would have some basis to go on. But, on this side, one group says this is unethical, and wrong, and we say it is not unethical.

Mr. BULWINKLE. I know, Mr. O'Brien, but I am sitting here as a member of this committee not knowing a great deal about the stock exchanges. You are an expert, so far as this committee is concerned, and you make the direct statement that you want legislation enacted to prohibit unethical practices.

Now, I am getting at this: What legislation do you want?

Mr. O'BRIEN. Well, I would say, Mr. Bulwinkle, that we would first have to decide among the committee and whoever is appointed to take it over, what are the unethical practices. It is evident that legislation is deemed necessary. If anybody would ask me what is wrong with our exchanges, I naturally would tell them I do not think anything is wrong. We have set up rules. We penalize our members. And, there are lots of practices that are criticized, which happen on the outside of the exchanges.

Mr. BULWINKLE. All right. Let us leave the practices a minute and come down to the individual.

Mr. O'BRIEN. Yes.

Mr. BULWINKLE. You stated that you wanted legislation to control unethical individuals whom you could not reach.

Mr. O'BRIEN. Yes, sir.

Mr. BULWINKLE. What do you mean by that statement?

Mr. OB'RIEN. I mean by that statement, the people that I referred to a while ago as the fellows who are telephone operators, that is, the people using the telephone to solicit, not members of the exchange, and who use our exchange to our detriment. We cannot reach them. We have no authority over them.

Mr. BULWINKLE. What sort of legislation have you in mind to help control those unethical individuals?

Mr. O'BRIEN. Well, I am not enough of a lawyer. to say that, sir. I would like to tell you so. I would like to be able to draft an answer to that, but I really cannot do it. I think it can be done, but it can be done by your own minds, which are legal, and not by mine.

Mr. BULWINKLE. Well, I know, but we should have the information from you, when you make the statement.

Mr. O'BRIEN. Now, so far as I am concerned, I would be very glad to discuss it with you and perhaps get a lot of information myself. Sometimes we get in a rut in our business and get the idea that maybe we are all right, and we are partly wrong, and by discussing it with people outside we come to a better conclusion.

Mr. BULWINKLE. Well now, I would suggest this in order not to take the time of the committee, that if you have any recommendations to make along this line, that is contained in that sentence, that you put them into the record with your remarks.

Mr. O'BRIEN. I will be glad to consider it.

The CHAIRMAN. We are very much obliged to you, Mr. O'Brien. The next witness is Mr. Kinnicutt, from a committee of New York investment market or stock-exchange firms.

STATEMENT OF G. HERMANN KINNICUTT, REPRESENTING THE INVESTMENT HOUSE GROUP, DEALERS, BROKERS, AND UNDERWRITERS, NEW YORK, N.Y.

Mr. KINNICUTT. Mr. Chairman and members of the committee. I am simply the spokesman for 18 investment houses, a partner of one of them, the houses being Chas. D. Barney & Co., Callaway, Fish & Co., Cassatt & Co., Clark, Dodge & Co., Field, Glore & Co., Hallgarten & Co., Hemphill, Noyes & Co., A. Iselin & Co., Kidder, Peabody & Co., Ladenburg, Thalmann & Co., Laurence M. Marks & Co., G. M. P. Murphy & Co., Riter & Co., L. F. Rothschild & Co., Edward B. Smith & Co., Spencer Trask & Co., Tucker, Anthony & Co., White, Weld & Co.

The CHAIRMAN. All New York companies?

Mr. KINNICUTT. All New York firms.

The CHAIRMAN. Are you the gentleman that represents the associations that Mr. Hathaway spoke to me about?

Mr. KINNICUTT. Mr. Hathaway is a partner of one of the firms in this group. I am only the official spokesman for these 18 firms, and what I am about to say is in no sense a legal argument. It is simply a statement written without the aid or advice of any counsel, and without consultation of any other group, by a person who has never been in politics, who knows nothing of them, and who has never appeared before a congressional committee before.

May I say in advance that the time allotted to us is very short and if it is the pleasure of the committee, I would first like to complete our statement and may I also say that while the first part contains some objections to certain clauses of the bill we also have some constructive suggestions to offer. If there is not sufficient time for any questions at this present hearing, if your committee wants to ask any questions, we are always available at the convenience of any member of this committee to answer any further questions to the best of our ability and there are several of my associates here today of the group for which I am speaking.

