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on any exchange, but which are thoroughly sound and profitable. Their securities are certainly entitled to some credit facilities from persons who are acquainted with their worth. This criticism is even more pertinent if the definition of a “member" includes a bank buying or selling securities for its own account or as agent for its customers.

The weaknesses and limitations of the margin requirements proposed in subdivision (b) of section 6 have been thoroughly discussed by others, and the Merchants' Association, in this respect, will merely record its concurrence in the objections already raised, except that it particularly objects to the adoption of any restriction which would lead to a wave of deflation through forced liquidation of loans.

We are strongly inclined to believe that the present margin restrictions of the New York Stock Exchange are sound and reasonable, and that the control of margin requirements should be left in the hands of this body on the ground that it is thoroughly conversant with past experiences in this field and able to act quickly and effectively to remedy faults in the situation as they arise because of its intimate acquaintance with daily developments. Certainly if any margin requirements are to be written into law they should only be of the most flexible nature.

ODD-LOT BUSINESS

The provisions of sections 7 (c) and 10, which prohibit a broker from acting as a principal, apparently would so restrict his activities as to make impractical the odd-lots business which is the only means by which many thousands of legitimate investments can be made. We cannot see any legitimate objection to a man investing in less than 100 shares of high-grade stocks nor any reason for penalizing him other than the small premium required by the rules of the New York Stock Exchange for purchasing less than a round lot. A purchase of 90 shares of American Telephone & Telegraph Co. stock, for example, involves over $10,000, but if the odd-lot business is practically destroyed, as is reasonably argued it would be under the terms of this bill, a man would be practically prohibited from making use of such an investment to finance his business and he would be thereby encouraged to invest in lower-grade stock. We are firmly of the opinion that any advantage which may be gained by separating completely the operations of a broker and of a dealer would be more than offset by the penalty placed upon millions of legitimate investments, particularly those of men and women of small means or businesses of moderate size.

PROXIES

We believe that the provisions of section 13, which require any person soliciting a proxy to send to the person solicited, the names and addresses of persons from whom similar proxies are being solicited, is another instance in which the disadvantages outweigh the possible advantages. The necessity for printing a stockholders' list every time a stockholders' meeting was held would be a considerable item of expense without conpensating advantage in a great majority of cases. We recommend that this provision be eliminated.

OVER-THE-COUNTER MARKETS The Merchants' Association objects, on behalf of the many small companies which are not listed on any exchange, but which within narrow circles are well known, to the provisions of section 14 insofar as they would prohibit dealing in unlisted securities without complying with all the rules and regulations which the Commission might see fit to prescribe.

AUTHORITY

OVER

ACCOUNTS

AND

RECORDS

AND EXPENSE

OF EXAMINATIONS The Merchants' Association questions the desirability of the provisions of section 16, which would permit the Federal Trade Commission to require the preparation of any accounts and records which it sees fit and to assess the expense of any examinations made by its order against the company examined. This is very broad inquisitorial power bordering closely on deprivation of property without due process of law. It is obviously open to great abuse at the hands of subordinates and could be carried to an extent which would make a given business unprofitable through too great an increase in its overhead.

EMPLOYEES OF THE FEDERAL TRADE COMMISSION This association further objects to the exemption of the employees of the Federal Trade Commission from the requirements of the Federal civil-service law as provided in section 30. Past experience with newly created Federal agencies has proven that such an exemption provides a large amount of political patronage and that the efficiency of any agency staffed in this manner is greatly reduced. We respectfully submit that any regulatory body set up with broad powers over security exchanges and general business must be as free from political influence and the inevitable inefficiency which goes with political patronage as possible. We, therefore, strongly urge that this section be amended to require that all of the employees of the regulatory body, with the possible exception of a few technically qualified chief subordinates, be recruited under the restrictions of the Federal civil-service law,

CONCLUSION In conclusion the association believes that unless this bill is substantially modified in the directions outlined above, its enactment would do more harm than good both to the business community and the investment public by causing deflation of sound loans, by unduly restricting the investment market for long-term capital, by unwarranted restrictions upon credit facilities for the securities of small companies and small investments, and in the laudable endeavor to protect the investing public against fraud, will so cramp that same public with bureaucratic methods and control as to destroy or reduce the value of sound securities far more than the sum which may be saved by reducing fraud.

