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trustees of trusts, corporate and individual investors, who are primarily interested in the highest grade of seasoned investment securities. Most of such clients have done business continuously with the undersigned firms for many years.
Our business has been threefold; security analysis, acting as brokers, and acting as dealers.
This threefold business has been developed over a long period because of the requirements of our type of clients. Our customers require careful and continuous study of particular securities coupled with expert knowledge of markets and normal price ratios between securities. The larger institutions also must have means provided whereby to purchase and sell advantageously large blocks of securities.
To accomplish such purposes the undersigned firms were forced to build up their statistical and research organizations until the expense involved for this purpose amounted to a heavy proportion of overhead. The value of such service is indicated by the continuous demand for information and advice.
Due to the narrow market for bonds on the exchange, large blocks cannot be purchased on the board without a material effect upon the price of the securities. Many issues of seasoned bonds are of the closed-mortgage type, which have long been held by investment institutions and accordingly change hands so infrequently that there is seldom an active market for these bonds
on the floor of the exchange. Moreover, many of the high-grade or seasoned investment bonds, such as State and municipal bonds and railroad equipment and other securities, are not listed on any exchange at all. They must be bought and sold over the counter in both broker and dealer transactions.
To meet this general situation the undersigned firms became merchandisers of securities and are accustomed to gradually accumulate from time to time blocks of desirable seasoned securities which are sold when required to the larger institutions at prices, if the securities are listed, closely approximating the prices on the exchange. These blocks are acquired partly on the board and partly directly from many institutions and individuals with which we are in touch.
Over a period of years a very considerable proportion of all the business of this nature with the larger institutions in seasoned securities, has been done through the undersigned firms.
Conversely, when these institutions are faced, for one reason or another, with the necessity of selling very large blocks of securities, such firms as ours supply a vital market or distribution agency. For instance, during the savings-bank runs in Philadelphia in 1932, or in New York and New Jersey in 1933 shortly before the banking holiday, millions of dollars of high-grade securities were marketed for the savings banks through our firms in order quickly to supply the cash urgently needed to meet demands. The market for such securities on the exchange had largely collapsed, but this distribution was accomplished quickly and at reasonable prices largely on a brokerage basis. This was successfully accomplished because the liquidating banks and the other institutions who were able to help, were willing to rely where necessary upon the knowledge and fairness of our firm in arranging the transactions and setting prices fair to both sides in spite of the market chaos that then existed. These special incidents furnish dramatic examples of a vital service in secondary distribution which the undersigned firms are continuously rendering.
To collect or dispose of blocks of securities for such institutions it is vital that our firms be permitted to buy and sell, not only over the counter but also upon the exchanges and without the additional cost of employing a broker middleman.
At times the exchanges offer the only outlet for securities, particularly whenthe dealer feels it cannot recommend purchase by one of its own clients. If as dealers we are forbidden as might be construed from the act, to buy and sell upon the exchanges, the ultimate purchaser or seller must suffer because of the price spread which must be asked in order to compensate for the increased risks of delay in distribution or acquisition. If forbidden to be members of an exchange but permitted to transact business on the exchange through other brokers, the added expense involved would probably necessitate the abandonment or severe curtailment of our research department. We believe that from a financial standpoint it is only possible for us reasonably to finance an adequate statistical research service by a combination of a broker-dealer business. The earnings of the brokerage business, or from the dealer business in high-grade securities (which yields only a very limited turn-over profit) will not, in our opinion, separately justify the expense of an adequate statistical research department.
Furthermore, both institutional and other clients from time to time desire, or we recommend, that certain transactions be carried out upon a brokerage basis,
sometimes on the exchange and sometimes on the over-the-counter market. The price spread required to compensate for the risk to the dealer involved in the chaotic markets during the last few years would make dealer transactions often too costly for our clients. Smaller investors buying small blocks usually can more economically be served by transacting their business as a broker. If, as is the case with some of us, we give continuous supervision of a list of securities for a fee, all transactions for such clients must be carried out as a broker.
