and risk of any such member. The Commission could from time to time by classifying assets as current or otherwise thus cause the liquidation and insolvency of firms whose practices it did not like.

Section 8, page 15, of the bill, is entitled "Prohibition against manipulation of security prices."

Subdivision 4 makes it unlawful for any broker to give information that the price of a security is likely to rise or fall partly because of the market activity of certain individuals if he believes that the person may purchase securities on the basis of such information. Widespread circulation of such information might have some harmful effects, but it is not seen what purpose is gained by prohibiting a broker from giving such information personally to his customers. To forbid a broker to so advise his customer might be depriving the customer of information useful to him in the protection of his interests.

Subdivision 5, page 16, of the bill makes it unlawful to give information which in the light of circumstances is misleading, if the broker giving such information has reason to believe that the person to whom it is given will rely upon it in the purchase of securities. The broker is granted the defense that he acted in good faith, but to put the burden on him to justify every statement and to give every customer the right to put his broker to the proof of every statement made, can only result in the refusal of cautious brokers to give any information whatsoever. Certainly this cannot be in the public interest.

The liabilities imposed are severe and would undoubtedly be used by unscrupulous purchasers, when they made an unfortunate purchase, as a means of forcing some settlement or contribution from the broker. They would have nothing to lose and everything to gain. They could engage in speculative purchases and could keep the benefits if the purchases turned out successful. If they were unsuccessful they could try to recover from their broker because of something they claimed that they had heard him say, and if they could not recover, possibly force a settlement because of the drastic penalty provisions.

There is moreover nothing in this section which limits the type of information to which this subdivision refers to being matter specially within the knowledge of the broker. The liability might be based on misinformation which was being generally circulated and to which the customer had just as good source of information as the broker himself. Nor is there any requirement that the mistaken information has any relation to the purchase of the security or its market value.

This liability of the broker would probably drive much of the business from responsible houses to unreliable brokers willing to gamble on such liability and to give any advice to their customers on the chance that they could evade liability.

The restrictions of this section against the giving of advice and the heavy liability provisions herein before discussed also will render practically obsolete the business of investment counsel and may tend to eliminating the possibility of people desiring to invest getting any practical advice from those more experienced. The result may thus be to put a greater difficulty in the way of the small investor in his efforts to make a real investment which will not exist in regard

to the wealthy investor who may have statisticians and assistants in his service to make his personal surveys.

Subdivision 9 (i), page 18, of the bill, will result in the absolute elimination of any transactions with warrants, and subdivision 9 (iii) will likewise make impossible any transactions in convertible bonds.

Mr. MERRITT. Mr. Chairman, may I ask a question?

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. On page 17 of your brief you refer to subsection 9. Is that what you are reading about now?

Mr. HOPE. Yes, sir.

Mr. MERRITT. About transactions in convertible bonds.

Mr. HOPE. We are coming to that.

Mr. MERRITT. Well, I am going to ask you if my understanding is correct that that subsection would prevent, for instance, the Pennsylvania Railroad from issuing several millions of convertible bonds which they now propose to issue, to enable the road to give employment to many in improving the road and equipment.

Mr. HOPE. That is the way I understand it.

The CHAIRMAN. I do not understand that question.

Mr. MERRITT. The brief states on page 17, on subdivision 8, that that section would make it impossible to have any transactions in convertible bonds.

Now, the Pennsylvania railroad, for the sake of improving its road, is about to issue $40,000,000 of convertible bonds.

Mr. HOPE. The New York Central is the one we have been talking about; refunding.

Mr. MERRITT. The New York Central?

Mr. HOPE. Yes.

Mr. MERRITT. They are offer bonds, which are convertible into stock for the purpose of improving the road and improving the rolling stock. Now, under this subdivision, according to Mr. Hope, it would not be possible to issue those bonds and therefore it could not be used for that purpose.

The CHAIRMAN. Well, what is that based upon?

Mr. HOPE. Page 17, by limiting

The CHAIRMAN. No, I am not talking about your brief.

Mr. HOPE. The bill, page 18 of the bill, section (i).

