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livelihood of the prople living in these communities. We feel, therefore, that this bill must be given careful consideration from the point of view of the smaller cities and of the thousands of small companies which do their financing in local markets where they are known. If local markets are destroyed these thousands of small corporations may be forced to close or seek their financing requirements in the large capital centers of the country and past experience has demonstrated that only the exceptional smaller corporation can secure its financial requirements in the large money centers. We believe that it is to the best interest of the United States that corporations should not be at the mercy of any one city and that local capital markets should be encouraged rather than destroyed.

Most of the companies which have their securities listed on the local exchanges are small companies, and because of the stringent requirements of the bill many may be forced to delist their securities because of the added expense and burdens necessary to keep them listed. Our exchanges have for years been working toward annual independent audits and quarterly reports, and have been successful in obtaining them. In most cases the quarterly reports are furnished by the corporations' own auditors. The expense in having their accounts audited four times a year would be so prohibitive that it would not be in the interest of their stockholders to have them prepared. There is an additional expense in preparing monthly reports which must include earnings and sales.

We have been advised by many local companies that they will be forced to withdraw their securities from our exchanges. This will prove a great hardship upon the corporations themselves whenever they are in need of additional financing, but it will be a greater hardship upon their stockholders, as their securities will then lose their collateral value for loans and their saleability will be greatly hindered, and they will be forced to look to the over-the-counter market in order to realize on their investments. There is usually a large spread between the bid and asked prices in over-the-counter markets, and the seller of securities would be forced to suffer unnecessary depreciation on his holdings.

The bill makes it unlawful for a member of an exchange to grant credit on any securities not registered on a National Securities Exchange. This works a particularly great hardship upon local brokers and their clients, as it destroys the collateral value in a brokerage account of State, county, and municipal bonds, most mortgage bonds, Federal farm loan and joint-stock land bank bonds, bank stocks, insurance stocks, most guaranteed railroads stocks, and also securities of many good local companies. Many people have much of their capital invested in securities falling in these categories, and the passage of this bill would cause a tremendous amount of forced liquidation as well as the elimination of future collateral value for the purpose of purchasing listed stocks.

Fixing of margin requirements at 60 percent gives a great advantage to the wealthy and penalizes those of moderate means. The wealthy are in a better position to advance 60 percent but not so those of moderate means. This certainly is not fair to the great majority of our people who, therefore, will be unable to margin their accounts in accordance with this section and will lose the securities which they are now carrying. It is possible that wealthy speculators will be able to borrow money on their securities from foreign sources, and will probably do their business direct with foreign brokers in foreign markets.

This requirement will also result in great loss to banks holding collateral loans which today are properly margined but which they would be forced to liquidate because of decreased borrowing value of the collateral. In small communities the price of a stock is not the only yardstick by which its collateral value is measured. Local bankers are fully conversant with the affairs of corporations in their communities, and they use as a basis for determining collateral values not only the price at which a security is selling but also recognize the inherent worth of the corporation and the ability of its officers. There are many local securities selling at high prices which banks will not accept as collateral. Banks also recognize the moral and financial character of the borrower in determining collateral values; thus a person of good moral character and high purpose can usually borrow more on his securities than a speculator or one whose record does not entitle him to credit. Owners of real estate can borrow up to 60 percent of its appraised value from banks, and up to 75 percent of its value from the Home Owners Loan Corporation.

Certainly securities which to a large degree represent the value of real estate owned by the corporations should not be given a lower collateral value. The rise of prices of securities and commodities in recent months has done much to alleviate the hardships caused by the painful process of deflation of the past 4 years. This section of the bill will undoubtedly necessitate enforced liquidation and might conceivably result in a renewal of the vicious deflationary movement which we have all been combatting. We do not believe a hard and fast rule of percentages should be set forth in the bill, as there are different conditions existing in various parts of the United States, and in view of constantly changing conditions and policies.