In addition, it is obvious that each client presents a different investment problem, whether in the type of security desirable for his list, or in the maturity of the bonds which may be best suited to his needs. Obviously, such firms as ours cannot hope to keep in stock, in view of the heavy risks involved, a list of securities adequate to meet every need of our clients.
We submit the conservative investors need and should have a combination of broker-dealer investment house which is a member of a national securities exchange. The advisability of this triple service can easily be confirmed by those investors of capital funds best qualified to know, such as savings banks and nsurance companies, as well as individual and corporate fiduciaries. It would not seem in the public interest to disrupt relationships between such houses as ours which have existed in some cases for generations, nor would it seem in the public interest to restrict a secondary market which seems vital to large investment institutions through crippling by legislation the complex and important machinery which has for so long a period served its purpose to the satisfaction of these same institutions. We feel that the legislature, desiring perhaps to correct certain abuses which may have grown up in connection with the use of the market provided by the exchanges, should consider carefully before passing legislation the provisions of which will indirectly cripple the various services we have outlined.
In this connection we should make it clear that the broker-dealer business to which we refer is done on a cash basis.
To what extent the restrictions of the act will affect our capacity to finance our own business through the banks is not very clear. Many institutions, such as savings banks and insurance companies, have stringent rules affecting the investment of their funds which postpone the date for the acceptance of and payment for securities purchased until the necessary formal ratification of the transaction has been concluded. During the intervening period and until payment is made the securities so contracted are customarily carried by the investment house. Our firms must also carry a large inventory of securities which are necessary if we are to continue the services referred to. If the restrictions in the act relating to margins and ownership of the collateral over a period are applicable to all borrowings to finance the carrying of securities as outlined above, it will unnecessarily curtail both our volume of business and the service we render.
We would not be in a position to bid at public sale for issues of State and municipal bonds or railroad equipment obligations. In such cases the amounts to be purchased are often large and have to be paid for upon delivery and may have to be carried in whole or in part for some time before the investment house can, in turn, sell them. The proposed restrictions would necessarily curtail the market for issues of municipal bonds.
We understand that the Public Works Administration is preparing to receive bids for securities held as collateral for loans made by it to certain municipalities. The normal bidders for these bonds would to a very large extent be investment houses like our own. If we could not finance the purchase
of these securities by immediate bank loans, we doubt very much if the Public Works Administration could obtain satisfactory bids.
In the case of bank loans for such purposes we see no logical need for legislative restrictions. We believe the security of such loans may safely be left to the discretion of banks or other loaning institutions, particularly when the type of collateral offered is considered.
We take pride in our business. We have spent many years in building up a clientele among institutional and individual investors. We believe that they have faith in our integrity and fair dealing, and if desired will so testify. We are convinced that restrictions that may indirectly cripple our capacity to render investment advice are not in the public interest. We believe our clients are entitled to the services we can render without curtailment. We believe they are entitled to a market for their investments which is as free and unrestricted as is possible in the public interest. To that end we believe that investment houses
doing the type of business we have outlined above should be permitted and en-
R. L. Dar & Co.
This memorandum is intended as a supplement to that already submitted by the undersigned firms.
In respect of specific recommendations for amendment of the bill in question, our interest lies mainly in the provisions of the first sentence of section 10, which forbids members of an exchange or any person who as broker transacts a business in securities through such member, to act as a dealer.
We are informed that a suggestion has been made in the House committee that the act be amended to permit members to act as broker-dealers provided they carry on their business upon a cash basis.
A study of this committee's memorandum describing the type of business done by the firms we represent will show that from our point of view such an amendment would be wholly satisfactory and would permit us to continue our business as presently conducted.
We have been reluctant to propose or argue for such an amendment, realizing that the question of restriction of margin trading, though not of importance in our business, involves considerations affecting other firms both large and small throughout the country now rendering valuable service in the investment field. It furthermore raises difficult questions which probe deeply into the fundamental fiscal policy of the United States, embracing as it does questions of deflation and the inadvisability or restricting a form of credit which may be of considerable importance in meeting and sustaining the capital needs of industry.
