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that can be legally brought before the meeting. It is necessary in order to obtain A quorum that some system of obtaining proxies should be adopted.

The other provision, forbidding the disclosure of any confidential information, which is intended to prevent officers of the corporations from giving to some favored few information which may affect the value of the stock, will do away with the great improvement which has taken place of late years in relation to the contact of officers of corporations with their stockholders. This contact should be encouraged and in my opinion the stockholder should be furnished with all information in relation to the corporation's activities that he may desire. Under the provision, however, the officers of a corporation, especially those against whom the section is aimed, will find a ready excuse for not furnishing a stockholder with information, except through public statements, while the confidential information is carried in some indirect way to the favored few. Any information than an officer may give in relation to his company is liable to have some bearing upon the value of its stock and might, therefore, be held to be confidential.

The provision in relation to registration is also extremely onerous. Why should a corporation agree to comply with the law? It has to comply with the law, if the law be constitutional. The documentary evidence which will have to be produced in connection with the registration of a corporation would incur a heavy burden especially as the officers of today would become responsible if there were any inaccuracies in the accounts of past generations. It is a very serious thing for a corporation to agree to comply with any rules that a public body may hereafter promulgate.

We therefore call these matters to the attention of the committee and the serious damage which may be done to the interests represented by us, and we trust that the committee in its wisdom may confine the proposed bill to remedying such evils as may exist but not to approve in its final form an act which will be so rigid and severe that the industry of our public exchanges will be crippled or destroyed.


2695 AND H.R. 7852 Attendance at five hearings before the Interstate and Foreign Commerce Committee of the House, followed by attendance at nine hearings before the Banking and Currency Committee of the Senate, leads us to believe that most of the sections of the National Securities Exchange Act of 1934 have been adequately discussed, but also leaves us in doubt as to whether there is a clear understanding of a few sections upon which we desire to comment.

We do not come with apologies for the profession in which we are engaged. We know that our business is essential and any regulations which would seriously hamper its normal operations would unfavorably affect the public. Those interested in securities must, of necessity, have someone to whom they can turn for advice. My own firm, in association with two other banking firms, just completed what I believe to be one of the largest refunding operations of its kind ever attempted in the United States. A plan was worked out with the assistance of the Reconstruction Finance Corporation for the refunding by two large surety companies of approximately $80,000,000 of bonds secured by mortgages which had been guaranteed by those surety companies. Seven hundred and eighty security dealers located in 45 States and the District of Columbia cooperated with us in this plan and more than 39,000 certificates of deposit were issued to 29,395 investors. The significant fact of this achievement is that thousands of bondholders relied upon the advice of those dealers to the extent of approximately 94 percent of the bonds affected. This is only one illustration of what is constantly going on throughout the country; investors depending upon their local dealers for advice and counsel. Years of experience, constant study and the expenditure of a substantial part of gross earnings on statistical departments are necessary to give adequate service to clients. The cost, time and expense involved precludes any but very substantial investors from maintaining adequate statistical organizations, making it necessary for smaller institutions and investors to seek the advice of security dealers.

The representatives of recognized stock exchanges scattered throughout the United States bave testified here that an overwhelming majority of their members are both brokers and dealers in securities.

To our mind the first sentence of section 10 is especially objectionable. It is necessary for a hroker and dealer to combine their two functions in the smaller financial centers, and the smaller the city or town the more necessary this becomes if the broker-dealer is to have sufficient revenue to afford the overhead coste essential to provide the character of service desired by the investing publie. In this act there is a clause which does not allow an investment banking house to have any affiliation with the brokerage business, meaning the selling or buying of securities for their clients either on a cash or part-cash basis. This bill, if unchanged, will force out of business the great majority of the bond and brokerage houses in the smaller financial centers, which in the aggregate number more than 6,000 firms, employing many thousands of people. Merely to act as dealer and underwriter and distributor of new issues would not bring them enough income to keep their businesses going. Who, then, would remain to underwrite and distribute new securities and perform the useful function of dealing in securities now outstanding?