The requirement that brokers may not borrow money from other than members of the Federal Reserve bank will work a great hardship on some of our local communities, as brokers in small communities have for years borrowed money from individuals and small companies on collateral loans. In recent years there have been so many bank closings that it would be difficult to obtain all the credit necessary for the operation of a brokerage business from banks which are members of the Federal Reserve. This provision also greatly discriminates against banks which do not happen to be members of the Federal Reserve, and against many institutions which make a practice of employing their excess funds by means of collateral loans. Many of our small businesses which have a surplus of money at one season of the year or another are able to employ them in this manner, and it has also become a practice for educational and charitable institutions to do likewise. Because of the limited banking facilities in some parts of the country, this section may force borrowers to seek accommodation in the large financial centers, thereby centralizing monetary control.

Section 6 apparently permits anyone not a member of a national securities exchange and not transacting business through the medium of any member to extend uncontrolled credit in any amount on securities not registered on a national securities exchange. This would seem to unduly penalize every member of a national securities exchange as well as their clients by forcing the withdrawal of certain business from established relationships. It is also conceivable that unregistered securities enjoying more liberal credit would invite active speculation through uncontrolled channels with consequent disastrous results.

The requirement that a broker cannot borrow more than ten times the amount of his capital will put out of business a large percentage of those now engaged in the business. During recent years brokers have suffered a great loss of capital just as have all other classes of people, and thousands of them would be denied the right to follow their chosen profession if this bill is enacted into law. It hardly seems fair to penalize those who are not as fortunate as their competitors in material resources. The amount of capital required to carry on a brokerage business varies with conditions, and it is hardly good practice to have a hard and fast rule governing this phase of the business. Nearly all of our States have "blue-sky” laws and commissions which regulate the security business and security dealers. In my own State of Ohio our Security Commission requires financial statements of all brokers and dealers in securities before issuing a license to do business, and also makes periodical investigations by examination of the books of those whom it licenses, as well as applicatns for licenses. It would seem pertinent that the excellent financial record of brokers during the recent trying years makes the stringent capital provisions of this section absolutely unnecessary.

The bill makes it unlawful for any member of a national securities exchange or any person acting as a broker through a member to act as a dealer and/or underwriter of securities whether registered or not registered on a national securities exchange. This eliminates the means by which most of our small local coporations raise necessary capital for their operations as they must naturally turn to brokers for the sale of their securities. The business of a local stock exchange is not large enough to have both brokers and dealers and, therefore, it is necessary for them to act in a dual capacity. Whenever a local corporation is in need of financing they naturally turn to brokers for the sale of their securities. As these people are usually the only ones qualified to sell them, the livelihood of most local brokers is dependent, to a great extent, upon underwriting of these small issues, and if brokers are not permitted to handle same it would make it impossible for small companies to finance themselves. The markets on local stock exchanges are not broad enough to permit the sale of securities in large blocks without special effort on the part of brokers. This naturally entails expense of selling and advertising, and local brokers could not handle the sale of new capital issues on the usual commission allowed by the exchanges, which averages one eighth of 1 percent. This section of the bill, if incorporated into law, will be a death blow to all of our smaller dealers in securities, as there would be no possibiliy for them to earn a livelihood if they are denied either the right to act as broker or the right to act as dealer.

Small exchanges, as a rule, do not have what is commonly known as "specialists." Members usually execute all orders that come to them, so that, in a sense, they are specialists in all securities. As the bill prohibits the specialist from executing any orders except at a fixed price, it can readily be seen that this section of the bill would be unworkable on a small exchange.

On some of our smaller exchanges there are a few members who are designated as specialists in certain securities which have a market active enough to necessitate having a specialist. This provision would prohibit these specialists from purchasing or selling securities on their own account. Where the markets are not broad, it is usually necessary that there be someone who is willing to purchase or sell stock when the occasion arises when there are no near bids or offers on the books. If this did not prevail, the fluctuations in stocks would be greatly increased to the extreme detriment of the customer.

As previous witnesses have covered the entire bill in detail, I shall not impose a further discussion of other sections of the bill on the committee. However, I wish to point out that the other provisions of the bill would work a great hardship on all of the securities markets in the country, the corporations whose securities are listed thereon, and the public in general.

Mr. HUDDLESTON. Who do you want to be heard next?

Mr. THOMPSON. Mr. Shaughnessy of the San Francisco Stock Exchange.

