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time his obligations as a dealer are even greater than as a broker and there is little danger to the seller in the broker's acting in these different capacities.

Generally throughout New England a broker cannot buy from or sell to his customer securities without full disclosure of the fact that he is selling his own securities. If that fact is not disclosed, the customer may repudiate the transaction and recover what he has paid, with interest.

McNulty v. Whitney (273 Mass. 494).
Hall v. Paine (224 Mass. 62; 230 Mass. 62).

Under our State blue-sky laws a broker cannot sell a security to a customer that has not met the requirements of that law, and if he violates this prohibition, the customer can rescind and recover back the purchase price. If the dealer in the sale of a security is guilty of misrepresentation, bad faith, or gains, an exorbitant or unconscionable profit, his license may be suspended.

Finally, and conclusively, however, the Federal Securities Act itself eliminates any improper advantage on the part of a dealer. Under section 12 of that act, the seller of a security is not only responsible for any misstatement of a material fact but an affirmative duty has been imposed upon him to state all material facts omitting none which would make the dealer's statement misleading, in the light of the circumstances.

Under section 11 of the same act, as an underwriter the dealer is also liable in a civil action for any untrue statement of fact or omission of a material fact contained in the registration statement over which he has little or no control.

Perhaps no more forcible statement of the effect of this act can be found than that made by Professor Frankfurther of the Harvard Law School, in reply to the criticism that it placed too great a responsibility upon the dealer that "he who is unwilling to assume the responsibility of a fiduciary has no business to be a fiduciary.'

It is significant that although there are blue sky-laws in every New England State that not a single State has found it necessary to segregate the brokerage and dealer activities of New England firms dealing in securities.

It is suggested that even if as “an abstract matter, the segregation of these various activities has much to commend it”, New England has not found abuses which warrant segregation, or that if abuses. have existed, they are minor compared to the cost and repercussions which the Roper committee admitted must be calculated (Roper Committee Report, p. 24) before final decision.

We are convinced that in New England the enforced segregation of these activities would result in the further withdrawal of the more responsible financial houses from activity in the very necessary function of financing our industries and local governments, with the consequence that it will be sought at a greater cost in other markets, or if they are unavailable, of necessity, from the Federal Government itself.

AS TO THE REQUIREMENTS OF REGISTERING AND COMPLYING WITH INFORMATION

REQUIREMENTS AND THE SUBMISSION TO THE RULES AND REGULATIONS OF THE FEDERAL TRADE COMMISSION

As we view it, in this aspect of the bill it is sought by discrimination against unregistered exchanges and unlisted securities to force their registration and compliance with the information requirements of the act.

Unfortunately in this respect the bill is so drafted that the disadvantages of registration are even greater than the hardship imposed upon the unregistered. The cost and the extensive nature of the information required will drive securities from the exchanges with the consequent impairment of that fair and free market for which the bill is intended. Then again, while there is today a general tendency for publicity, the requirement in this case will not always prove beneficial to the holders of securities, who are the ones intended to be benefited. Indeed, while the bill makes the information filed with the Commission available to the public, there is ground for the belief that in many aspects this will have an undesirable effect.

The filing of the information will not result in its being brought to the attention of investors except by dis emination through private channels, newspapers, and financial services.

Already many corporations refuse to permit their securities to be listed because it is honestly believed that it places in the hands of operators and gamblers, and even competitors, the opportunity to create a misleading inference by the simple expedient of manipulating facts and figures revealed by such reports, and unless the corporation jumps into the breach and by way of defensive explanation interprets the facts back of the apparent result shown by the figures, serious damage may be done to investors. The directors of such corporations believe honestly and sincerely that it is better to let their stockholders rely upon the reputation of the concern and the integrity of its management, with only yearly reports, than to become involved in the complexities of market manipulation.

Furthermore, the requirements of the bill would tend to drive from the directorship of registered corporations many able and responsible men who would prefer not to serve than to make their personal holdings a matter of public comment and speculation.

In short, the matter of listing requirements and the matter of publicity of information is so complex and so far from abstract decision and rigid legislation, that even a cursory consideration must result in the conclusion that as to such matters, just as with credit matters, if legislation is needed, it should provide an elasticity in the determination of what best suits the needs of the particular community and the protection of its investing public. Such power should only be given to a body made up not only of men of experience in market and industrial matters but, indeed, with the operations and demands of the financial machinery of the nation and its political subdivisions.

For these reasons we believe that (1) legislation with regard to the prohibition of the use of the mails or instrumentalities of interstate commerce should be confined to those things which are by the preponderance of opinion wrongful or harmful (a supplementary memorandum describing in detail such legislation is being prepared and will be submitted later).

