the listing of their securities on exchanges, or, if not so listed, through limitations upon their use as a basis of credit.

Broadly speaking, these objects are sought to be accomplished in one or both of two ways:

First: The use of the mails, or of any means or instrumentality of communication or transportation in interstate commerce, for the purpose of using any facility of any securities exchange is prohibited by section 4 of the bill unless such exchange is registered as a national securities exchange under the provisions of section 29 thereof, and the registration fee therein provided for is paid.

Second: The use of the mails, or of any means or instrumentality of communication or transportation in interstate commerce, for making or creating a market for any security whether or not listed on any national securities exchange is prohibited under the provisions of section 14 of the bill unless compliance is had with such rules and regulations as the Federal Trade Commission may prescribe as appropriate in the public interest, or for the protection of investors. Both means of accomplishing the desired objects are, therefore, predicated upon the power of the Congress over interstate commerce, or its control of the use of the mails. May either power be constitutionally exercised in the manner proposed? The purpose of this brief is to demonstrate that it may not.

In his testimony before the House Committee on Interstate Commerce, the Hon. J. M. Landis, Commissioner of the Federal Trade Commission, and one of the draftsmen of the bill, stated very frankly that:

"At the threshold of this question, there seems to me to lie the question of national power over the exchanges. I think this committee has to meet that and face that before it can go any further. The question is not free from doubt." (Tr.. pp. 2-3.) (Italics supplied.)

The need for regulation, in view of many social and economic evils now alleged to arise from and exist by reason of practices indulged in by those engaged in the buying and selling of securities, whether as members of stock exchanges or in the over-the-counter markets, is being pressed upon the Congress as a jusification for the enactment of the proposed bill. Public necessity does not, however, give rise to Federal power.

The Government of the United States is not a National, but a Federal Government. Not national in the sense that it possesses inherent power, but Federal in the sense that it possesses only those powers expressly, or by necessary implication, delegated to it by the States. All powers not so delegated are by the tenth amendment to the Federal Constitution expressly reserved to the States respectively, or to the people.

CONSTITUTIONALITY UNDER THE COMMERCE CLAUSE

Article I, section 8, of the Constitution of the United States confers upon the Congress power "to regulate commerce with foreign nations and among the several States * * *""

Commissioner Landis, in his testimony before the House Committee on Interstate Commerce, testified in this connection that: "In order to spell out an appropriate power for Congress to deal with stock exchanges, you have to show the intimate relationship of these transactions on the exchange itself to interstate

commerce.

I speak primarily of the interstate commerce power, because I do not believe that legislation of this type can be based effectively upon any other power than the congressional power over interstate commerce." (Tr., p. 4.) (Italics supplied.)

In justification of the attempted exercise of the power of the Congress over interstate commerce section 2 of the bill contains a recital of facts which are declared to make the regulation of exchanges using the channels of interstate commerce necessary in the public interest. To the extent that this section embodies findings of fact it will, of course, go far in satisfying judicial inquiry into the need for such legislation, but to the extent that the section contains mere conclusions of law upon the facts recited therein, it establishes nothing and would have no controlling effect upon the decision of any court that might be called upon to decide whether such conclusions were, in point of law, correct.

The findings of fact in this section that "transactions in securities as commonly conducted upon securities exchanges by means of the mails or instrumentalities of transportation or communication in interstate commerce, are affected with a national public interest", are predicated upon the conclusion of law that transactions in securities by means of the mails or instrumentalities of transportation or communication are interstate commerce. If such is not the

case, congressional declaration to the contrary does not make it so as a matter of law.

Again, the section provides that "Transactions in securities upon exchanges create a flow of securities in interstate commerce to and from the places where such exchanges are located." Here, again, is found a conclusion of law that such flow of securities as may in fact result from stock exchange trading, constitutes interstate commerce. If such is not the fact, it isn't made any more so by congressional declaration. Finally, the section provides that "Regulation of transactions in securities conducted upon exchanges by means of instrumentalities of transportation and communication in interstate commerce or of the mails is imperative in the public interest for the protection of interstate commerce * * *"" The regulation of transactions in securities thus declared as imperative in the public interest, presupposes that the transactions so to be regulated constitute interstate commerce. If they do not, Congress cannot by legislative fiat ascribe to them legal characteristics which they do not otherwise possess.

Putting aside, however, what may be said to be a legislative attempt to give to the business of securities exchanges, and that of their members, factual char acteristics which they do not possess, but which are admittedly essential to any lawful exercise of the power of the Congress to control interstate commerce, a general statement of the nature of such businesses is necessary in order to properly determine whether they are in fact so interstate in character as to constitute interstate commerce. That they are not is fairly demonstrable.

