The statement was made here by some member in a question asking about the tremendous losses on the exchanges.

I wish it were possible to bring to this committee I know that it is not, I know that there is no source from which we can get it-the terrific deflation in prices of real estate and unlisted securities. It seems to me we, as listed brokers, are for instance asked to assume the responsibility for a great many evils which have been the result solely of those terrific deflationary activities.

And also, I know and you know this with me. I often pick up a paper in the morning, and see headlines which say, "Prominent broker involved", and then when I read on, I find that he is a jobber in peanuts, or a real estate broker, and I believe that the net result has been a great unjustified public reaction against stock brokers, because of the fact that in every use of the word "broker" the public has grown to believe that it is a member of the New York Stock Exchange, or a stock broker. And I believe that should be taken into consideration.

I would like to explain one thing from my standpoint as vitally affecting members of stock exchanges, and that is along the line you asked, Mr. Merritt, the relationship between a broker and his dual capacity as a dealer.

I happen to be a one-man organization. I have 1 employee, 1 clerk. I also happen to be, for your purposes, exhibit A, a specialist on a secondary exchange.

Naturally I have some friends. I have people whom I might classify as clients, although my relationship with them is very personal. I act really in the capacity, at times, to the limit of my ability, as their adviser covering all investments. For instance, they may wish to purchase listed securities and I purchase them for them. Or, they may wish to purchase Government bonds, or a State obligation. I pick that, for as I interpret this act it means that I will have to say to every client of mine who wants to buy an obligation of the State of California, "I am sorry. You will have to go across the street to some other broker, because I cannot handle that business for you." And, I say in all seriousness, that it would be disastrous to me, and I am using myself merely as an example, because it will deprive thousands of others who are in the same category of that additional revenue, from a business which we have always conducted, and I would say in defense of this that in California-and I rather imagine that it is true in most every place we have statutes, provisions of law on the subject of principal and agent, and our own corporation commissioner, who corresponds to the securities commissioners in other States, himself has definite regulations under our securities act, covering the undisclosed relationship of principal.

We have in our own exchange regulations, definite rules, covering that situation and I submit to you that subjected as I am to stringent regulations of my own organization and with their powers of punishment, which are unlimited, that even if I were inclined to try to do anything improper in my relationship with a client, I am subjected to such possible punishment that I probably would not do so even though my own inclinations might be to the contrary, I would be governed by those laws.

In other words, I think that in California particularly, and I think it is probably true in other States, and it could certainly be true under

any regulation which might be adopted, that transactions by those houses who act as dealers in securities, such as I mentioned, which are not listed, can be perfectly safely carried on in combination with a brokerage business.

I might also say here, I believe that to a great extent you might assume with me that the operations of such business are even safer in the hands of a member of a recognized reputable stock exchange, because of the regulations and rules which those stock exchanges put over their members. In other words, as with the Los Angeles Stock Exchange, we tell our members that we assume the authority to investigate any of their activities in securities. It does not mean that we only punish for infractions of our market rules; but any transactions, in bonds, unlisted securities of any sort, are subject to our supervision so that any of our members conducting other phases of business besides brokerage business are subject to our rules and our regulations.

I happen to have been forced or drafted to assume the office of secretary of our exchange, due to the death of our own secretary. And I offer you gentlemen in all seriousness any of my time while I am in Washington on any matter concerning stock exchanges.

In line with San Francisco, we have tried to parallel with the New York Stock Exchange by adopting those rules in our organization which we thought most acceptable. In line with Mr. Shaughnessy, we have made changes where we thought that they might be necessary; but those changes, I do not believe have occurred within recent months, and they have not been brought about as a result of any investigation which we thought might be coming along.

We had a thorough house-cleaning at one time, and for the last 6 or 7 years, at least, the records of the Stock Exchange are open for any investigation by any organizad body that would like to see them. Frankly, gentlemen, I believe in the stock-brokerage business and I believe in the men who are in that business, and I believe that the vast majority of us are in danger of being unduly penalized for the acts of the minority.

I thank you.

Mr. COOPER. Mr. Chairman

Mr. HUDDLESTON. Mr. Cooper.

