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agencies. The Securities Act deals primarily with the original distribution of securities. The Stock Exchange Act deals with trading in outstanding securities. Problems of a like character are to be found in both of them. Registration requirements of one will be different, naturally, from the other, and yet there will be a great deal of similarity between the two. In the Securities Act there are certain provisions covering trading in securities as well, inasmuch as it prevents the resort to fraud and deception in connection with the sale of stock, gives power to the administrative authority to enforce by injunctive process or otherwise certain standards of decency in trading in securities, and provides methods whereby the administrative authority should handle that kind of situation.
Now, it may be said, why not take the Securities Act away from the Commission and put it in the hands of whatever administrative authority may be chosen to administer the job of administering this act? It seems to me in a large measure that the answer to that is this-that the Securities Act has been administered and has been developed in the Federal Trade Commission where there is a corps of experts in whom I happen to have confidence. I think they have a morale that I would say is second to none in any Government department. It would be a shame to lose the benefits of those traditions. The building up of a successful, worthwhile efficiency has already been achieved there.
Secondly, I think there is always danger attendant upon the establishment of new commissions. It takes some time for a commission to get started. The Federal Trade Commission, I think, can be credited with efficiency in operation, a tradition of true service, and one of integrity; all qualities demanded by an act of this type, and for that reason, the Commission itself, I think, feels that it would like to undertake zn activity of this type.
One provision in this act, in that connection, which I think deserves particular attention by the committee, is section 30, which is a provision taken in the main from the emergency acts passed in the last session of this Congress, which exempts employees to be employed by the Commission in connection with this act, and the Securities Act, from Civil Service classifications. The reason for that I think deserves real weighty consideration.
The type of men necessary for administering this act are men who come high. You want the best you can get. You have your difficulties. I have never yet mastered all of these job classifications in the Civil Service. You have your difficulties in getting a man and fitting him in the proper job classification required by the Civil Service requirements. We have had our difficulties there in connection with the Securities Act. I do not think they have been too serious there, but I have my doubts as to just how well you can get the type of men that you want to administer this act on the basis of a job classification of $3,800, or $5,600, or $6,000, or whatever it may be. Frequently, to reach a salary like $6,000, you have to create an assistant chief, or something of that type, and it presents somewhat of a hardship in the administration of an act of this type, where competency is the main thing.
With that, I will have done, unless the committee wishes me to take up another subject, and that is the relationship between this bill and the so-called “Roper Report”, to which I referred some
The CHAIRMAN. I think you might proceed with that.
The CHAIRMAN. I think it might be worth while, Mr. Commissioner, for you to place in the record the personnel of the Roper committee.
Commissioner LANDIS. Mr. Chairman, that committee was composed of Mr. John Dickinson, Assistant Secretary of Commerce, chairman; Mr. A. A. Berle, Jr., professor at Columbia, and I have forgotten his title in the New York City Administration. It is one of those nice titles they have there; Mr. Arthur H. Dean, an attorney with Sullivan & Cromwell; myself; and Henry J. Richardson, an attorney in Washington.
It might be well worth while to examine this relationship between this bill and this report, because of the fact that the report received what might be called editorial praise; and certain provisions of the bill have not received that editorial praise. Whether that is worth anything, I make no comment, but I think it is worth while considering the report and the bill. Where does this bill depart from the recommendations of the Roper report, and why does it depart?
The Roper report stressed what I was trying to stress a little while ago, that is, flexibility of administration and efficiency of the administrative authority. It made no specific suggestion as to what the administrative authority should be. It suggested that either a new administrative authority should be created to which both this act and the Securities Act of 1933 should be entrusted, or else the Federal Trade Commission should be entrusted with the administration of this act, and in that event that reorganization of the Federal Trade Commission should be carefully considered; namely, it suggested specifically that two new members might well be added to the Federal Trade Commission.
The need for that I would be glad to take up with the committee. I can speak only for myself, and not for the Commission as a whole, although I think that I express the majority opinion of the Commission. Not that there is any opposition to such a program, but I simply have not spoken of this particular problem with some members of the Commission, due to the press of business.
