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Commissioner LANDIS. No, I do not think I said that. I said this, that it is desirable
Mr. PETTENGILL. You said that it has that tendency.
Commissioner LANDIS. That it is very desirable to keep the man of poor means out of the market who cannot stand the loss of speculation, but you do try and keep him out by not letting him operate on a shoestring. That is the effect of the margin provision, general requirements, as I see it. Now, that may have, perhaps, what you suggest, the tendency not to let the small man come in on the terms of the big man, but it does say to both, “You have to operate on the same shoestring", not one fellow operating on a lesser shoestring than another.
The CHAIRMAN. Is not this true, Mr. Commissioner: We know that the rich man can put up again and again, and stay in the market, and the little fellow has to go out.
Commissioner LANDIS. Of course, that is true. The man who has resources, can protect his margin. That is, the man with the resources can and the man without resources cannot protect them. that is very true.
The CHAIRMAN. The man with a wide margin put up can stay in longer.
Commissioner LANDIS. Yes; that is true.
The CHAIRMAN. Therefore the little man who invests some money under this provision has the same chance as the big man with large margin, whereas if he were in there with a smaller amount he would be sold out, because he would not be able to put up more margin if he had gone in on a so-called "shoestring.”
Commissioner LANDIS. Yes, I think that that is true.
Mr. MARLAND. Mr. Chairman, we are cutting the odd-lot buyer, the little fellow, out of the market with these high margin requirements. Does that not naturally have the tendency to make the stocks cheaper for the big fellow who can buy them?
Commissioner LANDIS. Of course, I think that you want to look at this in a different way than that, Mr. Marland. The whole aim of legislation of this type is directed not toward promoting purchasing of securities, with the idea of appreciation and immediate sale thereafter. It does look forward to purchasing from an investment standpoint. Now, I think it is true that some of the provisions that will necessarily be incorporated in any legislation will very likely work out differently than it was your idea, or my idea, or anybody else's idea they should work out.
I just cannot see why when you allow them both to go in on terms of equality, you have that feeling that this thing operates as against the little fellow in favor of the big fellow. It operates that way today, if that is so, because today they do not even go in on terms of equality. They go in on terms that are not equal. I do not see that this change will change that basic principle.
Mr. MARLAND. Little fellows are of necessity required to purchase anything on the partial payment plan, are they not?
Commissioner LANDIS. Yes.
Mr. MARLAND. They buy real estate and many other things that way.
Commissioner LANDIS. Yes.
Mr. MARLAND. But, under this you would prohibit them from buying stocks and an interest in the future of the United States on a partial payment plan?
Commissioner LANDIS. Except on a larger payment. Mr. MARLAND. Except on 60 percent down payment. Commissioner LANDIS. Sixty percent down payment. Mr. MARLAND. On that down payment. Commissioner LANDIS. That is true. But, why do you think this will operate in favor of the large fellow rather than the little fellow?
Mr. MARLAND. And will it not keep the stocks down?
Commissioner LANDIS (continuing). Because the man with $10,000 can take just as great a proportion, buy just as great a proportion as the man could buy with $1,000,000. The proportion of stocks is the same. He can spread himself; both parties can spread themselves, according to the same ratio.
Mr. MARLAND. Without taking up too much time, it appears to me that the other fellow, the big fellow, has other sources from which he can acquire funds, and if you keep the stock market down, by keeping the odd-lot buyer out, he can buy stocks cheaper and acquire money from other sources than his broker.
Commissioner LANDIS. Of course, this only increases, as you say, and keeps the odd-lot buyer out by force of the margin requirements in this provision, as such, against the odd-lot buyer.
The CHAIRMAN. In my country, and in Mr. Marland's, we did have this situation for a long time. A man with $500 could buy on the margin 100 bales of cotton. All he had to do was to put up 1 cent a pound and if the market went up 1 cent he was wiped out. If he had had to put up three times that much, or 40 percent of the value of the cotton, why he could have stayed in the market. If it had gone down 2 cents a pound, or $10 a bale, or $20 a bale, and then, having ridden it down, he might have had an opportunity to ride it back, but his $500 was cleaned out when it went down 1 cent a pound and he was broke.