Mr. CooFER. The speakers this afternoon have been dealing mostly with their own regulation or the regulation of the stock exchanges. What is your opinion as to how this will affect other people, business and industry, and so forth? We are concerned about that, too.

Mr. PAUL. I have some definite opinions on that. I thought that it would be covered adequately, or had been covered previously. I did not want to take up too much of your time.

I have no doubt but that, particularly, the exchanges, such as the San Francisco and Los Angeles Exchanges and others, those we might call secondary or regional markets, will be adversely affected and when it comes to the business end that many corporations will not feel that they can either from the standpoint of expense or burden, continue to maintain their securities as listed securities which in turn is going to have, in my opinion, a very definite effect in the future financing program of those corporations.

In other words I can see very definitely an extreme burden being placed on the smaller corporations of the United States as they need capital in the future.

Now, the great corporations of the United States naturally can turn to New York for their larger capital requirements but the more modest corporations, which after all are probably the backbone of American business, must depend upon their local exchanges and because I, as a broker in my town, am willing to assume the responsibility of recommending an investment in a small corporation, recommending it to my clients, they invest in that corporation. And I, as a rule, am rather reluctant to do that unless I know there is nothing going to interfere with the liquidity of that security afterward, and I will tell you, I believe, very frankly, that the financing of the smaller units of American industry would be very seriously and adversely affected by this act.

Mr. MARLAND. Mr. Chairman

Mr. HUDDLESTON. Mr. Marland.

Mr. MARLAND. What percentage of the sales per day on your exchange is the result of the execution of orders for customers and what percentage is the result of trading between brokers and members as such?

Mr. PAUL. I should say that during the last 3 years now, this can only be an estimate, because no analysis has been made-I am simply judging this from my experience in daily contact on the floor of the exchange I should say by far the greater majority, at least 80 percent of the orders executed on the floor during the past 3 years have been actual execution of customers' orders.

Mr. MARLAND. You report publicly daily the number of shares traded in on your exchange, and have during that time?

Mr. PAUL. We have an official bulletin that goes out every day. Mr. MARLAND. Have you ever required your members to show to or report to the exchange the number of shares purchased or sold for customers' account during the day.

Mr. PAUL. As against any trades they may have made personally? Mr. MARLAND. As against anything.

Mr. PAUL. No; we have never made such a check.

Mr. MARLAND. You do not have any such figures?

Mr. PAUL. No, sir.

Mr. HUDDLESTON. Mr. Kenney.

Mr. KENNEY. You do not object to such regulation of stock exchanges, do you?

Mr. PAUL. I might answer that question this way, that I would prefer not to be regulated. I am a human being.

Mr. KENNEY. Would you have any objection, provided the business of the country were not injured by the regulation?

Mr. PAUL. My answer to that is, I think it might be very politic to do so, and I see no reason why I could object if our operations were permitted in such a fashion that we would not be damaged. In other words, practically as it was expressed in the opinion of Mr. Whitney.

Of course, I hate to be regulated. I feel this very keenly, if I do not satisfy my clients, if I do not give them the best of everything I have, I will lose them as clients, and contrary to the general prevailing public opinion, I do not believe that I know a member of my exchange who is not intensely interested in doing the best he can for his clients, and every rule of my exchange that I know of really penalizes the broker in his relationship to his clients, to his customers, rather than

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his cutomer's relation to the broker, so that any regulation which merely makes that a general practice, I should see no objection to.

Mr. KENNEY. Now, it seems to me that the general testimony here today has pulled all of the teeth out of this bill.

Are you prepared to tell us briefly how far you think the regulation ought to go?

Mr. PAUL. I am not prepared to tell you how far the regulation should go. I should say, frankly, I believe, from the standpoint of my exchange, and myself personally, our greatest fear is, too much rigidity. For example, we strenuously object to the rigid margin requirement, because we do not believe it is sound economically. It can be changed downward, and cannot be changed upward.

Mr. KENNEY. In whose hands would you leave that?

