I particularly desire at the outset to heartily endorse on behalf of the Association of Stock Exchange Firms the proposal made by Mr. Whitney on behalf of the New York Stock Exchange as to the creation of a Stock Exchange Coordinating Authority. This proposal has been submitted to the board of governors of our association and I am authorized to say to you that they join in the making of this proposal as a sound, workable, and efficacious way to regulate the stock exchange should regulation be deemed in the public interest. I have every reason to believe that this proposal meets with the hearty approval and will receive the full cooperation of all.

I will not have presented any discussion of the constitutional aspects of the bill, as Federal Trade Commissioner Landis has already presented to your committee the brief on this subject prepared by Mr. R. E. Desvernine, counsel for our association, which I understand is in the possession of each member of the committee.

The only definition in section 3 to which your attention has not been called, which requires your special consideration, is subsection 10 of section 3, pages 6 and 7 of the bill.

The only securities which are exempted from the bill are "direct obligations guaranteed as to principal or interest by the United States.' It is not clear from this language if it is intended to only include guaranteed obligations and to exclude direct obligations. Furthermore, State, municipal, and bonds of quasi-governmental bodies, such as Port Authorities, and so forth, are not exempted, which will result in an impairment of the value of these obligations and will result in the forced sale of many of such securities now held as collateral.

Section 5, on page 9 of the bill, is entitled "Registration of National Securities Exchanges."

The most outstanding characteristics of the proposed form of regulation is that the Federal Trade Commission is to to granted detailed and complete supervisory power over all the transactions on the exchanges and that as a condition of registration, an exchange must agree to abide by any future rule or regulation made by the commission. In this connection it should be pointed out that the Roper report contemplated that the governmental agency exercising supervision over security exchanges would primarily have power to interfere with the exchange only in the event of certain improper conditions arising in respect to the operation of the exchange and the conduct of its members. Until such conditions arose the operation, control, and management of the exchange, and the responsibility therefor would be primarily that of the exchange itself and its officials and governors. The present proposal gives the Federal Trade Commission power from time to time to change all rules and requirements, including the power to prescribe regulations for the election of officers and committees of the exchanges; for the suspension or disciplining of members, and so forth, thus substituting itself to the fullest extent in the place of the private management of the several exchanges.

This is a real problem because it renders the present exchanges absolutely impotent to effectively and efficiently act; it deprives them of all self-government and implies the principle that the Government will in fact run, not alone supervise, the exchanges.

Most careful consideration should be given as to what body should be given such powers and to the special and expert knowledge and

technical skill of the personnel. The Roper report signalized the importance of this.

Control of the Federal Trade Commission would tend to centralize the financing and management of all security investment in the Federal Trade Commission without reference to the other governmental departments and agencies having similar and concurrent jurisdiction. Confusion and conflict in policy and regulation would result. It would seem that some means of coordination with the Treasury Department and the Federal Reserve System would be indispensable. The broad powers over the entire credit and financial system of the country given, directly and indirectly, by the provisions of this bill must be self-evident.

Subdivision 4 (d) of this section, on page 11 of the bill, should be considered for it appears to require the expulsion of a member of an exchange for any infraction of the rules. No discretion is apparently granted to the exchange or to the Commission and there are no provisions for reinstatement or other adjustments of penalty or variation taking into consideration the relative gravity of the offense. This is particularly arbitrary in view of the fact that violations of the rules may occur through mistakes without any wrongful intent or any gross negligence on the part of the member. It is difficult to conceive of why a person should invest substantial amounts in a business from which he may be arbitrarily expelled permanently and without recourse or the right of reinstatement.

Mr. LEA. Mr. Chairman

The CHAIRMAN. Mr. Lea.

Mr. LEA. Mr. Hope, in reference to the language of section (d), or paragraph (d)

Mr. HOPE. Yes, sir.

Mr. LEA. Do you think your statement is quite accurate in that connection, that this would require expulsion for violation, or for conduct not just and equitable?

Mr. HOPE. On the meaning of the words.