For such reasons we have been disposed to recommend that the first sentence of section 10 be striken out because we feel that the joint broker-dealer service is in the public interest, believing that the general question of margin credit should be the subject of further study.
On the other hand, it is only fair to our own interest to restate that from a personal point of view the opportunity to conduct a threefold broker-dealeradvisory service, provided it is done on a cash basis, would be wholly satisactory. Respectfully,
R. L. DAY & Co.
For the purposes of the record, may I state that I am Waldo S. Kendall, of Minot, Kendall
, & Co., Inc., of Boston, Mass., investment bankers. I am also president of the Security Dealers Association of New England and a member of the regional code authority of the investment banking business, when that code is adopted.
RE H.R. 7852 Every security dealer in the country is vitally concerned with section 14 of this bill. There are thousands of them, unorganized and inarticulate as far as representation here is concerned. I had no idea when I arrived here yesterday, merely to act as an observer, of asking for the privilege of appearing before you. But as I sat here listening, the necessity of giving voice to what I believe represents the sentiments of these inarticulate thousands living in communities large and small and performing therein the function of financial adviser to those desirous of buying securities, became apparent.
This section in effect puts all these dealers in securities, who carry on the bulk of the genuine investment business of the country, in contradistinction to the
speculative business, into the hands of a regulatory body acting under limitations so broad (I refer to the words "with such rules and regulations as the Commission may prescribe") as to be practically nonexistent. It cannot be wondered at then that responsible investment bankers and dealers view the situation with grave concern.
The "over-the-counter" markets in their functioning are no less complex than those of the stock exchanges. These, as you have heard from Mr. Whitney, have solved their difficulties of control through the powers reposed in the board of governors and the business conduct committees, which are broadly analogous to those vested in committees in private clubs, where continued membership is based on considerations of conduct befitting a gentleman, prompt payment of financial obligations, and in general, observance of the constitution and bylaws. As Mr. Whitney said in effect, there is no effective legal recourse against the dictum of the exchange.
In the "over-the-counter" market there is, and I believe, cannot be effective control over the vast stretch of our country, in transactions interstate, intrastate, and foreign through rules and regulations imposed on the business, unless such have the force of law in interstate commerce. This raises at once a question of constitutionality, as to whether the Congress has the right to delegate its authority without setting the limits of such delegation in such precision as to fit the innumerable variety of cases that might occur.
As far as intrastate business is concerned, which probably comprises the greater part of transactions, there can be I believe, no effective control by such procedure.
However, please do not misunderstand me. There should be and there are effective safeguards for the public interest
The Securities Act of 1933 affords such, insofar as interstate transactions are concerned; and the code of fair practice of the investment banking business extends its protection to the investing public, both in interstate and intrastate transactions, in a way I believe no rules or regulations can do, in that it reached or can be made to reach through emendations made as necessity dictates, those elusive cases where the imponderable considerations of fair practice rather than the bald, bare facts, are the essence in forming the judgment of the Code Committee sitting.
And let me say right here that it is my conviction that the investment banking code committees mean business in cleaning house. Four years of public condemnation have borne their fruit. In many cases such condemnation was warranted, in many not, but whether or not, the investment banker today is showing by his drastic code, with which you gentlemen of this committee should familiarize yourselves, even though the final draft has not been signed, in order to get proper orientation on this question of section 14, that he is in earnest in his determination to put the business on a high, ethical plane, not only because it is "good business" and more profitable (as it undoubtedly is) but because most of them are instinctively decent in their business relations.
To the recalcitrants under the Code, I say “Beware!"
So it is my hope that the control of the "over-the-counter” markets will be left to the securities act and the Code and that you will not impose thereon a third source of regulation.
WALDO S. KENDALL.