Mr. KENNEY, Under this bill the banks can still loan on less margin, can they not, on the securities?
Commissioner LANDIS. The banks are required to loan on the same margin plan, except where those loans are not for speculative purposes or margin purposes, but that
Mr. KENNEY. How are you going to determine that?
Commissioner LANDIS. The method that is worked out in the bill is that the margin requirements will not apply to loans on securities that have been purchased 30 days prior to the time when the loan is asked for or secured.
Mr. KENNEY. You mean by this bill, it gives the broker the same rates as the bankers?
Commissioner LANDIS. On the same right
Commissioner LANDIS. On the right to deal that way. Further, there is a flexible provision in here with reference to margin requirements that I think is something with which I do not want to take up the time of someone else who can really discuss this thing in an authoritative fashion, but I think it is worth while to present this fact, namely, the requirements on what might be called volatile and steady stocks are differentiated. Sixty percent is your general standard; but when it comes to steady stocks, the margin requirement then runs 20 percent of the lowest price that the security has had during the last three years.
Mr. KENNEY. Well, the merchant who is in business and who has had stocks on a 50-percent basis with the banks will be required to get 60 percent for them?
Commissioner LANDIS. Yes.
Commissioner LANDIS. The idea is one of restricting the sucking in of credit for speculative purposes. That is the idea.
Mr. KENNEY. Now, let me ask you this question: This bill is rather severe, is it not, on the limitations placed upon this disinterested broker's advice, as to advice to the customers?
Commissioner LANDIS. I wonder if that is severe. The provision that will worry the broker most, if I may put it that way, casually, is the provision there on page 16, paragraph (5), which does require the broker to use reasonable care with reference to such information as he circulates about the security that he is urging someone to purchase.
Mr. KENNEY. Do you not think that that provision could be made less severe?
Commissioner LANDIS. Well, I should hesitate to make it less severe. It is largely the provision that is now present in the Securities Act, and I have seen it operate in the type of instructions that dealers have given their salesmen. I think they are very
Mr. KENNEY (interposing). It does affect the dealer.
Mr. KENNEY. Let me ask this question: The banks will still be able to give advice to their customers about the customers doing their buying?
Commissioner LANDIS. There is no provision in that section, as I read it, that applies to that.
Mr. KENNEY. I mean national banks, or banks of that character, or State trust companies; it would not apply to them, would it?
Commissioner LANDIS. Why, of course, this is true, that the provisions of that section only apply to these people when they come within the Federal power; namely, use facilities of registered exchanges, or use the mails, or means of interstate commerce in making their statements.
Mr. KENNEY. They would not come within that category if they bought these stocks as an agent of their customers, would they?
Commissioner LANDIS. No, I do not think so.
The CHAIRMAN. We will now have to adjourn until tomorrow morning. We will go ahead tomorrow morning at 10 o'clock. Commissioner Landis you may extend your remarks on the constitutionality of this bill when you revise your statement. We will now have a short executive session.
(Thereupon, at 11:48 a.m., the committee proceeded to the consideration of other business, after which, at 11:55 a.m., it adjourned.)
FEDERAL TRADE COMMISSION,
Washington, February 19, 1934. Hon. Sam RAYBURN, Chairman Committee on Interstate and Foreign Commerce, House of Representatives, United States,
Washington, D.C. My Dear MR. RAYBURN: May I request the privilege of supplementing my discussion of the constitutionality of H.R. 7852 before your committee on Wednesday, last, in order to make clear distinctions which I believe it is important to bear in mind in framing Federal legislation for the control of our security exchanges?
The basis for Federal control of the technically intrastate transactions on our security exchanges depends upon the intimate relationship between these transactions and interstate commerce. If that is established, the Packers and Stockyards Act case (Stafford v. Wallace, 258 U.S. 495) and the Grain Futures Act case (Board of Trade v. Olsen, 262 U.S. 1) seem conclusively to establish the constitutional right of Congress to regulate these transactions.
