NATIONAL SECURITIES EXCHANGES-H.R. 7852

TUESDAY, FEBRUARY 27, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the Committee Room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

The first on the list this morning is the Boston Stock Exchange, 15 minutes.

STATEMENT OF CHARLES A. COLLINS, PRESIDENT BOSTON STOCK EXCHANGE, BOSTON, MASS.

The CHAIRMAN. State your full name and business, please.

Mr. COLLINS. My name is Charles A. Collins, president Boston Stock Exchange.

The CHAIRMAN. You may proceed.

Mr. COLLINS. The Boston Stock Exchange hopes to celebrate its one hundredth anniversary next October. It was the third stock exchange organized in the United States, and with the exception of a short period at the outbreak of the World War has continued its activities uninterruptedly from its inception. There are 139 members, approximately 70 individuals and 69 firms, of which firms 40 are also members of the New York Stock Exchange.

At the present time there are listed upon the exchange the bonds of over 260 different corporations representing 360 separate issues, and having a face value in excess of $3,000,000,000. There are also listed common and preferred shares of over 300 corporations, having in excess of 398,767,489 shares.

During the peak year of 1929 the number of shares of stock cleared through the exchange exceeded 25,000,000. In the year 1933 over 13,500,000 shares of stock were cleared through the exchange.

Using the quotations of July 31, 1933, the total computed value of the securities listed was as follows:

Common stock.

Preferred stock.
Bonds..

$8, 712, 000, 000 613, 000, 000 2, 578, 000, 000

About 20 percent of these securities were originally listed on the Boston Exchange and since then have also been listed on the New York Stock Exchange.

All of these corporations represent either New England industries, in whose issues there is a present material local ownership, or industries in which a very substantial part of the capital has been supplied by New England people.

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Outside of the members who are also members of the New York Stock Exchange, there are only 11 members who carry margin accounts for customers. This is due to the fact that probably more than in any other part of the country the people of New England are inclined to buy and pay for their securities and put them away as long-term investments.

In New England there is an unusually large investment public which buys stock in less than 100-share lots, and while difficult to arrive at an accurate computation probably 60 percent of the business transacted represents investment business as distinguished from speculative business.

In the last 5 years of the exchange 4 members only of the 139 have been suspended from the exchange for insolvency, 2 of them being also members of the New York Stock Exchange.

Historically, the exchange has greatly assisted in the furnishing of capital not only for the development of New England industries but in the pioneer work of building railroads in the West, developing copper deposits in Michigan, Montana, and elsewhere, and the development of the telephone and electrical industries throughout the country.

Approximately 75 percent of the members of the exchange act not only in the capacity of broker but also as dealers, both in listed and unlisted securities.

Many New England corporations whose securities are of known and established value do not list their securities. Among these are a great number of textile industries producing nationally known products. The securities of these companies, as well as the securities of banks, insurance companies and other favorably known and established corporations, are bought and sold over the counter, not only by those members of the exchange who also act as dealers but by dealers who are not members of the exchange.

New England is peculiarly dependent upon the full resources of these financial houses not only to provide a free and fair market for the outstanding supply of unlisted securities but also to provide new capital for these industries and the marketing of the bonds and notes of the States, counties, municipalities and their subdivisions. Without the assistance of these houses, it is exceedingly doubtful if a ready market could be found for these securities without subjecting the issuers to an excessive cost for financing.

While there is no occasion or warrant for the taking of the committee's time to reiterate the many objections to the bill as it is presented, New England wishes to register an emphatic and special protest against section 10 of that act, which makes it unlawful for a concern to be both a dealer and a broker.

We respectfully submit that section 10 would work a hardship on the New England public as a whole and on the security houses serving New England particularly on the smaller holders of securities in the comparatively small cities and communities in New England. By forcing segregation, we believe the act would force New England security houses to withdraw from these small cities and communities both their services as brokers and their services as dealers. The effect on listed holdings of these investors in these small places would be to make their listed holdings less readily marketable. The small holder, if the security houses in the small communities are forced to

withdraw, would not be likely to have established connections with security houses in big cities. This being the case, he would find it difficult, in case of necessity, to dispose of his listed holdings promptly, to make instant arrangements for quick execution of an order to sell. The corresponding difficulty would obtain in case he desired immediate execution of an order to purchase listed securities. The general effect on the small holder in smaller towns would be as stated, to make his listed securities less readily marketable.

