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Mr. WOLVERTON. It would seem to me from section 2, which you state is argument for the bill, or reasons for it

Commissioner LANDIS. Yes.

Mr. WOLVERTON. You have definitely fixed the taxing power also as a basis.

Commissioner LANDIS. That is correct.

Mr. WOLVERTON. And you are using that also as a basis for this regulation.

Commissioner Landis. I tried to mention that as an additional basis.

Mr. WOLVERTON. That is very clearly set forth. You make reference to the fact that it is a basis for establishing and determining the value of securities for the purpose of calculating the amount of taxes owing to the United States and the several States.

Commissioner LANDIS. Yes.

Mr. WOLVERTON. So the justification for this bill is not entirely to be found in the power of Congress to regulate interstate commerce!

Commissioner LANDIS. That is true, and yet I think this support lies on the interstate power.

Naturally, you try to get every support you can for any particular piece of legislation in order that you may have at least one prop, if one happens to be knocked out from under you by a constitutional decision that is adverse.

Mr. WOLVERTON. Is it your thought that by incorporating in section 2 these different reasons for this legislation, that you are fixing, by a declaration of Congress, those reasons, rather than leaving it to & court to determine that such was the reason, by reading of the Committee report?

Commissioner LANDIS. Yes; that is quite true. It happens to be true. I think that the true idea of the separation of powers is that the facts, factual judgments, primarily are matters of concern to Congress rather than the courts; matters of law are largely for the courts.

Mr. WOLVERTON. You feel that it is proper for the court in construing legislation to look at the committee report to determine the reasons for the legislation?

Commissioner LANDIS. Yes, sir.

Mr. WOLVERTON. And therefore it would be much better to state those reasons in the act itself?

Commissioner LANDIS. Yes, I think so, and to return to that same thought, it is possible to take to a court this argument. The committee report, after all, represents the mere judgment of a committee and here we have a weightier judgment of the entire Congress, if you write the thing into the bill. How much there is in that I do not know. It may be more apparent than real.

Mr. WOLVERTON. In other words, Congress is fixing it by their own declaration, rather than depending on the language of a committee report? Commissioner LANDIS. Yes. Mr. PETTENGILL. Mr. Chairman The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. Well, is it not a fact that in the District of Columbia and New York State emergency rent statutes during the World War the Supreme Court of the United States paid a good deal of attention to the preamble?

Commissioner LANDIS. Yes. Mr. PETTENGILL. In deciding or passing upon the constitutionality of those laws?

Commissioner LANDIS. It did pay a great deal of attention to the preamble.

In the Chicago Board of Trade case it paid a great deal of attention to the preamble, and in the Dayton Goose Creek Railway case, where Congress expressed in that situation its conclusion that it was impossible to regulate rates so as to be sure not to get more than an excess return on some and on others get less than a fair return and therefore it was desirable to have this recapture provision in there, Mr. Chief Justice Taft in deciding that case laid great empahsis on the fact that that particular language was contained in, I believe, section 15 (a) of that act.

Mr. PETTENGILL. Mr. Landis, you agree, of course, that the various stock exchanges have the power themselves to do all this bill calls for?

Commissioner LANDIS. Practically; not quite.

Mr. PETTENGILL. What is to prevent them from doing all that the bill calls for, if they would?

Commissioner LANDIS. Well, perhaps short-sightedness. Undoubtedly this thing I think this thing is to be said: That what the stock exchange has done, especially the New York Stock Exchange, in the last 3 years has been very important; there has been a great deal done in the last 3 years with reference to adoption of new regulations. The regulations which they adopted yesterday are among the most helpful and important things.

Mr. PETTENGILL. Would it be possible to state very briefly what this bill does that is not now being done by the various stock exchanges as a matter of self-government.

Commissioner LANDIS. Well, I do not know whether I can state that briefly or not. I will try my best on that. The important requirement, for example: The margin requirement today does not run as high as in this bill. They run—I think I am right on this—50 percent on the accounts under $5,000 and 30 percent on accounts above that; and the 30 percent is fixed on the debit balance rather than the value of the securities. Furthermore, this act also governs not only the lone relationship between brokers and customer, but between broker and banker as well. That is an important feature of those requirements.

