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others to buy. A public market by concentrating the buying and selling demand creates fairer prices for the benefit of both buyer and seller and, therefore, the principal function of an exchange is to give the public the facility of selling the securities which they own and of buying others. There are literally millions of our citizens who own or are interested in listed securities. The vast majority of them are investors and not speculators. Among this great number of persons you will find both rich and poor, but whether they are the owners of thousands of shares or the owners of only a few shares of a single company, they are all interested in the maintenance of a public market for securities. Their interest is a real one because the concentration of supply and demand on exchanges results in creating a market in which securities are daily bought and sold in volume. This gives assurance to the holder of securities that his property can, if it is necessary, be turned promptly into money.

Through the activity of exchanges, securities have remained liquid throughout the entire depression. It is true that they have declined tremendously in value, but in spite of declines securities have remained marketable. Real estate, on the other hand, became practically unsalable and at times it was impossible to find a buyer for mortgages or other forms of real-estate investment. Holders of listed securities, however, have been able to sell them whenever it was necessary to raise money. The interest of these security owners in the bill to regulate stock exchanges is, therefore, very direct and real. To the extent that this bill seeks to regulate stock exchanges to the point where it will destroy the free and open market for securities, the liquidity of the one form of investment that has remained liquid throughout the depression will certainly be impaired if not entirely destroyed. I say, therefore, that this bill affects not only members of stock exchanges and dealers in securities, but the entire public. With your permission I will now discuss the bill in detail. Section 1 of the bill contains simply the title of the act.

Section 2 of the bill consists of a number of statements of fact which I understand are included solely for the purpose of supporting the constitutionality of the bill. I disagree with some of these conclusions and doubt whether they are true. As a layman, I am not competent to discuss questions affecting the constitutionality of the bill. Mr. Thomas B. Gay, of the firm of Hunton, Williams, Anderson, Gay & Moore, of Richmond, Va., is present and will, if the committee will permit, make a brief exposition in regard to the provisions of the bill which, in his opinion, are not constitutional. I have asked Mr. Gay to prepare a brief on this subject, which he will submit at a later date.

Section 3 of the bill contains definitions of the terms used in the bill. These definitions are unusually broad and sweeping. I call your attention particularly to the first definition which defines the word "exchange" to include not only the institution itself but also all of its members.

The third definition defines a "member" of an exchange to mean not only those persons who are actually members but also all persons who have a right to use in person any facility of an exchange for the purpose of making purchases or sales thereon. This extension of the meaning of the term "member" produces certain surprising results in some of the later sections of the bill.

The fourth definition reads as follows:

The term "broker" means any person engaged in a business of effecting transactions in securities for the account of others.

As a result of this our banks, which customarily act as agent for their customers in buying and selling securities, may be subject to many of the provisions which on their face regulate only stock exchanges and stock exchange practices.

The fifth definition defines the word "dealer" to mean any person engaged in a business of buying or selling securities for his own account and, therefore, would include persons engaged in the business of buying and seiling securities for investment. As in the case of the definition of the term "broker," the arbitrary inclusion of those who buy and sell for investment in the category of dealers, who buy purely for the purpose of resale, makes many of the later provisions of the bill applicable to a large number of persons who are not, in any sense of the term, dealers in securities.

The other definitions, which are likewise broad and general, should be made more definite and specific, especially in view of the heavy criminal penalties imposed by the statute.

Section 4 of the bill

Mr. MAPES. May I interrupt?

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. The definition of "dealer" is any person "engaged in a business of buying and selling securities for his own account, through a broker or otherwise." Would that modify in any way what you have to say?

Mr. WHITNEY. Any person engaged in the business of buying and selling, sir, would, under the act, be a dealer.

Mr. MAPES. That would not include individual investors, at all, would it?

Mr. WHITNEY. Not necessarily; no.

Mr. MAPES. Well, not only not necessarily, but not possibly, it

seems to me.

Mr. WHITNEY. It will depend on his interests.

Mr. MAPES. Unless he is engaged in the business of buying and selling securities.