We most earnestly urge that the importance of the question involved is such as to warrant the most careful consideration for every proposed phase of this subject and the enactment of legislation after mature deliberation. Above all whatever statute is enacted should not be punitive in spirit nor intended to substitute Government supervision and control for the initiative and detailed knowledge which can only come from long and intimate acquaintance with the manifold forms of business organization and needs.

NATIONAL ASSOCIATION OF RAILROAD AND UTILITIES COMMISSIONERS,

Washington, D.C., March 15, 1934. Hon. SAMUEL RAYBURN, Chairman Interstate and Foreign Commerce Committee,

House of Representatives, Washington, D.C. DEAR SIR: By direction of the chairman of the committee on legislation of the National Association of Railroad and Utilities Commission, I desire to make certain suggestions concerning H.R. 7852; and I request that this letter be made a part of the printed record of the hearing on that bill.

First, with respect to section 18 of the bill. That section gives to the Federal Trade Commission very broad power affecting exchanges and corporations which issue securities listed upon exchanges. The commission is empowered to prescribe accounts and the methods for determining depreciation. Care is taken, however, to guard against conflict between the requirements of the Federal Trade Commission and the regulations imposed by the Interstate Commerce Commission for carriers subject to the jurisdiction of the latter commission. Lines 8 to 13 of the section, both inclusive, on page 34 of the bill as printed, provide as follows:

But insofar as they (the methods prescribed by the Federal Trade Commission) relate to any common carrier subject to the provisions of section 20 of the Interstate Commerce Act, as amended the rules and regulations of the Commission with respect to accounts shall not be inconsistent with the requirements imposed by the Interstate Commerce Commission under authority of such section 20."

This provision has been thought necessary, by those who drew this bill, to protect the authority of the Interstate Commerce Commission to regulate the accounts and depreciation practices of carriers subject to its jurisdiction.

The State regulatory commissions feel that Congress ought to be, and they believe it will be, just as solicitous to protect State regulatory agencies in the exercise of the powers which have been granted them as to public service corporations subject to their jurisdiction under State laws. They, therefore, ask that the following language be added to paragraph (b) of section 18:

"Provided, That nothing in this act, and no rule or regulation made hereunder, shall operate to relieve any common carrier or public utility from keeping any accounts prescribed under State law or from obeying any order or regulation made or imposed under the law of any State in which such common carrier or public utility shall be engaged in intrastate business."

I have also been requested by Mr. A. R. McDonald, who is chairman of our executive committee and a member of the Public Service Commission of Wisconsin, to make certain other suggestions to the committee, which are designed to protect the powers of those State commissions and boards which operate for the protection of investors in securities, commonly known as "blue-sky" commissions.

In Wisconsin, the Public Service Commission is not only vested with power to regulate public service corporations but it administers the blue-sky law.

Mr. Adolph Johnson, chief counsel of the securities division of the Wisconsin commission, has made a study of this bill, and has made certain suggestions for its amendment, which are incorporated in a memorandum which Mr. McDonald has given me, with the request that I present the same to your committee. I attach the same hereto, and ask that the same be printed with this letter. Yours very truly,

John E. BENTON, General Solicitor.

PUBLIC SERVICE COMMISSIONER OF WISCONSIN Memorandum to the commission. Re: H.R. 7852, a bill to provide for the registration of national securities exchanges

operating in interstate and foreign commerce and through the mails, and to prevent inequitable and unfair practices on such exchanges, and for other purposes.

A question has been raised with reference to the possible effect, if the bill referred to in the caption hereof is enacted, upon State regulation of persons and companies engaged in the securities business in particular States.

The only reference in the bill to State laws or State authority is set forth in section 26 (a) which provides

“The rights and remedies provided by this act shall be in addition to any and all other rights and remedies that may exist at law or in equity, except that this act shall supersede such laws of any State as are inconsistent with the provisions or purposes of this act and such laws of any State as provide for the supervision or regulation of the administration or conduct of business on any exchange which is licensed by the commission."

