not approach in difficulty the questions presented by this bill for final decision and action by the Federal Trade Commission.

As instances of governmental supervision which have not been effective it is noted that supervision did not stop the opening of unnecessary and unsound banks, or insurance companies. There doesn't seem to have been any question about the capacity of the men doing the supervisory work, but the difficulties of effecting adequate supervision are tremendous. If the supervising agency limits the number of banks in a period of expansion it is accused of favoring a monopoly. If it hasn't limited the number of banks it will find itself accused of allowing too many banks when the next period of depression rolls around. It is obviously much easier to criticize the supervisory organization after the event but it is impossible to insure sound supervision at the time the supervisory action has to be taken.

If authority is to be given to the Federal Trade Commission, must there not be a clear definition of its responsibility so that there may not later be a question as to whether the exchange authorities were responsible or whether the Federal Trade Commission was responsible? It looks like too much management to have two such organizations both doing the same job, and without any separation of duties or responsibilities.

APPENDIX C-ADDITIONAL NOTES AND QUERIES ON SPECIFIC SECTIONS

Section 3, paragraphs 11 and 12, have very broad definitions for the words "buy" and "sell", "buy" including an attempt to acquire an offer to sell, and "sell" including an attempt to secure an offer to buy. This makes a mere conversation have the same legal effect as the action resulting from this conversation.

Section 6.-The margin requirements in section 6 are less strict in connection with new securities which are entirely unseasoned, for obviously they cannot have been in the market for 3 years. After a new security has been listed for 1 day, customers would be free to borrow 80 percent on it. Another security of far better character, outstanding during a 3-year period, would quite likely have a much lower loan value. Under today's market conditions a newly issued, highly speculative security could be borrowed upon more liberally on the day after its listing than a seasoned security of a well established business.

Section 6 (a).-Has any study been made of the comparative advantages of owning listed stocks or securities as compared with unlisted stocks or securities over recent years? Why should one class be singled out for regulation in a different way than the other?

Section 6 (b).-Under the powers proposed for the Federal Trade Commission, it apparently would be able to fix the rules for liquidation of margin accounts. Under this power could it go so far as to freeze security loans? Could it practically prevent a foreclosure? There was a social argument for delaying foreclosures on homes. Might not this be used as a precedent for preventing foreclosure on collateral loans?

Section 6 (d).-With regard to the making of rules by the Federal Trade Commission in connection with selling out a customer's securities in order to pay off a collateral loan, suppose the broker demanded one procedure for his protection and the Federal Trade Commission would not allow him to proceed in accordance with his request. Suppose, too, that as a result of this Federal Trade Commission attitude or ruling the broker lost money and the customer lost money also.

Sections 6-7.-This legislation would allow the Federal Trade Commission to have jurisdiction and control over loans on securities. On account of the present powers of the Federal Reserve Board it would not be at all surprising to find the Federal Trade Commission trying to force a deflation at the time the Federal Reserve Board was trying to force an inflation. Certainly the responsibility ought to be fixed.

Section 7 (a).-This section would forbid borrowing on securities except from a member of the Federal Reserve System. It might be possible to borrow from foreign sources or even from private sources in this country at a time when the Federal Reserve member banks which might be approached would decline to make a loan. Time might not permit going to other banks which might be perfectly willing to make the loan. Would not an exception be in order in the event a loan were refused by one or two members of the Federal Reserve System?

Section 7 (b).-Has any work been done to show that the requirements under section 7 (b) are reasonable, or whether some other percentage might not be thoroughly safe?

45381-34-32

Section 7 (c).-Does section 7 (c) prevent a broker from employing his capital in anything except Government securities?

Section 8 (a) (5).—This prohibits the circulation of false or misleading information in the belief that the circulation may induce the purchase or sale of a security. Careful houses of issue have proceeded on the theory that they were not liable if they did not overstate the facts. They have taken unusual care to avoid unfair favorable inferences from prospectuses. If an additional issue were to be sold now by or through a banking firm it would no longer be any protecton to follow the previous sound practice, for an understatement would be as misleading as an overstatement. If a company now states its inventory as of the end of the year at cost or market, whichever is lower, that is the conservative and accepted practice. Under the bill it would be necessary to state also the replacement cost at market as of the end of the year. This might well lead to the inference that the "paper profit" in inventory at the end of the year would inure to the company's benefit during the coming year. This would be as likely to be false as to be true. Section 8 (a) (4)–(5).—This whole question of what are misleading statements is a very involved one and leads to a very dangerous situation. From an ethical point of view I assume it is as wrong for the corporation officer to understate earnings as to overstate them. It is certainly true that a material understatement may do as much harm as a similar overstatement; yet every honest corporation officer recognizes that both balance sheets and earnings statements are not statements of fact but are statements of opinion. The honest officer's desire is to err, if at all, on the conservative side. This has been the custom generally accepted for many years and has been generally sanctioned. From the social point of view it is probably the soundest attitude. It tends to avoid stirring up unusual enthusiasm on account of unusual earnings in a short period. It is quite a violent proceeding to rule that an officer carrying out his conscientious duty as he sees it shall be held liable to the extent provided by the statute, even when he has no possible interest and takes no advantage of any stockholders through his action.