THE NATURE OF THE BUSINESS SOUGHT TO BE REGULATED

The business of a stock exchange is to centralize the purchase and sale of securities. Sales are made only between members of the exchange and, in the case of the New York Stock Exchange, the transactions occur only in its building in the city of New York. The purchases and sales made by members on the floor of the New York Stock Exchange are completed by actual delivery, either through the place for central delivery maintained by a subsidiary of the exchange or directly between the offices of the members which, under the rules of the exchange, must be located in its immediate vicinity. Therefore, the actual contracts of purchase and sale take place only in New York City, and all deliveries of securities and payments of money in connection with the performance of these contracts likewise occur solely in New York City.

The immediate objects of sale are bonds or certificates of stock. In the case of bonds listed on the New York Stock Exchange, not only are the instruments themselves evidences of debt, but, under the rules of the exchange, the issuing corporations must maintain offices or paying agencies in the city of New York at which both principal and interest are payable. In the case or certificates of stock, they are constituents of title and, under the rules of the exchange, the issuing companies must maintain transfer agents and registrars in New York City where such certificates may be transferred of record.

In the use of the exchange's facilities, transactions of three general classes

occur.

First: Transactions where seller and buyer are both residents of the city and State of New York. Transactions of this nature are obviously local in character and, therefore, solely within the control and regulation of State laws. Boothe v. Illinois (184 U.S. 425); Otis v. Parker (187 U.S. 606); Hatch v. Reardon (204 U.S. 152); Brodnax v. Missouri (219 U.S. 285); House v. Mayes (219 U.S. 270).

Second: Transactions where seller and buyer are residents of different States but no actual shipment of securities occur because payment for the buyer's account is effected through some means of financing requiring the securities to remain in New York. Marginal transactions are of this character.

In transactions of this nature nothing more than buy and sell orders pass between the States through use of the mails or other instrumentalities of communication, such as telephone or telegraph.

This form of interstate communication is sought to be made interstate commerce by the provisions of paragraph 16 of section 3 of the bill defining such

commerce as

66* * * transaction in respect of any security shall be considered to be in interstate commerce if such transaction is part of that current of commerce usual in a security transaction whereby an order to purchase or to sell a security originates from a person in one state with expectation that it will or may be consummated by the receipt on an exchange of an order to sell or purchase the same security originating from another person in another State * *

As thus defined, interstate communication would constitute interstate commerce. Indeed, it is declared to exist upon a mere expectation. Such, of course, is not the law. In United States Fidelity Co. v. Kentucky (231 U.S. 394), in which the constitutionality of a Kentucky license tax upon commercial agencies was upheld, the court said:

"The circumstance that in a substantial number of cases-even if in the greater number-there is correspondence, by letter or otherwise, from State to State, which may perhaps have an affect upon the conduct of other parties about entering or not entering into transactions of interstate commerce, is not controlling" (p. 398).

In New York Life Insurance Company v. Deer Lodge County (231 U.S. 495), the Supreme Court upheld the validity of a Montana statute imposing a tax upon insurance premiums collected in that State, and in disposing of the contention of the insurance company that its business was interstate because conducted in large measure through the use of the mails, it was said at page 509:

To accomplish the purpose there is necessarily a great and frequent use of the mails, and this is elaborately dwelt on by the insurance company in its pleading and argument, it being contended that this and the transmission of premiums and the amounts of the policies constitute a 'current of commerce among the States.' This use of the mails is necessary, it may be, to the centralization of the control and supervision of the details of the business; it is not essential to its character." (Italics supplied.)

In Graniteville Manufacturing Co. v. Query, (44 Fed. (2d) 64) (affirmed 283 U.S. 476), it is said that the "sending of notes by mail or otherwise from one State to another does not constitute interstate commerce." See also Blumenstock Bros. v. Curtis Publishing Co. (252 U.S. 436); Engel v. O'Malley (219 U.S. 128). The above decisions clearly demonstrate that interstate communication is not interstate commerce. It is the character of a business and not the fact that the mails, or other means of communication may be employed in its conduct, that determines whether such business constitutes interstate commerce. The mere

use of the mails, or other means of communication, for the purpose of effecting the purchase or sale of securities between citizens of different States through the facilities of the New York Stock Exchange, where no actual shipment of securities takes place is not, therefore, interstate commerce and cannot be made so by mere legislative fiat.

Third: Transactions where buyer and seller are residents of different States and the transaction of sale and purchase results in actual shipment of securities between the States. Transactions of this character involve the question whether stocks and bonds are commodities in the sense that they may be the subject of commerce between the States.

It is believed that they are not in view of the decisions of the Supreme Court of the United States in respect to substantially similar businesses.

