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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. Well, 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. MARLAND. 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.

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 a 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. Automobiles 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

Mr. KENNEY. The right to what?

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

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