We recommend that independent audits should be required annually, but company audits only quarterly.

We recommend that all exchanges should require from their members semiannual statements of their actual position including their working capital in relation to the total commitments.

We recommend that in such a statement there should be included a statement from a partner as to any outside loans he may have on securities.

We recommend that the strongest provision shall be included against all wash sales or matched orders.

We recommend that in all transactions there shall be the fullest disclosure in every case as to whether a dealer is acting as principal or agent, and I would again emphasize that, in every case as to whether a dealer is acting as a principal or a broker.

We recommend that there should be provision against the hypothecation of more securities held for the account of a customer than is fair and reasonable in view of the indebtedness of the customer.

We recommend a provision against hypothecation of any securities for the account of a customer under circumstances that will permit the comingling of the securities of one customer with those of any other person without the written consent of such customer.

As to the segregation clauses in this bill you have already heard our definite ideas.

We recommend that at this time there should be no provision definitely requiring segregation.

We agree with the attitude of the Dickinson Committee, in general and particularly on this point.

Final judgment should be delayed until there is much more knowledge than today exists.

Mr. COLE. Mr. Chairman, may I ask the witness a question?
The CHAIRMAN. Mr. Cole.

Mr. COLE. Last spring we passed a securities act, placing the administration thereof in the hands of the Federal Trade Commission. Are you familiar with their administration of that act?

Mr. KINNICUTT. Fairly.

Mr. COLE. Are you satisfied with the way they are administering that act?

Mr. KINNICUTT. I think that in many cases, the restrictions or penalty clauses are such against errors, no so much of commission, as of omission, that it makes it very difficult to operate.

Mr. COLE. What I am getting at is this. My understanding is that the Federal Trade Commission in executing the securities act has brought into employment very competent people from all over the country. I was wondering whether the experience they have had in the operation of that act qualifies them, in your judgment, to take legislation of this character and administer it.

Mr. KINNICUTT. Speaking personally, of course, I cannot criticize the publicity required by the Securities Act at all, because I think the greater the publicity, the better. But so far as operation goes, expressing a personal opinion, I think that it would be far better to create a separate commission to deal with securities primarily.

Mr. LEA. Well, is not that a part of the main problem of guarantees of integrity and stability; is not the stock exchange and the regulation of securities, very closely associated in this problem?

Mr. KINNICUTT. Well, of course, we look upon the securities business as just as much of a specialist industry as the motor vehicle business, or the steel business, or any manufacturing.

Mr. LEA. And probably that is true, from the standpoint of a man engaged in the business, but from the standpoint of the people in the country, who are represented here in Congress, where we want to assure all of the integrity in the transactions that we can, we want the exchanges of the country to enjoy the confidence of the people of the country.

The fact that the stock is listed on an exchange should give it an assurance, in the mind of investors. Now, is not that so closely related, that is, the question of the issuance of securities so closely related to that problem that you cannot properly separate the two? Would it not be a rather strange thing that two features so closely allied should be disassociated in Government control and regulation? Mr. KINNICUTT. Well, I should not think so. You speak, of course, of the purposes of this bill which is to give confidence to the public as well as protection to the public by the fullest publicity and the elimination of bad practices.

Now, it seems to me that you will get exactly that same competency in a commission, such as we recommend; but I think they would function more efficiently, because they would concentrate their energy and their knowledge upon specific questions of dealing in securities, and the exchanges and regulation of those exchanges.

Mr. LEA. Yes; but the exchange is just one step of the journey from the issue of the security until it is purchased by the customer. There is no doubt about that, is there?

Mr. KINNICUTT. Yes.

Mr. LEA. No; why should not the commission that deals with the one problem also have jurisdiction over the other, so they can have a full perspective of the situation and be in a better position to have a proper understanding of the relations of these various steps that are involved in the security from the time it issues until it reaches the hands of the customer or purchaser?