There is no statute in Wisconsin providing for the supervision or regulation of stock exchanges in this State. The only stock exchange now located in Wisconsin is the Milwaukee Grain & Stock Exchange which has a relatively small number of securities listed. Therefore it appears that there is now no law of this State with reference to that subject which may be superseded by the proposed Federal enactment. However, if at any future time the State desired to regulate or supervise the operation of the Milwaukee exchange or of any other exchange within this State, it appears that the language above referred to would prohibit any legislation for that purpose.

However, the State does have legislation regulating the business practices and conduct of persons and companies engaged in the sale of securities in this State either as dealers or brokers. That legislation appears in the statutes as chapter 189, commonly known as the "securities law." There is no specific provision in the bill considered herein which has the effect directly of superseding any provisions of the securities law. However, the bill does confer upon the Federal Trade Commission extremely broad powers to regulate and supervise brokers and other persons, and authorizes the Commission to adopt rules and regulations in the exercise of said powers. If such authority to the Federal Trade Commission and the rules and regulations adopted thereunder are construed as exclusive powers, it appears that the authority of the respective States to regulate brokers engaged in business therein would be practically emasculated.

To point out the possibilities in this connection, attention is directed to certain specific provisions of the act. Section 14 of the act contains the following language:

"It shall be unlawful for any person singly or in concert with others to make use of the mails or of any means or instrumentality of communication or trsnaportation in interstate commerce for the purpose of making or creating, or ed

abling another to make or create, a market for any security, whether or not registered on a national securities exchange, without complying with such rules and regulations as the Commission may prescribe as appropriate in the public interest or for the protection of investors."

It will be noticed first of all that this provision is not a limitation upon persons engaged in the business of buying and selling securities, but is a restriction upon any person. There is probably some question as to whether the provision is constitutional inasmuch as there is at least a possibility that it may be construed as an unwarranted interference with the rights of an indiviqual to hold and dispose of property. Aside from that question it appears that if the language is construed literally, every person offering a security for sale through the mails or in interstate commerce must make such offer in accordance with rules and regulations prescribed by the Commission. Undoubtedly many uninformed persons not in any way engaged in the securities business would expose themselves to liability through ignorance of the existence and content of rules and regulations.

If the rules and regulations adopted by the commission with reference to overcounter markets were construed as exclusive regulation thereof, the rights of the States to regulate such markets would be eliminated and the public interest would be seriously impaired. At the present time there is in the city of Milwaukee particularly a rather broad market on building and loan stocks, baby bonds issued by the city of Milwaukee, real estate bonds (including those in default and those not in default), and preferred stocks of certain Wisconsin utilities. The practices of dealers and brokers in connection with the sale of such securities may be controlled by the Public Service Commission of Wisconsin through the licensing provisions of the Wisconsin Securities Law. In the event that unfair or inequitable practices are disclosed, the person who indulges in said practices may have his license revoked and thus be removed from the securities business. It is unnecessary for the Wisconsin Commission to adopt general rules and regulations relating to said business or said practices, but each case may be examined and the determination based upon the facts of the particular case. It is submitted that such regulation by a local commission familiar with local conditions, local securities, and local brokers and dealers, would be more effective than regulation by a central body located at Washington. There can be no objection to such a situation as a supplement to State regulation providing the language of the section under consideration is amended to clearly indicate that it applies only to persons engaged in the business of buying and selling securities, but if such Federal regulation through prescription of general rules and regulations is to be continued as in any sense exclusive regulation, it is highly objectionable as an invasion of State rights generally, and particularly as pairing the State's right to protect its local investors.

The first sentence of paragraph (c) of section 18 of the act contains this language:

«The authority above given the Commission shall include, among other things, authority to prescribe such rules and regulations for national securities exchanges, their members and persons transacting a business in securities through such members, in addition to those specifically provided in this act, as it may deem necessary or approrpiate in the public interest or for the protection of investors, and may by its rules and regulations more specifically define the form and procedure to be followed in carrying the provisions of this act into effect.”