In the second place, the Roper report sets forth certain substantive regulations. This bill sets forth certain substantive regulations.
'This bill contains numerous substantive regulations that are not contained in the Roper report.
As to the treatment of the specific problems raised by the Roper report and raised by this bill, I think I might take them up in order of the Roper report.
Dealing with pools, the Roper report recognizes the difficulty of distinguishing between pools that have no disturbing factor upon the market, and pools for the purpose of “rigging the market; pools for purely manipulative purposes and pools which have a justification, provided that the present mechanics of trading and securities distribution is to endure. It is said that there is very great difficulty in drawing that line. It is suggested broadly that certain types of pools might be outlawed, and certain publicity with reserence to all types of pools should be required.
The bill tries to draw that distinction, which the report does not try to draw. The bill, as I read it, in section 8, paragraph (3), tries to outlaw the manipulative pool or the pool to “rig" the market. In paragraph (7) of the same section, it tries to permit certain types of pegging, fixing, and stabilizing actions, provided that there shall be the type of publicity that the Commission requires. The second thing that the Roper report took up was washed sales and matched orders.
Mr. CROSSER. What?
Commissioner LANDIS. Washed sales and matched orders. Fictitious sales, in other words. It said those should be outlawed. The bill does that. It outlaws those particular transactions.
The third subject of the Roper report was margin trading. The Roper report suggested that there should be no rigid requirement with reference to margin trading, but that the matter should be handled by administrative action, and in that connection that the administrative authority under the act should act in cooperation with the Governor of the Federal Reserve bank of the district in which the exchange was situated. The idea underlying that cooperation was to get the advice and help of men who were perhaps particularly attune to the credit situation in developing just what kind of margin requirements should be imposed.
The bill on the other hand, in section 6, specifically limits margin trading. I do not want to go into the particular desirability of that. There is a gentleman who is to follow me who I think knows something about margin trading and can take up the desirability of that feature.
The bill also says that the Federal Trade Commission can go further on and restrict the margin trading beyond the minimum set forth in the bill. It does not call, as the Roper report does, for cooperation between the administrative authority and the Federal Reserve bank in matters of that type.
The fourth thing that the Roper report does is to suggest that something should be done as to the problem of specialists, particularly with reference to power of specialists to trade for his own account and secondly, that the question of whether he should ever disclose any matters in the specialist's books, should be raised; and thirdly, as to whether or not the specialist should be eliminated and a clerk, or a man of that caliber take his place.
The bill treats the problem of specialists considerably different. Specialists cannot trade on their own account, because no member of the exchange, under the bill, can trade for his own account.
It also prohibits the disclosure of any information on the specialist's books.
I notice that, if I read the newspapers aright this morning, the New York Stock Exchange yesterday put in exactly that rule. The rule heretofore was that information should not be disclosed when the disclosure of such information was detrimental to the market. As I read that rule, and I do not want to presume to know about it on the authority of a newspaper account, the ban against disclosure becomes absolute, except disclosure to a committee of the exchange is allowed.
Fifth.' The Roper report took up the question of short selling. It said in substance that there is much diversity of opinion on just what the effects of short selling are and because of that we ought to gather
information before we act, and it suggested that the administrative authority be given considerable powers over short selling with a right to suspend short selling for a limited period of time in conjunction with the Governor of the Federal Reserve System.
The bill proceeds upon the theory of regarding short selling, generally, as a device capable of manipulating prices, but it does not ban it. It
says it shall be exercised according to such regulations as the Commission itself may prescribe.
With reference to the reports to be made by the issuer as a condition of licensing and as a condition of not being delicensed, the Roper report is somewhat more specific than the bill is, and, in some minor details, I think there are differences there.
For example, the Roper report only calls for quarterly statements. The bill, as is set forth in section 12, calls for certain monthly reportsnot a complete income statement for the month, but a monthly report, which will set forth gross sales or gross income.