GEORGE W. H. ALLEN,
Cazenovia, N.Y., February 20, 1934. Hon. FRANCIS D. CULKIN, House of Representatives,
Washington, D.C. DEAR MR. CULKIN. The National Securities Exchange Act for 1934 recently introduced into Congress while obviously drawn with the intent of protecting investors, appears to me to be very dangerous legislation. The bill seems to me to be so drastic that it defeats its own purpose.
Subdivision (b), section 6, calls for heavy liquidation of customers' accounts to the great detriment of security prices and to the recovery program. Subdivision (a) of the same section discriminates against small or local enterprises which are not listed on any exchange and makes all unlisted securities worthless for margin purposes.
Section 8 enables persons who claim they have been injured by manipulation when as a matter of fact no loss has been incurred, to recover vast sums which
would be in the nature of penalties. This, in my opinion, might work a great injustice on innocent parties.
Section 9 prohibiting short selling except under the specific rules and regulations of the Federal Trade Commission and prohibiting stop-loss orders brings up a much mooted question. I am not in accord with Mr. Presley in his views of short selling as I have always considered this practice a brake on overspeculation. Of course, short selling is often carried too far but I think its advantages offset to & large degree what disadvantage there is in the practice to an investor. I have never been a short seller myself. I cannot see in any way, shape or manner why stop loss orders should be prohibited.
Section 10 prevents "over-the-counter” activities by members either in local or unlisted securities. It also destroys the odd lot business. Is it not a fair question to ask where this section aids the small investor?
Section 17 I consider to be dangerous in that yital statistics in regard to American industry would be available to foreign interests and would work a great detriment to the best interests of the country.
Section 14 in connection with section 10 completely destroys the market for unlisted securities of which literally hundreds of millions of dollars are outstanding in the hands of investors both large and small.
Section 16 frankly seems very arbitrary to me in that the Federal Trade Commission has the power to impose heavy expenses for examinations whether or not such examinations are necessary. I feel that the wording of this section and the spirit of it are socialistic and confiscatory.
Section 18, subdivision (c) together with section 20, subdivision (b) (II) (III) puts the Federal Trade Commission in as a board of governors over all exchanges with the power to expel any member or officer of the exchange whom the commission feels has violated any of the rules or regulations which it may adopt. This, in my opinion, would lead to a situation where through an inadvertant mistake the work of a lifetime might be ruined, and disgrace heaped undeservedly upon an honest man. It might be argued that an honest man would have nothing to fear, but it is the possibility and not the probability which makes for good or bad legislation.
Section 29 represents another heavy burden on the stock exchange business in that it provides for a fee on the aggregate amount of all business transacted on any exchange during the calendar year. I believe that the Federal Trade Commission under this bill would, among other exchanges throughout the country, strangle the New York Stock Exchange which is known to be one of the greatest, if not the greatest, institutions of its kind in the world.
I have tried in this letter to honestly present my views without endeavoring to mince matters and I have done so drawing upon an experience of more than 15 years of private investing for my family and myself both as an individual and a trustee, and there are many people who depend on me for advice on financial matters.
The ideas embodied in this letter are given in all due respect to our great legis. lative organizations and merely express the opinions of a citizen who believes he speaks with some knowledge of the subject. Very sincerely yours,
GEORGE W. H. ALLEN.
STATE OF NORTH CAROLINA UTILITIES COMMISSION,
RALEIGH, February 24, 1934, Hon. Sam RAYBURN, Chairman Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D.C. DEAR MR. RAYBURN: Enclosed you will find a copy of a statement issued by this division in support of your bill, known as the "National Securities Exchange Act of 1934.”
Copies also have been forwarded to Hon. Duncan U. Fletcher, chairman of the Senate Committee on Banking and Currency.
I would like to have this statement considered and placed in the recorda. The expression of public sentiment locally is almost unanimous in support of the passage of your bisl in its present form. Sincerely yours,
STANLEY S. Woul, Executive Assistant in Charge of Securities.