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changeable insurance contracts moving in interstate commerce in the way that securities move.

Secondly: It must be remembered that these cases do not establish the proposition that the Federal Government has no power to regulate insurance. They simply establish this proposition, that if the Federal Government has not acted, transactions in insurance are not immune from State control. That is a very common principle, such, for example, as is illustrated by the Federal Employers Liability Act. There the State can, until the Federal Government intervenes, control the liabilities of carriers in interstate commerce, of the employees in interstate commerce; but when the Federal Government intervenes, ïts constitutional right to do that has been sustained.

Thirdly, and I think that this fact is not without interest in connection with the insurance cases: There is a series of these cases ending with the case of the New York Life Insurance Company v. Deer Lodge, 231 U.S. 495, where the question was again urged before the court, i think, in the ablest fashion that it was ever argued before that court. The two members of that court who are now members of that court who dissented are Mr. Justice Hughes and Mr. Justice Van Devanter. It is not that that means these cases are no longer law, but I think that represents an attitude of mind, a realization, that perhaps the problem of insurance is one of national concern and therefore subject to national control.

Two cases in this field, I think are the cases upon which reliance must be placed for regulation of the exchange. The first of those two cases is Stafford v. Wallace, 258 U.S. 495. That case upheld the constitutionality of the Packers and Stockyards Act of 1921. That act sought to control transactions in the Chicago Stockyards which were purely intrastate in character, as well as some transactions that were interstate; but the issue as to whether or not Congress should control those transactions in the Chicago Livestock Exchange or stockyards, was raised by that case.

Mr. Chief Justice Taft in deciding that case used this graphic expression of the throat; namely, he saw how through the Chicago Stockyards moved this vast stream of commerce in cattle from the far West through those stockyards, perhaps to be slaughtered there and then to move in the form of products to the East and to other parts of the country. He recognized that the markets for livestock were very much affected by the transactions that took place on the Chicago Stock Exchange. He recognized that there was a power and a duty on the part of Congress to protect that flow of commerce from burdens which might be imposed of this nature, which might be imposed by purely intrastate transactions.

The second case is the case of the Chicago Board of Trade v. Olsen (262 U.S. 1), which upheld the constitutionality of the Grain Futures Act.

There again, the transactions that were sought to be controlled by that act were intrastate transactions. The control was being exercised over future contracts in grain. That, in itself, was not an interstate transaction, except in so far as the court did relate that transaction to the flow in commerce of grain. It recognized specifically that the price of grain was largely affected by transactions of the Chicago Board of Trade.

I think if I might just give you one quotation therefrom the Chicago Board of Trade against Olsen, which I think puts the case in a nut shell, this intimate tying up of the intrastate and interstate streams of commerce will become clear.

Chief Justice Taft again delivering the opinion in this case said:

If a corner and the enhancement of prices produced by buying futures directly burden interstate commerce in the article whose price is enhanced, it would seem to follow that manipulations of futures which unduly depress prices of grain in interstate commerce and directly influence consignment in that commerce are equally direct. The question of price dominates trade between the states. Sales of an article which affect the country-wide price of the article directly affect the country-wide commerce in it.” (Chicago Board of Trade v. Olsen, 262 U.S. 1, at 39-40.)

I think it is upon the basis of conceptions of that type that the constitutionality of legislation such as is proposed here in H. R. 7852 must be sustained.

The bill itself in section 2 sets forth that in the judgment of Congress, that the activities on the exchanges intimately related to the movement of securities in interstate commerce. It sets forth other relationships as well, and I think some of these other relationships might well be adverted to in order to show how much of the problem of control over the market is a problem not of State concern, but of national concern, and therefore, one within the powers of Congress to regulate.

That section sets forth that there is a distinct relationship between the price of securities and the price of commodities. I think that that can be demonstrated, namely, that a depreciation in the stock market is frequently followed-sometimes preceded-by depression in the commodity market.

Secondly, this section also sets forth the conception that there is likely to be a great curtailment of industrial activity as a consequence of movement, of a depressing character, on the stock exchange.

