Now, to the second point, the question of segregating broker and dealer activities.

With respect to section 10, which separates the activities of the broker and dealer, I would respectfully submit that such a separation would work a hardship on New England people as a whole, and on the security houses serving New England, particularly on the smaller holders of securities in comparatively small cities and communities. By forcing segregation we New England people believe that the act would force our local securities houses to withdraw from the small cities and communities, to withdraw both their services as brokers and their services as dealers. The effect on the listed holdings of such investors would be to make them less readily marketable. The small holder, if the securities houses in the small communities are forced to withdraw, would not be likely to have established connections with securities houses in the large cities. This being the fact, he would find it difficult, in case of necessity, to

dispose of his listed holdings promptly, or to make arrangements for quick execution of an order to sell. A similar difficulty would obtain in case he desired immediate execution of an order to purchase listed securities. The general effect, therefore, on the small holder in the smaller towns would be to his decided disadvantage. It would make his listed securities less readily marketable.

In addition to this, individuals in small places holding unlisted securities would be deprived entirely of services and financial advice from dealers if the segregation section forced, as we believe it would, the withdrawal of securities houses from the small cities and towns. Moreover, this section would, I believe-and when I say I, I mean my associates too-would produce the following additional unfortunate results: First, a radical curtailment of our established organizations. Second, the discharge of members of the personnel of our organizations who have labored long and faithfully and have established recognized reputations for honesty and fair dealings with the customers. I may say that in the State of Massachusetts alone there are something more than 10,000 employed by our organizations. Third, the forced separation and perhaps the loss of a clientele built up over a period of many years. Fourth, an increased cost to industry for financing and consequently a decreased valuation of the securities sold to the investor. Fifth, the entire elimination from the dealer business of the most financially responsible firms and individuals in our district.

It is my personal belief, based on the local situation, that this will result in the driving of purely local financing to other fields, particularly to New York, where alone I believe could dealers be found of sufficient means to absorb and distribute the securities necessary for current financing. This is due to the fact that the majority of the houses of substantial financial resources in our district are members of the stock exchanges.

The criticism which has been directed at brokers occupying this dual position, it would seem, has been largely, if not entirely, overcome by the passage of the Federal Securities Act, which appears to have eliminated the opportunity for unfair advantage, not only under section 12, imposing civil liabilities upon the seller, but by section 11, imposing even greater responsibilities upon an underwriter. Furthermore, under our New England laws, both statutory and common law, full disclosure as to his relations to the transaction is required on the part of any broker who is selling as a principal. I am also advised that the Investment Bankers' Association Code of Fair Practices, about to be adopted, makes further require ments in this type of transaction.

Now, third, the regulation of exchanges and their practices.

As to the prohibition and regulation of practices of exchanges, it seems to me that there are two considerations. Certain practices are condemned by exchanges as well as public opinion. As to such practices, there can be no objection to the enactment of a law prohibiting them. There is a distinct difference, however, between such practices and many other matters covered by the proposed bill as to which there is a sincere and honest difference of opinion.

As to such things, if Congress feels that certain Federal regulations should be imposed upon the activities of the stock exchanges, we

should not oppose it, provided that the authority is placed in the hands of a capable independent group of men, not bound in advance by specific prohibitions and requirements, before whom we could appear and discuss our local conditions and our local practices. Before such a body we should feel that, if any of our practices were regarded as ill-advised or not in the interests of the public and we could not convince them otherwise, then there really was some question as to the soundness of our own position. In other words, a body with flexible authority, sitting in conference with the exchanges, studying their problems, and both interested in the same ends, the public good and the sound interest of the security holders, is without objection. We believe under those conditions a sounder practice and procedure can be worked out than is possible in any other manner. The CHAIRMAN. Are there any questions of Mr. Rich?

Mr. PECORA. I would like to ask a few questions, Mr. Chairman. Mr. Rich, you said that certain practices are condemned by exchanges as well as public opinion. As to such practices there can be no objection to the enactment of a law prohibiting them. Would you be good enough to enumerate the practices you have in mind? Mr. RICH. What I had particularly in mind, Mr. Pecora, was the wash sales, and so forth, some extreme types of pool operations. Those were the particular things I had in mind.

Mr. PECORA. În the concluding part of your statement you said that "as to such things, if Congress feels that certain Federal regulations should be imposed upon the activities of the stock exchanges, we should not oppose it, provided that the authority is placed in the hands of a capable, independent group of men, not bound in advance by specific prohibitions and requirements, before whom we could appear and discuss our local conditions and our local practices."

As to that, Mr. Rich, do you have any notion that the Federal Trade Commission would shut its ears to any suggestions made by representatives or officers of stock exchanges when it devoted itself to the task of formulating rules and regulations?

Mr. RICH. I had no thought, and I have none, that the Federal Trade Commission, if it were given this authority, would not give every member of the present exchange, broker, or dealer, the opportunity to present their cases to the Commission and get their hearing. What I would suggest and what runs in my mind is that whether or no the organization, the form in which it could best handle this problem, should be more diversified and have more opportunity to attend to the particular problems than perhaps such a commission would have. În one of the reports-I think, the Dickinson reportthey made two suggestions, did they not? Óne, that there could be a remaking of the Federal Trade Commission, setting up certain commissioners who would give all their time, or to an independent stock exchange authority. What we have in mind is a group of men of diversified contacts and of wide experience to whom we could present matters, because we feel very strongly that a uniform law imposed on every exchange would, in certain instances, work injustice to many of these purely local markets. We are trying to preserve our local market.

