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to go to the courts because it entered into a contract or undertaking to abide by the rules, it clearly could not be sustained or enforced.

Those are the three broad grounds on which I object to the bill.

There are many technical details that might be taken up but, as I said previously, I do not think that it is necessary to do so. But I do feel that we should all recognize that there is a real need of proper supervision and regulation of exchanges, to the end that speculation and the sale of securities may be honestly conducted, and the dice not loaded. It seems to me that a commission, working on the general lines of the Dickinson report, could go far to see that such speculation and such selling of securities is honestly and fairly conducted.

I have no doubt that, from time to time, as conditions change, it will be found advisable to modify the rules of the exchanges.

May I, then briefly outline what I conceive to be the proper foundation of and chief points that should be embodied in a measure for the regulation of the exchanges?

First. To utilize such constitutional powers as Congress may possess to provide for the Federal licensing of security exchanges for the purpose of regulating the business of such exchanges and of their members.

Second. To establish a Federal administrative authority with broad discretionary power to require the exchanges to adopt and enforce rules and regulations in a form satisfactory to said authority, and of such character as to establish a minimum standard of fair dealings on such exchanges.

Third. In the case of the violation of such fair rules, the “Federal administrative authority" should have power to deprive such exchange of its license or to suspend it, or to fine it, or to require it to change its governing personnel.

Fourth. The fair rules to be adopted by the stock exchange should include provisions governing such matters as pools, margin trading, wash sales, specialists, short selling, retailing methods, listing or withdrawal requirements, reports of corporations whose securities are listed, and so forth. The following are suggestive of rules which should be adopted. The first one of those would be:

(a) Borrowings for marginal purposes by members of the exchange should be regulated in at least two particulars: First, they should be limited, so far as practicable, to loans by banks operating under Federal or State laws, and second, they should be limited in the percentage of loan to the market value of the collateral, by classes of securities, unless in any case a higher percentage is specifically approved.

I think there is a perfect justification for requiring that different classes of securities have different margins. Obviously, Government bonds, high-grade railroad securities, or utility securities do not require the same degree of margining as a security that is highly speculative in its character.

(6) A member of an exchange should be prohibited from using securities left with him by the owner thereof as collateral for loans, unless the loan is for the exclusive benefit of the owner.

That is a very important point, as I see it.

(c) Corporations whose securities are listed should be required to file annually with the exchange a copy of an audit by an independent certified public accountant, presenting such information as the ex

change may prescribe. It should rest with the discretion of the exchange to require quarterly statements, in less complete form than the annual statement and without the requirement of certification by public accountant. The exchange should have the right, however, to call for special statements when will be in the public interest.

The exchanges should have also the right to call for special reports whenever they have reason to believe that there has been a marked change in the condition of the company, and that the public interest requires immediate information as to what the conditions are.

(d) Dissemination by members of an exchange of false or misleading statements with reference to corporations or their securities should be made subject to fine by the governing body of the exchange, dismissal from membership in the exchange, and in case of grave offenses, criminal penalties.

(e) Members of the exchange should be prohibited from being parties in any manner to wash sales that are engaged in for the purpose of increasing the volume of transactions to establish a fictitious market situation.

I do not think that a broad general rule of that kind should be prescribed by law. I think that it should be left to the discretion of a commission. There are undoubtedly many cases where the stabilization of securities will warrant that. I have no doubt that the Government of the United States under authority coupled with the $2,000,000,000 fund for stabilization purposes, may very properly, from time to time, stabilize United States securities. So, I do not think that there should be a broad provision like that enacted into law, but I do think that is a matter that should come under very careful consideration the regulatory authority.

(f) The operations of specialists should be made subject to rigorous rules to avoid abuses, or if necessary prohibited.

But, I do feel that there are certain definite rules which may have from time to time, as experience shows, be changed, so that the regulatory authority should have the right to put out its rules of the exchange to govern such transactions.

(9) Short selling, pools, syndicates and stabilization efforts should be made subject to special rules designed to avoid stimulation of undue speculative activity.

Those are the types of rules that, it seems to me, Mr. Chairman, should come under the supervision of this regulatory authorityrules to be adopted by the exchanges themselves, finally. The Federal authority may be the Federal Trade Commission.

