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the case of bonds they are actively supervising the property against which the bondholders are creditors. It seems thoroughly consistent that both of these groups of security holders would follow the recommendation of the management of the company on this additional item of where the securities are to be traded in. On page 17 Mr. Grubb says:

"It is a market which does not 'fold up' when the pressure on dealers becomes too heavy, creating thereby a moratorium on the security with the resulting embarrassment to an owner who has to realize on his security."

Experience of professionals in that over-the-counter activity is augmented when exchange facilities "fold up" under stress. On this point we refer you to the testimony recently presented to you by six of the biggest investment banking houses in the country, Salomon Bros. & Hutzler; Wood, Struthers & Co., etc. On page 18 Mr. Grubb says:

"In an outside market a few purchases may lift the level 25 points."

Here again professional experience proves the reverse, particularly in regard to institutions and others buying "en bloc", and again we refer you to the report of the six investment banking houses which speaks of the liquidation of securities under stress. It says: "This was successfully accomplished because the liquidating banks and other institutions who were able to help, were willing to rely where necessary upon the knowledge and fairness of our firms in arranging the transactions and setting prices to both sides in spite of the market chaos that then existed."

On page 19 Mr. Grubb says:

"It is for these reasons that the exchange is not necessarily led to remove a security because the company objects."

Here again, the question comes up, who should be the judge of where the security should be dealt in, the exchange or the issuing corporation?

It is interesting to know the attitude of the president of another exchange on this matter of admitting securities by application of a member of an exchange rather than by the corporation. Mr. Michael J. O'Brien, president of the Chicago Stock Exchange, recently stated in these hearings:

"No security can be bought or sold on the Chicago Stock Exchange unless and until its listing shall have been accepted by the governing committee upon an application signed and sworn to by a duly authorized officer of the corporation issuing the security. The Chicago Stock Exchange for many years has had no so-called "unlisted" department, nor does it list securities upon data or application filed by its own members or any persons other than the company itself." On page 19 Mr. Grubb says:

"It must be remembered in this connection that the exchange does not admit securities to unlisted dealing when primary distribution is taking place."

This may be the new policy of the New York Curb Exchange since the investigation by Attorney General Bennett, but can hardly be said to be the policy of the various other exchanges which follow the practice of admitting securities to "unlisted trading privileges."

On page 23, Mr. Grubb says:

"It becomes a nationally known stock such as several now on the exchange. Would it be in the public interest for the Curb to be compelled to cease trading in this stock because the company, perhaps for selfish reasons, listed the stock on an exchange, say for illustration, in Arizona?"

This brings out again the question of who ought to be the judge of where the security should be traded, the exchange or the issuing corporation.

In conclusion, permit us to say that we introduce this brief not for the sake of complicating your deliberations but because we feel compelled to do so to clear the record of the brief submitted by Mr. Grubb, president of the New York Curb Exchange, on the same subject. Respectfully submitted.

[graphic]

MARK A. NOBLE,
OLIVER J. TROSTER,
MEYER WILLETT,

Members of the Board of Governors of the
New York Security Dealers Association.

will now have to adjourn until 10 o'clock

m., the committee adjourned until 10 a.m.,

On page 14 Mr. Grubb says: "The interest of the dealer is in the profit he may make for himself acting as a principal; the interest of an agent or broker buying and selling securities for his customer on an exchange is in his commission, fixed by the exchange."

Here again Mr. Grubb is painting the simon-pure theory of an exchange without referring to the incidence on the exchange of the specialist who buys and sells for his own account.

On the same page Mr. Grubb says: "The outside dealer answers to no one other than his customer."

This definitely does not portray the picture in New York and, we believe, in many other sections of the country. Our association was formed in 1926 and from the constitution we have submitted to you, you will see that we have various standing committees, such as the business-conduct committee, the committee on securities, the arbitration committee, etc., to safeguard the public interest. In addition the forthcoming Investment Bankers' Association Code of Fair Practice will regulate dealers, whether they sign the code or not. We have advised our members to sign this code.

