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Mr. WADSWORTH. I will aks that the letter be printed. The CHAIRMAN. The letter will be printed in the hearings. (The letter referred to is as follows:)

AMERICAN TELEPHONE & TELEGRAPH Co.,

New York, March 2, 1934. Hon. James W. WADSWORTH, Jr.,

House of Representatives, Washington, D.C. DEAR MR. WADSWORTH: Certain provisions of the Fletcher-Rayburn bill to regulate stock exchanges now under consideration by the House Interstate and Foreign Commerce Committee have come to my attention, which provisions so vitally affect this company that I have concluded to ask your consideration as & men ber of the committee of the contents of this letter concerning these provisions.

The provisions I have in mind are in section 13 (a) of the bill which reads as follows:

“Sec. 13. (a) It shall be unlawful for any person by the use of the mails or of any means or instrumentality of transportation or communication in interstate commerce or of any facility of any national-securities exchange or otherwise to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security registered on any national-securities exchange unless at such time prior to such solicitation as the Commission shall by rule or regulation prescribe the persons named to exercise such proxy, consent, or authorization shall file with the Commission a statement, which shall be included as a part of every such solicitation, setting forth the purposes of the proxy, consent, or authorization, the persons to exercise it, their relations to and interest in the security, the names and addresses of the persons from whom similar proxies, consents, or authorizations are being solicited, and such further information, and in such form and detail as the Commission may by rules and regulations prescribe in the public interest or for the protection of investors."

These provisions would seem to require that when a corporation sends to its stockholders with its notice of annual or special meeting a proxy running to certain individuals there must be transmitted therewith a list of all of its stockholders, with their addresses, together with the other information required in section 13 (a) and such further information as the Trade Commission may prescribe.

This company has 681,000 stockholders who live in all of the States of the Union and 82 foreign countries and United States possessions. It is apparent that as a practical matter in a corporation like ours the only way in which stockholders' meetings can be held at all is to send to each stockholder with the notice of the meeting (which by the New York law, under which we are incorporated, must be sent to each stockholder not less than 10 or more than 40 days before the meeting) a proxy to be executed and returned if the stockholder so desires. (At the annual meetings during the past 10 years from 57 to 72.7 percent of the shares of this corporation have been voted and from 50.9 percent to 69 percent of the stockholders have voted, either by proxy or personally.)

So that you may appreciate what the quoted provisions of the pending bill would mean as applied to this company I have had our telephone directory experts make estimates of what would be required to comply with these provisions of the bill, based on their experience in the publication and distribution of telephone directories. So that the committee may have available a basis for comparison it was assumed that such a list of stockholders as is required by the bill would be set up in type of the size now used the in Washington telephone directory and that it would be printed on the same kind of directory paper as is that directory. We estimate that 2 lines would be required for each stockholder (including his name and address), but that 4 columns could be placed on each page, instead of the 3 columns of the Washington directory.

On these assumptions and estimates our conclusion is that the total list of our stockholders, as at present constituted, would comprise four volumes of the size of the present Washington telephone directory (including therein not only the list of Washington subscribers but the classified directory and the list of Washington suburban subscribers). Each set of 4 volumes would weigh approxi. mately 11 pounds. Assuming that delivery would be by parcel post, but that bulk freight shipments would be made to some 40 centers in the United States in order to secure the most advantageous parcel post zone rate, it is the conclusion of our directory experts that the cost to this company would be approximately $950,000 to print and deliver these books the first year and approximately

$900,000 yearly thereafter. These estimates are based on present material and labor costs.

If this sort of publication and distribution served any proper purpose of the corporation or its stockholders possibly it might be justified, but I cannot conceive that such purpose is or can be served thereby. If any stockholder of this corporation wants to inspect its stock books he may do so under a right which is expressly given him by section 10 of the stock corporation law of this State. In this connection it might be noted that section 10 contains the following limitations on a stockholder's right to inspect the books of a New York corporation:

"Provided (a) That such inspection shall not be for the purpose of communicating with stockholders in the interest of a business or object other than the business of the corporation, and (b) that such stockholder or other person has not within 5 years sold or offered for sale any list of stockholders of such corporation or any other corporation, or aided or abetted any person in procuring any stock list for any such purpose; and provided further that such inspection may be denied to such stockholder or other person upon refusal to furnish to such corporation or its transfer agent a written statement that such inspection is not desired for purpose (a) and that such stockholder or other person has not been connected with any stock list as provided in (b)."

Obviously the limitations last quoted are proper and in the public interest, and as obviously also the provisions of this bill to which I have referred, if enacted into law, will make these limitations nugatory and useless to any corporation or its stockholders.