Likewise, individuals in small places holding unlisted securities would be deprived entirely of service and financial advice of dealers if the segregation section forced, as we believe it would, the withdrawal of security houses from the small cities and communitites. Moreover, this section would, we believe, produce the following additional results:

(1) A radical curtailment of our established organizations;

(2) The discharging of members of the personnel of our organization, who have labored long and faithfully and have established recognized reputations for honesty and fair dealing with their customers;

(3) The enforced separation and perhaps loss of a clientele built up over a period of years;

(4) An increased cost to industry for financing, and

(5) Consequently a decreased valuation of the security sold to the investor; and

(6) Finally, the entire elimination from the dealer business of the most financially responsible firms or individuals.

It is my personal belief that it will result in the driving of purely local financing to other fields, particularly New York, where alone, I believe, could dealers be found of sufficient means to absorb and distribute the securities necessary for current financing.

A committee representing the New England security dealers has been formed and with the help of counsel they have carefully gone over the proposed bill, analyzing its purposes and the means suggested to carry them out. A brief has been prepared in which we have endeavored to point out aspects of the bill which we feel rather than assisting in the maintenance of a fairer and freer market will result in the obstruction of such a market. On the other hand, realizing that destructive criticism is of little assistance unless constructive suggestions are made, we have reached certain conclusions which may roughly be stated as follows:

(1) Any legislation with regard to the prohibition of the use of the mails or instrumentalities of interstate commerce should be confined to those things which have already been established to be unlawful, or which, in the light of considered opinion, are determined to be more conducive of harm than productive of general good;

(2) That regulation of credit to prevent excessive speculation should be left to the control of the Federal Reserve System under the National Banking Act by amendment or amplification if the provisions of that act, as at present drafted, are insufficient to accomplish this result; and

(3) Finally, that with respect to the regulation of exchanges, their rules and practices, and the requirement for information from corporations, there should be created a body such as is suggested in the Roper report or as suggested by the New York Stock Exchange, but

in any event, a body which will include men of experience and responsibility who will command the confidence and respect not only of exchanges and their members but the executives of State and Federal banks, industrial corporations, and insurance companies, and through them, the confidence of the investing public whose welfare in the last analysis is what we all desire, and that this body be provided opportunity to study and authority to devise an adequate means of controlling such unfair market practices and abuses as impair the maintenance of a free and fair market for securities.

With respect to these suggestions, in order that the committee may have the benefit of our own considerations, if it is so desired by the committee, we should like to file our brief and later, with the consent of the committee, submit more detailed suggestions for such proposed legislation.

The CHAIRMAN. You have that privilege. You may file your brief. It would be better if you incorporated it following your

remarks.

Mr. COLLINS. Thank you.

The CHAIRMAN. We are very much obliged to you, Mr. Collins. (The brief referred to is as follows:)

BRIEF IN BEHALF OF SECURITY DEALERS IN NEW ENGLAND

The main purpose of the proposed act is to maintain a fair and free market for securities, the importance of which is expressly acknowledged by section 2 to be of national public interest. It proposes to do this

(1) By curbing "excessive speculation" through the control of credit, sections 6 and 7, and

(2) By preventing certain "inequitable and unfair practices.'
The accomplishment of the latter it is suggested can be obtained-

(a) By the enforced registration of all "exchanges" and their "securities" with the Federal Trade Commission, sections 4, 5, 14;

(b) By the denial of credit to the holders of securities not registered and the limitation of credit to exchanges and holders of registered securities, sections 6, 7; (c) By the prohibition by heavy fine and/or imprisonment and civil penalties of the use of the mails or interstate facilities to effect certain enumerated acts declared to be manipulative devices, sections 8, 9, 10, 15, 17, 19; and

(d) By providing an official source of information as to securities traded upon the exchanges, section 5, 11, 12, 13, 15, 16.

There can be no criticism of the main purposes of the bill. There can be no denial that the maintenance of a fair and and free market is of the utmost importance not only to traders but, because of the effects which an obstruction of such market has, upon industry and commerce in general.

Nor can it be argued that mischiefs have not existed which warrant the careful consideration of Congress to determine whether further regulation by legislation is needed even though it may be argued that exchanges are themselves striving to develop a self discipline which might more effectively prevent recurrences than any control by public authority.

