more than the New Yorker, even, he wants to deal with the broker whom he has confidence in, whom he knows. Indeed, in many places he has hardly any choice. Yet if that broker does any business through the medium of any member of any exchange, he will be debarred from taking any orders for his customer in baby bonds, guaranteed railroad stock, real estate bonds, municipal bonds, and all the other types of securities not dealt in on an exchange. He will be debarred even from loaning or arranging for a loan on any of the stocks or bonds in local companies owned by his customer. We therefore believe it to be extremely important that the same loan privileges be granted to unlisted securities as are finally granted to listed securities. Indeed, the effect of requiring brokers and those dealing with brokers to get rid of the unlisted collateral in their accounts will in my opinion result in a great amount of dumping, the effect of which will be definitely deflationary. This is more important outside of New York, as we in New York do our over-the-counter business almost entirely on a cash basis, whereas in other cities customers' securities are very frequently carried by the dealers, who are in many cases members of at least one exchange. We further believe that the phrase "any person who transacts a business in securities through the medium of any such member" should be replaced by a phrase which would be limited to persons habitually and primarily engaged in a brokerage business on an exchange. The same considerations apply to the term in section 10: Any person who as a broker transacts a business in securities through the medium of any such member. We come finally to section 14. Placing all "over-the-counter" trading and dealing under the jurisdiction of a commission is not objectionable per se. No honest security dealer is afraid to be under supervision, any more than anyone else conducting an honest business. There is a belief among us, however, that a national commission, if not fully acquainted with the nature of the over-the-counter business, might attempt to regulate it along lines which follow strictly the regulation of exchanges. The "over-the-counter" business differs in so many ways from exchange business that it plainly needs rules of its own which, though similar in general scope and purpose to those applying to the listed business, must of necessity differ from them in details, many of which are essential to the survival of the business. Trading in securities "over-the-counter" is the oldest form of dealing in securities. It antedates all exchanges and is essentially one of barter or negotiation. There can be no argument against the pure theory of an exchange, a central meeting place where the orders of buyers and sellers of active securities meet at a central place and are executed at one price at a fixed rate of commission. The trouble comes when it is attempted to stretch the theory to cover securities and situations to which it cannot apply. Our recommendation is that, inasmuch as the investment bankers' code when approved by the President will itself become a law regulating the activities of dealers in securities, and inasmuch as that code contains stringent and enforceable regulations, there is no necessity, at least at this time, for the enactment of section 14 of the proposed National Securities Exchange Act. Before closing, may I express my thanks to the chairman and members of this committee for giving me this patient hearing. This concludes my formal statement. I would like to submit for the record a brief statement with regard to the practice of dealing in unlisted securities on exchanges with particular reference to the document submitted by the New York Curb Exchange on this same matter, and I would be happy to answer any questions which any member of the committee may wish to ask. ACTIVE MEMBERS OF THE NEW YORK SECURITY DEALERS ASSOCIATION Allen & Co., Charles Allen, Jr., New York, N.Y.; Bristol & Willett, Meyer Willett, 115 Broadway, New York, N.Y.; Frank Charcot, Jr., 25 Broad Street, New York, N.Y.; Clokey & Miller, Gerald Clokey, 50 Broadway, New York, N.Y.; T. C. Corwin & Co., T. C. Corwin, 25 Broad Street, New York, N. Y.; Doty, Fay & Co., A. C. Doty, 15 William Street, New York, N.Y.; Dillon, Throckmorton & Shantz, Howard D. Shantz, 115 Broadway, New York, N.Y. Chas. E. Doyle & Co., Frank Y. Cannon, 20 Pine Street, New York, N.Y.; Joseph Egbert, 2 Rector Street, New York, N.Y.; Elliot & Wolfe, George A. Elliot, 115 Broadway, New York, N.Y.; Englander, Birnbaum & Co., Gustave L. Birnbaum, 30 Broad Street, New York, N.Y.; Clinton Gilbert & Co., Clinton Gilbert, 120 Broadway, New York, N.Y.; Greene & Co., Irving A. Greene, 37 Wall Street, New York, N.Y.; Greene & Perkins, Herbert L. Perkins, 39 Broadway, New York, N.Y.; George W. Hall & Co., George W. Hall, 61 Broadway, New York, N. Y.; Hanson & Hanson, A. R. Hanson, 25 Broadway, New York, N.Y. Dunne & Co., Frank Dunne, 40 Wall Street, New York, N. Y.; Fred H. Hatch & Co., Inc., Arthur C. Madeau, 63 Wall Street, New York, N.Y.; Hewitt, Ladin & Co., J. F. Hewitt, 74 Trinity Place, New York, N.Y.; Hoit, Rose & Troster, James Currie, Jr., 74 Trinity Place, New York, N.Y.; C. E. Judson & Co., Chas. E. Judson, 19 Rector Street, New York, N.Y.; Katz