The investor should be no less concerned with the facilities the investment dealer puts at his service.

It seems to us who have been in the business many years that as complete an understanding as possible should be esablished between client and principal. Unless this understanding exists the investor is likely to have an unbalanced list of securities not adequately suited to his needs. It is obvious that such an understanding is hard to create and must be the result of constantly growing confidence, and therefore easier to establish with one person than with several. It is equally obvious that the wider the scope of the investment dealer the more competent he will be in handling his customer's account in all its ramifications. If this scope is narrowed as contemplated in this act we feel that both customer and investment dealer will be seriously damaged.

The problems which are created by the provisions of section 10 not only for the investment dealers but also the purchasers of securities from such persons, are far more serious than one not familiar with the necessities of the business of dealing in securities may imagine.

Section 10 of the National Securities Exchange Act of 1934 contains this provision:

SEC. 10. It shall be unlawful for any member of a national securities exchange or any person who as a broker transacts a business in securities through the medium of any such member to act as a dealer in or underwriter of securities, whether or not registered on any national securities exchange.

This section proposes to incorporate into the Federal statutes a prohibition against the transaction in a perfectly normal way of a business which has been engaged in for more than a century by those who have conducted it with integrity, with honor, and to the credit of this branch of the securities business, as well as to the satisfaction and protection of their customers.

Mr. PETTENGILL. Do I understand that the double function of dealer and broker has been going on in the markets for a century? Mr. NEWBOLD. So far as I know, sir. From my own connection in my own firm, which is now almost 40 years, and what I had from my brothers, older than myself, and from my grandfather, and father, it was always that, for the 90 years we have been in business. Mr. PETTENGILL. Acting as both dealer and broker?

Mr. NEWBOLD. Yes, sir; and I am under the impression that that has always been the case.

The record of those who are generally classed as investment dealers, substantially all of whom also buy and sell securities as brokers on a commission basis, may well be envied by the representatives of any other business in this country that can show a continued service over so long a period of years.

The power to transact a business in securities as a broker at the same time that a person is acting as a dealer in or underwriter of securities is found by those presently engaged in such business to be essential to the conduct of such business in a manner that will produce a reasonable profit to the person so engaged and a greater protection and service to the customers of such person.

The report of the so-called "Dickinson Committee" disposes of the suggested segregation as follows.

45381-34--27

I quote section 8, in which segregation of brokerage and other forms of business is mentioned [reading]:

8. Segregation of brokerage and other forms of business.-Your committee has given careful consideration to various proposals that the business of underwriting and retailing securities should be completely divorced; that those who underwrite securities and who are members of a stock exchange should not be permitted to carry margin accounts for customers; and that those engaged in the retailing of securities should not be permitted to be members of any stock exchange.

The various activities in which the members of the stock exchange engage, such as underwriting, acting as broker, carrying margins, etc., are all closely intertwined in our financial structure. Any such proposed segregation should not be accomplished before we are in a position to calculate its cost and to foresee its repercussions. As an abstract matter, the segregation of these various activities has much to commend it. Such an important decision as this can hardly be left to the discretion of an administrative authority. Segregation, if it is to be accomplished, must be accomplished by legislative fiat. Your committee finds that there is not yet available sufficient information to enable it to recommend such a far-reaching decision. It recommends, therefore, that the Stock Exchange Authority be charged with the task of assembling information to permit such a decision to be made intelligently and with assurance by a later Congress.

The investment dealers presenting these objections to section 10 of the proposed bill are confident that, if a stock-exchange authority be created by the legislation of this session of Congress and assume the task of obtaining information concerning those persons engaged in the security business rendering both a brokerage and a dealers' service, such authority will find sound and convincing reasons to maintain the existing powers and no substantial basis for attributing to this industry generally methods of business or courses of dealing which have been detrimental to the interests of those doing business with them.

Among the convincing reasons why this relationship should be maintained are the following.