The exchanges' regulations on pools, I do not believe, are as broad as are set forth here in section 8. The exchange, I do not believe, has any strict requirement-I may be wrong on this—but, I do not believe it has any strict requirement that a broker, a member of the exchange, shall not borrow beyond a certain percentage of his capital. They watch that very closely, but whether they have a strict requirement on that, I am not sure.

Short selling: The exchange has placed regulations on short selling. At times it has suspended short selling entirely. I know of no regulation on stop loss orders that correspond with the type of things that are looked forward to in this bill.

The segregation of the functions of broker, specialist, and dealer, which is accomplished by this bill, is not accomplished in the present exchange regulations.

Considerable criticism exists today against the licensing requirements of the exchanges in that they do not require persons who register the securities on the exchange to tell their full story, adequately, sufficiently. Some unfortunate controversies have been raised, not very long ago, with reference to matters of that type.

Mr. PETTENGILL. Might it be said that, in defense of the need for additional regulation over and above the control of human self interest and cupidity and further that if the New York Stock Exchange, for example, were to increase its margin requirements, and the Chicago Stock Exchange would not do so, that the business would be lost to one exchange and go to the other?

Commissioner LANDIS. That might be true; yes.

Mr. PETTENGILL. And so, general legislation that would regulate margin requirements in all stock exchanges might work to the advantage and protection of all exchanging?

Commissioner LANDIS. Of course, I think that is one thing that it is desirable always to keep in mind on the question of this matter, namely, when we commonly talk and think of the New York Stock Exchange, which, of course, handles more traffic of this nature than any other, we criticize perhaps a requirement of the New York Stock Exchange, but I think it should be remembered that those requirements are very much higher than those prevailing in many exchanges all over the country, with smaller traffic, it is true. Perhaps not in Chicago.

This bill produces uniformity, and yet this bill does not look forward to freezing over the situation completely. In other words, it gives administrative discretion to the Commission to treat the Cincinnati Exchange differently from the New York Exchange because perhaps of different requirements that may be necessary there.

The CHAIRMAN. But, your standards are fixed?

Commissioner LANDIS. There are minimum standards and the general standard.

The CHAIRMAN. Even though the stock exchanges have all these rights to make changes, have the same right to change back to former practices.

Commissioner LANDIS. Yes, sir.

The CHAIRMAN. And under this law they would not be allowed to do that?

Commissioner LANDIS. No.
Mr. KENNEY, Mr. Chairman-
The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. As I recall it, the Roper report made a general observation or suggestion that something new and less harmful should be found to take the place of widespread speculation or gambling on the part of the masses of the people.

Commissioner LANDIS. Yes, it does.

Mr. KENNEY. Would you be good enough to read that part of the report, which I understand is very brief?

Commissioner LANDIS. I would be very glad to.

It must always be recognized that the average man has an inherent instinct for gambling in some form or other. It has been recognized as a social evil, always inveighed against since early times. No method of combating it has ever been completely successful. If once abolished in one form it seems always to crop out in another. In America the man of average income has perhaps turned to the stock exchange because of the prohibition of various forms of

gambling. If the speculative tendencies of our people could be turned into other channels, this instinct might be satisfied without the far-reaching economic consequences which come from wide-spread public speculation in the stock market.

Mr. KENNEY. Now, the committee has reference, I suppose, to other forms of gambling outside of the stock exchange?

Commissioner LANDIS. Yes.

Mr. KENNEY. Now, in that connection, I would like to ask the Commissioner if he saw in the Time magazine of February 5 a reference to that part of the report with a significant head note that a bill for a national lottery had been introduced in the House of Representatives.

Commissioner LANDIS. I did not see that.

Mr. KENNEY. I will be very glad to send the Commissioner a copy of the magazine.

Commissioner LANDIS. I would like to see that.
The CHAIRMAN. Any further questions of Mr. Landis?
Mr. MARLAND. Mr. Chairman-
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. Mr. Commissioner, how can it be construed as an interference of interstate commerce, when a person sells on the New York Stock Exchange a security he does not own?