Mr. Grubb, on pages 14 and 15, says: "Moreover, as frequently happens, the customer has little or no means of ascertaining the standing of the outside dealer and takes a very wide chance when he forwards his securities for sale or his money for purchase to one whom he may know only through advertisement."

The implications in this sentence are distinctly unfair and misleading. The majority of dealers are very jealous of their reputations for honesty and fair dealing. Moreover, as we know from experience, the occasional investor is well able to make his choice by reference to his local bank.

On page 15 Mr. Grubb says: "It has sometimes been claimed that the public is deceived, when it reads the record of transactions on the Curb Exchange, into believing that all securities named are fully listed. As a matter of actual fact,

as has been said above, and this is deemed of great importance, no security is dealt in on the Curb Exchange today which is not officially listed; that is to say, listed upon the official action of the exchange itself.

"The exchange has urged that a clear demarcation be made in the press between these securities. Many newspapers distinguish in their reports between 'fully listed' and 'admitted to unlisted trading'."

Again by a manipulation of words Mr. Grubb is attempting to make unlisted and listed securities one and the same thing on the ground that they are both "officially" listed. The history of the differentiation in the newspapers and on the ticker between these two groups is that differentiation was urged by the National Association of Securities Commissioners a number of years back, as follows:

"Your committee suggested that the New York Curb Exchange work out some plan with the various newspapers and financial publications which carry daily stock quotations, whereby the listed and unlisted securities might be distinguished by any reader of such publications. The officials of the New York Curb Exchange stated that an effort would be made to comply with this suggestion."

And again, about a year ago, when Attorney General John J. Bennett of the State of New York investigated unlisted trading on the New York Curb Exchange, one of the regulations that the Curb Exchange promulgated as a result was: "Resolved further, That newspapers in market reports shall be urged to make a clear differentiation between listed and unlisted securities.

"Resolved further, That Fitch's sheets shall be requested to group separately sales of fully listed and of securities admitted to unlisted trading.

"Resolved further, That the bulletin of the exchange shall differentiate between fully listed and securities admitted to unlisted trading."

Here we see that two important sources maintain that the public interest requires that the real distinction between "fully listed" and "unlisted" securities be continuously established.

On page 16 Mr. Grubb says:

"In cases where substantial and adequate reasons for removing a security from unlisted trading were presented, the exchange was glad to drop the security from the list."

Why should the officials of a company be compelled to submit any reason to the Curb Exchange authorities for compliance with the company's request that a security be not dealt in on that exchange? It is being recognized more and more that the executives of a company occupy a semifiduciary position in relationship to the owners of their securities. In effect, in the case of stocks the executives of a company are investing and managing the funds of their stockholders. In

the case of bonds they are actively supervising the property against which the bondholders are creditors. It seems thoroughly consistent that both of these groups of security holders would follow the recommendation of the management of the company on this additional item of where the securities are to be traded in. On page 17 Mr. Grubb says:

"It is a market which does not 'fold up' when the pressure on dealers becomes too heavy, creating thereby a moratorium on the security with the resulting embarrassment to an owner who has to realize on his security."

Experience of professionals in that over-the-counter activity is augmented when exchange facilities "fold up" under stress. On this point we refer you to the testimony recently presented to you by six of the biggest investment banking houses in the country, Salomon Bros. & Hutzler; Wood, Struthers & Co., etc. On page 18 Mr. Grubb says:

"In an outside market a few purchases may lift the level 25 points."

Here again professional experience proves the reverse, particularly in regard to institutions and others buying "en bloc", and again we refer you to the report of the six investment banking houses which speaks of the liquidation of securities under stress. It says: "This was successfully accomplished because the liquidating banks and other institutions who were able to help, were willing to rely where necessary upon the knowledge and fairness of our firms in arranging the transactions and setting prices to both sides in spite of the market chaos that then existed."

