Experience gives us a situation illustrating this point when in the latter part of 1928 and first few months of 1929 it was obvious to the Reserve banks that the securities markets were absorbing far too much of the available liquid bank credit, but could do nothing about it except raise the rediscount rate. Raising the rediscount rate meant raising the rates on all loans as well as security loans. With authority to raise margins on security loans of all types with banks and brokers, no disturbance to the money market would have been necessary. The Open Market Investment Committee of the Federal Reserve Banks enlarged to include one representative of the security exchanges other than the New York Stock Exchange, and one representative of the New York Stock Exchange would seem the most practical group in whom to vest authority over margin requirements on security transactions. Securities on all exchanges and also unlisted securities suitable for collateral loans could be graded according to marketability and investment worth and loan values established accordingly. 3. Lastly, it must be realized that the authority to change margin requirements carries with it the power to affect markets. Herein lies one more great reason for constituting the authority over margin requirements in a committee as above indicated. Such authority must obviously be placed in hands where it will be most effectively handled but as free as possible from political influences and political pressure. This is said with all due reverence and courtesy to you gentlemen now in office, to those in office before you, and to those who may follow you. It is clearly obvious that if this authority is subject to frequent change by political appointments, that political changes, or even threatened political changes. would prove seriously disturbing to the markets regardless of the trend of business conditions. The free flow of investment capital is greatest when as many uncertainties as possible are eliminated. The Federal Reserve Banks were created as a nonpolitical organization to supervise and control the banking and credit policies of the country. The only serious errors in policy in their 19 years of existence were (or seemed) the result of political pressure, one Democrat (1919-1920) and the other Republican (1927-1928). These errors only emphasize the necessity of keeping the control of market machinery as free as possible from political factors. In regard to the Stock Exchange bill as a whole and in particular to the section pertaining to loans on securities, it is genuinely hoped this will be done. Yours very truly, RUSSELL G. LONGMIRE. NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, Hon. DUNCAN U. FLETCHER, Senate Office Building, Washington, D.C. MY DEAR SENATOR: I am sending you herewith a copy of a memorandum by the Mutual Savings Bank Association on S. 2693. This Association represents the mutual savings banks of the United States. They respectfully request that this memorandum be made a part of the record in the present hearing before your Committee on that bill. Sincerely yours, FRED N. OLIVER, Counsel. NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, Hon. DUNCAN U. FLETCHER, Chairman Committee on Banking & Currency, Senate Office Building, Washington, D.C. DEAR SIR: The National Association of Mutual Savings Banks has directed the undersigned to communicate to your committee the views of the Association on S. 2693, the proposed “National Securities Exchange Act of 1934." The association represents 567 mutual savings banks doing business in eighteen states of the Union. Their combined resources are $10.856,000,000, their total deposits $9,594,000,000, something like one-fourth of the total bank de posits of the United States, and the total number of their depositors is around 13,400,000. These banks are not stock institutions but are organized and oper ated solely for the benefit of the depositors, and the officials of the banks, as well as the banks themselves, are acting in what is essentially a fiduciary capacity. The only object of mutual savings banks is the safekeeping and provident investment of the funds of depositors who are generally the small savers of the country, accumulating funds for old age or special purposes. These total savings represent an average deposit of $715.32 for approximately one out of every nine people in the country. By limitation of statute as well as by force of the very nature of the business in which they are engaged and of their relations to their depositors, the security holdings of these banks are confined almost exclusively to those of the soundest and most conservative investment type. as contrasted with speculative issues. Typically and generally, their investments in securities of the character dealt in over the exchanges are bonds, and not stocks. Their test of desirability is stability and dependability, to the subordination of measures of return or of capital profit. The organized savings banks have no comment to submit regarding what they conceive to be the primary purposes of the proposed measure. They leave that discussion to those who are engaged in the activities which the bill. as we understand its general tenor, purports to regulate. This communication is confined to what we deem to be departures from the policy which the bill. as we read it, is intended to embody, and to particular provisions which ap pear especially to threaten the proper and just interests of investors such as savings banks. Our criticisms of the bill may be summarized as follows: 1. It fails to differentiate between stocks and bonds. 2. It forbids the combined service of dealer and broker in bonds, frequently valuable to the holders of conservative investment securities. 3. Even outstanding bonds of municipalities, states and their political suldivisions, and railroad bonds, would be excluded from the exchanges except under burdensome conditions with inevitable impairment of values. 4. In the matter of loans on bonds, the bill unjustly discriminates against mutual savings banks in favor of member banks in the Federal Reserve System. 