Commissioner LANDIS. The way in which it can be construed as an interference with interstate commerce is that the wide practice of that kind of a device may have a tendency to depress prices to an undesirable level, even to an artificial level, and for that reason be a burden on interstate commerce; in other words, to destroy the real market that might otherwise be available in securities of that type.

The particular transaction by itself, of course, means nothing; but it is the cumulative effect of those transactions which, if, as economists say, it has these effects upon the market, furnishes justification to deal with those practices just as much as any other practice which may be one which may manipulate prices.

Mr. MARLAND. I have noticed, Mr. Commissioner, that you have gone to considerable length with regard to margin requirements on long transactions, going so far as to require a margin of 80 percent of the previous 3 years' low and that you have not made any such provision regarding short sales.

Commissioner LANDIS. Exactly.

Mr. MARLAND. Why would it not be just as logical, and a better protection, to provide that the short seller should have to put up 80 percent of the previous high for the last 3 years, or 5 years' high?

Commissioner LANDIS. That very question was considered, Mr. Marland, but the analysis of that question does not indicate that you want the same margins with reverse English in the short-selling field. The idea of this section is to give the commission power to prescribe appropriate margin requirements and yet there certainly is a strong belief that the margin formula for short selling is not the reverse of the margin formula for transactions on the long side.

Mr. MARLAND. Is there any reason why it should not be?

Commissioner LANDIS. Weil, yes, perhaps this is so, namely, that there are times when it may be very desirable to encourage short selling. I do not want to talk as an authority on this thing. I just am not.

Mr. MAPLAND. Short selling, Mr. Commissioner, is purely betting that a stock will go lower than it is. Why should you want to encourage that?

Commissioner LANDIS. That a stock will go lower?
Mr. MARLAND. Yes.

Commissioner LANDIS. If the price is very much above what other conditions indicate that it should be, it may be desirable to have that stock lower. I am heartily, here, in sympathy with one statement in the Roper report, namely, that too often stock legislation has been aimed at keeping stocks from going down rather than at keeping them from going up and sometimes it is very important that brakes be put on up side as well as on the down side.

Mr. MARLAND. By this act, you are making it very difficult for the small purchaser of stocks to get into the market, are you not?

Commissioner LANDIS. Yes, that is true.
Mr. MARLAND. Is that the purpose of it?

Commissioner LANDIS. Not the primary purpose of it; no. The primary purpose of it might be a larger purpose, namely, to discourage speculation, and yet this act, with reference to margin requirements, does not draw a differentiation that is drawn today. Today, there is a requirement that for small accounts, under $5,000, the margin must be 50 percent and another requirement for accounts above $5,000 where the margin must be 30 percent.

This bill at least has equality there, whether it will exactly work out that way or not.

Mr. PETTENGILL. Mr. Commissioner, do you think as a broad public policy Congress has any more right to prevent the poor man from taking a chance to recoup his losses than a millionaire?

Commissioner LANDIS. Well, I think I should hesitate absolutely to give a judgment on that, and yet I think you want to consider it from this angle: The small man is usually the man who suffers badly in the market. It may be perfectly desirable to protect men against the consequences of perhaps their own folly, and to base that protection upon a monetary requirement. It is done in many types of legislation. For example, much of the security legislation in the States requires a dealer to put up certain bonds. The poor fellow cannot put up that bond. Of course, that has an amount of protection of the public at large in it.

Mr. PETTENGILL. Mr. Commissioner, the argument has been made in referring to these margin requirements that it is going to drive the poor man out of the market and whatever profit may be made in the future, in the rise of securities, on the market, as we all hope they will to some extent, will result in it all being gathered up by the rich men of the country and not distributed through the little fellows who may want to trade. Now, what have you to say on that?

Commissioner LANDIS. Well

Mr. PETTENGILL. Will this tend toward the concentration of the future profits in the hands of the wealthy?

Commissioner LANDIS. I do not think so.
Mr. PETTENGILL. Why not?

Commissioner LANDIS. I do not see why raising the margin requirements should necessarily have that effect.

Mr. PETTENGILL. I understood in answer to Mr. Marland's questions, you said you thought that that was desirable, to keep the poor man out of the market.

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