Section 8 (a) (5).—The valuation of tangible property is difficult and inconclusive at best. Almost nothing conclusive can be set as its value; yet our accounting systems and our custom of reporting corporate affairs are based upon the publication of balance sheets. The value of the property carried on the balance sheet would be open to question even if the amount carried in the balance sheet represented purchase price in currency less reasonable and proper depreciation. Such a figure might be thoroughly unrelated to liquidating value or present market value, or present replacement value, but added difficulties would be established in setting up any figure if the property were acquired for stock. In the same way no valuation of patents could be made; if they were valued at one dollar there would be the air of gross under-valuation, and if any other figure were used, there I would be the risk of overstatement.

SECTION 8 (a) (5).—Would not the bill go so far as to prevent an honest man from presenting his views as to adverse conditions in a company or its management, even to its annual stockholders' meeting? A frank, open statement at this place might make the person liable to suit. Unless he could feel sure of effecting the reforms he desired, he would be slow to speak and the benefit of his criticism would not be secured. It is best in such cases to bring all criticism into the open, but if the critic were to be required to face the liability under this legislation he would be slow to criticize.

SECTION 8 (a) (5).-Is the commission to be privileged and free of liability in the information it gives out, or in its opinions, which undoubtedly will affect security values?

SECTION 8 (a) (5).—Would not this provision result in the destruction of existing financial and credit reporting and advisory agencies? Those advisory services which are doing a good job would be frightened by their liability, leaving in existence only those which are irresponsible. Would not the same restriction apply even to credit agencies, such as Dun and Bradstreet and the National Credit Bureau?

SECTION 8 (a) (7).—On the matter of the pegging of prices, it seems to make some difference who does the pegging. Congress has just been satisfied to allow two billion dollars for a stabilization fund for gold and foreign exchange. The people's money may be lost in the transaction but it wasn't a vice when the Government set up the fund for this purpose. The Government stabilizes the bond market in preparation for its large issues. Bankers who do exactly the same thing in connection with their issues are condemned for doing it. If the practice is right in one case what makes it immoral in the other?

SECTION 8 (a) (9).-Would not this provision effectively destroy property rights in existing options which were given for proper consideration and without reference to any manipulation of the market price of any security?

It would prevent trading in any securities with warrants attached and would also effectively prevent a corporation from issuing rights to buy additional capital stock.

SECTION 10.-Some statements have been made to the effect that the purposes of segregation, section 10, would be met by the British method of splitting commissions. That is exactly the method we have in effect now. The banking firms which are also members of the exchanges but have no "floor member" now give up part of their commissions to the floor brokers.

One of the theories back of the segregation provision is that no man can serve two masters. It will be readily admitted that a man may not serve two masters either to their satisfaction or his own, but there is scarcely a transaction in life in which counter interests do not arise. Even in the ordinary affairs of home life the desires of some individual members are not met and the desires of other individual members are met. The parent making the decision has to view the interests of the family as governing his action; he cannot avoid a charge of selfinterest or of misjudgment. The whole competitive system is based upon the idea that the seller who best serves the buyer's interest will himself profit by doing so.

SECTION 11 (a) and (b).—The bill appears to preclude the possibility of any "when-issued" market in new securities. Further, it prevents the purchase of new issues (which would be unlisted for at least 30 days) for other than cash by customers.

SECTION 11.-This section establishes new difficulties in the marketing of new securities probably not contemplated by the authors of the bill. Under the Securities Act the new issue must be registered with the Trade Commission at least 20 days before it is sold. Under the present bill in order to have a security listed on any exchange it must be passed upon by the exchange authorities and 30 days after that the final decision is made by the Trade Commission. Furthermore, as noted above, the bill appears to preclude a "when-issued" market. any case, it seems likely that a period of weeks or months might have to elapse before a new security could be listed and used for collateral purposes.