The existence of the relationship between these transactions and interstate commerce and their tendency to impose burdens upon interstate commerce are necessarily questions ultimately of fact and not of law, and thus questions upon which men's minds must bend to such truths as continuing economic research develops. It is unnecessary to point out to your committee that, even in the last 2 years, we have learned much of the effects of stock-exchange practices upon our national economic health and well-being.
Only a short time ago it was natural for us to conclude that the conditions of manufacture were too far removed from the free flow in interstate commerce of manufactured goods to permit the National Government to concern itself with such questions. Accepting a similar premise, it was again logical to assume that purely intrastate transactions in securities did not sufficiently affect in terstate commerce to permit of their control. But our concentrated effort in the past 2 years to grasp the realities of our national economy, has demonstrated the unreality of many economic views that we as individuals and as a Nation formerly held. It is no novel thought that law must give weight to these realities, and, though holding to its same essential objectives, mold its principles to make possible their effectuation in a growingly more complex economy. Minnesota v. Blasins (290 U.S. 1); Home Building & Loan Association v. Blaisdell (U.S.Sup.Ct. decided January 8, 1934.) Were our courts not to do so, they would ignore Chief Justice Marshall's memorable warning: We must never forget that it is a Constitution we are expounding, a Constitution intended to endure for ages to come, and consequently to be adapted to the various crises of human affairs.” McCulloch v. Maryland (4 Wheat. 316, 407).
Today there can be little question but that the security markets present a question of national concern. During the past two years a Senate and a House Committee have revealed in great detail the extent of the influence of these transactions upon our national morals as well as our national economy. The direct effect of these revelations was the inclusion of a demand for their regulation in the program of a great political party. In 1934, this recognition of the function of security exchanges became so implicit that the President could quite simply state that such exchanges "conduct, of course, a national business .
The relationship of these exchange transactions to interstate commerce deserves & little further analysis. To build a bill upon the theory that trading in the securities of a corporation becomes a matter of federal concern only if that corporation ships its products in interstate commerce, seems to me of doubtful validity, as well as of doubtful utility, inasmuch as the holding company might easily be employed to evade its provisions. The control that the federal government now exercises over the issuance of the securities of interstate railroads might not be construed as extending to a control over the trading in securities of all corporations manufacturing products to be shipped in interstate commerce.
But though legislation framed upon one theory may be constitutionally invalid, legislation having essentially the same objectives but proceeding upon another theory, if adequetely substantiated by economic fact, will be valid. First Employers' Liability Cases, 207 U.S. 463; Second Employers' Liability Cases, 223 U.S. 1; Hill v. Wallace, 259 U.S. 44; Chicago Board of Trade v. Olsen, 262 U.S. 1.) H.R. 7852 proceeds upon such a different theory. It regards transactions on the security exchanges as intimately related to the flow of capital in interstate commerce because our Nation-wide dealing in securities moves through these
markets. This, the bill contends, justifies regulation in aid of protecting that interstate commerce in securities.
One further legal contention need be noted, namely, that interstate trade in securities is not "interstate commerce.” No specific decision supports such a contention. The insurance cases that permit states to control the writing of insurance by foreign corporations within their borders may only argumentatively be said to support such a conclusion. But from the standpoint of the constant flow of capital, there seems an insufficient parallelism between the writing of insurance and national trading in securities. Furthermore, the Securities Act of 1933 precedes upon the theory that the distribution of securities throughout the nation is such commerce over which Congress has control.
Finally, it is well to recognize that constitutional law is dynamic. Doctrines of an earlier day frequently fall, directly or indirectly, as the pressure of events demonstrates their nonalignment with basic constitutional aims. Different courts at different periods, naturally responsive to differing national stresses and strains, will reach conclusions that only further grasp of the realities of our national life will ultimately reconcile. But the reconciliation is rarely a mere matter of legal dialetic. Fundamentally, it must come from an appropriate appreciation of the place to be accorded national government in a federalist system-an appreciation evolutionary in character which it is the high function of Congress to create. Respectfully yours,
J. M. LANDIS.