A closely related series of cases are those setting forth the doctrine that insurance, in all its forms, is not interstate commerce. Paul v. Virginia (8 Wall. 168); Ducat v. Chicago (10 Wall. 410); Liverpool Ins. Co. v. Massachusetts (10 Wall. 566); Philadelphia Fire Ass'n. v. New York (119 U.S. 110); Hooper v. California (155 U.S. 648); Noble v. Mitchell (164 U.S. 367); New York Life Ins. Co. v. Cravens (178 U.S. 389); Nutting v. Massachusetts (183 U.S. 553); New York Life Insurance Co. v. Deer Lodge County (231 U.S. 495).

In the latter case, it was urged with great ability upon the Supreme Court that the enormous importance of insurance to interstate commerce, particularly its relationship to the interstate shipment of goods, justified the reversal of its earlier decisions holding that insurance was not interstate commerce. The court, however, affirmed the doctrine announced in Hooper v. California, supra, where it was said:

*

(* * * the general rule (that insurance is not commerce) and its exceptions are based * (upon) the difference between interstate commerce or an instrumentality thereof on one side and the mere incidents which may attend the carrying on of such commerce on the other. This distinction has always been carefully observed, and is clearly defined by the authorities cited. If the power

to regulate interstate commerce applied to all the incidents to which such commerce might give rise and to all contracts which might be made in the course of its transaction, that power would embrace the entire sphere of mercantile activity in any way connected with trade between the States; and would exclude state control over many contracts purely domestic in their nature. The business of insurance is not commerce. The contract of insurance is not an instrumentality of commerce. The making of such a contract is a mere incident of commercial

intercourse, and in this respect there is no difference whatever between insurance against fire and insurance against 'the perils of the sea'."

These decisions establish that the business of insurance is not immune from State regulation as being interstate commerce. The corollary, that the business of insurance cannot be regulated by the Federal Government because it is not interstate commerce, would seem to follow. Indeed a committee on the judiciary of the United States Senate unanimously reported that insurance was not subject to Federal regulation as interstate commerce. (S. Rpt. No. 4406, 59th Cong., 1st sess.)

In Nathan v. Louisiana (8 How. 73), it was held that a broker engaged in the use of the mails in buying and selling foreign bills of exchange "in not engaged in commerce, but in supplying an instrument of commerce."

66

In Hemphill v. Orloff (277 U.S. 537), a Massachusetts trust," doing a business of buying and selling negotiable notes in various States, was held not engaged in interstate commerce in respect to the ownership of notes of a resident of Michigan where it undertook to enforce them without having first complied with local law requiring domestication of corporations. The court said:

"Upon the facts disclosed the court below held the trust was carrying on a business of dealing in negotiable notes within the State of Michigan; and we find no reason for rejecting that conclusion. Such business is not interstate commerce. Nathan v. Louisiana (8 How. 73); Paul v. Virginia (8 Wall. 168); Hatch v. Reardon (204 U.S. 152, 162); Blumenstock Bros. v. Curtis Publishing Co. (252 U.S. 436, 444)."

In Graniteville Manufacturing Co. v. Query (44 Fed. (2d) 64), the validity of a South Carolina stamp tax was upheld as not imposing a burden on interstate commerce in respect of a series of notes executed by the plaintiff over a period of years-between 1923 and 1930-and sent by it to banks outside of the State for discount. The District Court of the Eastern District of South Carolina said: "The plaintiff contends also that the laying of the tax in question is a burden upon interstate commerce. But under the decisions of the Supreme Court it is plain that the notes in question did not constitute interstate commerce. They are mere personal contracts. The making of such a contract is a mere incident of commercial intercourse, and sending the notes by mail or otherwise from one State to another does not constitute interstate commerce. See New York Life Ins. Co. v. Deer Lodge County (231 U.S. 495, 34 S.Ct. 167, 58 L.Ed. 332), where the subject is fully discussed and the decisions reviewed."

The foregoing decision was affirmed in 283 U.S. 376..

These authorities determine that the negotiation of insurance contracts, the buying and selling of foreign bills of exchange and of negotiable notes through the medium of the mails, or other means of interstate communication, is not interstate commerce, and it would seem to follow by analogy that the buying and selling of securities in similar manner is likewise not interstate commerce, and, therefore, not subject to Federal regulation or control.

The basis of congressional control over interstate commerce, as distinguished from its control over the instrumentalities of commerce such as railroads, telegraph, telephone, etc., arises from the power which the Federal Government possesses to insure the free movement of commodities, or subjects of such commerce, between the States. To this extent direct and substantial interference by the States is prohibited.

