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own auditing department analyzes these questionnaires upon receipt. Any discrepancies bring about immediate action by the committee on business conduct. In addition, members of our auditing department go into the field and not only may but do make spot audits of members' books without prior notice.
I believe that in considering what governmental regulation may be necessary, Congress should weigh most carefully how to preserve the efficiency of the organization we have built up. There is danger of creating overlapping authority that can stifle efficiency.
Only a portion of the investment business is done on stock exchanges. Unscrupulous persons use the exchanges just as they use every other human agency to attain their ends. We welcome whatever assistance Congress can give us to eliminate unfair practices. All that we ask is that in helping us to correct abuses, you do not go to such extremes that you put us out of business.
Let me cite to you portions of provisions adopted by the Chicago Stock Exchange on May 17, 1933. These are stricter amendments of similar provisions theretofore existing. Section 2 of article XII of our constitution reads:
Whenever the governing committee shall determine that a member (a) has been or is doing business in a reckless or unbusinesslike manner, or (b) has made a fictitious transaction or given an order for the purchase or sale of securities the execution of which would involve no change of ownership, or has executed such an order with reasonable cause to believe that the execution thereof would involve no change of ownership, he shall be suspended or expelled as the governing committee may determine.
In this series of amendments last year we went even further and created a presumption of knowledge in section 3 of article XII of our constitution, which reads as follows:
Purchases or sales of securities or offers to purchase or sell securities made for the purpose of upsetting the equilibrium of the market or bringing about a condition in which prices will not fairly reflect market values, are forbidden. Any member who, with knowledge of the purpose thereof or with a reasonable opportunity for ascertaining the purpose thereof, makes or offers to make, or assists in making, any such purchases or sales, or shall be a party to or assist in carrying out any plan or scheme for the making of such purchases or sales, or offers to purchase or sell, shall be expelled or suspended, as the governing committee may determine.
I have tried briefly to indicate how far self-regulation has gone, in order that you may reach sound conclusions as to how far the Government needs to supplement private initiative.
I would emphasize the need to keep our securities exchanges free to function as markets that insure a reasonable degree of liquidity for investments. Certainly this is not the time to put unnecessary restrictions on liquidity, when freezing of assets and destruction of values have nearly paralyzed our economic life.
I would make it obligatory that the securities exchanges govern themselves—and do so within the principles of the new deal. Let the Government assist us by legislation to prohibit unethical practices and control unethical individuals whom we cannot reach.
Mr. MARLAND. Mr. Chairman-
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.
Mr. O'BRIEN. Yes, sir.
Mr. O'BRIEN. Well, a bucket shop—the common interpretation is—and our own idea-is where there is no actual security bought or sold; simply trading on differences.
Now, in Chicago, and I presume elsewhere, we have so-called high-pressure houses not members of the exchange which call people over the telephone, take a telephone directory, tell them, or advise them to buy some stocks, usually mentioning some good stock, maybe the Standard Oil of Indiana, or Steel, and by suggesting a stock of quality, they give to themselves an appearance of respectability and gain the confidence of the man they are talking to. He sends them the money to buy this stock. They notify him that it has been bought on a margin, or outright, or any way you like; but immediately thereafter they notify him they have sold that stock and have purchased some security of which he knows nothing. It is a telephone operation. It is the customer's word against the so-called telephone broker. That is what we are trying to eliminate, and we are given a great deal of cooperation from the State's attorney's office in Chicago.
Mr. CHAPMAN. Do I understand that they sell that stock without any instructions from him?
Mr. O'BRIEN. You see, the operation, sir, is over the telephone. If they can say to him, "We telephoned you and you told us to go ahead and do this.” It is just a matter of who said this and who said that; who said yes and who said no.
Mr. CHAPMAN. It is all a crooked set-up?
Mr. O'BRIEN. It is intended to be from the beginning. And, unfortunately, most people are hurt for little amounts of money and they do not think it is big enough to make a complaint about, but under the new State's attorney, Mr. Courtney, in Chicago, we are getting complete cooperation. The trouble is that they close out John Jones & Co. in this room and the same crowd, operating under another name, will open up in another room.
Mr. MARLAND. Is that operation that you describe similar to the operations the old bucket shops engaged in?
Mr. O'BRIEN. It is a little different.
Mr. O'BRIEN. We call anything a bucket shop where no actual purchases or sales are made. There are no actual sales or purchases. in these instances, or in a great majority of them, anyway.
Mr. MARLAND. Another question. You are speaking only for the Chicago Stock Exchange?
Mr. O'BRIEN. Yes, sir.
Mr. MARLAND. Do you have specialists who bucket the orders they get?
Mr. O'BRIEN. No, sir; they do not do that; no, sir; there would be no occasion for it.
Mr. MARLAND. When a specialist takes up stock for himself, is he not performing just about the operation of the old bucket shops, bucketing the orders of the customers?
Mr. O'BRIEN. I would not say so, sir. He makes a market. He is making an actual transaction.
Mr. MARLAND. So did the bucket shop make a market for that customer.
Mr. O'BRIEN. He is making a market for that customer, but the purchase or sale that he reports to that customer has no influence on the stock or on the market for the stock that the customer is buying or selling, because there has been no transaction.
There is quite a decided difference, in my opinion, between the two. Mr. MARLAND. You have men who operate as specialists on the Chicago Exchange?
Mr. O'BRIEN. Yes, sir. Mr. MARLAND. The man who operates as a specialist on the Chicago Exchange, does he have an opportunity of doing that? I do not like the word bucketing an order of the customer.
Mr. O'BRIEN. There would be no object of his bucketing the order. Mr. MARLAND. What.
Mr. O'BRIEN. There would be no object of his doing that. He is bound by the rules.
Mr. MARLAND. He matches orders of customers.