I think that can be demonstrated by a more or less homely illustration. Namely, people, when the market goes up, do buy their wives fur coats, and so on. This stimulates a demand which may be an unhealthy demand, if it does not truly reflect the business conditions in the country. In other words, business men are likely to make commitments in times of a rising market, whereas there is a tendency to curtail otherwise.

There are other features set forth too. The first is the relationship of these prices to the exercise of the taxing power by Congress. Market value is an important thing in determining just what taxes should be. The capital gains and loss tax, for example, depends entirely upon the value of the securities. It is important for the Government that those values reflect real values and not artifically stimulated values, or artificially depressed values.

Again, there is an intimate relationship between these transactions and the credit movement in this country. The stock market has a tendency, on occasions, to absorb credit into the market which perhaps might otherwise move into new activities unrelated to speculative purposes, or again, the solvency of the banking structure may be regarded as depending largely upon the problem of the proper working of the market. Banks after all, their solvency, is dependent largely upon the market, and a depression in the value of securities,

or an artificial condition in the market produces an unhealthy situation in the banking system.

All of these considerations, I think, point to the main thing, namely, that the regulation of exchanges is a matter of national concern and being that it lies within the power of Congress. I do not want to trespass upon your time with reference to this argument. I simply would like to call your attention to some of the writing there has been on this problem. Perhaps the best statement of the case against the constitutionality of regulation of stock exchanges is a recent brief published by Mr. Raoule Desvernine, of Hornblower, Miller, Miller & Boston, a New York firm of considerable experience in stock market transactions, which I am sure would be supplied to you upon request.

The best statement of the case from the other side is an argument by Mr. Hanna in the University of Southern California Law Review and there is also here a monograph on the subject presented by the Library of Congress, which I think is very worthy of consideration.

The main thoughts are set forth in those articles.

Now, the second question to which I would like to address your attention is the general question of the relationship of administration to this legislation.

I think it is the general viewpoint of nearly all persons that have dealt with stock market legislation that two aims are desirable:

One is flexibility of administration. The problem is very complex, very delicate, very technical. Moreover, our knowledge about many of these things is quite inadequate. So, the flexibility and the opportunity to move rapidly, to experiment, as the exchange itself experiments, in pushing through a regulation or trying something for a time, to see what its effects are, is imperative in legislation of this type.

The second thing, and I think that every one is agreed about this, is that that being so, what is needed is to intrust the administration of an act of this type to the best possible administrative agency that can be conceived for that purpose.

I think the best way in which I can bring out the way in which this bill meets that objective of flexibility of administration is by tryin to give you a picture of what flexibility it contains, what powers it gives to the Commission that it intrusts with the administration of this act. I think if I can go through the thing, not section by section, in any detailed sense, but just taking the various sections to show the kind of administrative powers that are deputed to the administrative authority:

Section 5 of the bill deals primarily with the registration of exchanges. In a large measure the conditions which will surround the registration of exchanges are to be governed by rules and regulations set forth by the Commission. The main principles are set forth in the bill, but the working out of those details is entrusted to the Commission.

In section 6, which deals with margin requirements, there is a flat rule laid down below which there shall be no margin accounts, but there is a power in the Commission to increase the margin requirements if it deems such a thing wise, with reference to the objectives that are set forth there: The protection of investors, and the public interest.

Secondly, that same section does give the Commission exhaustive power over the handling of margin accounts, How shall they be closed out? How shall they be kept up? That is set forth there in section 6 (d).

If we turn to section 7, we again find a wide discretionary power given. There in section 7 (b) of the act, there is a flat limitation placed upon the amount which any member of the exchange can borrow with reference to his own capital; namely, that they shall not exceed 1,000 percent, or 10 times his capital; but the power to narrow that, the power to bring that down, is granted to the administrative authority.

Section 8, paragraph (7), contains requirements of publicity for what might be called stabilizing pool operations, which is left within the control of the Commission.