In

The above is based on the assumption that section 6 (a) as presently drafted means that a bank or broker cannot lend on a security not listed on an exchange. Newspaper reports are that the bill will be redrafted so that banks can lend on unlisted security. If this happens a new issue would have higher collateral value than an issue which is listed and seasoned on a stock exchange.

In the case of all of those old issues where the 80 percent margin provision is the lower (true at present of practically all established stocks) the listed security is good as collateral for a loan of only 40 percent of its market value. In the case of a new issue which is hovering around the issue price the 80 percent provision would apply, and the new issue could be used as collateral for 80 percent of the lowest price at which it sold in 3 years, which would be approximately the issue price.

Section 12 (2). The cost of compiling quarterly audited reports is out of all proportion to the benefits secured. In the larger companies the audited report would come out so late that it would be only history and would have no effect upon current market quotations. It is doubted that there are auditors available in the country for carrying out the provision of the bill. The accountants should be better able to testify on this point.

Section 13. The unusual character of the bill is evident in section 13 wherein the requirement exists that companies sending out proxies must furnish the Federal Trade Commission and each stockholder the names and addresses of the persons from whom proxies are being solicited. The cost of these stockholders lists would be material, and no possible reason is seen for furnishing them, nor would any probable use be made of them if they were sent. If the company's own list is required to be made available is not that sufficient?

Section 13 provides for information being given to the Federal Trade Commission about proxies and the interests of the persons requesting proxies. It should be pointed out that in many corporations where the stock is widely held it is difficult to secure proxies sufficient to hold an annual meeting. If the Commission by its regulations makes it difficult to the point of impossibility to secure proxies the result will be that no meetings can be held. Under the existing law if there is no meeting of stockholders to elect directors the present directors continue in power. This point is cited because in the attempt to cover certain evils it seems

quite possible that the bill is creating a different kind of evil. Certainly there is nothing to be gained by having management continue in power by default.

Section 17 (d). This section gives the right to recover contribution from others also responsible for a misleading statement, but this would only tend toward a multiplication of law suits and would not benefit anyone in the great majority of cases. No reason is seen why all parties responsible in one jurisdiction should not be sued in one suit.

THE WAY TO PERFORM A LEGISLATIVE OPERATION

By President Woodrow Wilson

And I might add this, if you please; not to go at them haphazard but to go steadily through the things that have become obvious excrescences and cut them off. That's a very definite program, and then I might add, go into an absolutely thorough investigation of the way it may best be conducted, find out just when, in dissecting, the scalpel can be introduced and divorce these artificial unions, because I know that you will not be cutting living tissues.

I hear a great deal of talk about conservatism and radicalism. Now, what makes a man shiver when he hears a statement of the facts concerning it? He feels it is cold-blooded and indiscreet to state the facts and yet he really is inclined, I must say, to think there is something in it. He says to himself, this man must be a radical because if he sees the thing that way, what in God's name is he going to do, because, if he is going to go to work thoroughly to change those facts there is no telling where he will stop. Now, it is just there that he ought to stop being radical. If the prudent surgeon wants to save the patient he has got absolutely to know the naked anatomy of the man. He has got to know what is under his skin and in his intestines; he has got to be absolutely indecent in his scrutiny. And then he has got to say to himself: "I know where the seat of life is; I know where my knife should penetrate; I dare not go too far for fear it should touch the fountain of vitality. In order to save this beautiful thing I must cut deep but I must cut carefully; I must cut out the things that are decayed and rotten; the things that manifest disease and I must leave every honest, wholesome tissue absolutely untouched." A capital operation may be radical but it is also conservative. There cannot be life without the cutting out of the dead and decayed tissue.

The CHAIRMAN. Mr. John Dickinson, chairman of the so-called "Roper Committee", will be the witness on Tuesday.

I have here a resolution adopted by the Board of Directors of St. Louis Chamber of Commerce, at a meeting held February 21, 1934, a memorandum from R. L. Day & Co., Dick & Merle-Smith, R. W. Pressprich & Co., Rutter & Co., Salomon Bros. & Hutzler Wood, Struthers & Co., a memorandum from Mr. Waldo S. Kendall, a letter from Mr. George W. H. Allen, Owera Point, Cazenovia, N.Y., addressed to Mr. Culkin, and a letter and memorandum from Mr. Standley S. Wohl, executive assistant in charge of securities, North Carolina Utilities Commission, Raleigh, which I will insert in the record.