Mr. KINNICUTT. Well, are not the two steps there, Mr. Lea, different? One is the permission to issue a security at all, which comes under the securities act, but having passed that juncture then it becomes a security that will pass on to the public and will be traded in on the markets, or will be on the exchanges.

The Federal Trade Commission passes upon the soundness of the security and then it is turned loose as a public security with a market, and it seems to me there are rather differences, different functions. Mr. LEA. Something may occur in either case that vitally affects the ultimate purchaser.

Mr. MERRITT. May I make a suggestion?

Mr. LEA. Yes, Mr. Merritt.

Mr. MERRITT. Of course, there will be many more securities issued under the securities act or law than will ever come on the exchange at all.

Mr. LEA. That is true, but nevertheless that does not mitigate at all against the argument that the exchange controls and is a necessary step in the regulation the idea of giving assurance to the ultimate purchaser of the security.

I am just speaking about what seems to me to be the inadvisability of separating the regulatory powers of the Federal Government in the two cases, so closely connected so far as results are concerned.

Mr. KINNICUTT. Of course, what I would like to see would be the operations of the securities act under the supervision of the Federal Securities Commission, rather than under the Federal Trade Commission.

The CHAIRMAN. Well, suppose that the securities administration is going to be left where it is and suppose we are not going to form a new commission in the matter. Then, where would you want the administration of this act placed?

Mr. KINNICUTT. I would still want it under a securities commission.
The CHAIRMAN. I say, if we do not create a new commission.
Mr. KINNICUTT. I beg your pardon.

The CHAIRMAN. I say, suppose that the securities act is going to remain under the administration of the Federal Trade Commission and we are not going to have a new commission, then where do you think the administration of this act should be placed?

Mr. KINNICUTT. Well, I should think, obviously, then it would have to come under the Federal Trade Commission, because they already have one function.

The CHAIRMAN. I think we might just as well go along with that theory.

Mr. COLE. Mr. Chairman, one other question of the witness.
The CHAIRMAN. Mr. Cole.

Mr. COLE. I understood you in the early part of your statement, this morning, to say that you favored the Roper report.

Mr. KINNICUTT. Yes.

Mr. COLE. The commission you advocate would have representation from the stock exchange?

Mr. KINNICUTT. Yes.

Mr. COLE. The Roper report on page 7 recommends very definitely against that at bottom of page 7, it says that the holder of any position connected with such agency be required to disassociate himself from all business connections engaged directly or indirectly with market transactions, just as the Secretary of the Treasury is required to disassociate himself from any private business.

Then, you approve of the Roper report, or approve of the recommendations of Mr. Whitney?

Mr. KINNICUTT. Well, I do not think in our recommendations we made any recommendation except only that there should be a commission, made up of men who served in the securities business. Mr. COLE. Oh, yes.

Mr. KINNICUTT. Does that not conform to the Roper report? Mr. COLE. I understood your recommendation to be that there be a member from the stock exchange.

Mr. KINNICUTT. No; I did not say that. Personally I think it might be wise, but the primary thing is that he should have had practical experience in the securities business.

Mr. BULWINKLE. Mr. Chairman.

The CHAIRMAN. Are you through, Mr. Cole?

Mr. COLE. Yes.

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Mr. Chairman, practically every person who is opposed to this bill, representing the various exchanges, have come before this committee and have admitted that there were bad practices in each exchange and, I think that that is practically so, without an exception.

What are those bad practices?

Mr. KINNICUTT. Bad pools, washed sales, of course, fraud, which always happens in every industry; manipulations and, of course, false statements or misleading statements.

Mr. BULWINKLE. Now, that being so and that condition having existed for some time, and assuming, and knowing that the greater part of the members of each of these exchanges are honest men, why have you not done something to remedy that condition yourselves? Mr. KINNICUTT. I think there has been a great deal done and I do not mean since this hearing started, but I could go back a good many years, and every year we feel it, because we are constantly coming under tighter and tighter rules and regulations from the exchanges of which we are members. I think there is a definite progression being made every year.

Mr. BULWINKLE. But, these five bad practices that you have mentioned to me just now have been existing all of the time, have they not? Pools, manipulations, and so forth.