These are our views, sir:

1. The combined service rendered to their customers by investment dealers, which cannot be efficiently rendered by one who is a broker only, is of such value that it ought not to be destroyed by the proposed segregation. The investment dealer who is a broker also is able to supply the needs of his customers by purchases of securities upon the exchange to the extent that they are available, and by sales from securities then owned by the investment dealer or other dealers to the extent that they are not available by purchases on an exchange. It frequently happens that the demands of a customer exceed the available supply of a security then for sale on an exchange, and it is this balance which the ownership of such security by the investment dealer is supplied from the dealer's holdings, thereby making a transaction possible which otherwise might not be completed for a long period of time. The reverse also occurs, and to the advantage of the customer, when the market will not absorb at a fair price the quantity of a given security which the customer desires to sell, and it then becomes possible to complete the transaction for that customer by the purchase from him by his investment dealer of the quantity of the security not then salable upon an exchange. In both instances, if the services demanded by the customer were to be rendered by one who was either solely an investment dealer or solely a broker, the transaction could not be promptly, efficiently and economically accomplished for the best interest of the customer.

That is the customer's interest in the thing.

2. The volume of business available to the houses here represented acting only as dealer or broker is not sufficient at all times to permit of a continuance in business with a reasonable profit, and it is therefore essential to the existence of the business that additional sources of revenue should be available from both types of business. This is particularly true of investment dealers in the great majority of small cities and towns throughout the United States and is clear to those familiar with the economic situation of these dealers that the attempted segregation would deprive them of a livelihood. It is to be remembered that not only does this affect the members of the firms but a large group of employees whose training has been such that the only livelihood in which they could maintain an existence might be destroyed.

3. The investment dealers afford the personnel, experience, and what may be called the "machinery" for marketing new capital and new municipal issues, the latter including State and county bonds, which cannot be supplied by a broker under the terms of this bill. Those members of the stock exchanges throughout the country engaged solely in the brokerage business have neither the experience nor the machinery to afford a distribution for such new issues to the advantage of the investing public as well as to the issuers.

This is particularly true as regards State, county, school-district, and municipal bonds, and it is obvious that the proposed segregation would be greatly to the disadvantage of the municipalities concerned and to the investing public seeking such means for investment. The proposed segregation would require the investment dealer to elect between bidding for municipal issues or continuing his sales and purchases for customers as a broker. Such election, if in favor of the brokerage business, would deprive the municipalities and his customers of his services. That is of general interest.

4. The elimination of the investment dealers as factors in the business of buying and selling securities would deprive the stockexchange business of what has been one of its most stabilizing and conservative influences. The record and place of the investment dealers in the history of the stock-exchange business has shown a consistent position on the conservative side and a helpful influence upon the markets.

The only apparent reason why the authors of the National Securities Exchange Act have ignored the wise recommendation of the Dickinson committee and have included in this drastic legislative document the provisions of section 10 would seem to be a failure upon the part of the authors to understand the fundamentals of the business of a dealer in securities.

Mr. MERRITT. Mr. Chairman

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. Your clients, and I take it, the clients of the others. you represent are regular clients, people who had business with you for a long series of years?

Mr. NEWBOLD. Yes, sir.

Mr. MERRITT. And I take it that they are insurance companies and savings banks, and others, who want to get the soundest kind of securities?

Mr. NEWBOLD. Yes; all kinds.

Mr. MERRITT. Now, if you should not be allowed to be a dealer and a broker, would not the result be that your customers on the average would have to pay more for their securities than they would by dealing through you?

Mr. NEWBOLD. I would think that, sir, but, of course, somebody might have a different view, but to my mind that would be my experience, in my time.

Mr. MERRITT. Well, the fact is that, if your customer in dealing with you, felt that you were inclined to take advantage of him, he would not continue to deal with you?

Mr. NEWBOLD. That is one of the reasons we thought that the rendering of long service might be of interest to this committee and might have some weight, add some weight to what we have to say. Mr. MERRITT. It seems to me it would have very great weight. Mr. PETTENGILL. Mr. Chairman

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. Before you turn away from this subject: The fact, as you state, that this double relationship has endured for a century or more with houses such as yours, indicates to me that, when the business is carried on with a high degree of honor between principal and agent, there cannot be in such cases, any great evil in it or you would not have continued in business for 100 years.

