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INVESTMENT BANKERS CODE COMMITTEE The following list of the personnel of the investment bankers code committee is submitted for the information of all dealers and brokers in securities:

Francis A. Bonner, Bonner, Troxell & Co., Chicago; Arthur H. Bosworth, Bosworth, Chanute, Loughridge & Co., Denver; George W. Bovenizer, Kuhn, Loeb & Co., New York; Robert E. Christie, Jr., Dillon, Read & Co., Inc., New York; Sydney P. Clark, E. W. Clark & Co., Philadelphia; Edward J. Costigan, Whitaker & Co., St. Louis; Harry S. Grande, Grande, Stolle & Co., Seattle; B. Howell Griswold, Jr., Alex. Brown & Sons, Baltimore; Edward H. Hilliard, J. J. B. Hilliard & Son, Louisville; W. Hubert Kennedy, Wells-Dickey Co., Minneapolis; Lamartine V. Lamar, Lamar, Kingston & Labouisse, New Orleans; Lawrence H. Marks, Lawrence H. Marks, New York; Frank McNair, The N. W. Harris Co., Chicago; Robert H. Moulton, R. H. Moulton & Co., Los Angeles; Daniel W. Myers, Hayden, Miller & Co., Cleveland; Joseph R. Swan, Guaranty Co. of New York, New York; Henry B. Tompkins, Robinson-Humphrey Co., Atlanta; Frank Weeden, Weeden & Co., San Francisco; Sidney J. Weinberg, Goldman, Sachs & Co., New York; George Whitney, J. P. Morgan & Co., New York; Orrin G. Wood, Estabrook & Co., Boston.

STATEMENT OF OLIVER J. TROSTER

Mr. TROSTER. My name is Oliver J. Troster of the firm of Hoit, Rose & Troster, 74 Trinity Place, New York City, dealers in overthe-counter securities. I am also secretary of the New York Security Dealers Association, which is (so far as I know) the only organized association of over-the-counter dealers in New York City. I am appearing at the invitation by your chairman to that association to send a representative to this hearing. I am submitting herewith a list of our members and a copy of our constitution; but I will not take the time of the committee to read either of these.

Most of the members of our association are not members of any stock exchange. The typical business of an over-the-counter securities dealer consists of buying and selling as a principal, and not as a broker or agent, securities which are not listed on any exchange. We deal in a very wide range of securities, including among others Liberty bonds, Federal farm-loan bonds, home-owners-loan bonds, bank stocks, insurance stocks, municipal bonds, public-utility stocks and bonds, guaranteed railroad stocks, real estate, industrial and railroad bonds, baby bonds, and so forth.

In general, we serve two principal functions: The first being to provide a market for investors in securities in which there are not enough buyers and sellers for investment for the stock exchanges to provide a really free market;

The second—a function of an entirely different character—to provide a market for dealings by insurance companies and other large institutions which deal in such large blocks that their purchases and sales would frequently swamp the market on an exchange.

This latter function is of particular importance in dealing with Liberty bonds, Federal farm-loan bonds, and other Government and State and municipal bonds. Although some of these are listed on stock exchanges, the trading in them on stock exchanges is of very small volume, and by far the greater volume of sales are made off the exchanges. This does not necessarily mean that the greater number of sales take place off the exchanges. "In these issues the small investor may customarily use the exchanges. The purposes of the bill appear to us to be met, therefore, by regulating the exchanges. It is there that the small investor will be protected, and it is there that the credit

system of the country will be protected against undue price fluctuations. In this, our function is supplementary. By handling the sales in large blocks by large institutions and large investors, we prevent the devasting fluctuation in price which would really, result if these securities were all thrown onto the exchange.

One of the Senators asked the other day if there were any reason why all this trading in bonds should not take place of the exchanges. The "social reason" (as Mr. Corcoran expressed it) is the one that I have given.

I now come to the service which we render in providing a market for securities which otherwise would not have one. These are the securities which cannot wisely be listed or dealt in on a stock exchange, because they have one or more of the following characteristics:

First, lack of speculative interest;
Second, small capitalization, or limited number of shares or bonds;

Third, limited distribution, or small number of shareholders or bondholders; or

Fourth, comparatively high price.

These are the types of security which, if they were listed on an exchange, would be subject to wide fluctuations in price due to the comparative scarcity of dealings.