In section 9 some of the most important powers granted to the Commission are set forth, namely, the power over short selling. Instead of dealing with that by arbitrary requirements, one way or another, the question was left to the discretion of the Commission. Subsection (b) of the same section places the use of stop loss orders within the control of the Commission, and section (c) gives the general power to the Commission to prescribe the rules and regulations governing any other manipulative devices.

Section 10 again gives the Commission considerable power over specialists. The powers the specialists now exercise on the Exchange are very greatly curtailed by the act.

Section 11 deals with the registration requirements of securities as distinguished from exchanges. In other words, with listing. The conditions of listing, the type of information to be supplied, is set forth generally in the section, but the details are to be worked out by the Commission.

Section 12 deals with current information that is to be supplied by issuers whose securities are listed on the exchange, requiring them to furnish certain current types of information and the type of information is again within the discretion of the Commission.

Section 13 deals with proxies, requiring the submission of certain facts to the Commission prior to the solicitation of proxies. The nature of the facts to be stated and made of public record are again largely within the control of the Commission.

Section 14 gives very wide discretionary powers, and in section 14 deals with the problem that disturbs nearly everybody and that is how can you control the over-the-counter market? Well, section 14 puts that control practically wholly within the Commission.

Ñr. MERRITT. Mr. Chairman, may I ask a question? Is it proposed at some time to explain to the committee the dangers that are guarded against by these sections?

Commissioner LANDIS. Yes.

Mr. MERRITT. For instance, what is the trouble as to stop-loss orders.

Commissioner Landis. Yes, Mr. Merritt; if I may say this, the gentlemen who will follow me will take up each one of those. They know much more than I do about the economic validity of the conclusions that are arrived at in this bill.

Mr. MERRITT. I am hoping that our darkness will be illuminated at some point.

Commissioner LANDIS. Well, I am sure it will.

And, that is the idea of presentation, to have those questions answered by those who have some knowledge on them.

Section 16 of the act again puts the accounting of members of the exchanges, dealing in over-the-counter markets, brokers who deal with members of the exchange under the control of the Commission. It gives the right to surprise examinations.

Section 18 gives large powers to the Commission. Subsection (a) of it is a general section which sets forth powers to make rules and regulations. Section (b) deals with powers to try and work to some form of uniform accounting in our various corporate industries. And section (c) of that section is what the New York Times the other day called a "bundle of happy thoughts”, I think; but the powers that are granted in section (c) are wide and extensive.

Now, that makes me want to interject this consideration, namely, that the objection may well be raised that large powers, as I say, are granted, large, wide, and discretionary powers are granted to the Commission. Is not that an enormous step to take? I think we ought to recognize this fact that these powers, these large powers are today being exercised not by the Government, but these powers are being exercised by the governing boards of the exchanges, and the fact that the Government steps in to assume or exercise those powers which work for the public good or public detriment, is not unusual.

Section 20 of the bill-I may briefly comment upon that in this way: That sets forth the powers which the Commission has to enforce, the regulations as set forth. In other words, it can suspend an exchange from the right to do business by canceling or suspending its registration. Moreover, it can under another subsection of that paragraph suspend members of the exchanges for violating either the provisions of the act or the rules or regulations of the Commission.

A number of other sections of a more technical character, or powers of the Commission are given here, but there is one that I would like to call your specific attention to. That is section 28, dealing with foreign exchanges. In this section an effort is made to try and reach attempted violations of the act by transactions on foreign exchanges, and by the listing of American securities on foreign exchanges. The conditions under which contracts to buy and sell those securities can be made in this country are largely left to the discretion of the Commission.

Some weeks ago, Secretary Roper gave to the President of the United States a report of a departmental committee, of which I happened to be a member, which said that the objective stock exchange regulation should be a minimum of specific statutory requirements and a maximum of administrative discretion. I think that criterion is a proper one,

The bill, in my judgment, largely follows that requirement.

The further matter to which I would like to call your attention is this problem of the administrative authority deputed with the administration of this act. It happens to be the Federal Trade Commission. A consideration which should, I think, govern the question of choosing an administrative authority for handling this act is this, namely, that the Securities Act, which was passed by the last session of Congress, should be tied up with this act. The administration of those two acts should not be vested in different administrative

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