We are permitted to appear here to express, so far as we can, the views of a group of investment firms who are all members of one or more securities exchanges, who are all members of the Investment Bankers Association, who will all come under the Investment Bankers code now in process of completion. We do a commission business, we act as dealers in investment securities, and at times we act as underwriters of new issues. In the business of no member of this group is any one of these three activities a dominating factor, and our business is approximately divided between these three functions. We do not claim that there are no dishonest persons in the securities business. We do not claim that at times unsound practices may not be used. We do not claim that no improvements can be made. We are all about to subject ourselves to the very stringent detailed requirements of the N.R.A. code for Investment Bankers, which, as a matter of fact, go very far toward eliminating many of the dangers of the unfair or unsound practices this bill aims to cure. We do claim however, that with very rare exceptions the security dealers of this country are honest and maintain standards of practice at least as high as those in other industries, and we definitely believe as to certain sections of this bill that the effort to cure a lesser evil will

create a greater one. In a very different field, the eighteenth amendment honestly sought to cure certain evils and the result we all know.

The avowed purposes of this bill are in the interests of the public welfare and the protection of the investor, and we believe there are certain sections of it that will not only fail to accomplish these purposes, but will have a contrary effect. Any clause that merely does damage yet fails to accomplish the desired end, you will not wish to make law.

As member of one or more exchanges, we are, of course, vitally interested in all that affects their activities. What hurts them hurts us. There are a number of clauses in this bill that in our opinion are unwise, as, for example, its deflationary aspects, its effect on corporations and their security holders, which either will not or cannot register on a security exchange, and the destruction of the free market which now exists for these securities, and lastly that the bill goes far beyond its nominal purposes. There are, however, certain specific clauses which are of particular concern to us. In the economy of time, I shall confine myself largely to these, because as a group we know more about them and how they are likely to work. They affect us and they also affect very many others. I mean by "us", the many broker, dealer, and underwriter groups throughout the country, of which we are but a part. They concern us however, more vitally than they do firms engaged exclusively in a commission business.

We wish to demonstrate in the first place that the business of the distributor of securities acting as a dealer and an underwriter, is not only to the benefit of the investor, but also an absolutely necessary function in the financial system of this country and is essential for the economic welfare of the country; particularly so during this difficult period of recovery. If this can be shown, and at the same time it can be demonstrated that this bill will greatly hurt or largely destroy the ability of this group to function, when they are more needed than ever, we cannot be accused of speaking purely from motives of self-interest.

As to the necessity for the dealer; it is an undisputed fact that for many years a very large proportion-probably as much as 90 percent of all the high-grade investment securities of this country have been placed by dealers in every State of the Union, and in their capacity as dealers, though at the same time in other directions they act as brokers.

It is also a safe statement, and one which we wish to emphasize, that by and large the most responsible of these dealers are members of some exchange and each one in his own community does a substantial commission business.

Thirdly, it seems undisputed that an essential and absolutely necessary part of the recovery program is to transfer from the Government to private capital the heavy burden of financing industry which has taken on such staggering proportions of late. The Reconstruction Finance Corporation is today the biggest lender in this country to practically every form of industry-not from choice but from necessity and to avoid a greater calamity. These loans must ultimately be absorbed by private capital-by savings banks, insurance companies, estates, and individuals, as earning power is restored and savings are augmented by means of these very same loans, that the R.F.Č. is making.

By accident, we can give you a concrete example of very recent date. Last Friday, at the very moment that section 10 of this bill was being discussed in this room, four of the very firms I am speaking for today, purchased from the R.F.C. a million municipal bonds of a large western city which the R.F.C. had taken some months before when conditions were such that the city could not sell elsewhere. In the past 4 days these 4 firms, through their combined distributing organizations with their knowledge of markets and of likely buyers for these bonds, have placed a portion of them, and are in process of placing the balance, in permanent hands.

I speak of that, because I happen to be a partner of one of those houses that bought those bounds, and when I left New York last night I think about $400,000 of them had been sold. They had been sold to individuals and insurance companies. To this extent they have lightened the load of the R.F.C. and made funds again available for some similar constructive purpose. Under clause 10 of this bill, this operation would not be possible for any member of any registered exchange. This is only an isolated case of which we happen to have personal knowledge, but transactions of this nature must be taking place almost every day.