Conditions of the securities markets may be such that at one time most activities in securities would be centered in the brokerage department of a brokerdealer, while at another time the major activities are confined to the investment and over-the-counter departments, and only occasionally are conditions of the securities market such that all departments are active at the same time.

The right to exercise both functions tends to keep the income from the business at a more uniform level than would otherwise be the case, which permits the broker-dealer to employ an average force much larger than if he is permitted to act as broker only, and, in doing so, gives much better service to his clients.

It may be roughly estimated that of all transactions in bonds only 10 percent is made on the New York Stock Exchange, the remaining 90 percent being made on other exchanges and on over-the-counter markets, which are largely dealer transactions.

Very careful consideration should be given to the position in which the buyer of unlisted securities would be placed by segregation. Billions of dollars of securities--including State and municipal bonds—are traded in only over-the-counter. If the broker-dealer retains his membership in an exchange, he is prevented from exercising his latter function—that of dealing in securities and so his clients who buy or sell such securities are forced to transact their business elsewhere with a nonmember-a person unregulated except as the Federal Trade Commission may at some future date prescribe. The Dickinson report and statements made here by Mr. Corcoran emphasize the difficulty in formulating effective control of over-the-counter markets. In what possible way can this segregation be called a safeguard for the public? The activities of the broker-dealer as a member of a recognized exchange are under supervision and his methods scruti. nized. On the other hand, if we interpret the proposed law correctly, the nonmember dealer will be comparatively unregulated.

In February 1933, the bond market was completely demoralized. A sale of as few as five bonds would often cause a decline of several points from the last recorded sale. Bids at times were so far below last sales that frequently the stockexchange authorities would refuse to allow a sale to be made at the market but would fix a minimum price. Such action by the exchanges helped to stabilize the markets, but did not help the banks and insurance companies to raise the funds demanded by their depositors and policyholders. Frequently a broker-dealer would act as broker for his bank or insurance company customer and sell on the exchange as many bonds as the market would take at a fair price, and then in his capacity as dealer would negotiate with his client and purchase the balance of the block and through his own sales force distribute them.

A similar operation comes about through the functions of broker-dealer in distribution of stocks and bonds through options on securities which are worthy of recommendation to his clients. We have in mind a block of stock held in a back loan. Careful investigation convinced the broker-dealer of the merits of the stock; a circular was issued and through their sales organization they distributed a substantial block of the stock. As broker they were able to stabilize the mar. ket by purchasing such stock as was offered for sale on the exchange and sell such stock as was wanted while the distribution was going on.

We believe the question of segregation, which involves over-the-counter transactions, is grave enough in its possibilities of harm to both the investing public and the broker-dealer and his employees to justify the appointment of a committee to study every phase of the proposed segregation.

Under Margin requirements on long accounts," section 6 (a) may possible have been designed to protect brokers, but would work serious hardships upin small corporations throughout the country and upon owners of their unlisted securities by destroying their collateral value. The burden of registration rew quirements under the act may force many small and medium sized corporations to remove their securities from listing on exchanges in smaller financial centers, thus aggravating the situation. The drastic and rigid margin requirements under section 6 (b) would in all likelihood prompt further substantial liquidation of securities. Those responsible for the writing of this bill, no doubt, were largely influenced by the revelations made before the Banking and Currency Committee of the Senate, and, as is often the case, when concentrating upon abuses and their correction the suggested remedy may do an incalculable harm. Will the commission at all times in the future be better able to regulate the amount that can be safely loaned on a given security than broker-dealers and the banks from whom they in turn borrow?

We believe that the volume of credit used by stock exchange members can be regulated under the banking act of 1933; the effective curb to undue speculation is the curtailment of credit. Prices of stocks cannot be advanced inordinately unless the purchases can be financed. Officers of banks with their knowledge of security markets who pass upon collateral loans, when acting solely in the interest of the depositors and stockholders, are able to place proper loan values on collateral offered. Thus unwise and destructive speculation can be better regulated.