Mr. PAUL. Frankly, from a rather hurried consideration of the proposal made by Mr. Whitney, I am inclined to feel that some such body as that would be highly desirable. In other words, I do not want to be in the position of saying that we are afraid of Government bodies. It is not that, except I do feel that a body such as he suggested would be more flexible, possibly, would represent a greater cross section, not only in finance, but of business relationships and rules and regulations, and could conceivably be more effective and possibly more capable, and would be more satisfactory to all concerned.

Mr. KENNEY. I understood Mr. Whitney to say yesterday that he thought that the rules and regulations and the conduct of the Stock Exchange should be left in the hands of the governors of the exchange entirely and that their decision should be final and that there should be no appeal from that decision. Do you agree with that?

Mr. PAUL. In large part, yes, sir; because I believe that the rules governing trading in most parts are purely technical and I do not believe that they are such as to have any serious effect on the public interest.

Mr. KENNEY. Would you give any of that power to this coordinating authority that has been suggested here, or was suggested yesterday?

Mr. PAUL. Well, I would assume that the coordinating body would have some powers along that line, except that the exchanges themselves having representation would be able in detail to present each case and the practical matters involved would be understood. The net result should be satisfatory.

Mr. KENNEY. Would you have the coordinating authority sit with the governing committee of the stock exchange?

Mr. PAUL. I think that would be a very serious error. I believe that any investigation this body would care to make on the activities of governing bodies of stock exchanges would disclose that they have acted in the majority of cases properly and promptly, and I do not believe that that power could in all fairness be delegated to some other constituted authority, because, as Mr. Whitney explained, through no one's fault many cases arise suddenly, and if they were not willing to act

Mr. KENNEY. Would you give that power solely to the governing committee of the exchange or would you reserve the right of review to the coordinating authority?

Mr. PAUL. My reaction to that would be that the coordinating authority in its investigation probably would arrive at the conclusion

I maintain. They probably might themselves see the wisdom of leaving that subject to review.

Mr. KENNEY. Subject to review by the coordinating authority? Mr. PAUL. Yes.

Mr. KENNEY. Would that that be agreeable to you?

Mr. PAUL. I should assume so.

Mr. HUDDLESTON. Thank you.

Mr. THOMPSON. I would like to give our time to Mr. Whitney. I am sorry that we have taken up so much of his time, but part of it has been due to questions.

Mr. HUDDLESTON. I do not know how long the committee wants to sit. As for myself, I would be pleased to hear Mr. Whitney further. Mr. THOMPSON. We would appreciate it if he could be heard. Of course, questions have taken up a good deal of our time. Mr. HUDDLESTON. If there is no objection, we will hear Mr. Whitney.

STATEMENT OF RICHARD WHITNEY, PRESIDENT NEW YORK STOCK EXCHANGE, NEW YORK, N.Y.-Resumed

Mr. WHITNEY. Mr. Chairman, I do not want myself to take but very little of your time, although I regret I have not been able to put my entire statement and certain other things that I would like to present before the committee, because

Mr. HUDDLESTON. May I suggest that you may add to your statement and incorporate in the hearings your entire statement, if you have not done so.

Mr. WHITNEY. As I understand, that was put in the record this morning.

Mr. HUDDLESTON. Yes.

Mr. WHITNEY. There are two things that I would like to say in my suggestions for a stock exchange coordinating authority. I think there may have been some impression that the word "may" had reference to the designated representative of the New York Stock Exchange. It was my very definite intention that in suggesting such authority on which a representative of the stock exchange should be, that he must be on there and must serve on it.

The stock exchange would certainly want such a representative as I suggested.

Mr. Gay, this morning, for a correction of the record, if I may— Mr. Gay said, I think purely inadvertently, that the members of the New York Stock Exchange were all residents of New York. The majority of them are residents, I think, of New York. Many, of course, also are residents of-the active ones-of New Jersey and Connecticut. And then there are scattered memberships, residents throughout the rest of the United States.

With regard to some of the questions that Congressman Lea asked recently, if there is time later, I would take particular pleasure in going into certain points he raised.

I may say Mr. Allshue, chairman of the committee on stock listings, was here this morning, and was prepared to make a complete statement to you regarding the workings of his committee and the effect of the bill upon listings of securities, when we were advised that it perhaps would be impossible for the committee to hear us at length