Mr. O'BRIEN. He did not have either. He might have a buy order and no sell order. He simply reports the transaction as having been made when really no transaction was made. He was taking his own risk on the market, the bucket shop man.
Mr. MARLAND. That is all.
Mr. PETTENGILL. Since these new regulations of March 21, 1933, went into effect, how many new listings have been made?
Mr. O'BRIEN. Not very many, but that is perhaps due as much to the fact that business conditions have not warranted many new enterprises since that time.
Mr. PETTENGILL. In other words-
Mr. PETTENGILL. In other words, the fact that there have been few listings made under these new principles devised by your exchange would not indicate to your mind that the principles are so severe as to prevent listings if business was normal?
Mr. O'BRIEN. Not at all, sir. The fact of the matter is that the corporations now listed have all been asked to comply with these rules, although they do not have to, because they have a contract signed previously, but all are being asked to do so.
Mr. PETTENGILL. I was going to ask about the old listings. In other words, practically all of your listings, all of your business, is not guided by your new rules?
Mr. O'BRIEN. Excepting so far as our listed corporations voluntarily bring themselves in.
Well, it is interesting in that regard. We have the correspondence in our files which we can furnish, that the corporations themselves have seemed almost anxious to comply with these rules, to benefit the situation so far as the public is concerned, in giving them information.
Now, last fall we wrote to all of the corporations suggesting a clarification of their annual reports. We thought that the reports sent out, in some instances, were all right. Perhaps they were all all right, but the average man reading a statement could not understand it. Therefore, he would not know and he could not know just how the figures applied.
So our auditors decided to draft or drew up plans, which were submitted to practically every corporation, or to all corporations whose stocks are listed on our exchange, and the surprising thing is that although it is a little bit burdensome to them, perhaps, to make the changes, almost entirely they have done so.
Mr. PETTENGILL. Does your exchange listing contract have a time basis?
Mr. O'BRIEN. No, sir.
Mr. PETTENGILL. Well, why could you not terminate them and bring all listed corporations within the provisions of the March 21, 1933, rules?
Mr. O'BRIEN. Because when—it is like joining a club. You are in there until they throw you out or you want to leave.
Mr. PETTENGILL. Do you not have the option of putting enough pressure on them to consent to the cancelation of the old contract and coming under the new contract, with the new requirements?
Mr. O'BRIEN. We have found no reason to exert any coercion whatever. They are all coming in.
Mr. PETTENGILL. Well, now, how many of your 387 corporations are now legally bound by the rules of March 21, 1933?
Mr. O'BRIEN. How many of them?
Mr. O'BRIEN. I should say-it would be a guess—we have not had over 10 listings.
Mr. PETTENGILL. In other words, you have got 387 that are not legally bound by these rules? Mr. O'BRIEN. Yes, sir.
Mr. PETTENGILL. And you claim that you have no right to require them to abide by these rules, if they do not want to?
Mr. O'BRIEN. No, sir.
Mr. PETTENGILL. Well, that is not a very safe structure to hold out to the public, is it?
Mr. O'BRIEN. The old structure was not unsafe. That is not the point.
The securities now on the exchange are now in the hands of the public. Take the 387, or the 397, so far as listing requirements are concerned, that is not of vital interest to those companies. All we are asking them to do is to do certain things to clarify their statements to the public. We are not asking anything beyond that.
Mr. PETTENGILL. Well, you do not have the right to require your 387 old corporations to file these independently audited accounts, do you?
Mr. O'BRIEN. No, sir.
Mr. O'BRIEN. May I have a moment to speak with the secretary? Mr. PETTENGILL. Yes; surely.
Mr. O'BRIEN. The secretary of the exchange says in excess of 200, at this time, and it is progressing.
Mr. PETTENGILL. Are doing it?
Mr. PETTENGILL. So you have got about 50 percent who are filing the independent auditors' accounts within or under the new regulations?
Mr. O'BRIEN. Yes, sir.
Mr. PETTENGILL. Well, it seems to me there is a great weakness there that deserves to be corrected, because you come here and you give to this commitee, and to the country, the impression that you have a lot of self-regulation self-discipline, and high standards up there, but at the same time, however, your corporations are not yet, despite the fact that a year, nearly, has gone by, have not yet come within these regulations. And perhaps many of them will always refuse to do so.
Mr. O'BRIEN. I would not entirely agree with that, Mr. Pettengill.
Mr. PETTENGILL. I do not want to be unfair in the matter. I want to get what the facts are.
Mr. O'BRIEN. I think that you have gotten the wrong impression, if I may be bold enough to say so.
Mr. PETTENGILL. I want to get it straight.
Mr. O'BRIEN. This thing is cumulative. We are approaching it not in the spirit of coercion, but in the spirit of cooperation, and we are very much pleased with the cooperation received, and I see no reason why a great majority of those corporations will not sign the new agreement, or agree to comply with any request we have made since, within a reasonable time.
Mr. PETTENGILL. Have you asked all of your corporations to voluntarily withdraw, because that is the only way you may compel them, withdraw, as you say, from the present club? Have you asked them to give up all old listings and come under the new regulations?
Mr. O'BRIEN. I do not think that we are looking at this matter similarly.
Mr. PETTENGILL. Of course, it would not be necessary for the corporations already listed to comply with your rules, I mean, with reference to the independent audit, for instance.
Mr. O'BRIEN. We are asking them.
Mr. PETTENGILL. Well, until they do do it, if these regulations, your judgment, are in the public interest, then until these corporations do do it, they are transacting business which, as your own regulations indicate, are not in the public interest.
Mr. O'BRIEN. I would not entirely agree to that statement.
Mr. PETTENGILL. Well, you take the position that in the public interest they should file independently audited accounts?
Mr. O'BRIEN. Yes, sir.