It is our belief that the reasons for regulating stock exchanges and their members arose from the disclosures developed by the investigations of the Banking and Currency Committee of the Senate in the past 2 years. We believe that the overwhelming majority of the members of the New York Stock Exchange are in whole-hearted sympathy with your desire to eradicate any practice detrimental to the best interests of the public and believe if the governors of the New York Stock Exchange had been more fully advised of the feeling in different parts of the country toward practices that some regarded as detrimental to the best interests of the public, that remedial measures would have been adopted sooner.

If, as we recommend, the management of the exchanges is to be left to the exchanges with such regulation as Congress decrees, we believe the opinions of the various parts of the country should be expressed through representation on the board of governors of the New York Stock Exchange by members located in various parts of the United States.

We are convinced that the day to day management of the New York Stock Exchange must be conducted by governors available for immediate decisions. For that reason it may be inadvisable to enlarge the governing committee to a point where it would be difficult to obtain a quorum, but the out-of-town members selected could be formed into an advisory committee to meet frequently with the governing committee.

Following our belief that the proposed regulations are suggested as a result of the disclosures of certain practices on the New York Stock Exchange, we presume the regulations suggested are for the purpose of eliminating such practices and respectfully suggest that the regulations be confined thereto and not extended to affect other functions of broker-dealer business to the detriment of the general public.

With that in mind we suggest changes in several sections under the heading "Definitions.” Section 3, subdivision 4, to read, “The term 'broker' means any person engaged in a business of effecting transactions in securities for the account of others, for which service a commission is charged. The definition as given in the bill could be interpreted to include banks and trust companies who buy securities for the account of others.

Section 3, subdivision 5 to read, “The term 'dealer' means any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise, the chief purpose of which is to give investors a service that will enable them to buy or sell securities, whether listed or not, which cannot be purchased or sold to better advantage on a national securities exchange. A dealer also may be an underwriter and distributor of securities.

We urge the elimination of section 6 for reasons given previously.

We urge the elimination under, “Restrictions of members borrowing” section 7 (a).

To prohibit a member of a national securities exchange from borrowing from any person other than a member bank of the Federal Reserve System would work an extreme hardship on broker-dealers located outside of the principal financial centers. In the ordinary conduct of business broker-dealers find it necessary to carry open accounts with their correspondents in the financial centers where the larger stock exchanges are located. If broker-dealers are denied the privileges of carrying such accounts with their broker correspondents, they could only use a member bank of the Federal Reserve System to clear their transactions. Even if practical, this would naturally incur another charge to be passed on to the public.

We suggest a change in the heading, "Segregation and limitation of the fubstions of broker, specialist, and dealer", on page 21 to read "Segregation and limitation of the functions of broker and specialist.

It has been stated before your committee that the segregation of "broker" and "dealer" was to give greater security to the clients of brokers, reciting the failure of four New York Stock Exchange firms, chiefly because of their "dealer" commitments. Compare the markably low percentage of failures of private banking firms to other failures and we believe you will agree that their is no apparent need to prescribe such stringent regulations as would destroy the necessary part of our financial structure as would be the result of the proposed segregation of broker and dealer. We strongly urge the elimination of the first sentence of section 10.

We appreciate the opportunity you have given us to appear before you and express our views on the pending legislation.

William G. BAKER, Jr.,
John C. LEGG, JR.,

Representing 18 broker-dealers of Baltimore, Md.


March 12, 1934. Hon. Sam RAYBURN, Chairman Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C. MY DEAR CONGRESSMAN: In response to your letter of March 10, concerning an opportunity to be heard on the bill proposing to regulate stock exchanges, we regret that time will not permit us to be heard directly, but in accordance with your suggestion we are enclosing to you a copy of the statement presented by us to the Senate Committee on Banking and Currency concerning the same subject. We request that you will make this statement a part of the record before your committee and that it be considered by the committee when the bill is taken up in executive session. Sincerely yours,


March 1, 1934. The Merchants' Association of New York, representing some 4,500 business enterprises and touching almost every branch of business and industry in the Nation, is profoundly disturbed by some of the provisions of the Fletcher-Rayburn bill to regulate security exchanges (H.R. 7852; S. 2693).