Mr. WHITNEY. I think if it was specific that he had to be in the business, primarily, or whatever, yes, that would take him out. Mr. MAPES. Well, that is in the definition here.

Mr. WHITNEY. I think that there are other parts of the bill, however, sir, that tie the possibility of almost any individual into this whole category. However, to answer you, I think if that can be clarified so that the individual who has no intent of dealing in securities, as such, then that would be perfectly proper.

Section 4 of the bill prohibits the use of the mails or any means of interstate communication or transportation for the purpose of transacting any business on an exchange which is not registered under the

act.

The CHAIRMAN. Is that as far as you are going to discuss the definitions?

Mr. WHITNEY. On section 3?

The CHAIRMAN. Yes.

Mr. WHITNEY. Yes.

The CHAIRMAN. All right.

Mr. WHITNEY. Section 5 of the bill states the terms and conditions under which an exchange may be reigstered with the Federal Trade Commission.

Subdivision (d), which appears on page 11 of the committee print, makes any violation of a rule or regulation adopted by the Commission a ground for the suspension or expulsion of a member of the exchange. This provision is in line with the general policy of the bill of vesting in the Federal Trade Commission power not to regulate but actually also to supervise and manage all stock exchanges.

The CHAIRMAN. Mr. Whitney, let us get back to (d).

Your statement is rather broad as to the supervision by the Federal Trade Commission of an exchange.

It states very specifically there, does it not, just what shall be the duty of the Commission? In other words, it will not be entirely a Commission regulation, but it will be a Commission regulation following very definite instructions in the act, if we should, in the last analysis, decide to adopt that language. It reads:

(d) No registration shall be granted unless the rules of the exchange provide for the expulsion and suspension of a member for conduct or proceeding inconsistent with just and equitable principles of trade and declare that the violation of any provisions of this act or any rule or regulation made by the Commission thereunder shall be considered conduct or proceeding inconsistent with just and equitable principles of trade.

It is referring to this act. It is presumed, of course, that reasonable men will administer these acts. Of course, we had in the beginning, with reference to the Interstate Commerce Commission, the railroads said its powers were destructive, and yet they have been added to for more than 40 years.

It was said about the Federal Reserve Act, that it was wrong, and among our bank friends, that it was a destructive, act, and yet none of the railroads would like to go back to unregulated competition, and few, if any, of the banks would like to repeal the Federal Reserve Act, and when we come to the proposition of the powers of the Commission, they are broad powers and we have got to take the risk that it will be administered, of course, by reasonable men and men fairly wise. Otherwise, of course, the Commission or the board would not be properly doing its work. But that justifies, therefore, it seems to me, the statement that the provisions of paragraph (d) are not, in the light of previous enactments, so very drastic.

Mr. WHITNEY. I agree with you, sir, on the basis of what you said. There is also given, however, a very large power in "or any rule or regulation made by the Commission thereunder", and as I interpret that, that refers to all of the other provisions and sections in the act.

Then, they are so specific in nature that the daily work of the exchange organization, the governing committee of the exchange, as I see it, would not be capable of functioning except by reference to an authority which in the normal course of proper administration on their part could not act with the speed and necessity that must be done with regard to a living, human institution, such as the exchanges. I can tell you an instance, sir, that happened the day before yesterday, when, because of the tremendous snow around New York City, and Long Island, all trains were stopped, and out on Long Island, from

which a great many brokers and a great many of their employees come, two men of the governing committee were the only ones present at around 20 minutes to 10, because of that fact, and they decided, and issued an order at 10 o'clock, that the exchange would not open until 11. That was ratified later by the governing committee.

But there are many instances of similar import where the governing committee must act, do what is necessary as to the penalties imposed upon members, do what is necessary with regard to the restriction of securities or suspending them from the list, and instantaneously act, where, under in various provisions of the bill, I do not see how they could operate if reference to such cases presumably is to be had to an administrative body, or would have to be made.