5. Frequently, the registration requirements for bonds already issued would not affect the interest of the issuer of the security, but would penalize the holders thereof. It is in the above order that we shall discuss our objections to the bill. 1. We take it that in large part the bill is the outgrowth of disclosures during the recent and continuing stock-exchange investigation. So far as we have observed, that investigation accorded little or no attention to the characteristics of transactions in bonds of the type required by savings banks and trustee institutions, or to the practices of those who specialize in transactions in high grade investment bonds. It seems plain that the principal evils to which the bill is directed have to do with corporation control, or are associated with the practice of conducting transactions in stocks on margin. Throughout the bill there are provisions which in terms include bonds and bond dealers and brokers but which the policy of the bill makes applicable only to stock and stock-handling houses. Consider Section 15 (a). It is difficult to perceive the justification for requiring tedious reports, with monthly supplements to reflect changes, from owners of five percent or more of a company's bonds. Bondholders as such exercise no control over the management of the issuer and its policies. In fact, that it was the holders of the stock and not of the bonds who are in contemplation is suggested by the fact that the title of the section reads "Transactions by Directors, Officers and Principal Stockholders.” That proper differentiation be made in this respect between bonds and stock is a matter of material importance to the savings banks. It is by no means unusual for a savings bank to hold in excess of five percent of a particular class of securities of a particular issuer. The burdensome provisions in other sections of the bill looking to the furnishing by issuers of voluminous data as a condition to listing securities for trading on exchanges in most instances plainly reflect the desire that complete information regarding corporation control be disclosed to the public. Bond ownership does not ordinarily mean an opportunity to participate in management. Section 6 (b), dealing with margin requirements, is also plainly aimed at stocks, as there can be no sound reason to require margins such as are there specified to carry high-grade bonds. 2. As stated above, purchases of securities by members of this Association are almost wholly limited to those of the soundest and most conservative investment type. The same thing is true of all institutions of a like fiduciary type. Chiefly because of the low yield which goes hand in hand with their high degree of stability, such securities are often, perhaps usually, held in comparatively large blocks by investment institutions, and change hands so seldom that there is no active market for them. Consequently when an institution, such as a savings bank, desires to sell or buy a large block of such securities, there may not be bids to buy, or offers to sell, in quantities sufficient to complete the transaction without undue delay. Investment houses handling high-grade bonds have therefore developed and have acquainted themselves with the selling and the buying needs of institutional investors of the kind mentioned. They must be prepared to purchase large blocks of these securities with the view of disposing of them to other investors, perhaps a number. Taking the other side of a transaction, it is often necessary for an institutional investor desiring to purchase a block of seasoned securities to depend upon a security house which had acquired the securities previously, perhaps by gradual accumulation. A dealer in bonds cannot carry in his inventory all issues of the kind of bonds in which he deals, and cannot carry issues which he possesses in quantities sufficient to satisfy every demand of his customers. Consequently, it is desirable for the customer that the dealer be permitted to handle some transactions in part or in whole on a brokerage basis, going in behalf of his customer to the exchanges, or, as it usually is done, to over-the-counter markets to complete or to effect the transaction. The alternative is either to force the customer to resort to other sources of supply, or to compel the dealer to endeavor to sell the customer "something just as good." A situation similar in principle is presented where the customer desires to sell an issue which a security house is not in a position to acquire on its own account, or to acquire in the quantity in which offered. In short, the savings banks have found that they require the services of dealers in high-grade securities who are also empowered to act as brokers. This combination service will be denied to them if the provisions of Section 10 of this bill become law. The restrictions there proposed should be removed as to security houses dealing in bonds of the type held by savings banks. It may well be that such dealer-brokers should be subjected to some regulation by the Federal Trade Commission, including perhaps a requirement that they make known to their customers instances in which they are exercising a combination function. But it seems plain that to forbid such houses to provide the valuable services which have heretofore been availed of by institutional investors, such as savings banks, would be highly unsatisfactory, and might have the effect of preventing the savings banks from realizing quickly on their assets in times of emergency. Many savings banks, as well as other institutions of somewhat like fiduciary character, have rules which in practice postpone, sometimes for considerable periods, the final consummation of transactions in bonds, pending formal approval or ratification. During the intervening time, it is necessary that the bonds which have been contracted for be carried by the investment house. The investment house, in turn, must arrange for credit in order to carry the securities. The provisions regarding extent of margin contained in Section 7 (b) would severely limit the continuance of this service which the investment houses have furnished the savings banks, and other like investors. It is plain that such requirements are not apt when the security is a high-class bond. Investment houses handling high-grade bonds are usually found among the subscribers to issues of state and municipal bonds, and bonds of like character, all involving purchases in large amounts. It is plain that if it is necessary for the investment house to possess such bonds in its own name for a period of more than thirty days before a loan can be had thereon, as contemplated in Section 6 (c), the ability of investment houses to finance such issues, and to provide them for savings banks and the like, will be drastically curtailed. 3. The bill proposes what in effect approaches the retroactive application of the Securities Act of 1933 in that it applies the substance of certain provisions of the earlier act referring to registration and its consequences to seasoned investment securities tested by the experience of years. It is with surprise. therefore, that we find that it fails to exempt from its requirements as to registration municipal bonds, bonds of states and political subdivisions, and railroad bos, all exempted in the Securities Act. The ground for exemption in the Securities Act is plainly because obligations of the classes specified possess guaranties not found in securities generally. As to governmental issues of the several orders, there is a presumption i favor of soundness and against deception in the nature of their issuers. Railroad bonds must pass the scrutiny and obtain the approval of the Interstate Commerce Commission. It is difficult to conceive of justification for a refusal to accept like guaranties in connection with the acceptance of these already outstanding bonds for trading on the exchanges. 