The CHAIRMAN. What section did you say that was?
Mr. HOPE. It is the first paragraph under (9).

The CHAIRMAN. You say that what?

Mr. HOPE. This issue that the Congressman mentioned refers to convertible issues, entitling the holder of the bonds a right to change. them into stock. He does not have to do it; he may. I should say that this would prevent any transactions in such issues.

The CHAIRMAN. Well, I am just asking why you say that.

Mr. MERRITT. That, of course, is

The CHAIRMAN. What?

Mr. MERRITT. That is convertible bond, so called, and contains a call for stock.

Mr. HOPE. It gives the right to call for the stock at certain prices, and within a certain number of years. That is a call, and there are many millions of them.

Mr. WADSWORTH. It is also an option or privilege.

Mr. HOPE. Yes, sir.

The CHAIRMAN. Go ahead.

Mr. HOPE. Section 9, on page 20 of the bill, is entitled "Regulations of the Use of Manipulative Devices."

This section gives the Federal Trade Commission blanket control over short selling, stop-loss orders, and the right to establish rules for the use of "any device or contrivance" in connection with the purchase or sale of any security. The danger of putting in the hands of any body not in intimate and immediate contact with minute-tominute developments the power to change rules affecting matters having such direct effect on the entire stock-market situation as short selling is extremely dangerous and may lead to results entirely different from what is contemplated. The elimination of stop-loss orders is undoubtedly against the public interest. The last subdivision of this section giving them control over devices and contrivances might be construed to mean almost anything.

Section 10, page 21, of the bill: The detrimental effect of the abolition of the odd-lot house has already been fully and ably explained to this committee. The segregation of the investment banking business of the issuance, underwriting, and original distribution of securities and the brokerage business and the control of "over-thecounter" securities have already been and, so I am informed, will be further discussed. All have been treated in our brief. I will not burden you, therefore, with a discussion of these questions, except to emphasize the devastating effect they have upon all brokers.

There is also the possibility that this section prevents a stock-exchange member from investing in any securities for his personal account. In other words, a stock-exchange member could only buy and sell shares on commission for others. This may not be intended but is a possible interpretation of the restriction of members acting as sealers in securities. In view of the serious liabilities imposed for violation of the bill, it is doubtful if an exchange member would be willing to take a chance on his possible right to invest in securities for his account and thus to the extent that the commission business does not provide adequate income may force stock-exchange members to withdraw from the brokerage business in order to be able to invest their personal capital in income-producing securities.

Section 11, page 22, of the bill, is entitled "Registration Requirements for Securities": There is nothing to indicate whether these requirements apply only to securities to be registered in the future or whether a relisting of all presently listed securities is required. . The possible effect of this must be fully considered. The enormous expense entailed in relisting all these securities and collecting and furnishing data would be tremendous. In fact, one corporation recently, in order to qualify a single bond issue for $15,000,000 under the Securities Act of 1933 before the Federal Trade Commission, reports that it was required to spend approximately $250,000 therfor. Mr. WOLVERTON. Mr. Chairman, may I ask the name of that particular corporation?

Mr. HOPE. I am told that it is the American Water Works.
Mr. WOLVERTON. The American Water Works?

Mr. HOPE. Yes, sir.

The CHAIRMAN. I know a little something about that, and that has been used as a horrible example as an argument against Federal

control of anything. The trouble about the American Water Works was this: It had never brought its property up to the point where they knew what their physical property was, and it had to go out and have the whole thing appraised, did it not? They just were not up to date with their business, and did not know what they had, and of course it cost them $250,000 to have property valued on which they could issue $15,000,000 worth of bonds. Do you think that would be an unreasonable figure in valuing property of that type which would justify $15,000,000 bond issue; $250,000?

Mr. HOPE. I am not competent to answer.

The CHAIRMAN. Well, using that as a horrible example as to what bills might do to business and industry, if these people had had their accounts up; had had their engineering reports up to date; and had their property valued, and their property values in hand, it would not have cost them all of this $250,000. Do you think that there is anything amiss in that this company, and the stockholders of such a company should know something about the property value and otherwise, of the American Water Works Co.?

