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.

Mr. KENNEY. Is that quite fair?

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.
Commissioner LANDIS. Yes.

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 a 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. (See e.g. 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.

NATIONAL SECURITIES EXCHANGE-H.R. 7852

THURSDAY, FEBRUARY 15, 1934

HOUSE OF REPRESENTATIVES, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Saym Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

We have this morning Mr. Fred Y. Presley, of New York, whom we understand has had quite some experience in matters that will be affected by legislation of this sort, and will speak with regard to marginal matters in reference to this bill; also, with reference to matters of publicity.

Mr. Presley, will you qualify by giving the committee your name, business, and experience connection.

STATEMENT OF FRED Y. PRESLEY, PRESIDENT OF THE NATIONAL INVESTORS CORPORATION, NEW YORK, N.Y.

Mr. PRESLEY. My name is Fred Y. Presley. I am president of the National Investors Corporation of New York, and affiliated investment trusts, including the Second National, Third National, and Fourth National.

The CHAIRMAN. You may proceed, Mr. Presley. in your own way. Mr. PRESLEY. Mr. Chairman, what further qualifications do you wish?

Mr. MAPES. Mr. Chairman, I should be glad to have the witness amplify a little on what the National Investors Corporation is; how large an institution is it?

Mr. PRESLEY. National Investors Corporation, and its three managed or controlled companies, which are the three publiclyowned companies of the group, have a capital at market value of approximately $30,000,000, with from 17,000 to 20,000 stockholders situated throughout the United States.

National Investors Corporation was organized in 1927 and began to function on a practical basis at the end of 1928, with the formation of the first public company, Second National; and thereafter, Third National and Fourth National were formed in 1929.

Mr. MAPES. Are they controlled by any particular banking interests?

Mr. PRESLEY. National Investors Corporation is not controlled by any particular banking interests.

Second and Third, and Fourth National Investors are virtually mutual funds owned by the public and managed by National.

Prior to organizing and becoming president of National and the affiliated companies, I was one of the organizers of the Harvard committee on economic research and was the organizer of the Harvard economic service, and general manager of the Harvard economic bureau for 6 years preceding this work.

The CHAIRMAN. You may proceed now in your own way, Mr. Presley, to tell us what you think about legislation of this sort, and any specific provision that you desire to express yourself on.

Mr. PRESLEY. I understood that I was requested to come here to discuss more specifically that aspect of this proposed legislation which has to do with the reporting policy of corporations which come within the scope of this act.

The bill has two major aspects, in my opinion.

One, the restriction of credit for speculative purposes; and, second, proper and adequate publication of information at reasonable intervals by corporations whose shares are listed on national exchanges.

Of the two aspects of the bill, I regard publicity by corporations as far the more fundamental of the two.

I think it strikes a major blow at one of the most vulnerable spots in our present social and economic system. In my opinion, if the public is kept fully informed currently regarding the earnings, financial status, and other considerations, by which we are able to determine values, that there would be much less inducement or basis for pool operations, for short selling, and for those other practices of organized exchanges which have been cheap, undignified, and pretty costly to the small investor.

Pool operations, in my opinion, are reared largely on very limited information about the stock which is being engineered and manipulated to higher levels.

The only way that pool operators can make a profit, ultimately, is to distribute such stock to uninformed people-certainly not to informed people. A great many of the most important pool operations have been conducted in the stocks of companies which have not been reporting quarterly and which have been giving the public just about as little information as necessary.

With complete publicity by corporations at frequent intervals, I do not think that stock prices would move to such high levels in a period of business prosperity, and for that reason I do not think there would be the same opportunity for short selling since short selling can ordinarily only be profitable in stocks which have reached higher levels than the position of the company justifies.

Mr. MAPES. I did not hear that last statement, Mr. Chairman, the witness was speaking so low.

Mr. PRESLEY. To restate that again: Short selling is most profitable when stocks rise either through public buying or through pool operations above any reasonable value. And inadequate information and excessive credit expansion combined usually provide the basis for untenable price levels in securities.

I very strongly believe that all corporations with shares outstanding in the hands of the public should be required by legislation to report quarterly, and promptly at the end of each quarter.

In the first place, practically all our large companies today are controlled by the public. The boards of directors simply are elected