Fifth: The Federal administrative authority" preferably should be a special agency established for the specific purpose of regulating exchanges, I would suggest that it consist of the Secretary of Commerce and at least four other members appointed by the President, including a representative of the Federal Trade Commission, a representative of the Federal Reserve System, and two persons, at least one of whom shall have had practical experience in the business of originating and marketing of securities and the operations of security exchanges; the President should designate the chairman.

Finally, Mr. Chairman, it would seem to me that the greatest power of all that could be exercised, would be the power of public opinion that would come from publicity of these matters.

Half of the trouble that we have had has been due to secrecy. That would be impossible, in my judgment, or greatly retarded, in any event, if there were such a regulatory authority with broad general powers, unrestrictedly specific provisions of law saying that this or that must be done or must not be done.

The CHAIRMAN. Your objections then to the bill, as drawn, would go to the rigidity of it?

Mr. HARRIMAN. To the rigidity of it, very largely. The CHAIRMAN. And inMr. HARRIMAN (interposing). And in including in the terms of the bill provisions which seem to me are not subjects connected with stock exchange regulations per se. I believe that such a bill as I have outlined could be drafted in 4 or 5 pages and could be so simple and so clear that there would be no difficulty in understanding the exact purpose or intent of it.

The CHAIRMAN. We are so much attacked, Mr. Harriman, in our actions, that we have to be rather meticulous in drawing a measure. I will assure you that in bringing into existence a board or an authority like this, I doubt if it should be done in a bill of four or five pages.

We also wish that it could be, but it is pretty hard to do it.
Mr. KENNEY. Mr. Chairman-
The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. You referred to the regulation of retail methods? Would you stop high-pressure salesmanship of stocks and bonds?

Mr. HARRIMAN. Mr. Kenney, I do not know whether that can be done or not. I think

Mr. KENNEY. Would you stop constant telephone calls by people wbo have stocks to sell; would you stop the incessant calling by representatives of houses at the homes and offices of people to get them to purchase stock?

Mr. HARRIMAN. Mr. Chairman, I should think it would be unwise to attempt anything of that nature as a hard and fast provision of the bill, but I should think it would come well within the scope of the rules of the exchange.

Mr. KENNEY. Do you regard the business of a broker as a professjon, or in the nature of a profession?

Mr. HARRIMAN. I think that a dealer is dealing as a principal with the man on the other side. I think that a broker is largely dealing in a fiduciary capacity.

Mr. KENNEY. Most of them deal in that double capacity, do they not?

Mr. HARRIMAN. Probably a great many of them do.

Mr. KENNEY. Would any great harm come to the banks and brokers, if we should consider the question of preventing the solicitation of the purchase of stocks and bonds?

Mr. HARRIMAN. I think if you went so far as that, Mr. Kenney, it would probably be harmful. I can conceive of circumstances where it would be very desirable for brokers to say, “I think there is going to be a movement and for your own protection, you should either sell or buy.”

Mr. KENNEY. That is all very well to say to a regular customer, but how about the propriety in the case of one whose account the broker does not have. A lawyer may not solicit business.

Mr. HARRIMAN. I beg your pardon.

Mr. KENNEY. A lawyer may not solicit business, is not that so?

Mr. HARRIMAN. Why, the ethics of the profession very properly prohibits that, but it is done.

Mr. KENNEY. Should not the ethics of banking and brokerage be just as high?

Mr. HARRIMAN. Yes, they should.

The CHAIRMAN. We are very much obliged to you, Mr. Harriman. You have made some constructive suggestions, and we appreciate it very much.

STATEMENT OF HON. JOHN FITZGERALD, OF BOSTON, MASS.

The CHAIRMAN. Mr. Fitzgerald, we will be glad to hear you a little while. We are running overtime and we want to hear you.

Mr. FITZGERALD. Mr. Chairman and gentlemen: I thank the committee for this opportunity to appear before them and say something on this legislation.

