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

by the public to represent their interests and the officers of such a corporation are simply paid employees of the stockholders.

I believe that the individual with 100 shares has just as much right to complete information as the investor of substantial means owning 10,000 shares of stock in that company. They are both partners in the business, and the investment of the 100-share investor may be as large, in relation to his financial position, as the 10,000share investment in the case of the wealthy individual.

From the standpoint of the position of the company itself, I cannot believe that complete reporting on a quarterly basis would be prejudicial to the interests of that company. Any concern worthy of being regarded as an important competitor in the business is pretty well informed at all times about the activity of all other important companies in that industry, and when a company fails to provide current information of its operations and financial status, that company is only misleading the stockholders; certainly not their competitors.

That has been my experience in talking with the active heads of a good many hundred industrial corporations in the past 6 or 7 years in connection with the investment of the capital of our companies.

I have found that a large number of the heads of these corporations have been very liberal and very generous with their information and very sympathetic in respect to the necessity of information for providing a basis for judgment concerning the value of their securities. I have likewise found that where corporations have been unwilling to afford us reasonable information, either their companies have been on the toboggan and they have not cared to disclose it; they have been in price difficulties, with their competitors, and have not cared to disclose it; they have been pursuing practices which they have not cared to disclose; or they have been sponsored by certain groups which have for a good many decades pursued a public-be-damned tell-them-nothing policy.

I think that corporations should report their sales as well as their net earnings on a quarterly basis, thereby enabling the stockholders, or the prospective stockholders, to determine the margin of profit in that business.

I think that on an annual basis that companies should report sales and net earnings by major divisions of their business in order to determine the margin of profits in their major lines. I think that quarterly reports also should include net earnings classified by these major divisions of the business.

I do not think that corporations should include in their operating earnings capital profits arising out of the sale of securities or other property. Such profits should be reported separately. They should report separately income from marketable securities; they should report separately income from investments in subsidiaries and associated companies. If they do not report these various sources of earnings, it is very difficult, if not impossible, in a great many companies, to know where their earnings are coming from.

At the end of each year, in their annual report, these companies should report in full their holdings of marketable securities.

I say this, because we have discovered from time to time that companies have been including in their marketable securities their

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own stock, which they have acquired in the open market or otherwise. They have been including securities which are not marketable, and should not come under this caption at all. Most investors regard marketable securities as the equivalent of cash.

I think that all companies should be required to have their annual reports certified by an accredited public accountant. I think that is particularly important. There are a number of concerns today which do not have their reports audited by outside, disinterested public organizations.

I do not think that the investor or the prospective investor in a company wants anything that is unreasonable in the way of reporting, because anything prejudicial to the interests of the company would be prejudicial to the interests of himself as the stockholder. I think that what he wants simply is an honest and true statement of the earnings and the sales and other associated information of the company at quarterly intervals. In other words, he wants a trustworthy historical record periodically of that company. He does not want to know future plans, new developments, contemplated acquisitions which might prejudice the interests of that company. And I do not think that anyone expects such information to be reported to the stockholders.

A great many concerns today are not reporting sales, largely because they do not want to show their margin of profit. They fear that it will invite competition and reduce prices, and that is just about the best reason in the world why they should report their sales and net profits.

I could go on indefinitely on reporting policies of corporations. I would just like to say in a word, that the small investor is entitled to just as much information as the large investor on any basis of reasoning. The company by giving the stockholders and the public a trustworthy record of progress is not prejudicing its interests, and that if such information is made available, I think it will place a curb in certain directions on excessive credit expansion; will operate to discourage pools; will make short selling less profitable.

I regard pools and short selling as effects rather than as causes. Insofar as margin requirements are concerned any figure, any percentage that you might name is naturally arbitrary and it is subject to controversy, whether 40 percent of the loan value, or 70 percent. Insofar as the investing public is concerned, it has been pretty well demonstrated in this depression, as in all other depressions of which we have a record, that the investor is not capable, either by his training or his contacts, to protect himself, and that very heavy losses and very substantial percentages of investors, even intelligent investors and informed investors, operating on borrowed money in 1929 were wiped wiped out in subsequent years.

I personally believe that a loan value of 40 percent of the current market value of common stocks is altogether ample if this bill is intended to protect the individual who has not been able to protect himself.

In respect to collateral loans outstanding, a substantial part of which were made at much higher price levels than now prevail, I think that individuals under such circumstances should be dealt with leniently. I think that a loan value of 40 percent of the market value of securities might impose quite a hardship on individuals,

who contracted this debt at substantially higher levels than now obtain, and that those individuals should be given an opportunity, with the cooperation of the banks, which in the main hold such collateral loans, to work out their situation over a fairly long period of time, similar to the protection which is being provided for the farmer who contracted debts at much higher price levels.

Insofar as new loans are concerned, I think that a 40 percent loan value is altogether adequate.

Mr. MARLAND. Mr. Chairman, I would like to ask a question.
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. Have you any reason in connection with these quarterly reports that you are suggesting, do you see any reason why those reports should not show the number of shares owned by the officers and directors of the corporation at the end of each quarter? Mr. PRESLEY. Not at all.

Mr. MARLAND. Would not that be very valuable information to the public, to show whether the men in charge of their corporation are increasing or decreasing their holdings?

Mr. PRESLEY. It might. Such information at certain junctures might be quite significant.

Mr. MARLAND. Are you familiar with the practice of short selling by directors in some corporations, against the box, as it is called? Mr. PRESLEY. In a very general way.

Mr. MARLAND. You know that is done, do you not?

Mr. PRESLEY. I know it exists.

Mr. MARLAND. The directors knowing that a forthcoming corporation report will be unfavorable will sell short against securities they actually possess.

Mr. PRESLEY. There is no question about the existence of the practice.

Mr. MARLAND. A sworn statement of their ownership of shares at the end of each quarter would stop that practice, would it not? Mr. PRESLEY. No; not necessarily.

Mr. MARLAND. How could you stop it?

Mr. PRESLEY. By legislating short selling out of existence, and I think it should be legislated out of existence, for the simple reason, sir, if I may give you my reasons, that I do not think that the proponents of short selling can demonstrate that it is a stabilizing influence on the market; certainly when the market is on the down side in a period of declining business, it intensifies the decline of stock prices. At the same time I do not think that the opponents of short selling have a very good case in establishing that short selling is a significant matter. It is simply cheap, undignified, and of no importance, in my opinion.

Mr. MARLAND. You are very doubtful of whether short selling is of value?

Mr. PRESLEY. I am doubtful.

Mr. MARLAND. Very doubtful about the value of short selling.

Mr. PRESLEY. I am extremely doubtful about the value of short selling as a stabilizing influence; yes, sir.

The CHAIRMAN. Any further questions?

Mr. CROSSER. You think it should be stopped?

Mr. PRESLEY. I think it should be legislated out of existence.
Mr. LEA. Mr. Chairman.