Mr. LEA. Then, passing that, let us go to the motive leading to the sale of poor stocks to the uninformed.

That is, so far as the owner of the stocks are concerned he has a motive which serves this own purpose, and that may not serve the purposes of the customer. That is manifest, is it not?

Mr. NEWBOLD. Yes.

Mr. LEA. And that is a very great temptation for the average

man?

Mr. NEWBOLD. Yes.

Mr. LEA. Now, as to the agent, what motive has he to sell his customers poor stocks instead of good stocks?

Mr. NEWBOLD. Well, Mr. Lea, did you give as an alternative there the prohibition entirely of the dealer selling the bad stocks that he has bought? If you can achieve that, why, I would say that it is worth while going into, but I do not think that you can. I do not think that is quite really the alternative that you have presented

to me.

Mr. LEA. I do not want to argue that. I am just after information on the point as to what is the motive back of this dumping of poor stocks on the uninformed.

Mr. NEWBOLD. Trying to make money out of other people.

Mr. LEA. Why would not an agent sell his customer good stock instead of poor?

Mr. NEWBOLD. Why does not the agent?

Mr. LEA. Yes.

Mr. NEWBOLD. You mean if he is making the sale on commission why does he select the poor stock?

Mr. LEA. Yes; why does the broker pass over this poor stock on the customer, when they have good stock that they could sell to the customer, and in the end produce better results? What is the motive back of the broker doing that?

Mr. NEWBOLD. Well, a broker can have no motive because the commission he makes out of the transaction is the same, whether he sells good stocks or bad.

Mr. LEA. Does the exchange tolerate any differential in regard to the broker's commission?

Mr. NEWBOLD. You mean

Mr. LEA. Does he get more; does the exchange permit the broker to charge more or does he receive more for selling one stock than another?

Mr. NEWBOLD. I am a little hazy about that, because I am not very close to the actual mechanics, but I understand that recently, there is a different commission for stocks selling in different grades of prices; but, of course, not between two stocks selling between 15 and 25. The commission would be identically the same on the stock exchange.

Mr. LEA. How about the ordinary brokerage firms over the country; is there a privilege of taking larger awards for selling one class of stocks than another?

Mr. NEWBOLD. Oh, I should think so. I should think probably so. Mr. LEA. Well, is that not one of the responsible motives for so much poor stock being sold to the uninformed?

Mr. NEWBOLD. Why, yes, sir; there is no doubt about that.

My colleague tells me just now that question is covered in the code. I have read the code only hastily, because I have been engaged so much on this; but it is covered in the code; that question, I understand, of getting larger commissions.

Mr. LEA. But, up to this time there has been nothing that prevented an ordinary stockbroker from favoring one particular stock because he got a larger reward for selling it; is that true?

Mr. NEWBOLD. I want to get that clear. Do you mean stocks that are listed?

Mr. LEA. No; I was not confining it to that. I was trying to get at the reasons for a broker being interested in selling poor stocks instead of good stocks.

Mr. NEWBOLD. Well, I do not think that I can help you very much there, except in the sense that if you get a man who is crooked, he will advocate the thing on which he makes the most money, that is true, and try to sell it.

The CHAIRMAN. Mr. Newbold, you are making a very interesting statement, but your time has expired. You will be allowed to print your whole statement in the record.

Mr. NEWBOLD. May I just say that we are also opposed to section 14.

The CHAIRMAN. You may print the rest of your statement in the record.

Mr. NEWBOLD. Thank you.

(The remainder of the statement above referred to is as follows:)