Mr. LEA. As I construe this language, it makes it possible to expel a member for that reason, but does not require him to be expelled. Would that not be your interpretation?

Mr. HOPE. You are probably correct. My impression was that it said that was required. I would have to take some time to look into it and to check that. You have it in front of you. I just cannot remember. I thought it said "required."

Section 6, on page 12 of the bill, is entitled "Margin Requirements on Long Accounts."

Subdivision (a) of this section makes it unlawful for any person who transacts a business in securities through the medium of a member of an exchange to extend credit on securities unless the securities are registered on an exchange. Banks throughout the country, particularly outside the city of New York, extend the service to their depositors of forwarding orders for the purchase and sale of securities. and to that extent engage in the business of securities through the medium of a member of an exchange. This section would, therefore, prohibit any such bank from making any loans on unregistered securities.

The effect of this on the banking business, the extension of credit, and the people as a whole is tremendous for they would either lose

the facilities of the banks in getting credit on unregistered securities, which include the shares of stock and bonds of thousands of small corporations (unless, of course, all such securities were registered), or it would make it necessary for persons living outside the great metropolitan centers to establish direct connections with those centers in order to invest their funds. The difficulties caused by this subdivision on all parts of the country outside of New York cannot be overestimated.

The effect of this section is also extremely deflationary. To the extent that it increases the margin requirements or makes any of the pledged securities illegal collateral it requires calling of the loans. This will be caused even in cases where the borrower is in good financial condition, because it prevents the putting up of any securities other than registered securities and a person with large holdings of State and municipal obligations, bank stock, insurance stock, or stock of small corporations which are not registered cannot use them as collateral even though they would be entirely satisfactory to the lender. A person only having unregistered securities available, no matter how valuable they may be, could not protect his equity by using them as collateral and would be compelled to a forced liquidation, thereby sacrificing his entire equity.

Conversely, a broker cannot accept unregistered securities to augment a customer's collateral and in a rapid price decline might thereby be obliged to suffer a loss by a forced sale and without the possibility that now exists of protecting his loan by receipt of any collateral. This might even cause the broker's insolvency.

The effect of making unregistered securities ineligible as collateral would greatly reduce the market value of such securities. To outlaw by one stroke the legality of State and municipal obligations and bank shares, insurance shares, equipment-trust certificates, and other presently unlisted securities as collateral for exchange firms and also as above pointed out for many banks, can only tend to make such securities less desirable and attractive for investment purposes and will impair the credit value of all such unregistered securities. To that extent securities worth billions of dollars will be frozen as a basis for credit in the country at a time when credit is most needed.

In considering the effect of these provisions the assumption cannot be made that the securities presently listed on exchanges will be registered under the act and thus made eligible for collateral. The restrictions placed by these bills upon corporations which register their securities and the officers, directors, and principal stockholders of such corporations may result in many listed securities not being registered.

This discrimination against unlisted securities will operate unfairly against hundreds of thousands of small corporations which are locally owned throughout the United States. It should be particularly noted that, insofar as this section is concerned, brokers may arrange for, and actually extend, loans to customers secured by real property, chattels, and commodities-the only restriction being that if the loan is secured by securities the securities must be registered. This distinction seems wholly arbitrary.

The same subdivision (a) also prevents a member of an exchange from arranging for any credit for a customer except on registered securities. This restriction is not confined only to the usual trans

actions between the broker and customer but would prohibit a member from assisting a person who happens to be a customer in obtaining any loan whatsoever from any third party unless the securities given as collateral are registered securities.

The effect of these requirements for collateral will undoubtedly render ineligible much of the collateral now pledged throughout the country. This will necessitate calling of loans as above pointed out and to the extent that the collateral, although adequate under normal conditions, cannot be liquidated under these forced conditions, losses will result to banks throughout the country. Collateral maintained for loans throughout the country has not been maintained on a level which will permit a forced liquidation by Nation-wide governmental action, without causing such a drop in the market value of the securities to be liquidated that the realizable value of such securities will probably be reduced below the amount of the loans.