4. At the time of the adoption of the Banking Act of 1933, and throughout the administration of the provisions of that and associated laws, constat reassurances have been made that there is no intention to discriminate against or in any way injure banks which are not members of the Federal Reserve System. Subsection (y) of section 8 of the Banking Act of 1933 expressly incorporates that policy. Adherence to that policy would be abandoned at least in some measure if the provisions of Section 7 (a) become law. To forbid a bank which is not a member bank of the Federal Reserve System to lend on any registered security would be to deprive such a non-member bank of a very important and legitimate part of the business in which it is in justice entitled to participate It is the practice of mutual savings banks in certain localities, particulară Massachusetts and Connecticut, to make loans to brokers secured by high grade securities as collateral. We can hardly believe that it was the intention of the framers of the bill to prohibit mutual savings banks from participating in such legitimate financing of securities as the banking laws of the several states provide. It has been demonstrated that they prove to be a strong secondary reserve and with proper arrangement of maturities provide an unfailing source of available money received regularly. Mutual savings banks should not be prevented, where other conditions are proper, from making sub loans secured by safe and sound securities. It would also seem unwise to fix by legislation rigid margin requiremen's with no differentiation whatever as to the classes of securities on which loans may be made under the banking legislation of the several states. These severe restrictive provisions would limit unduly the amount which savings banks might loan on high-grade securities. These provisions would also apparently limit the borrowing capacity of mutual barks on securities which they own in the case of a sudden temporary emergency where money might be reedei to pay their depositors. 5. Plainly the marketability, and hence the market value, of any ben? Will Le greatly influenced by the circumstances whether or not the home is eligible for purchase and sale on the exchanges. Section 11 makes it unlawful for any person to effect any transaction in an unregistered security on a resistend securities exchange. The registration requirements entail expenditure of time and tn a' le Br statutory provision he issuer must furnish information as to the issuer and its amates in respect of numerons specified matters concerning angriene financial structure, security provisiors and miscellaneous informáti a decis directors, officers and principal security holders and underwriters, and the remuneration and relationship with the issuer and its afflares: beers profit-sharing arrangements must be described: managements and servi tracts and options on securities set cut: contracts not made in the omi course of business must be described; and other information must be list-l The commission may make additional rules and regulations as to the information to be furnished in connection with the registration of securities, and as to the undertakings to be entered into by the issuer, but such rules and regulations shall require, among other things, an undertaking by the issuer to comply with the provisions of the bill and with the Commission's rules and regulations. In many cases the issuer of a bond may have little or nothing to gain from registration of the security. The securities are already in the hands of the public, and whether or not they are readily realized upon may be a matter of little or no concern to the issuer. On the other hand, registration subjects the issuer to trouble and expense, to an extent undetermined and subject to further enlargement by the Commission. Registration subjects the officers of the issuer, and other agents, to dangers of personal financial liability, or at least to annoying attempts to fasten such liability upon them. We may confidently anticipate, therefore, that many outstanding issues will not be registered. It will be the holders of the securities, and not the issuers, who will pay the penalty of impaired marketability. The mutual savings banks own municipal bonds to the value of several hundred millions of dollars. It is doubtful if many municipal bonds now outstanding will be registered. The same thing is true of the bond issues of states, counties, school districts, improvement districts, and other obligations of like nature. To a somewhat less extent, it is true of equipment trust obligations. The savings banks urge that consideration be given to this effect of the bill of visiting the penalty of nonregistration upon those who are unable to control the issuer in this respect. Here we have an additional illustration of the inapplicability of the principles of the bill to bonds. The holders of the outstanding stock of an issuer cannot be said to be without an opportunity of influencing the course of the issuing corporation with regard to registration. The holders of outstanding bonds certainly are afforded no such opportunity to influence the action of the issuing corporation. It is conceivable that the requirements concerning registration before bonds are eligible for sale on the exchanges might afford openings for abuses by issuers with nothing to gain from enhanced marketability. For example, an issuer might decline to make the registration statement and to enter into requisite undertakings for the very purpose of depreciating the market value and enabling the issuer to buy in its outstanding bonds at a substantial discount from par. This would penalize the owners of the bonds, and not the issuer. CONCLUSION We ask the Committee not to construe this expression as voicing disapproval of the general policy of the bill. We have purposely and carefully confined ourselves to an attempt to point out particulars in which the bill appears to threaten the direct and proper interests of savings banks, chiefly by impairing the marketability of the bonds which they hold. Respectfully submitted. Hon. DUNCAN U. FLETCHER, PHILIP A. BENSON, O. O. RENNET, Chairman Committee on Federal Legislation. SOUTHERN BUILDING, Washington, D.C., March 14, 1934. Chairman Committee on Banking and Currency, United States Senate, Washington, D.C. MY DEAR SENATOR FLETCHER: In compliance with your request to comment on Senate Bill 2693, 73d Congress, 2d Session, relating to the regulation of Security Exchanges, I submit a few observations on the more vital aspects of this bill. First, the regulation of the stock exchanges was an issue in the campaign of 1932, and its necessity has been fully demonstrated by our experience. |