STATEMENT OF FRANK C. SHAUGHNESSY, PRESIDENT SAN

FRANCISCO STOCK EXCHANGE

Mr. SHAUGHNESSY. Mr. Chairman and members of the committee: As president of the San Francisco Stock Exchange, it is not my desire to criticize unduly the general tenor of the proposed legislation. I should prefer that the committee consider my statement as counsel which may assist in clarifying some of the issues involved in the act and in furthering the objects which the framers of this legislation had in mind.

The San Francisco Stock Exchange is both willing and anxious to further every regulation that will give to persons who deal in securities a protected and well-organized market.

Mr. Whitney, I believe-I only arrived here this morning, and I am told that he has proposed some legislation.

I believe he is right, but I am sent here particularly to give the committee a message from my members, and that is, if possible, you should call together a conference of the various stock exchanges, that through their representatives, they could meet with the congressional committee. We stand for regulation to the fullest degree, but we believe that it should be intelligent regulation and should be done by those who are familiar with the situation, and while I am here I would like to answer the question which hits my particular situation, which one of the gentlemen asked this afternoon, and that is as to the listing requirements.

In San Francisco we have full and complete listing requirements. Last fall Mr. Thompson called upon us in San Francisco, and he started in on what was supposed to be about a 3-hour session. It developed he had a lot of things to say to us in the way of changing the rules, and so forth, at that time. I presided. The president was away. Mr. Thompson left our meeting after having been shown that there was nothing in our rules that needed to be changed as a result of the depressing influence of the last 4 years, and I make the statement now that not a single rule has been changed since the investigation has gone into effect.

Now, the New York Exchange, we follow them along as far as possible. We do not think that the New York exchange has adopted à paternalistic attitude toward us. We regard ourselves as a competitor of the New York Stock Exchange. That sounds like California bragging, but that is the way we feel about it.

Now, in San Francisco our memberships are usually worth about one quarter of the value of the New York seats, though our membership is about one twentieth in number of that of the New York Stock Exchange.

So, you can see, in my community it is still somewhat of an honor and dignity to be a member of the San Francisco Stock Exchange. We own one of the finest buildings and for years we have had a very splendid record. However, I will now get back to my original thoughts, as I had prepared this statement.

Stock-exchange procedure has been developed through experience. In the past 15 years it has been greatly improved. The shocking scandals which have recently been disclosed represent a very small amount of the total volume of business transactions done on the exchanges, and an equally small amount in the value of money of the billions of dollars of securities that have been traded in these various exchanges. Many evils which by implication are ascribed to stock exchanges are entirely independent of market transactions. As an example, during the boom or before the boom, the Southern Pacific stock sold as high as $150, approximately. At the time that the stock of the Southern Pacific sold at $100 a share it was probably earning $10 a share or more. At the very depth of the depression Southern Pacific was down to about $7 a share. So you see it had gone from approximately $150 down to $7 a share, and the answer is very simple. When the stock sold at the high figure, the company was earning and paying dividends. When the stock sold at $7 å share, the company's earnings produced no funds applicable to dividends, and it had to apply for relief to the Federal Government.

Now, that action took part entirely separate from the stock exchanges and that simply shows you how a natural market does act.

The San Francisco Stock Exchange has sought to maintain a market on a natural basis with a minimum of artificial influence. It is, and always will be, a very difficult matter to regulate a natural market. A market that is subject to extensive manipulation is as artificial as the type of market which will prevail under excessive regulation. The few features which you aim to eliminate in this act would be present in a different form under the strictest regulation.

With the main purpose of the bill very few will find fault or will disagree. There have at times been abuses of trust, and brokers and banks have taken the part of both principal and agent. There should be stricter limitation of the use of proxies. And there should be some regulation of the transactions in a corporation's securities on the part of officers, directors, and large holders. We also agree with that.

The object of this bill is clearly to effect reform where a certain amount of reform is needed. The main question is how that reform may be accomplished. It is worth remembering that through selfregulation, stock exchanges have, in the main, been carried on with highly ethical standards and engagements involving millions of dollars are carried out by only oral contrcats. This bill attempts to reform

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