These principles have found application in the Packers and Stock Yards Act and the Grain Futures Act, the constitutionality of which have been upheld, exercising Federal control over certain practices on livestock and grain exchanges. The transactions made the subject of Federal regulation by these acts were not themselves regarded as interstate commerce, although the livestock or grain to which they related necessarily moved in interstate commerce. In fact, the Supreme Court has repeatedly held that transactions upon commodity exchanges do not constitute interstate commerce. Hopkins v. United States (171 U.S. 578); Hill v. Wallace (259 U.S. 44); Moore v. New York Cotton Exchange (270 U.S. 593). It is the effect of such transactions upon the stream of commodities moving in interstate commerce that makes them subject to Federal regulation. Swift & Co. v. United States (196 U.S. 375); United States v. Patton (226 U.S. 525); Stafford v. Wallace, (258 U.S. 495); Board of Trade v. Olsen (262 U.S. 1); United States v. Coffee Exchange (263 U.S. 611); Tagg Bros. and Marshall v. United States (280 U.S. 520). This is made manifest by the statement of Chief Justice Taft in Board of Trade v. Olsen, supra, when he said:

"The sales on the Chicago Board of Trade are just as indispensable to the continuity of the flow of wheat from the West to the mills and distributing points of

the East and Europe as are the Chicago sales of cattle to the flow of stock toward the feeding places and slaughter and packing houses of the East."

In the foregoing cases Congress undertook the regulation of transactions in commodities raised or produced with the expectation that they would move through instruments of commerce, the railroads, and become a part of the flow of such commerce between the States. Consumption of such commodities within the State of their origin, except to a very limited extent would be impossible. Their production, marketing, and sale to the ultimate consumer necessarily constitutes an interstate business. It is constant in its relation to the law of supply and demand and any interruption of that relationship through transactions of the character prohibited by the acts referred to, would necessarily constitute an interruption of and burden upon interstate commerce. The transportation and terminal facilities of the railroads are likewise dependent upon continuity in the flow of such commodities in interstate commerce.

None of these conditions obtain in respect to the business of buying and selling securities. There are no circumstances requiring securities to move from State to State in order to be dealt with in stock-exchange transactions. They may find a ready market on exchanges, or in over-the-counter trading, in the State of their issue. Nor are the facilities of the railroads in any sense dependent upon the movement of securities between the States.

In a letter of February 22, 1932, from Commissioner Landis, then a professor in the law school of Harvard University, to Messrs. Carter, Ledyard, and Milburn, counsel for New York Stock Exchange, a copy of which letter has been made part of the record in the hearings upon this bill before the Senate Committee on Banking and Currency and the House Committee on Interstate Commerce, Mr. Landis says:

"The recognization that this is the basic principle underlying congressional control over sales for future delivery and other practices on commodity exchanges in my opinion distinguishes these exchanges from stock exchanges. In the former type of exchange, the thing that is bought and sold is a commodity moving in interstate commerce. * * * The stock exchange, however, presents no such aspect. Other than a physical certificate representing a chose in action, no commodity is to move in interstate commerce as a consequence of a sale on the stock exchange. Dealings upon that market will effect no additions to the cost of moving these certificates from State to State. Indeed, the parallel between a commodity exchange and a stock exchange is so absent, that I cannot regard these decisions as governing the stock exchange situation nor as establishing a principle applicable to transactions upon stock exchanges." (Italics supplied.)

This reasoning is logical and sound. Coming from one of the persons largely responsible for the drafting of the Fletcher-Rayburn bill it should be highly persuasive in support of the view that the decisions of the Supreme Court in the stockyard and grain futures cases constitute no authority for the contention that the buying and selling of securities through the medium of stock exchanges constitute interstate commerce.

The fact that dealing in securities through the medium of the New York Stock Exchange, or in over-the-counter trading, may consist of purely local transactions where both buyer and seller are residents of the same State, or involve transactions between residents of different States, either with or without the actual shipment of securities from State to State, demonstrates that such transactions of purchase and sale do not provide for, nor do they necessarily contemplate, the shipment of securities between the States. If interstate shipments are actually made, it is not because of anything growing out of the making of the contract of purchase and sale on the New York Stock Exchange. The necessity for any such shipment is not implicit in the transaction. Under such circumstances the Supreme Court has repeatedly held that trading, even upon commodity exchanges, does not constitute interstate commerce.

In Hopkins v. United States (171 U.S. 578), transactions on the Kansas City Live Stock Exchange, an unincorporated association, having to do with the purchase and sale of cattle, hogs, and other livestock, were held not interstate, the court saying:

"The selling of an article at its destination, which has been sent from another state, while it may be regarded as an interstate sale and one which the importer was entitled to make, yet the services of the individual employed at the place where the article is sold are not so connected with the subject sold as to make them a portion of interstate commerce, and a combination in regard to the amount to be charged for such service is not, therefore, a combination in restraint of that trade or commerce." (Italics supplied.)