It appears that under the language above referred to a person engaged in the business of buying and selling securities exclusively for his own account may be subject to Federal regulation under the provisions of this section. There can be no objection to imposing the provisions of the act upon persons engaged in the business of buying and selling securities so far as their dealings with the public are concerned, but it is doubtful if the act should go so far as to regulate every individual who may buy and sell for his own account. This is particularly true in view of the other provisions of the act specifically regulating dealings by persons having interest in the issuer or having access to information not available to the public generally.

The balance of paragraph (c) of section 18 deals with regulation of many practices of dealers, and again it may be stated that there is no objection of such regulation, does not impair the rights of the States to regulate licensed dealers and brokers with reference to the fairness, honesty, legality, and equity of their practices, but that if said provision for Federal regulation contemplates

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exclusive regulation, it is highly objectionable. For instance, in lines 14 to 18 on page 35 of the printed bill, this language appears:

"The commission may fix or prescribe the method of fixing uniform rates of commission, interests and other charges, may prescribe minimum units of trading, rules limiting the manner, method, and place of soliciting business'

And so forth. It is submitted that the italicized portion of the above language deals with a matter which is particularly of local interest and should be subject to supervision and regulation by local authorities. To deprive local authorities of such authority again constitutes an invasion of State rights generally and particularly impairs the State rights to use its agencies for the protection of its investors. Sec. 16 of the act contains this language:

‘Every national securities exchange, every' member thereof, every person transacting a business in securities through the medium of such member, every dealer making or creating a market for securities through the mails or the use of any means or instrumentality of interstate commerce, shall make, keep, and preserve such accounts, correspondence, memoranda, papers, books, and other records and make such reports as the Commission by its rules and regulations may prescribe. The accounts, correspondence, memoranda, papers, books, and other records of such persons shall be subject at any time or from time to time to such periodic, special, or other examinations by examiners or other representatives of the Commission as the Commission may deem necessary or appropriate, and the cost of such examinations, including the compensation of the examiners, shall be fixed by the Commission and paid by the person examined. Any representatives of the Commission designated by it shall have access to the premises or any part thereof of any national securities exchange and the right to attend any meeting or proceeding of the exchange or any committee thereof."

The first conclusion which may justifiably be reached with reference to the above language is that it imposes an impossible administrative burden upon the Federal Trade Commission with reference to effective examination of books and accounts of the persons referred to in the section. However, from the standpoint of regulation it appears that this provision, if it is exclusive, takes away from the State all right to regulate persons engaged in the securities business within its borders. It will be noted that the section is not applicable only to securities exchanges and members thereof. It applies to every person transacting a business in securities through the medium of such members. Thus, it is applicable to every person who buys and sells securities for his own account for the purpose of making a profit even though he does not deal with the public. It also applies to every dealer making or creating a market for securities through the mails or the use of any instrumentality of interstate commerce. Thus, if a dealer in Milwaukee underwrites an issue of securities and attempts any solicitation of orders for the purchase of said securities through the mails, even though it is done exclusively in intrastate commerce, he is subject to the provisions oi this section. Even though the distribution of the securities was completed long before the act takes effect, if said dealer attempts to maintain a secondary market in such securities and receives inquiries by mail and replies to inquiries by mail in intrastate commerce, he is subject to the provisions of the section. There may be some question as to the propriety of the Federal Government attempting such detailed regulation with reference to purely intrastate business. However, if said policy contemplates an exclusive regulation thereof so that the State is left without authority to regulate in accordance with its laws the practices of persons engaged in strictly intrastate business within its borders, the provision has no justification.

It is submitted that section 26 (a) of the act referred to above should be amended, and that there should be incorporated in the act a provision substantially similar to section 18 of the Securities Act of 1933, which contains this language:

"Nothing in this title shall affect the jurisdiction of the securities commission (or any agency or office performing like functions) of any State or territory of the United States, or the District of Columbia, over any security or any person."

It is further submitted that the provisions of the act should be clarified to establish clearly that the regulation provided shall affect persons and companies engaged in the business of buying and selling securities to and from or for members of the public and not to a person who is not engaged in the securities business except as he buys and sells securities for his own account.

ADOLPH JOHNSON, Chief Counsel. MARCH 6, 1934:

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