Conceivably it might be argued that it is the policy of this bill in this connection to encourage stockholders to circularize their fellow investors in opposition to the management, and it might further be argued that, whatever the cost to the company, it would be cheaper to those desiring such counter circularization to have stockholders' lists furnished to them in book form. Even so granting the bill defeats its own purpose, for when those opposing the management circularize the other stockholders they too would be required to pay the enormous expense of publishing and sending out the lists required by the bill. A dissenting minority can get a stockholders' list from the books of the corporation under the present law and circularize the other stockholders at only a fractional part of what it would cost under the provisions of the pending bill.

Without imposing further on your time we submit that the provisions referred to herein are impracticable, unwise, and not in the interest of the corporations affected or that of any of their stockholders, and if the pending bill should be approved we believe and submit that these provisions should be deleted therefrom.

Briefly also I should like to call your attention to one other matter in connection with this bill. From the papers I note that Mr. Fletcher, counsel for the Association of Railroad Executives, recently appeared before your committee asking an exemption on behalf of railroads on the ground that substantially similar reports to those required by the pending bill are now required to be made by railroads to the Interstate Commerce Commission where they are a matter of public record. A similiar observation is applicable to telephone companies, whether Federal control of telephone companies is retained in the Interstate Commerce Commission or transferred to a new Communications Commission, and if the committee approves the exemption requested by Mr. Fletcher, which to us seems an eminently proper one, it is requested that an exemption of the same type be granted to telephone companies under the jurisdiction of the Interstate Commerce Commission. Very truly yours,

WALTER S. GIFFORD.

STATEMENT OF FREDRIC H. JOHNSON, PRESIDENT SAN FRAN

CISCO CURB EXCHANGE, SAN FRANCISCO, CALIF.

The CHAIRMAN. All right, Mr. Johnson, you may proceed. You have 15 minutes.

Mr. JOHNSON. My name is Fredric H. Johnson. I am president of the San Francisco Curb Exchange.

Before I start, I want to make the statement that our exchange has no objection to any reasonable regulation. At the present time our members as brokers are under the jurisdiction and regulation of

the "blue sky" laws of the State of California and have been operating under regulation for a number of years. I do not come here in a spirit of controversy, at all, but this is an attempt to discuss the problems which are of vital importance to my own exchange, and I shall not dwell upon the problems common to all exchanges.

The establishment of the San Francisco Curb Exchange on January 3, 1928, for the purpose of taking over the unlisted securities of the San Francisco Stock Exchange, was the culmination of a series of efforts to provide a legitimate market, where unlisted securities, already in the hands of the public, might receive the benefit of a regulated market. We conduct our business in a wholly owned building, representing an investment of $460,000. We are an association functioning under a constitution almost identical with that of the San Francisco Stock Exchange. Our membership totals 77, classified as follows: 4 associate, 6 bank, and 67 regular members. Of the 67 regular members 6 have seats on the New York Stock Exchange and 50 have seats on the San Francisco Stock Exchange. Listed on our exchange are 224,700,000 shares of stock and $554,000,000 par value bonds. Our volume of sales from 1929 to date are some 24,000,000 shares of stock and over $6,000,000 par value bonds.

Securities, in which the public of this vicinity are interested and for which there is no local organized market, are admitted to trading by sponsorship of a member. Early in 1933 the governing board discussed additional requirements for admitting securities and on June 8 a revised application for trading was adopted. On October 13, supplementary requirements for mining stocks were adopted. Our regular application for trading contains 24 requirements and our mining supplement records 15 in addition, some of which are as follows:

The sponsor must be a registered stockholder so as to furnish the exchange promptly with copies of all reports and notices which the company may distribute to its stockholders, a complete history of the company, the manner in which the stock has been or is being distributed, the present over-the-counter market, details of any treasury stock or stock issued subject to payment under option or the subject of any underwriting or sales agreement, and full details of any options given by an officer of the company on any personally owned stock.

Now, under the provisions of the California corporate securities act and the rules of the State corporation department, no person may act as broker, investment counsel, or agent unless he has applied for and received a certificate authorizing him to do so, based upon the furnishing of satisfactory evidence of financial and moral responsibility and the filing of a satisfactory statutory surety bond. All certificates expire on December 31 of each year in which issued and are subject at that time to renewal upon application. Jurisdiction of the corporate securities act is not recognized as extending directly to the exchange but to its members through a control over all brokers. This statute also gives the corporation department control over the original issuance of securities in California and has stringent regulations with respect thereto.

In addition, rule 23 of the State corporation department provides that no stockbroker will be permitted to trade, or deal, in unlisted securities of a foreign corporation not issued under a permit of the corporation commissioner, or in any security listed or admitted to trading on any stock exchange or curb exchange, unless there shall

be submitted to the Commissioner such data as will enable him to determine whether the sale of such security will be fair, just, and equitable to the buyer thereof. Such securities must be approved for trading by the Commissioner.