The CHAIRMAN. Yes. I just want to say this, that all boards and commissions of the Government are expected to be reasonable, as the members of this committee usually are, and, of course, I think that we would not be expected to talk about the enactment of a law that would be impossible of administration, and I think that probably the thing you are speaking of now, the commission would not, and that they could not fix a rule or regulation in 15 or 20 minutes by being called up for New York. I think that the text of the bill is to form reasonable rules and regulations that can be followed even in emergencies. That would be our hope, as to the wisdom, and the reasonableness of the commission, even though it were granted very broad powers.

We would have the trouble here, if we started out to instruct the commission opon every detail of its work, we would have to write a bill of 500 pages, and there would be a great deal of hardship to understand that problem of regulating the commission.

Mr. WHITNEY. As I may later procede with other sections, the various points of control that do exist in this bill, Mr. Chairman, I will try to bring out.

I think that what you are speaking of, and what you say, has tremendous truth in it, without question, but it is the bill as an entirety, as it specifies control in one way or another, to which I most particularly refer here. Basically, I agree with what you have said. Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. The Chairman has expressed somewhat the idea I had in mind. So far as paragraph (d) is concerned, it simply says that the stock exchange shall agree to obey the law in order to be registered. That is all it says. Is it not?

Mr. WHITNEY. That is right.

Mr. MAPES. And the proper approach to this question is to see that constructive provisions are written into the law, and that the provisions of the law are reasonable and proper regulatory provisions. Is it not?

You would not expect the law to say that anybody could violate it at his pleasure, would you?

Mr. WHITNEY. No, sir.

Mr. MAPES. I do not just understand why you pulled out paragraph (d) to criticism.

Mr. WHITNEY. Because of the clause "or any rule or regulation made by the Commission thereunder", and with reference, as I have said to the chairman, to the other provisions, in specifying with

regard to certain conditions that it would be, in our opinion, impossible to operate under, and those I will touch on latter.

Mr. MAPES. Yes; but if Congress sees fit to give the Commission that power, it must be assumed that stock exchanges and everyone else will obey the regulation made in pursuance of that law. The problem is not to give the commission any power which it ought not to have.

Mr. WHITNEY. Exactly.

Mr. MAPES. Viewed in that light is there any particular objection to paragraph (d)?

Mr. WHITNEY. I think, sir, that perhaps I have been misunderstood, but I tried to point out that the power given would be power not only to regulate but also actually to supervise and manage, and my basis for that is because of other provisions, and the wording of that particular subdivision.

Mr. MAPES. I do not care to argue the point with you.

Mr. WHITNEY. I agree with what you said.

Mr. HUDDLESTON. Mr. Chairman

The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. May I ask how you define the clause, "inconsistent with just and equitable principles of trade", as used in subsection (d)? What does that mean? What are the just and equitable principles of trade? Is there any rule for difference of opinion as to what they are?

Mr. WHITNEY. I would think it is quite open to difference of opinion, sir.

Those words, if I may be so bold, have been taken from the constitution of the New York Stock Exchange, and insofar as I can answer you on that score, what constitutes just and equitable principles of trade today in the minds of the governors of the exchange-naturally when we have an individual member before us on trial as to whether or not he has violated that provision, there are often differences of opinion, just as there is in any court where a person is up on trial for a violation of law, or whatever it may be.

I cannot, sir, define it to you, I do not think, unless it came to a specific case.

Mr. HUDDLESTON. Now, this subsection provides in substance that any violation of any rule or regulation made by the Commission shall constitute acts or conduct inconsistent with the just and equitable principles of trade.

Mr. WHITNEY. Yes, sir.

Mr. HUDDLESTON. So that it leaves it to the Commission to say what are the just and equitable principles of trade.

Mr. WHITNEY. Absolutely.

Mr. HUDDLESTON. Do you understand this section to limit the meaning of the clause that I first read, on lines 12 and 13, only to such rules and regulations as the Commission may adopt, or does it also include those regulations and also any other matter that might be considered inconsistent with the just and equitable principles of trade -in short, in looking for a definition for that clause, do we look only to the regulations of the Commission, or do we look to the regulations of the Commission and also look further, outside of that, as to what may be just and equitable?

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