MEMORANDUM IN RELATION TO SECTION 14

The provisions of section 14 prohibit the making of over-the-counter markets for unregistered securities unless such market is made in accordance with rules and regulations promulgated by the Federal Trade Commission. The passage of this section in its present form would mean the delegation by Congress of power to the Federal Trade Commission, if it were so inclined, to prevent any market whatever for such securities by imposing drastic conditions which might be even more severe than the regulations applicable to registered securities traded in upon national exchanges. If the purpose of this section is to prevent speculation in unregistered securities, consideration should be given to the character of securities now commonly sold in the over-the-counter markets. This class of securities are dealt in largely by investors and not by speculators. They do not lend themselves easily to speculation, as may be realized when it is known that they consist largely of Federal Land Bank bonds, Home Owners' Loan Corporation bonds, other Government securities, State, county, school district, and municipal obligations, bank and insurance company stocks, railroad equipment trust certificates, and bonds secured by trust mortgages upon real estate. In addition to such unlisted securities, the over-the-counter markets afford an opportunity for transactions in large blocks of listed securities primarily for the benefit of institutional investors. The over-the-counter markets afford little opportunity for uncontrolled speculation, not only because of the character of the securities traded in and the transactions occurring there, but because of the type of customer with whom the investment dealer has the majority by volume of such transactions. These customers are such as insurance companies, savings banks, National and State banks and trust companies, educational and charitable institutions, and corporate trustees. These customers are advised by persons of long and extensive experience in the purchase and sale of such securities who are frequently as familiar with the market values as the representatives of the investment dealers trading with them. The purchases made are for investment and not for speculative profit, and almost invariably are cash transactions and not on marginal accounts. The problems arising out of such transactions are clearly not comparable to those which trading upon the national stock exchanges present, and a totally different treatment is required to control such practices, if any, that may have been indulged in by a

small minority of the dealers. The subject matter of this section is dealt with by the Dickinson committee as follows:

"10. Unorganized or over-the-counter markets. No study of regulation of organized stock exchanges would be complete without giving consideration to the problem of the unorganized or over-the-counter markets. Because of their importance, and because of the fact that certain transactions and practices could still be engaged in on the over-the-counter markets which, under the proposed regulation, would be prohibited on the organized exchanges, your committee has considered whether and to what extent it would be possible to regulate such overthe-counter markets. On the basis of the consideration which it has been able to give to this subject, your committee has come to the conclusion that the problem of the over-the-counter markets cannot be satisfactorily dealt with by Federal governmental action. It has not yet found any method of controlling such markets which it considers feasible or which could be applied without building up a Federal policing agency on such a scale as to be impracticable. It is, therefore, not prepared to recommend any Federal legislation for the regulation of such markets, but, if a further study on this subject should be considered desirable, your committee will undertake to proceed therewith."

In view of the fact that the evils which are complained of, due to individual transactions by a few dealers engaged in the over-the-counter market transactions, will be dealt with in a most comprehensive manner in the proposed fairpractice provisions of the Investment Bankers Code, which may be adopted before any National Securities Exchange Act is finally passed, it would seem unnecessary to enact the provisions of section 14 at this time.

These memoranda present reasons why sections 10 and 14 of this bill should not become law, and the undersigned investment dealers of Philadelphia urge the serious consideration of them by the Members of Congress.

STATEMENT OF R. V. FLETCHER, GENERAL COUNSEL ASSOCIATION OF RAILWAY EXECUTIVES, WASHINGTON, D.C.

The CHAIRMAN. We will hear Judge Fletcher.

Mr. FLETCHER. My name is R. V. Fletcher. I live in Washington. I am counsel for the Association of Railway Executives.

I address myself very briefly only to such features of the bill as seem to me to be unnecessary, so far as they are applied to railroad securities, by reason of the fact that under existing law, and particularly the Interstate Commerce Act, the securities are already fully regulated and the public authority is given ample information with reference to the type of securities and their value, and all of the information incidental thereto which could be of any interest to any regulating agency.

I address myself very particularly to section 11 of the bill. In that section, as you will recall, is dealt with the question of registering securities with the Federal Trade Commission, and not to take your time unnecessarily, I just call attention to some of the different. features of section 11.

Now, for instance, the first-and I am not quoting the bill literally-but I will quote a digest of it. It requires that there be given under section 11 information in connection with registration of

securities that will cover the organization's financial structure and the nature of the business. That identical information is given to the Interstate Commerce Commission in the annual reports which, under existing law, must be filed with the Interstate Commerce Commission by every carrier in the country.

The second matter particularly regards the term, position, rights, and privileges of the different classes of securities outstanding under section 20 (a) of the Interstate Commerce Act, wherever the railroad company applies to the Interstate Commerce Commission for the privilege of issuing its securities, the exact information there mentioned has to be filed with the Interstate Commerce Commission, not simply the information as to the particular issue but all of the information as to the exemptions, and positions, and rights and privileges of the different classes of securities.