On the other hand, I think public opinion is opposed to banks, at least, acting in a double capacity, pushing out on their customers underwritings of their own such as we have had not only by the big banks but the little banks of the Nation; it has become a very great evil, acting in that double capacity.

Now, I appreciate banking and brokerage businesses are different in many particulars, and yet I have a little difficulty in harmonizing the record of houses such as yours, who have lived for a hundred years, carrying on that double capacity, and banks which have very obviously been guilty of very great carelessness, if not fraud, in selling their customers their own underwritings.

Would you care to comment on that?

Mr. NEWBOLD. Could I take a moment to explain that, something that is germane to that?

Mr. PETTENGILL. Yes, sir.

Mr. NEWBOLD. We feel that although this is a delicate topic for us to talk about, that it involves our own livelihood, involves what we believe, what we believe to be, the worth-whileness of doing a job well. We like to think we put the doing the job well first, which means that the investor must be properly supplied. There are times in our business-too many-when the relative desirability of certain classes of securities vary. There are times that any man who has had any experience in business knows that for perhaps 2 years, or 3 years, municipal bonds ought to be bought, and not stocks. There are times when stocks ought to be bought, and not bonds. Above all, we have recently seen times when short-time securities have commanded the most ridiculous price, because it was obviously a time when one wanted to be sure of seeing their money again in 30 days, or 60 days, or 90 days, or 100 days.

Now, the seasoned investment broker, seasoned investment dealer, watches that kind of thing and over the period of years he is in a position to advise his customers. That is one of the services.

In order to live, however, he has got to have properly constituted departments in his business to handle the various kinds of fundamental investments which are desirable.

Therefore, in my own business, we felt it necessary to create a municipal department, a stock department, a corporation-bond department; and when I first went downtown-it sounds an awful long while ago-my firm was dealing in all of those things, and also commercial paper. It has been so far back as that. Now, that gives you an idea of what I have in mind by saying at the beginning of this thing, testing markets, in wide distributions, is what I think is the desirable thing to a well-rounded investment dealer's advice to his customer.

Now, in a bank, coming back to what you said, in a bank, I thinkI do not like to hit anybody-but, I think that the recommendation of securities to customers, unless the bank is marvelously well equipped to do it, is an excrescence on the banking business. We know, however, that in foreign countries it is a regular and usual thing, and yesterday, in the Senate hearing, I heard it suggested by one of the members of the Senate committee, that the small man, man of limited means, who seeks to speculate, ought to do it through his bank.

I am not in favor of that, unless the bank has as its first business giving investment service, and I do not believe that any bank can be run on that basis.

From our view, our first concern is to see that the customers are well handled, if for no other reason that if they are not, we will lose their business, and that follows what you asked.

Mr. PETTENGILL. I want to pursue that with one more question. You have impressed me very splendidly, sir, and I am asking you for a very honest answer to this question.

I see the distinction that you make between the dealer and the banker, that the banker does not have the wide background or the experience that the broker does, and so forth. But still is not the dealer, who has in his portfolio securities that he wishes he had not bought, is not he under the same temptation to deal those out to his customers who come to him for advice as a banker would be?

Now, that is a question that I would like to have answered.

Mr. NEWBOLD. Well, I must say I had not thought of this line of questioning, when I came here, about what a bank could do in connection with these investments. I had made my mind up years ago, but I will come to this

Mr. PETTENGILL. Everybody pursues his selfish interest in this world within certain limits.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. Here is a dealer who bought a lot of securities, 30 days ago, or 60 days ago, and they are beginning to turn a little sour and he wishes he had not bought them.

Now, what is his temptation; actuated by the ordinary human motive, what would he do except push them out on his customers? Mr. NEWBOLD. I want to ask you, if I may

Mr. PETTENGILL (continuing). Unless he is a man of the highest degree of honor and will disclose all facts known to him to his customers.

Mr. NEWBOLD. I want to say here and now that I think the seasoned investment dealer, one who has been doing it for a time, is