(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 (a supplementary memorandum describing in detail such legislation is being prepared and will be submitted later) and, finally,

(3) 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.

The CHAIRMAN. The next is the Chicago Stock Exchange.

STATEMENT OF MICHAEL J. O'BRIEN, PRESIDENT OF THE CHICAGO

STOCK EXCHANGE, CHICAGO, ILL. The CHAIRMAN. Will you give your full name and business, and I wish you would qualify so the members of the committee may hear you.

Mr. O'Brien. My name is Michael J. O'Brien, president Chicago Stock Exchange, and I am speaking on their behalf

. As I have sat through these hearings, I have been impressed with the earnest desire of members of the committee for suggestions as to how the problem in which we are both so viatlly interested can be solved. My associates and I, representing the third largest exchange in the country, do not come here to oppose legislation which may be needed in the public interest. We are here to cooperate; to explain our viewpoint and offer you our experience in the hope that it may be helpful in arriving at a solution that will be fair to business and in the best interests of all of us.

I believe I can best assist this committee by telling concretely and in simple narrative style the progress the Chicago Stock Exchange has made, of its own volition, in preventing many of the abuses outlawed by this bill.

Constantly changing social and economic forces make ours an everchanging business. To be workable, any legislation to regulate the exchanges and our business must be flexible enough to be almost instantaneously responsive to the forces that operate in times of crisis. Legislation should not discourage nor render ineffective the efforts of men who desire honestly to regulate themselves.

Since its organization in 1882 the Chicago Stock Exchange has been a definite factor in the financing and development of industry in the Middle West. In the 50 years of our existence, this country has gone through wars and panics. Such events have altered methods and practices in all lines of business. We have sought to have our rules keep pace with our experience.

I wish to outline to you briefly how far we have gone, so that you may judge how best to encourage self-regulation and impose the minimum of restraint upon individual initiative.

First, as to listings. The securities of 397 corporations are listed on the Chicago Stock Exchange. Each corporation has entered into a contract with the exchange. Experience has taught us many things in the years that these securities have one by one been admitted to the list, and those lessons have been incorporated in subsequent revisions of our listing contract. We have strengthened existing provisions and added new ones.

More than a year ago the Chicago Stock Exchange undertook a special study and survey of listing problems. Abuses had crept in which we realized should and must be eliminated. On March 21, 1933, the governing committee promulgated a statement of 10 simple principles which were incorporated in our listing contract. Some of these requirements were new, some a strengthening of old rules. For the past 11 months all new applicants for listing have signed this new contract. All corporations listed under the old contracts have been advised that the Chicago Stock Exchange is guided by those principles and that all listed corporations are expected to abide by them. The 10 principles are:

1. No security can be bought or sold on the Chicago Stock Exchange unless and until its listing shall have been accepted by the governing committee upon an application signed and sworn to by a duly authorized officer of the corporation issuing the security. The Chicago Stock Exchange for many years has had no so-called unlisted department, nor does it list securities upon data or application filed by its own members or any persons other than the company itself.

2. The application shall contain a full statement of the experience and reputation of the management as well as a description and history of the applicant company.

3. Clear and informative financial statements, including a balance sheet, profit and loss statement, and an analysis of surplus, shall be submitted as part of each application. Such financial statements shall truly disclose the past operations and present condition of the company and shall be certified to the Chicago Stock Exchange by duly qualified independent public accountants, whose certificate shall be set forth in full as a part of the application.

4. The securities themselves shall be as proof against forgery or fraudulent alteration as it is possible to prepare them. They shall be fully steel engraved, unless they are to be outstanding only temporarily.

5. The applicant company shall maintain a transfer agency and a registrar in the City of Chicago. To safeguard against the issuance of unauthorized stock, the registrar shall be an independent, responsible trust company. Only independent, responsible trust companies may act as trustees for listed bond issues.

6. The validity and legality of the securities listed shall be approved by competent legal counsel, who shall not be an officer or director of the applicant company.

7. Securities will not be listed coincident with a public offering. Applications will only be considered when the company demonstrates that the securities to be listed are sufficiently distributed to the public to assure a free and open market.

8. Distribution of additional securities of a class already listed shall be made only after application to list such securities shall have been made and the methods of proposed distribution shall have been found unobjectionable by the exchange.

9. Applicant companies shall agree to mail to the exchange and to their stockholders with the notice of the annual meeting a report of the operations for the preceding fiscal year, including a balance sheet, profit and loss statement, and analysis of surplus. Such financial statements shall be clear, complete and informative. They shall truly disclose the operations and condition of the company and shall be certified by duly qualified, independent public accountants whose certificate in form satisfactory to the exchange shall be attached.