With the elimination of the distributing machinery of bank affiliates, the dealers today provide the only remaining vehicle of distribution. To illustrate the importance of this business, during 1933 when volume was at an absolute minimum, the record shows that the volume of dealer business in bonds alone, exclusive of any business on any exchange, because we have had a very few days to collect this information and it has been rather difficult even among friendly competitors to have each one disclose what his volume was; but I think that I am understating it rather than overstating it Mr. MERRITT. Those are sales and purchases.

Mr. KINNICUTT. Those are sales and purchases; yes, sir. And, for the group I am speaking, it was over $1,250,000,000.

Now, please do not send me to jail if those figures are not right to a dollar. This is a substantial sum, yet obviously it is but a fraction of the business done by the several thousand dealers from Portland, Oreg., to Portland, Maine. During the same period the business on the exchanges was probably greater than the volume above. By far the largest part of this amount was not in new issues but in the important and necessary readjustment of portfolios as a result of changing conditions. Furthermore, in our judgment, it could not have been done by a broker.

You may say, Why could this not be done on a brokerage basis? To answer this not in a theoretical way, but from practical experience over many years, I think we can definitely say that it could not. If a savings bank or a trust company or an individual (if there are any such fortunate ones left) for sound reasons wants to sell, say, $200,000 of bonds of some issue, the very worst thing he can do is to go to a broker.

We are not criticizing the broker and he has a tremendously important function, but in a case like this he is legitimately keen to make his commission and so he offers the bonds wherever he has any chance of selling them and to many a place where has has no chance, and before you know it these two hundred thousand bonds appear to be two millions and obviously no one will buy.

I think I can speak from pretty firm ground there, because I have seen it happen so often. Obviously under those conditions no one will buy. Many and many a time when I knew less than I now know, we have had our own bonds offered to us at a price less than we had offered them at. The second or third or fourth broker believed, perhaps naturally, that the unknown seller would lower his price. As a matter of fact we once bought our own bonds in this way.

Except in very few and very active issues, the sound way to sell any sizeable block of bonds is through a dealer and not a broker.

We believe there is a further definite advantage in preserving the present method of operation. Investors rightly should have from their financial advisers information regarding all types of securitiesboth listed and unlisted-and get the best possible service, both as to values and prices.

It is definitely to the advantage of the investor to have his individual business in securities in the hands of relatively few people, which creates a greater sense of responsibility in the firm he is dealing with.

It is the part of wisdom for an investor to seek advice and service in security matters from some one person or firm, as he would from his doctor or lawyer on problems of health or law. Even with your groceries if you buy your vegetables and fruit and milk from one man, your chances of getting fresh eggs from him are better than from another.

Furthermore, it is only in the broker and dealer combined that you can get the necessary and essential statistical information in any comprehensive way. A man acting only as a broker, neither will nor can support the very great expense of an efficient service of this kind, and will be helpless, even with the best of intent, to give adequate information on most securities. The service and statistical departments of our group alone cost many thousands of dollars annually.

I am sorry time does not permit giving those figures but they would run, I think, into several hundred thousand dollars a year, in this group alone.

Turning to the function of the dealer in his capacity as an underwriter, we believe it is an equally necessary work in the public interest. Little financing of any size for refunding purposes or for the capital requirements of expanding business can be accomplished without the aid of underwriting. As an example, let us assume that a railroad finds it economically wise to electrify its lines from Chicago to St. Louis. Let us assume the completed cost will be $50,000,000. At first blush, it might be assumed that the railroad corporation could offer its issue direct to the public without the need of an underwriting to guarantee the sale, or could employ the broker to sell the bonds to the public for a commission. There are two fallacies in this:

First, the railroad is far more likely to make a mistake in the terms and price of its issue, and its reception by the public, than the dealer group with their combined knowledge and long experience of market conditions and the public demand of the moment, and also for the very good reason that the dealer is backing his judgment by his own. money and commitment; secondly, though the railroad may not make this mistake and the security may be attractive to the public, both from the point of view of safety and yield, it can only be so, provided