However, regulation of either sort must be considered with relation to the main purpose sought to be achieved, for if that regulation itself, in an effort to prevent unfair practices, should destroy or unduly restrict the fair and free market which it is sought to maintain, it defeats itself.

AS TO CURBING SPECULATION

Ostensibly the bill seeks to limit the amount that brokers and dealers may lend upon securities and to limit the places and the amount the broker may borrow on those same securities. In truth, the effect of the bill is to limit the power of individual owners of securities, most of whom are not speculators, to borrow on their securities in any event in excess of 40 percent of their current price as against the limit of 80 percent allowed Federal Reserve banks on loans secured by stocks, bonds, or debentures, and 90 percent on loans secured by obligations of any State or political subdivision thereof. Obviously, the result of

this is to limit greatly the marketability not only of existing securities but of those hereafter to be issued. In a time when we are making every human endeavor to reopen the avenues of credit, it would make the marketing and distribution of both industrial securities and State and municipal obligations at a reasonable cost difficult, if not impossible.

We fear the passage of the bill would of necessity drive securities from listed exchanges into bootleg markets and stop the desirable trend of State banks into the Federal Reserve System, as otherwise they could not lend money on values generally considered safe from the banks' standpoint, values without which no individual could be induced to invest his money except at an exorbitant cost to industry and governmental agencies.

We believe, and are advised, that the Banking Act of 1933, which was expressly directed to "prevent the undue diversion of funds into speculative operations" already provides ample power and machinery to protect against excessive loans for speculative purposes; but if further power is needed, it should be through the amendment or amplification of the banking iaws and not through the extreme and inflexible limitations of this bill which confers to the Federal Trade Commission power to even further curtail that credit.

AS TO THE PROHIBITION OF ACTS DECLARED TO BE "MANIPULATIVE DEVICES" Sections 8 and 9 of this bill forbid, under penalty of heavy fine, imprisonment, and civil damages, the use of the mails or facilities of interstate commerce in connection with certain "effects" and "devices" which are alleged to be wrongful. In effect, these sections are extensions of the act forbidding the use of the mails to defraud. There can be no criticism of such extensions if the conduct or acts forbidden are universally or even generally admitted to be of greater public harm than public good. Many of the things aimed at are already declared to be illegal, either by common law or by State statutes, as, for instance, illegal pools and unlawful manipulation by false representation and corners, or the express statutory prohibition of the New York statute.

U.S. vs. Brown (5 Fed. Supp. 81). N. Y. Penal Law, sec. 953.

In such cases there can be no just objection to legislation extending the prohibition to instrumentalities of interstate commerce as well as the mails.

There is just objection, however, to the imposition of additional and unwarranted civil damages in the determination of which there is absolutely no causal connection between the act and the penalty provided. Nor should the statute extend its prohibitions to those things as to which the general good may greatly outweigh the harm, e.g., in such cases, until the balance is decided, other means should earnestly be sought which reduce the harm and preserve the good.

But in any event it must be borne in mind that unless the prohibitions are reasonable and directed to practices generally condemned, the risks of business are increased and the cost of this increased risk must eventually be passed on directly in the cost of money to industry and indirectly to the value of the security in the hands of the investor.

AS TO SEGREGATION OF THE DEALER-BROKER ACTIVITIES

The evident purpose of this provision is to protect the purchaser of securities from possible unfair practices on the part of the seller.

The fundamental argument against the broker's occupying this dual position rests on the fact that as a broker, he is occupying a fiduciary position and as such is under certain affirmative duties which disappear when he becomes, a seller, a principal charged only with an affirmative duty of refraining from actual misrepresentations of fact.

It is urged that a customer coming to a broker as confidential advisor and agent is lulled into a sense of security which makes him easy prey for that same broker, who, acting as a dealer, sells his own securities to that customer; that the broker cannot fairly deal with the customer as an agent and fiduciary and at the same time be fair to him as a dealer, discharged of any fiduciary obligations, in selling his own securities.

If this were the real situation, even though most brokers honestly and scrupulously avoided any possible advantage over the buyer in the desire to retain the good will of their customers, there would be much to commend it if it really protected the buyer from unscrupulous brokers. However, as the law has been developed, the duties of the broker have been so increased that there is really little distinction in his obligations in the two capacities. Indeed, at the present