Securities vary greatly in their availability for this purpose. At one extreme stand securities like the common stock of the American Telephone & Telegraph Co. or the General Electric Co., with millions of shares distributed among tens of thousands of different shareholders. Such a stock will generally find a ready and active market between active investors willing to buy or sell. The function of the exchange which makes a business of trading in securities is simple in such a case, being merely to provide a place where buying and selling orders can be matched at one price at a fixed rate of commission.

The normal over-the-counter security does not belong to this class. It is ordinarily of a type which could not be successfully listed or dealt in on an exchange. Recent attempts by the exchanges to deal in the slower-moving securities prove that they are not adaptable to this purpose. The attempts to deal on the New York Real Estate Exchange in bond issues of limited distribution affords an example. This exchange, created some 4 years back by well-intentioned people who apparently did not understand the economics of the situation, and since which time there has been intense change in real estate values, has been virtually nonfunctioning. Other unfortunate examples have been the attempt to deal in unlisted securities by the securities division of the New York Produce Exchange and the so-called unlisted section of the New York Curb Exchange.

In the progress of marketability from the slowest to the most active type of security, it is the function of the over-the-counter dealer to provide a market for as many securities as he may, excluding those which enjoy a wide enough distribution to be properly listed on an exchange. Natural desire for profit will make him extend the range of his activities as widely as possible the list of securities in which the public can find a market. At the same time it promotes business development and employment by extending the number of corporations in which the public will be willing to invest.

Now let us see this picture in its full perspective. It is estimated that there are 180,000 industrial corporations in the United States

alone. The number of corporations of all types-industrial, rails, public utilities, etc.—whose stocks are listed on the New York Stock Exchange has been stated to be 788. Here we have the fundamental and vital difficulty with this bill, from our point of view.

Based, as the bill appears to be, on a desire to regulate the large exchanges of the country, and drafted with an eye to their peculiar problems, it has wholly overlooked the infinite diversity of the overthe-counter business and of the problems of that business. After devoting section after section to regulation of the stock exchanges and of the corporations whose securities are listed on the stock exchanges, it finally lumps the over-the-counter business in one comprehensive catch-all section (sec. 14), and leaves its entire regulation to the unfettered discretion of the same commission which is to regulate the stock exchanges and which will necessarily be principally occupied with their problems.

As the very name of this act implies, it is designed primarily for the regulation of national securities exchanges. Whether or not its provisions are well- or ill-adapted to meet these purposes, and whether or not the Federal Trade Commission is well-adapted or ill-adapted for this function, has been and is likely to be the subject of much testimony and thoughtful consideration here. We do not come to speak on that subject, except insofar as the over-the-counter business is affected thereby.

We come for what may be termed the "forgotten man" of the securities business, not the man whose large-scale dealings in the securities of a few great corporations fill the popular imagination, but the man who day in and day out provides a market for the infinitely larger number of smaller corporations which make up the backbone of the business of this country.

It is true that our New York Security Dealers Association represents only a small fraction of the business of this character in the United States. We do not presume to speak for all the dealers in that business. They are scattered through all the samller cities of the land. Wherever there is a group of small companies in a community whose securities are dealt in locally, there will be a local dealer or dealers who will strive to supply a market for that purpose.

We speak only because we have been invited to do so, and in confidence that our business is typical and representative of that of the many other cities of the United States. Nor does our association, of course, represent all or nearly all of the dealers in New York.

There are necessarily some people engaged in the business who are unfitted by character and experience to assume the very real responsibilities of this business. This group will attempt to avoid regulatory supervision, just as the bootleggers did under prohibition, and particularly where the supervision comes from so remote a source as Washington. There may well be prosecutions of a few offenders, but a few prosecutions and convictions will not stamp out the evil, particularly where the prosecution will be as slow and cumbersome as must inevitably be the case where it emanates from a single huge Government bureau in a distant central point. The real hope lies in constant vigilance and self-regulation in the locality.

I rather expect that the stringent regulations proposed in this bill in regard to lending on securities will result in the creation of a great bootleg lending market. If a man can no longer borrow from a

respectable dealer or broker more than $400 on a $1,000 bond, the pawnshops will soon provide him with an opportunity to pledge the same bond together with 1 stickpin, and to borrow $800 on the 2 of them, marking $400 against the bond and $400 against the stickpin. If the prohibition law has any lesson for us, I venture the suggestion that that lesson is that the Federal Government will not, as a practical matter, be able to reach this kind of business.

The respectable and honest dealers, and I confidently state that they are in the great majority, are as much opposed to the dishonest dealer as are the members of this committee. We suffer daily from his competition. What we really fear, is that this bill will encourage and promote his business and not discourage him. By constant local vigilance we have in the last decade gone far in the elimination of what might be called the “underworld” of traders in securities. That has been the prime cause for the creation of our association. At this moment, our members have been advised to subscribe to the proposed draft of Code of Fair Competition for Investment Bankers, which upon its adoption will provide stringent regulations on the same subject matter.