Brothers, Moe I. Katz, 37 Wall Street, New York, N.Y.; Kearns & Williams, Chas. M. Kearns, 11 Broadway, New York, N.Y. Hardy & Co., Lee Roth, 11 Broadway, New York, N. Y.; Lawson & Co., S. W. Lawson, 111 Broadway, New York, N. Y.; W. Wallace Lyon & Co., L. B. O'Meara, 40 Wall Street, New York, N.Y.; Morgan, Trow & Co., Ralph C. Morgan, 120 Broadway, New York, N.Y.; Munds, Winslow & Potter, Frank S. Thomas, 40 Wall Street, New York, N.Y.; William Morris & Co., William Morris, 44 Pine Street, New York, N. Y.; George Nelson & Co., George Nelson, 74 Trinity Place, New York, N.Y. H. D. Knox & Co., Herbert M. May, 11 Broadway, New York, N. Y.; Lasser Bros., Maurice Lasser, 70 Pine Street, New York, N.Y.; R. G. Notine & Co., Robert G. Notine, 74 Trinity place, New York, N.Y.; John J. O'Kane, Jr. & Co., John J. O'Kane, Jr., 42 Broadway, New York, N.Y.; Outwater & Wells, H. Prescott Wells, 15 Exchange Place, Jersey City, N.J.; J. Roy Prosser & Co., J. Roy Prosser, 52 William Street, New York, N. Y.; F. L. Rabe & Co., F. J. Rabe, 120 Broadway, New York, N.Y. Mark Noble & Co., Mark A. Noble, 30 Broad Street, New York, N. Y.; L. A. Norton & Co., Harry D. McMillan, 35 Nassau Street, New York, N.Y.; Simons, Blauner & Co., Isidore B. Kraut, 25 Broadway, New York, N. Y.; Sirota, Rosen & Co., Nathan Rosen, 42 Broadway, New York, N.Y.; Carroll M. Swezey, 42 Broadway, New York, N.Y.; Hart Smith & Co., H. Hart Smith, 52 William Street, New York, N. Y.; Spielmann, Shea & Co., Henry Spielmann, 111 Broadway, New York, N.Y. J. K. Rice, Jr., & Co., Richard C. Rice, 120 Broadway, New York, N.Y.; B. H. Roth & Co., B. H. Roth, 25 Broad Street, New York, N.Y.; Wm. J. Ryan & Co., William J. Ryan, 44 Wall Street, New York, N.Y.; Leo G. Siesfeld & Co., Leo G. Siesfeld, 25 Beaver Street, New York, N.Y.; W. C. Simmons & Co., W. C. Simmons, Room 1810, 40 Exchange Place, New York, N.Y. P. J. Steindler & Co., Percival J. Steindler, 11 Broadway, New York, N.Y.; Tweedy & Co., F. B. Tweedy, 15 William Street, New York, N.Y.; G. M. P. Murphy & Co., Prescott Erskine Wood, 52 Broadway, New York, N. Y.; National Quotation Bureau, L. E. Walker, 48 Front Street, New York, N.Y.; C. E. Unterberg & Co., Chas. E. Unterberg, 48 Wall Street, New York City; Ward & Co., Bertram A. Seligman, 120 Broadway, New York, N.Y. MEMORANDUM OF PROPOSED NATIONAL SECURITIES EXCHANGE ACT OF 1934. 8. 2693-H.R. 7852 There has been submitted a statement of president of the New York Curb Exchange dated February 23, 1934, in respect to exchange trading in unlisted securities as affected by S. 2693 and H.R. 7852 which says, among other things: "The New York Curb Exchange believes, moreover, that all trading should take place upon the floor of an exchange where it will always be subject to proper regulation and control." It contains, moreover, numerous remarks and statements to which we must take exception because of their inaccuracy. The matter of investigation by Government authorities of trading in unlisted securities on an exchange is not a new one. This was done a quarter of a century ago by the present Chief Justice of the Supreme Court, Charles Evans Hughes, in connection with the investigation of the insurance scandals in New York City. As a result of this, there came out the so-called "Hughes Report" which, in speaking of dealing in unlisted securities on the New York Stock Exchange, among other things recommended that "the unlisted department, except for temporary issues, should be abolished." As a result of this, the previously existing unlisted department of the New York Stock Exchange was voluntarily abolished in 1909. We propose in the main to refer to the text of the statement of E. Burd Grubb, president of the New York Curb Exchange, and make comment next to each quotation. Mr. Grubb says, on page 5: "The so-called 'unlisted securities' with which this review deals primarily are admitted upon an entirely different theory and fulfill a somewhat different economic need. Such securities are never those of new or newly formed companies, but are of companies which have been in existence for a substantial number of years and with respect to which there exists a public record of their history and financial condition and a public market." This may be the current policy of the New York Curb Exchange regarding dealing in securities of new or newly formed companies, but is not, we believe, the policy of other exchanges in New York dealing in unlisted securities, particularly the securities divisions of the New York Produce Exchange. On page 9 he says: "Quite naturally, the Exchange made mistakes both of commission and of omission. In the speculative period immediately approaching 1929, many securities were admitted to trading where an actual market in New York did not exist but where it was hoped that a market would develop. The Exchange now appreciates that the existence of an active market here is fundamental and should in all cases be a prerequisite for admission of a security to unlisted trading. This requirement is now among those firmly insisted upon.' Again, on page 16, Mr. Grubb says: " "In the past the Exchange has itself too freely admitted securities to unlisted trading, particularly in cases where, at the time of admission, no active market in the security existed in the