10. The Chicago Stock Exchange favors a policy of full publicity; after a security has been listed, the public and the press will be given access to listing applications and to reports filed with the exchange.

Among the most important are principles 3, 7, 9 and 10, to which I wish to refer briefly.

Principle 7 establishes that there shall be no listing for the purpose of attaining original distribution. Local exchanges, such as ours, have been wont to serve their communities to obtain capital for local industrial enterprises. In so doing, issues of securities have been listed before they were well distributed. A year ago the Chicago Stock Exchange decided that only adequately distributed issues of well-established companies should be listed. Any regulation, whether by an existing governmental authority or by a new coordinating authority for stock exchanges, should make a similar rule, in our opinion. The flotation of securities for new capital enterprises is properly a function of investment banking.

Principle 10 provides for full publicity to listing applications. We believe this sets up one of the best safeguards for the public. Fraud cannot stand the light of day. Complete, understandable information in the files of the exchange, disseminated through the newspapers, provides the existing and prospective securities holder with a basis on which he can act intelligently in the acquisition or retention of his investments. The Chicago Stock Exchange makes this information readily available to anyone seeking it. Stock exchanges, as such, as much as any other influence, have induced corporations to adopt the policy of furnishing .comprehensive annual reports.

The Secretary's office in the Chicago Stock Exchange carries on a voluminous correspondence and receives many inquiries in person from those interested in the securities there listed. No charge is made for this service. The cost which a governmental agency must necessarily charge for furnishing such information to securities holders might easily become so burdensome as to defeat the very object sought to be attained. Official copies of registration statements are often so voluminous that they are useful only to profound students very much interested in this particular security. The small investor cannot afford the service, and the inexperienced investor would have difficulty in understanding the information.

I would say that is not a criticism of the Securities Act. We are simply stating a fact. We are not critical of that act and believe in full publicity, and I think that the act is achieving great good. We do believe, however, that without being entirely familiar with it, that it may be cumbersome in some of its details. We made inquiry and found that the average investor, if he wished information, must pay 20 cents a page. We inquired of the department and they say the average cost is at least $20. There is so much detail required in the preparation of the statement that it takes up a lot of room and makes it very heavy reading for the average man.

I would not want that statement to appear

The CHAIRMAN. You do not doubt, though, that such information ought to be available if he wanted it?

Mr. O'BRIEN. Absolutely not. We are very much in favor of it. The CHAIRMAN. That is all that the act requires.

Mr. O'BRIEN. Principle 3 requires clear and informative financial statements, certified by duly qualified independent public accountants.

Principle 9, requiring certification of annual reports, has opened to ys an avenue for service to the public, to exchange members and corporations alike. During the past year one of the most active departments of the Chicago Stock Exchange has been that which has carried out the procedure of analyzing, criticizing, and procuring the improvement of financial reports submitted to stockholders by listed corporations. In this we have had the cooperation of the corporations themselves and of the public accountants making the audits for these corporations. Our staff of accountants and representatives of our committee on stock list are engaged in almost daily interviews with chief accounting officers of these corporations to the end that the greatest possible clarity and informative quality of reports may be attained. Coercion has not been necessary.

Again, we have had great cooperation from the corporations in that regard.

To comply with our rules, a number of corporations listed prior to the promulgation of these principles have changed the date of their annual meetings for the sole purpose of making the report of financial condition available to stockholders prior to the meeting.

My purpose in citing these matters is to show that our exchange is constantly endeavoring to adjust its practices to conditions as they arise. I do not believe we could achieve these adjustments so readily nor serve our public so well if we were put in a straight-jacket of rigid regulatory legislation under official supervision which would have to pass upon the details of policies and procedures such as these.

The second factor which gives an exchange its character and reputation is its administration. The Chicago Stock Exchange is governed by a committee of 25 governors of long experience. I am the president of this governing group, and have been in the business 35 years. A portion of the executive personnel devotes its time exclusively to carrying on a vigorous campaign to protect the public and the exchange from bucket shops and other forms of dishonest practice.

The average daily attendance on the floor of the exchange is about 125 members. Among this number are members of the committee on business conduct and the committee on arrangements exercising constant supervision of the operation of the exchange and the conduct of its members.

Members of the Chicago Stock Exchange carrying accounts for the public are required to submit to the committee on business conduct at least twice a year a questionnaire disclosing the true financial condition of the member. These questionnaires are signed by each partner in the firm. Any falsification of a material item in such statement renders the member liable to suspension or expulsion. Our

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