These regulations will, of course, like those under all codes, be enforced in the first instance by others engaged in the same business in the respective localities, and only the appropriate power of supervision and review will be required from the Federal Government itself. This seems to us to be a constructive step forward. But a proposed statute simply throwing this whole great subject under the general jurisdiction of the Federal Trade Commission seems to us a step backward which can only lead to the encouragement, and not the discouragement, of dishonest and bootleg practices throughout the country

I come now to particular provisions of the act.

Under paragraph 3 exchanges are defined to include any board or market place, whether organized or unorganized, however managed or conducted, and whether incorporated or unincorporated, where or by means of any facility of which, contracts or offers for the purchase or sale of securities or other transactions in such securities are made.

It appears to me as a layman that these words may well be broad enough to cover every place of business of an over-the-counter dealer. Purchases and sales are certainly made there, and by the use of its facilities. In a broad sense, it is itself a board or market place.

Yet we feel certain that the Congress cannot intend the absurd result that every little over-the-counter dealer's place of business is itself to be an "exchange" for all purposes of the act.

To insure that the intent will be clear, we suggest that the definition of exchanges be confined to regularly organized exchanges (as is done in the draft of Investment Bankers' Code).

We now come to paragraph 6. The problem here is whether the average over-the-counter dealer is "a person who transacts a business in securities through the medium of a member of an exchange.

Here dealers divide into many classes. Most of them also act as brokers in varying degrees. Why is this? The reason is simple, that the customers demand it. The average investor regards brokers and dealers as really the same. He uses the broad term broker" to apply to both classes, and to him his broker is the man through whom he can sell the security he doesn't want to hold any longer, and can buy the one he wants.

The average investor has no necessity to catalog in his own mind the house with which he does business definitely as broker or dealer, because of the general nature of the activities of the house; his requirements are that he know on every particular transaction what the relationship of the house is to him, whether it is as broker or agent on a commission basis or whether the house is a dealer acting on a net basis.

Now, in my firm, for example, if a man wants us to sell for him 100 shares of a listed stock, we pass the business on to a stock-exchange firm and take no additional commission above that charged us by the stock-exchange firm. This is the customary practice among over-thecounter dealers in New York. We cannot understand the economic benefit in upsetting the habit of our customer (which may be of years' standing and based on mutual trust) of going to a single broker or dealer for his financial advice and his financial transactions. In effect, you would be requiring us to tell him: "No, we will handle your Home Owners Loan Corporation and your municipal bonds or your publicutility preferred and insurance stocks for you, but we won't handle your A. T. & T. or your General Electric or your General Motors." The customer is baffled. To him they are securities, they are all one; and he wants us to handle them for him.

In my judgment, the principal effect of this will be to deprive the customer of the benefit of the knowledge of the dealer which is the result of years of experience and accumulation of records. The knowledge acquired by the sum total of the dealers throughout the country of all classes of securities—including those in which they do not themselves personally deal—is a real asset to the investors of the country,

This bill proposes to kill that asset at one blow.

Many Members of the Congress are lawyers. They understand well the difference between office lawyers and court lawyers, for example. Yet the layman speaks only of "his lawyer.” Most likely, his lawyer does not go into court; yet the layman goes to him with his court case, if he has one, and trusts to his lawyer to pass it on to the proper specialist if the need one-whether it be a divorce lawyer, a patent lawyer, a corporation lawyer or one specially qualified in bankruptcy law, railroad law, radio law, criminal law, or any other of the innumerable classes in which lawyers are specializing today:

So in the securities business there is an infinite variety of specialists. The lay investor cannot know them all. He comes to me and I take care of him, calling in the proper specialist where he has a security of the type I do not personally handle. But under the proposed bill I must turn him away whenver he comes with a type of security which is not what I myself directly handle; and I must do this under penalty of never being able to make a loan to him or arrange a loan for him on the very type of security which I do handle the over-the-counter security not listed on any stock or securities exchange.

We submit that this sort of division into rigid classes or castes of the different types of dealers or brokers is arbitrary, unnecessary, and fundamentally un-American.

I should suppose that these considerations are even more important to investors outside of New York than to investors in New York. The New York investor can perhaps educate himself as to the different types of available brokers and dealers. But the man in the smaller city or town will only have a few brokers or dealers available. Far

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