The Roper report again calls for the stock exchange to adopt regulations with reference to publicity and customers' men. The bill does not deal specifically with that problem. It does make unlawful dissemination of tips, of false rumors or the dissemination of inaccurate information, but it puts no specific regulation on the conduct of customers' men.
Finally-no, there are two other matters that deserve consideration. The Roper report calls attention to the question of segregation as between brokers, retailers, underwriters." Those three functions are now very frequently exercised by the same firm. And it says that segregation of that type has much to commend it in principle. It says it does not know what the functional consequences of enforcing that type of segregation will be.
The bill provides for segregation. It allows no merchandiser to be a member of the exchange. It limits the exchange activities to brokers, and brokers alone.
The Roper report again calls for examination of the books of the members of the exchange by the administrative authority.
The bill does the same thing in that respect.
Then, finally, the Roper report concludes by saying that something ought to be done about regulating over-the-counter transactions, but it has not yet thought out an effective way of regulation.
I think section 14 of the bill tells the Commission to think out an effective way of regulating "over-the-counter" transactions.
One feature of the Roper report that runs all of the way through it, which should be kept in mind, in differentiating between that report and the bill, is that the report avowedly calls for more reliance upon the governing committees of the exchange than the bill does. The report is built upon the theory of trying to get as much self-regulation as is possible out of the exchanges, permitting the administrative authorities to come in on occasions when that self-regulation fails.
The bill, on the other hand, permits this intervention with greater ease. It makes matters crimes which are not asked to be made crimes under the Roper report, and it furthermore gives a direct power of suspension over members of the exchange, which the Roper report does not give except in emergencies. The device of the Roper report was not to license the members of the exchange, but simply to license the exchanges, and if the exchanges did not behave, then a reserve power to license the brokers and members of the exchange could be invoked. Then, of course, in the exercise of that reserve power in case of misconduct by the member, the exchange could be a party.
Mr. MERRITT. Mr. Chairman, may I interrupt?
Mr. MERRITT. Would you care to express your opinion as to which is the better course, the course recommended by the report, or by the bill?
Commissioner LANDIS. Well, I should say, it is very hard for me to express an opinion one way or the other. I think the desirable thing, of course, is to get as much self regulation as possible and at the same time preserve the public interest.
Now, that balance has been differently achieved in the bill than. it has been in the Roper report. The balance which was achieved in the Roper report, was the result of what might be called the lowest common denominator of five men there.
Mr. MERRITT. You would not care to say whether you think that the bill has gone a little too far in the way of regulation?
Commissioner LANDIS. I am not sure that I really have an opinion on that, Mr. Merritt. I think it is a very hard thing to be sure you are right or wrong on a matter of that type.
I hope that this committee will have before it some evidence upon the effectiveness of the stock-exchange committees to control their own affairs, and in the light of that evidence reach even a better conclusion than was possible by the members of the Roper report or those who drafted the bill.
Mr. MERRITT. Are you prepared to say that your views are that as much local government shall be given to the stock-exchange committees as is safe?
Commissioner LANDIS. I think that is right. I think that I-I mean, that would be the way in which I would think about the problem.
Mr. WADSWORTH. Commissioner, if you care to do so, can you give us information as to the origin of this bill? I mean, who cooperated in its preparation?
Commissioner LANDIS. A great many men. I do not believe that I could name all of them. I think that I could give you the names of some of them if you choose
Mr. WADSWORTH. Any of the members of the Federal Trade Commission or its staff?
Commissioner LANDIS. One member of the Federal Trade Commission and its staff; yes. No; two members were detailed on occasions to help, collaborate, and that was done.
Mr. WaDSWORTH. Does it represent the opinion of the Federal Trade Commission? Has it the backing of the Federal Trade Commission?
Commissioner LANDIS. Yes; I think so.
Commissioner LANDIS. Yes; I think so. I do not mean by that to intimate that every provision in the bill has the backing of the Federal Trade Commission. I do not believe I can say that. The provisions of the bill itself have not-every provision has not been weighed by the members of the Federal Trade Commission, individually, and they have not reached a judgment.