Mr. KINNICUTT. Yes.

Mr. BULWINKLE. And, the others. Well, now, what have you done to remedy those?

Mr. KINNICUTT. I would have to take all of the different regulations in the exchanges in detail to answer that question.

Mr. BULWINKLE. Well, notwithstanding those regulations, you have passed from the statement which you have made to the committee there, you have not stopped them, have you?

Mr. KINNICUTT. On the other hand, my recommendations that such a commission should have in it, in the first instance, supervisory power to make their own recommendations, in the event the exchanges have not done what we all think they ought to do, and over and above that, if the suggestions of the commission are not put into effect by the exchanges, and the evil continues, our recommendation is, back of all of that, that such a commission should have mandatory powers.

Mr. BULWINKLE. Does it not seem to you, with the statement that each of you gentlemen have made, that you are asking the Congress in effect to protect you from yourselves?

Mr. KINNICUTT. I think we want protection just as much as the protection we want to give.

Mr. BULWINKLE. Protect you from your own membership and from your own bad practices.

Mr. KINNICUTT. Largely, is that not a protection against dishonesty or temptations?

Mr. BULWINKLE. Well, your States have various statutes covering, largely, dishonesty, do they not, and fraud?

Mr. KINNICUTT. Well, I think myself that legislation against temptation is almost an impossible feat. I think we are a little late on that. It should, I think, have begun in the Garden of Eden, perhaps.

Mr. BULWINKLE. Yes; I think so, too, but I am trying to find out, sitting here in the committee, not knowing anything about stock exchanges, but with every one of you gentlemen admitting that there are bad practices which have continued, and still continue, and that you want the help of Congress to eliminate these bad practices. That is all, sir.

Mr. PETTENGILL. Mr. Chairman

The CHAIRMAN. Mr. Pettengill, and then we must close with this witness.

Mr. PETTENGILL. You made one statement, Mr. Kinnicutt, inadvertently, I am sure, that I do not believe you want to stand. You said that the Federal Securities Commission passed upon the soundness of the securities.

Mr. KINNICUTT. I want to correct myself there.

Mr. PETTENGILL. They do not do that?

Mr. KINNICUTT. They make no observations, if that is a better phrase.

Mr. PETTENGILL. It is purely a matter that these securities are honestly represented to the public and not that the commission makes any recommendations as to their soundness.

The CHAIRMAN. We are very much obliged to you, Mr. Kinnicutt. STATEMENT OF CLAUDE FOLLETTE, REPRESENTING THE COMMITTEE OF PUT AND CALL BROKERS AND DEALERS IN THE CITY OF NEW YORK, 120 BROADWAY, NEW YORK, N.Y. Mr. FOLLETTE. My name is Claude Follette. I represent the committee of put and call brokers and dealers in the city of New York. The CHAIRMAN. We will have to ask you to speak a little louder. Mr. FOLLETTE. In setting forth the economic importance of puts and calls in the securities markets, we wish to emphasize three major elements: First, their value for insurance against loss; second, their stabilizing quality; third, the opportunity afforded the operator of moderate means to protect a position in the market at minimum. risk.

In appendix no. 1 will be found specimens of standard forms for put and call contracts employed by brokers and dealers in these contracts.

We wish to make it clear that this presentation refers entirely to privileges-puts and calls-sold on a competitive basis at a fixed premium and publicly offered, as distinguished from so-called "corporation or company options" frequently privately offered in large blocks for manipulative purposes.

Possibly it would be in the interest of clarity if a brief historical summary of puts and calls were presented to the committee. These contracts have been developed and sanctioned by business practice over a period of two to three centuries. Undoubtedly, they had their origin in transactions involving the merchandising of commodities, and in this respect are closely akin to the future contract system now in vogue and such an indispensible part of the marketing of all great staple commodities. As a matter of fact, the future contract system was devised entirely for the purpose of insurance against injurious price changes. The put and call system is in the same category, for