I came into Washington last night to see my good friend and Representative, John McCormack. I had no particular intention of appearing before the committee, but when I found out that the hearings were going on, I thought it my duty to come down here and express some of the thoughts that I have in mind, after considerable contact with stock exchanges, and stock-exchange houses, for 20 years or more.

I think it very important that this legislation be considered most carefully, because I know of nothing in the lives of the people of the country today that would have a greater effect upon the rehabilitation of the resources of the country than unwise legislation in the stock exchanges.

I have noticed for a great many years, whether traveling on the train, or in a hotel, that invariably people turn to the stock-exchange reports, stock-exchange pages of the newspapers, and, of course, you men here know, as a result of the debacle of 1929, almost everyone in the land was affected and millions of people were on the borders of destitution, because of the fact that the prices of railroad stocks went from 100 percent in 1929, according to the figures of the New York Stock Exchange, to 8 percent, and inasmuch as a large portion of those railroad properties were real estate it is almost unbelievable to think that within 3 years that the railroad properties in the United States as shown in the New York Stock Exchange figures could go from 100 down to 8, and I think the average of the leading stocks, anyway, on the New York Stock Exchange went from 100 down to 11, and there is not any wonder, when you consider those figures, of the impoverishment of the people of the country and practically every section of it.

I know some very good men, 3 or 4 or 5 years ago, the said ther was not any question about the worth of New York Central, that it would go to $300 a share and it was worth it. I remember men of the highest importance in the country, and supposed to have the best information, making that statement, and yet that stock went down to 18 or so, or less, 15 and 12, and I was just looking in the papers, and it is selling for 38 now, and some people who had the means to carry that through are hoping that it will go to 50 or 75, or 100, and they are hoping that some things will happen in the country to make the

prices that went down to 10 go to 30. They may be 30 now. I do not know the exact figures. And they are hoping that perhaps they will go to 50, and those figures will sell for around 50 percent of what they sold for in 1929, which I think would be a fair average of the real value of most of the stocks listed on the New York Stock Exchange.

Now, to do anything radical just now, as I told McCormack a while ago, that legislation that has been proposed here would be almost as radical as the prohibition law, where, as you know, they deliberately voted to poison liquor to kill men, and how drastic legislation that is now we can see; but that debate happened in the House of Representatives, you know, and within the last 3 or 4 or 5 years.

Therefore, I think every encouragement ought to be given to people that have clung onto their stocks and their properties, rather than discouraging them, as a great many people were, to my personal knowledge, 3 or 4 weeks ago when this bill was brought out.

I am particularly concerned, I want to say, particularly concerned about the men and women employed in the brokerage houses, particularly in Boston, where I am very familiar with most of them, and their lives, and they were crucified during the last two or three years in reductions of force and reductions of their pay. It is almost unbelievable. A representative of one of the biggest houses in the country told me in New York yesterday, if this bill became a law, it would result in a cut of 66 percent of their force, which, in view of the fact that we are hoping, with borrowed money, so that the debt of the country is now approaching $32,000,000,000, to get out of the atmosphere of despair this spring.

It would be, in my opinion, very dangerous to do anything in regard to this stock market legislation that affects almost every home in the land, that would make the people fearful and release them

from the courage which the great administration of Franklin D. Roosevelt has given the people of the country.

I was a candidate for the United States Senate against Henry Cabot Lodge in 1916 and one of the planks in my platform was the New York Stock Exchange and its compulsory control by the people of the United States, and I say that I cannot believe that, or that it is almost impossible to believe, that supposedly the most honorable brains in the United States would continue to operate that exchange without asking for the incorporation under the laws of the United States.

I think that that is an indictment against their fairness, and it cannot be said to be an unfair thing, and of course it was not done. I talked with Mr. Untermeyer a great many years ago.

He and I were very good friends, and I agreed with him that the New York Stock Exchange should be incorporated, and it was not done, and it is going to be done now.

I agree with many of the things Mr. Harriman has said. I think that the best principles ought to be laid down by the Congress of the United States and the control of, the direction of, the rules and regulations, carried out by a special board like the Interstate Commerce Commission, or the Federal Trade Commission, or a commission to be organized, so that the people would get the proper protection, and that there would be a free flow, a free flow of money in the stock exchanges of the country.

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