Mr. PECORA. The matter of preservation of local markets with regard to elements that apply only to localities could easily be taken

up with the Federal Trade Commission when that body formulates its rules and regulations, could it not?

Mr. RICH. I agree that it probably could. I just tried to express my thought and that of my associates as to the particular type of body that we felt properly could handle it better. It is not said in criticism.

Senator KEAN. I would like to ask you a few questions. If this law "as is" is enacted, the Federal Trade Commission would be bound, of course, by all the requirements of the law, would it not? Mr. RICH. Yes.

Senator KEAN. And if they are bound by all the requirements of this law, that would so cripple your exchange that probably it could not do business?

Mr. RICH. This bill that is before us now; yes. Our suggestion is that there should be great flexibility in the law in order that that body might function better.

Senator KEAN. I understand; but we have had testimony here that it would perhaps close most of the exchanges.

Mr. RICH. Section 10 would hit our district terribly hard, because, as I have stated, a substantial part of our long-term local business is done with those who happen to be members of the stock exchange. Senator KEAN. Do you have about the same rules as the stock exchange in New York has?

Mr. RICH. Pretty generally the same.

Senator KEAN. Do you have a right to question your members as to whom they bought for and whom they sold for?

Mr. RICH. Yes, sir; we do.

Senator KEAN. Have you questioned them on air stocks?
Mr. RICH. We have no air stocks listed.

Senator KEAN. None of them are listed?

Mr. RICH. No, sir.

Senator KEAN. If this bill is enacted into law it would interfere very much with the sale or financing of all municipal bonds, would it not?

Mr. RICH. It would, in our district. It would have to be done outside of our district.

Senator KEAN. In other words, it would drive municipals and other bonds off the market, and they are regarded as the highest type bonds in the market today. Bonds of the State of Massachusetts and towns in Massachusetts are selling on a better basis than those of other States and cities in the United States, are they not?

Mr. RICH. They are selling, yes; I would not like to go as far as that.

Senator KEAN. It would practically deprive those cities and towns of the ability of marketing their securities?

Mr. RICH. They would have to go outside of our district where they now operate.

Senator GOLDSBOROUGH. I understand, Mr. Rich, that it is your judgment that there should be set up an independent commission to carry out and effectuate the provisions of this bill?

Mr. RICH. My judgment, as I tried to express it, is that; yes, sir. Senator GOLDSBOROUGH. Rather than the Federal Trade Commission?

Mr. RICH. Rather than the Federal Trade Commission.

Senator GOLDSBOROUGH. Is that based upon the fact that you think the Commission would be carrying burdens already placed upon it, plus those imposed by this act, which would be such a stupendous task that it would be difficult for them to carry out the provisions of this bill?

Mr. RICH. There are two answers to that, Senator. First, I think it would be a stupendous task for them; and personally I am not clear in my mind but that a different type of personnel, a more diversified personnel, with broader contacts with economic and business conditions, would not be more serviceable. I am not criticizing in that suggestion, but am simply giving my reaction as to the most competent way of handling it.

The CHAIRMAN. Would you recommend that municipals be exempted from this act?

Mr. RICH. Frankly, I do not see why they should not, Senator. It covers the country over. I am not very familiar with municipals outside of my own district, and just what might be involved by giving that general exemption I do not know.

The CHAIRMAN. Are there any further questions? If not, we are very much obliged to you.

Mr. RICH. I thank you very much, gentlemen.

The CHAIRMAN. We will now hear from Mr. Archibald Roosevelt, who is accompanied by Mr. George B. Gibbons.

STATEMENTS OF ARCHIBALD B. ROOSEVELT, PRESIDENT OF ROOSEVELT & WEIGOLD, INC., DEALERS IN MUNICIPAL SECURITIES, NEW YORK, N.Y., AND GEORGE B. GIBBONS, PRESIDENT GEORGE B. GIBBONS & CO., INC., MUNICIPAL BOND DEALERS, NEW YORK, N.Y.

The CHAIRMAN. State your name, place of residence, and occupation, Mr. Roosevelt.

Mr. ROOSEVELT. My name is Archibald B. Roosevelt. I am president of Roosevelt & Weigold, Inc., dealers in municipal securities. By municipals I mean those of States and subdivisions of States. The CHAIRMAN. And your residence?

Mr. ROOSEVELT. New York City.

The CHAIRMAN. Mr. Gibbons, you may state your name.

Mr. GIBBONS. My name is George B. Gibbons. I am president of Geo. B. Gibbons & Co., Inc., municipal bond dealers, New York City. The CHAIRMAN. Proceed, Mr. Roosevelt.

Mr. ROOSEVELT. Mr. Chairman and Senators of the committee, last week the Municipal Bond Club of New York had a meeting and appointed a committee to study the National Securities Exchange Act of 1934, of which committee Mr. George B. Gibbons is chairman. After some study of the bill we were asked to come down here and explain to the committee just how we thought that this bill would affect municipal bonds and municipal securities. Neither Mr. Gibbons nor myself are members of any exchange that deals in securities. We deal solely in municipal bonds.

We have made a study of this bill and have come to certain conclusions. We feel that it is pretty definite that if the bill goes through