On page 19 Mr. Grubb says:

"It is for these reasons that the exchange is not necessarily led to remove a security because the company objects."

Here again, the question comes up, who should be the judge of where the security should be dealt in, the exchange or the issuing corporation?

It is interesting to know the attitude of the president of another exchange on this matter of admitting securities by application of a member of an exchange rather than by the corporation. Mr. Michael J. O'Brien, president of the Chicago Stock Exchange, recently stated in these hearings:

"No security can be bought or sold on the Chicago Stock Exchange unless and until its listing shall have been accepted by the governing committee upon an application signed and sworn to by a duly authorized officer of the corporation issuing the security. The Chicago Stock Exchange for many years has had no so-called "unlisted" department, nor does it list securities upon data or application filed by its own members or any persons other than the company itself." On page 19 Mr. Grubb says:

"It must be remembered in this connection that the exchange does not admit securities to unlisted dealing when primary distribution is taking place."

This may be the new policy of the New York Curb Exchange since the investigation by Attorney General Bennett, but can hardly be said to be the policy of the various other exchanges which follow the practice of admitting securities to "unlisted trading privileges."

On page 23, Mr. Grubb says:

"It becomes a nationally known stock such as several now on the exchange. Would it be in the public interest for the Curb to be compelled to cease trading in this stock because the company, perhaps for selfish reasons, listed the stock on an exchange, say for illustration, in Arizona?"

This brings out again the question of who ought to be the judge of where the security should be traded, the exchange or the issuing corporation.

In conclusion, permit us to say that we introduce this brief not for the sake of complicating your deliberations but because we feel compelled to do so to clear the record of the brief submitted by Mr. Grubb, president of the New York Curb Exchange, on the same subject.

Respectfully submitted.

MARCH 6, 1934.

MARK A. NOBLE,

OLIVER J. TROSTER,
MEYER WILLETT,

Members of the Board of Governors of the

New York Security Dealers Association.

The CHAIRMAN. We will now have to adjourn until 10 o'clock Tuesday morning.

(Thereupon, at 11:48 a.m., the committee adjourned until 10 a.m., Tues 'ay, Mar. 13, 1934.)

NATIONAL SECURITIES EXCHANGES REGULATION

TUESDAY, MARCH 20, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to call, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Ravburn (chairman) presiding.

The CHAIRMAN. The committee will come to order. We are to take up for consideration this morning H.R. 8720, introduced on yesterday.

We had 3 weeks' hearings on the other bill. We listened very attentively to all of the suggestions which were made, and criticisms, and in this new draft we have tried to meet the legitimate criticisms. We do not hope, of course, to pass any bill at all that will please everybody. If we put all of the amendments in that were suggested, we would not have anything but the enacting clause left. It is the hope of the committee that when the explanations of this new bill are made by the gentlemen who have been interested in its drafting and representatives of the Federal Reserve Board, as suggested by many members of the committee, and of the Treasury, that we will close these hearings. I think that it could not be expected that we will go into new hearings and thresh over all of the things that we have been over, and I hope that that will not be expected.

(H.R. 8720 is as follows:)

[H.R. 8720, 73d Cong., 2d sess.]

A BILL To provide for the regulation of National Securities Exchanges and of overcounter markets operating in interstate and foreign commerce or through the mails, and to prevent inequitable and unfair practices thereon, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SHORT TITLE

SECTION 1. This Act may be cited as the "National Securities Exchange Act of 1934."

NECESSITY FOR REGULATION OF SECURITIES TRANSACTIONS

SEC. 2. Transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest. Such transactions are carried on in large volume by the public generally and a considerable proportion of such transactions originates outside the States in which the exchanges and over-the-counter markets are located and/or are effected by means of the mails and instrumentalities of interstate commerce. The prices established and offered in such transactions are generally quoted and disseminated throughout the United States and foreign

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