East of in New York. The Exchange has recognized these mistakes, and on its own volition, since January 2, 1933, has removed from dealing by reason of inactivity 696 issues of stock and 247 issues of bonds." These two statements recognize the principle that there must be a dividing line from the standpoint of activity and distribution, between securities that are properly susceptible to being traded in on an exchange and those which are not. We cannot reconcile them, however, with the following pronouncement which Mr. Grubb makes on page 24: "The New York Curb Exchange believes, moreover, that all trading should take place upon the floor of an exchange where it will always be subject to proper regulation and control." Mr. Grubb, on page 13, says: "The theory of the exchange in the maintenance of its unlisted department may be stated as follows: When an active market in a security, which meets the qualifications, exists in New York, the public is better served by having that security dealt in on an exchange. The purchaser or seller on an exchange deals through a broker member acting as agent who makes contracts for his customer with other members, likewise acting as agents. A specified commission only is charged; the transaction is immediately made public by means of the ticker; purchases and sales appear throughout the country in the daily papers; each transaction is open to investigation and verification; each member is subject to the rules and discipline embodied in the constitution and rules of the exchange." This is what we would term the simon-pure theory of an exchange with which we would be the last ones to quarrel. This picture does not take into consideration the activities of the specialist who buys and sells for his own account and whose activities notoriously can become pernicious and contrary to public policy when applied to inactive securities. When an order is put on the telephone through the machinery of an exchange, the buyer or the seller loses all power of direct negotiation. If he gets back more than he gives up in terms of an equitable execution at a fixed commission rate, the public good is served. But, if he gives up his power of negotiation and does not get back the benefits of an execution by the matching up of buying and selling orders that are extant, but is subject only to the good nature of the specialist, it would seem that he is worse off. On page 13 Mr. Grubb says: "By way of contrast to transactions taking place on an organized exchange, a transaction outside of the Exchange is generally conducted between the customer and one acting as a dealer or principal; i.e., for himself. There is no specified rate of commission. Indeed, the dealer pays what he feels inclined to pay and sells for what he can get. The spread is often notoriously wide. The opportunity of verifying the transaction is not comparable to that on an exchange where the officers or a committee may call upon members to produce all records and to explain any transaction." He neglects to point out that under the conditions pictured the purchaser or seller retains the important power of negotiation. It may be suggested that the power of negotiation by an individual investor is more theoretical than real; but experience shows that it is a common thing for the investor to reject a bid or offering, or for his banker or broker (who is acting for him) to do so. As to the spread being notoriously wide over the counter, we submit that the spread between the bid and asked prices of any security is based on the nature of the particular security rather than upon the market in which it is traded. In general, securities fully listed on, say, the New York Stock Exchange have a better market than unlisted securities. On the other side of the picture, there are securities in the over-the-counter market that day in and day out have a ready market. Putting it a different way, the listing of a security does not necessarily make a better market. The market is determined by characteristics of the particular security listed; that is, distribution, speculative interest, and so forth. The inference that listed securities uniformly have good markets and those dealt in over-the-counter have poor markets is not in accord with the facts. Looking at yesterday morning's New York Times in the column recording bid and asked prices of stocks not traded in the day before on the New York Stock Exchange, we find 39 which have either no bid or no offering and 211 which have a spread between bid and asked prices of 2 points or more and run as high as 262 points. For example: Mr. Grubb says on page 13: "Moreover, quotations of the outside market are not as accurate and complete as those on an exchange and are given very little publicity. Indeed, outside of the great cities, it is doubted if the price range in securities other than those dealt in on the New York Stock Exchange or the New York Curb Exchange is given any notice whatsoever. Most newspapers carry transactions on these two exchanges, but no reports of outside markets." This completely overlooks the fact that the newspapers in the smaller cities invariably carry the quotations of the unlisted local securities and, indeed, in many cases, carry the quotation of some of the New York securities. 45381-34-40 |