Rules further provide the procedure and requirements of approval for trading: So you may see that, although our exchange has no full listing stock requirements, we have at all times been comprehensively regulated by California's “ blue-sky” law and the State corporation department. Most emphatically, may I say, we have been regulated by a governmental authority and because of that reason, we have not pressed our corporations for full listing.

No member of the San Francisco Curb Exchange has had his license revoked or suspended by the Commissioner, nor have any verified or written complaints been lodged against any member of our exchange for the period investigated.

Our exchange provides a regulated market for local stocks, which would have no other than the usual unsatisfactory street market. Many companies do not formally list, because of their utter indifference to the market for their securities, after having completed their public financing. Others cannot afford the listing fees. I think the most frequent reason to be given is that of indifference. Several issues listed on major markets in the East are also admitted to trading. Only such stocks as have a genuine local public interest are so admitted to trading. This trading is demanded, due to the time difference between eastern markets and the Pacific coast, where, during daylight saving, the New York market closes at 11 o'clock. A business man on the Pacific coast hardly arrives at his office when the New York market is closed. The afternoon market in San Francisco, which lasts until 2:30 o'clock, gives him ample time in which to consummate the purchase or sales of securities without having to wait for the next day.

As a matter of interest, on days of important announcements from the President, or important announcements from corporations, we have had orders from all over the world coming in to the afternoon session in San Francisco.

The question may arise as to why we continue to admit a stock which has become inactive over a long period. I shall attempt to give a good reason.

The Argonaut Mining Co., one of California's famous gold mines, with 43 years of operation behind it, has been listed since 1929. There were no sales until 1930, when its price range was $1.30 to $1.35. In 1931 and 1932 there were no sales; 1933 witnesses the revaluation of gold and a tremendous increase in the earnings of this mine. Earnings were nil in 1932; $1 a share net in 1933 and it is estimated that $2 may be earned in 1934. The stock enjoyed a trading volume of 20,145 shares in 1933 and a price increase from $1.75 to $4.25. The trading this year so far has been very substantial and its current market is around $8. The company has always been well financed, having at present current liquid assets of 10 times its current liabilities, and we could see no reason in the past to remove such a stock, merely because its current earnings were negligible or that its market was dead.

We believe we have well served the public in retaining this stock and many others in the same category, without listing fees, which, in its years of no earnings, it would not have felt justified in paying.

In an over-the-counter market transaction, one, acting as a dealer or principal, pays what he feels inclined to pay and sells for what he can get. The spread is often notoriously wide. The opportunity for verifying a specific transaction is most difficult. An excellent example is the present over-the-counter market in eastern banks and insurance company stocks. In these stocks, valued at prices ranging from $10 to $50 a share, the spread runs from 1% points ($150 on 100 shares) to 2 points ($200 on 100 shares). Do you relize, gentlemen, that in many of these stocks that spread is more than the yearly dividend?

I am attaching a clipping from the Washington Herald of March 2, giving the over-the-counter New York bank stock market of the preceding day. Most illuminating-reading, in part, as follows:

BANK STOCKS

NEW YORK, March 1 (I.N.S.).—Quotations on the following securities are obtained from the Security Dealers Association of New York. There are no official quotations. This is a bid-and-ask market, and the actual sale of securities is often subject to negotiations.

It is our decided opinion that it is in the public interest that trading in the so-called unlisted” securities should be permitted on an organized exchange, where sufficient data is on file to give the investor substantial information in respect to the securities in which he may be interested.

We wish to make most plain the fact that we do not oppose regulation if it be borne in mind that acts regulating the sale of securities are comparatively new in the law, that it is only through trial and error that regulation may be developed to the point of giving maximum protection to the investor, and that only a minimum burden should be imposed upon legitimate business. We must of necessity voice our opposition to the bill in its entirety, as it would destroy our exchange and throw our stocks to the costly system of the over-the-counter market.

Therefore we propose the following amendments, which will permit the ultimate presentation to the Federal Trade Commission of the curb exchange right to maintain an unlisted market under proper regulation.

The curb exchange requires two amendments peculiar to its transactions and apart from amendments required by stock exchanges, namely, with respect to dealing in unlisted securities covered by the first amendment and to the dealing in registered New York securities covered by the second amendment. They are as follows:

First, at the very beginning of section 11 (a), page 22, add the words "except as prescribed by the rules and regulations of the Commission.

Second, at the end of section 11, page 25, add new subsection entitled (d) [reading]:

Nothing herein shall be deemed to prohibit transactions on any national securities' exchange, if permitted by its rules, in securities not registered thereon, but for which a registration is effective on any other national securities' exchange.

We also endorse the spirit of Mr. Whitney's plan for the creation of a Stock Exchange Coordinating Authority to exercise regulatory power. Such a plan would permit the flexibility to deal fairly with differing conditions in different parts of the country.

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