It is disturbed primarily by the extent to which the terms of these bills would subject all business and industry, both large and small, in this country to arbitrary bureaucratic control, and secondarily to the restrictions which would be placed upon the open market for corporate securities.

The association frankly recognizes that the period of economic depression which we are now experiencing has emphasized faults and abuses in the financial system under which we were operating in the preceding period of prosperity. It has no desire to condone the abuses nor to perpetuate the faults, but it does insist that in the effort to remedy these faults and abuses we should not cripple legitimate business, stifle initiative, destroy the liquidity of securities or place our private business at the mercy of bureaucratic inquisitors operating under blanket authority.

As business men, we believe that under any sound, advanced form of financial organization, we are entitled to a market to supply our needs for long-period capital and to an organization capable of transferring ownership rights in already existing securities properly and efficiently.

The Federal Securities Act, through its too drastic restrictions, liabilities, and penalties, has to a dangerous extent deprived us of the opportunity to obtain new long-period capital on reasonable terms. The Federal Banking Act of 1933, by requiring the divorce of banking affiliates from our large commercial banks, has greatly restricted the organizations engaged in or capable of carrying on invesiment banking. This association approves of the divorce of banking affiliates, but

it desires to point out that this proper act, taken in connection with the restrictions of the Federal Securities Act and the provisions of the Fletcher-Rayburn bill prohibiting the exercise of the functions of broker and underwriter by the same persons or companies, will so greatly restrict the capacity to perform the functions of investment banking as to make unnecessarily difficult the supply of long-period capital which is absolutely essential for the return and maintenance of industrial and business prosperity.

We are also mindful of the fact that labor is indirectly concerned with this aspect of the matter because when there is insufficient capital available to a company it cannot employ as many workers as it otherwise would.


Lodging the control over the securities market in the hands of the Federal Trade Commission is open to very serious objections. Since its creation over 20 years ago the Federal Trade Commission has been given various duties from time to time.

The most important of these duties were imposed by the Federal Securities Act of 1933. These duties are sufficiently important to require all the time and ability which the members of the Commission may possess without adding thereto the task of supervising and preparing regulations for the conduct of an extremely technical, delicately adjusted business with manifold ramifications into every part of the world.

We respectfully submit that if a Federal regulatory body is to be set up at all it should be set up for the sole and specific purpose of regulating security exchanges and that a large majority of its members be men thoroughly familiar with the problems of security markets.

We also urge, inasmuch as by far the greater part of the securities exchange business is concentrated in New York City, that the office of whatever regulatory body is set up should be located in New York City, the business capital of the country, in order to relieve business men from the expense and delay inseparable from transacting business with a regulatory body located in Washington.


It is common knowledge that the reports required by the Interstate Commerce Commission impose a tremendous cost upon the public utilities now under its regulation. It is also common knowledge that the Federal Trade Commission had from time to time required corporations to expend huge sums gathering information for that body from which little or no constructive results are discernible.

We are fearful that, if the body charged with the regulation of security exchanges and of securities listed thereon is given the blanket authority proposed in the Fletcher-Rayburn bill to require information of the issuers of all securities listed on exchanges, it will result in great waste and extravagance for the compilation of information which will have little or no real value when submitted.

Our great railroad corporations find the expense of filing information for the Interstate Commerce Commission a serious item. Compilation of similar records for the Federal Trade Commission would be a very serious burden upon businesses of ordinary size and might be particularly burdensome if called for in periods of seasonal activity. The tendency to require too voluminous and repetitious information would be particularly strong if the regulatory body were made the Federal Trade Commission and the Commissioners themselves were so preoccupied with their many other duties that the actual work of investigating and analyzing reports on business organizations was left to subordinates.

We, therefore, strongly urge that the power of the regulatory body to demand information be sharply restricted.


The very broad definitions of “member", "broker”, and “dealer" contained in section 3 make the requirements of section 6 unnecessary restrictive of credit on the securities of companies not listed on an exchange.

While New York is, of course, the headquarters for very many large companies as the most important center of commercial business and is the largest manufacturing center in the country, it is also the home of an even greater number of comparatively small and medium-sized companies whose securities are not listed

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