It is true that that information is not given in the annual reports, but I venture to say that there is not a carrier in the country of any consequence that during the 15 years while they have been under the scheme of regulated securities, that has not made application to the Interstate Commerce Commission in some form or other for the issuance of securities of some character, so that the railroads have filed with the Commission, I dare say, and have all given all of those particulars with reference to any carrier of any importance.

Now, the third thing required in section 11 relates to the terms on which securities have been or are to be offered to the public, and that also is given and must be given in any application which is made to the Interstate Commerce Commission for the privilege of issuing or reissuing any of its securities.

Now, I do not want to take time, Mr. Chairman, to go over this, all of the particulars with regard to section 11, except to say, with the exception of the eighth item in that section, all of this information has been given to the Interstate Commerce Commission either in annual reports or in the applications which the carriers have to make to the Commission for the privilege of issuing securities. That eighth item is particularly with regard to options in respect to securities existing, or to be created. That, so far as my information goes, is not covered by any requirement of the Interstate Commerce Commission as to reports, but I do not think it is a matter of much consequence or importance in connection with the marketing and disposition of railroad securities.

Now, it has seemed to us that it would be entirely unnecessary to require the railroads to furnish all this tremendous amount of information when the agency of the Government engaged in administering the act can ascertain all this information by consulting a public record, namely, the one kept by the Interstate Commerce Commission.

I say, also, with reference to section 12, which is the section which calls for elaborate reports, that likewise all of the requirements of section 12 are covered by reports to the Interstate Commerce Commission.

Now, in that connection it will be remembered that under the order of the Interstate Commerce Commission every class I railroad, which means every railroad with a gross income of $1,000,000 a year, must now file with the Commission not only annual reports, giving in great detail all of the information which this bill requires to be filed with the Federal Trade Commission, but they have to file monthly reports

showing their operating income, net income, additions and deductions, differences, and a digest of their balance sheets.

So that it seems to us just an unnecessary and expensive duplication of effort to require the registering of these securities and the making of these reports to the Federal Trade Commission.

And in connection with section 11, I do not want to overlook the fact that under paragraph 10 of that section it is required that the balance sheets of the railroads, of all companies issuing securities, I should say, must be certified to by an independent public accountant, and in paragraph 11 of that section it is provided that an independent public accountant for all the preceding years must certify with reference to the profit and loss statements of the company issuing these securities.

Now, what would that be? That would be a tremendous expense on the railroads to go back for nearly 100 years of their history and have to employ public accounts to go over all of their balance sheets, and all of their profit and loss statements, for all of these years, and examine their books for the purpose of giving a certificate to the Federal Trade Commission, which it seems to us is entirely unnecessary in the case of a regulated industry.

The CHAIRMAN. You are not objecting, Judge, but suggesting that some provision be put in this bill with reference to railroad securities, such as was put in the Securities Act last year?

Mr. FLETCHER. The same thing, exactly, Your Honor.

I just want to comment, also, and I will not detain you unnecessarily, I want to voice the same objection which I think has been expressed to this committee by persons more competent to express objections to that provision, about the provisions under the law as it is written here, proposed here, that every railroad company, when it proceeds to have its annual meetings of stockholders for the purpose of electing directors or carrying on any routine matter, must send out a notice to all of the stockholders, whose proxies are solicited, not only a statement as to the purpose and meaning of it; not only a statement as to the matter to be considered at the annual meeting, but also a complete list of its entire stockholders.

Now, that is a tremendous burden. In the case of the Pennsylvania Railroad I happen to know that they have 150,000 stockholders. In the case of the Chicago & Northwestern Railroad, as I recall, they have 50,000 stockholders, and the lists, printed list of the stockholders of the Pennsylvania Railroad, makes a book as big as the family Bible, almost.

Now, to require them to be printed or produced in any form and sent out to every stockholder every time you have an annual or special meeting of the stockholders would be exceedingly burdensome and this requirement would really make it almost impossible, as it seems to me, to hold the meetings of the stockholders.

The stock is so widely scattered it is next to impossible to expect that the stockholders will personally attend the meeting, particularly of routine meetings, which are held for the purpose of electing a board of directors and for conducting other routine business, or any other activity, the reports of which are always given in the annual report.

Mr. MARLAND. Mr. Chairman, may I ask Judge Fletcher a question?