(The documents referred to are as follows:)

The following resolution was unanimously adopted by the board of directors of St. Louis Chamber of Commerce, at a meeting held February 21, 1934.

The St. Louis Chamber of Commerce is opposed to the Fletcher-Rayburn bill, which contemplates the passage of the so-called "National Securities Exchange Act of 1934", because not only does it regulate stock transactions but this bill goes so far as to affect business in general adversely, and makes orderly recovery impossible without further governmental interference and financing. We have herein eliminated from consideration those sections which concern primarily the stockbroker or dealer, and have directed our attention only to those sections with which business and industry generally are concerned.

(1) We do not believe at this time business should have such restrictive legislation thrust upon it.

(2) We do not believe it to be prudent or constructive to require banking institutions to exact a 60 percent margin or that members of licensed exchanges

not be allowed to lien or trade in unlisted securities; thereby destroying the marketability of a great number of sound securities, thus causing irreparable harm to investors and corporations, further liquidation and deflation, together with restriction and curtailment of credit at a time when credit should be expanded. One inevitable result of the prohibitions in section 4, will be the development of a powerful wide-spread bootleg traffic in securities just as the prohibitions in the Volstead Act resulted in a powerful wide-spread traffic in illicit liquor.

(3) Every piece of legislation which is excessively restrictive is a stumblingblock to recovery, causes uncertainty and hesitancy, and destroys initiative. If we continue to compound the burden of business with legislation, which is highly restrictive beyond the correction necessary, recovery will be scuttled.

(4) At a time when the Administration is exerting its efforts to expand business to absorb workers so that the necessity of continuing the C.W.A. indefinitely will be overcome, legislation should not be enacted which will deter business expanding.

(5) Business should not be rendered impotent as a prosperity-builder in this way at a time when it is necessary for the Government to expand the national debt enormously.

(6) Specifically, this legislation is opposed by business, because:

(a) When the sale of corporate securities is surrounded by restrictions which prevent the ready sale and purchase of such securities, then they are no longer attractive to investors, and the investment of capital in business will tend to

cease.

(b) No informed investor will invest his money in securities of corporations whose affairs are subject to such complete bureaucratic control as this bill provides. (c) The provision pertaining to proxies and the mailing of complete stockholders' lists at the time corporations mail proxies with their calls for stockholders' meetings is unnecessarily burdensome.

(d) Business already supplies the various departments of the GovernmentInternal Revenue Bureau, Census Bureau, and others—with numerous reports and records. This bill will further increase enormously accounting, clerical, and other expenses with no advantage to industry, the public, or the investor.

(e) Making public, reports filed with the Federal Trade Commission will not only permit the domestic competitors of a company to inform themselves fully regarding the private affairs of a company, but this information will be available to foreign firms to the detriment of our foreign commerce.

We further feel that the restrictions, obligations, and liabilities as imposed by this act are so far-reaching as to destroy an open and liquid market for all owners, buyers, and sellers of securities and that, therefore, the passage of the act in its present form is detrimental to the public, the investor, and industry, and will not accomplish protection either for the above groups or for the National Banking or Federal Reserve System.

Further, this measure unreasonably and unwarrantedly assumes that all business is as questionable as the sensational exceptions that have come to light. In an effort to discipline and regulate the exceptional miscreant, this law indiscriminately stigmatizes and condemns all, and in so doing dips dangerously into the field of legitimate business to its serious detriment.

Already the burden of financing business is too heavy on the Government. The passage of this act will force further financing into governmental channels, thereby increasing the burden on the Government. Indeed, if it be the purpose of such legislation to foster governmental paternalism of all business, it is the more objectionable to the rank and file business man who desires to be self-sustaining and deserves not the inference of rascality and undependability inferred in such regulations.

Memorandum from R. L. Day & Co., Dick & Merle-Smith, R. W. Pressprich & Co., Rutter & Co., Salomon Brothers & Hutzler Wood, Struthers & Co. Regarding the business of a certain type of dealers and brokers in investment bonds and similar investment securities in relation to the provisions of the proposed National Securities Exchange Act of 1934.

The undersigned firms wish respectfully to outline the particular type of business in the investment field carried out by them.

These firms or their predecessors have been doing business in this field for generations one of them over 130 years.

Their clients are largely investment institutions such as savings banks, insurance companies, commercial banks, charitable and educational institutions,