Mr. LEA. Mr. Hope, have you heard anyone state any reasons why Government securities should be prohibited for collateral purposes?

Mr. HOPE. No, sir. My reading of the bill is that the bill excludes them, because they are not registered.

Mr. LEA. What reason, if any, is assigned for that proposed law. Mr. HOPE. I know of none. We use them in our own business and regard them as the best collateral, that is, United States Government securities.

The margin requirements established by subdivision (b), page 12 of the bill, are clearly unsound and excessive.

The fact that such liquidation need not be completed for 7 months does not change the fundamental effect of the margin requirements. Liquidation on such widespread scale to be completed by the specified time, would have to be started long before its completion was required.

A further error in these mandatory margin provisions lies in the fact that they do not discriminate between high-grade investment securities and highly speculative issues which fluctuate greatly and are of less certain value as security. In the last analysis the determination of what constitutes a sound margin involves questions of opinion as to the evaluation of actual and potential values and therefore requires the exercise of experienced and trained judgment in the appraisal of conditions which change from day to day. No fixed legislative formula can be used as a substitute for such a judgment and appraisal.

The power granted to the Commission by this section to adjust loan values gives the Commission power to expand and contract credit. It can, by increasing margin requirements, immediately cause the liquidation of loans throughout the country. All margin accounts could be automatically forced to liquidate. Furthermore, arbitrary distinctions could be made between different classes of securities. This, of course, may not have been contemplated, but to give to any governmental agency such complete arbitrary control over the credit structure of the country is such a drastic step that it should be considered with the utmost care, and adopted only if it is absolutely certain that there is little chance that the power can be mistakenly used.

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Subdivision (d), on page 13 of the bill, gives the commission right to establish rules as to the notice and method of closing accounts. This means that the commission, in an endeavor to protect the borrowing public might require such length of notice and procedure for foreclosing loans as would make the security of little value. In other words, marketable securities have been taken as collateral in many cases because the lender is able to realize on his collateral promptly, and thus avoid loss. If some third party can dictate the terms on which the lender can exercise such right, the certainty of the realizable value of such collateral is diminished, and the attractiveness and safety in accepting such collateral for loans will be impaired. The further fact that these rules can be established after the loan has been made greatly increases the uncertainty, and introduces another deflationary element, because it removes a large element of the assured security value from a large part of the collateral now relied upon for a tremendous volume of credit. This is of. tremendous concern to the brokers as it involves even their possible solvency.

Section 7, on page 13 of the bill, is entitled "Restrictions on Members' Borrowing.

Subdivision (a) of this section would have a most far-reaching effect which was probably not intended. It prohibits a member from borrowing on any registered security from any person other than a member of the Federal Reserve System.

This would prevent loans from special or general partners, and many other forms of special or emergency borrowings from others where even registered collateral is to be given as security. In emergencies, frequently hurried loans are imperative and can only be obtained from individuals thoroughly familiar with all the circumstances of the existing, and in many cases local and peculiar, conditions of the credit situation, and without having the time to clear a banking transaction. This may have serious effect by eliminating important sources of help at times when they are most needed, and may thus precipitate additional deflationary forces when they are most dangerous. The bill prevents a firm requiring such emeregency loans from securing them with sound collateral, registered or unregistered, which it might have available from any source as can be done at present. To so unqualifiedly confine borrowing to the Federal Reserve System may therefore deprive members from emergency relief with serious consequent dangers to everyone.

This provision also prevents many normal and customary personal loans and the utilization of private credit. Any such step results in the collectivization of all financial relationships between individuals into a Government-controlled banking system and restricts some of the private uses of capital and therefore should be most carefully considered.

These borrowing restrictions may also cause the closing of many branch brokerage offices and thereby the forcing of local business into the large metropolitan centers.

Subdivision (b), page 14, of the bill limits the aggregate indebtedness of members to a percentage, based on the "net current assets" employed in their business. Considering the fact that "net current assets are not defined, it is a grave question as to whether that method is the sound basis for determining the credit responsibility