Mr. HOPE. Certainly not.

The CHAIRMAN. They must not have known much about it or it would not have cost $250,000 to have prepared a statement that they were willing to stand on before the Federal Trade Commission.

Mr. HOPE. That is the only example we had any knowledge of. The CHAIRMAN. I will say to the gentlemen this, from $40 to $60 is the average cost of registration with the Federal Trade Commission, if the company knows about its business, as the officers and directors ought to know about it, before they start to register. All right, you may proceed.

Mr. HOPE. It is not inconceivable that the Federal Trade Commission would require somewhat similar data for registration on exchanges, and one should consider the expense of these requirements if every outstanding security presently listed on an exchange must go through somewhat similar procedure.

Furthermore, some of the issues may be denied registration under the new requirements and under the provisions of the bill practically at the discretion of the Commission. This might have serious effect on the credit situation of the country, the credit of corporations whose securities are presently listed, and the value of such securities in the hands of the public.

This section also requires that the registration information must be filed with the Federal Trade Commission in addition to being filed with the stock exchange. Furthermore, the information must be, filed at least 30 days before the registration becomes effective. If the bill goes into effect on October 1, 1934, the mass of information required from all the corporations having presently listed securities must be filed by September 1, 1934. It would be difficult, if not impossible, to compile adequate information even if the rules as to what would be required were immediately issued. How any single commission could digest all that information in 30 days and decide what securities were to be registered and what not, is a practical problem to be considered in the drafting of the legislation.

A restriction in this section affecting the corporations themselves is that they must file an undertaking to abide by all future rules and regulations of the Federal Trade Commission and agree not to lend

funds in any money market or to any person who transacts a business in securities except in accordance with the regulations of the Federal Trade Commission. By this and some of the following provisions this bill ceases to be a regulation of stock exchanges and becomes in effect a bill completely subjugating every business to the absolute discretion of the Federal Trade Commission over most of, if not all, the important phases of its operation.

Furthermore, when a corporation has once qualified for registration and agreed to abide by the rules of the Commission it is bound to do so forever and cannot withdraw from registration except "upon such terms as the Commission may fix."

Section 15, pages 28 of the bill, is entitled "Transactions by directors, officers, and principal stockholders."

This section may have a place in a national corporation act, but it has no place in a bill purporting to regulate security exchanges. It restricts transactions by officers, directors, and also any stockholders who hold more than 5 percent of the class of stock of which they are stockholders; and request all such persons to file monthly reports of changes in their holdings of the stock of the corporation, whether such holdings be of record or be beneficial. This would bring under the restriction of this section a broker in whose name there was registered more than 5 percent of a corporation's stock who might not own or have a beneficial interest in a single share.

It also makes it unlawful for any such person to purchase any registered security of his corporation with the intention or expectation of selling the security within 6 months; and any profit which he makes, if he should sell the security within that period, must be paid over to the corporation. It also prevents any such person from selling short any securities of the corporation. It also makes it unlawful for any such person to disclose any confidential information affecting a registered security of the corporation, and not necessary to be disclosed as a part of his corporate duties. Any profit made within 6 months in respect to such security by any person to whom such information shall have been disclosed shall be paid by such person to the corporation.

The effect of these restrictions cannot be fully visualized but they have definite possibility of seriously limiting the registering of securities by corporations. The credit value of the holdings of many stockholders may be seriously diminished through the restrictions on unregistered securities, because of these and other burdens thrown on the corporations and the officers and directors. If the burdens are as great as seem possible many corporations may not register their securities, for the benefit which the corporation receives from such listing may be small compared to the burden placed upon the corporation to maintain such registration.

Section 17, page 31 of the bill, is entitled "Liability for Misleading Statement."

The broad liability imposed by the bill makes this section particularly burdensome and puts tremendous advantages in the hands of a speculator to cover himself from bad speculation through endeavoring to force recovery from his broker for alleged misstatements. The nature of this right has been discussed herein before.

Particular attention should be called to the part of subdivision (c), page 33 of the bill, which gives the Commission power to prescribe