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correct: That so far as this legislation is concerned, it does not interfere with a bank making a loan on any terms it sees fit to its customer or customers, except insofar as the Federal Reserve Board passes regulations to limit loans by banks coming under its jurisdiction?

Mr. CORCORAN. No; that is not quite so. It says—may I read this section that covers the whole thing?

Mr. MAPES. It would be so except in case the loan is made for the purpose of speculation?

Mr. CORCORAN. Unless the loan is made for the purpose of purchasing or carrying securities. Yes, your statement is correct.

Mr. MAPES. What limitation is put upon the borrowing of funds, even though they are to be used for speculative purposes?

Mr. CORCORAN. Except where the Federal Reserve Board exercises what I call the escape valve, which I have just been discussing with Mr. Wolverton, the banks are expected not to lend for the purpose of carrying or purchasing securities in amounts which represent a higher percentage of the market value of the collateral than a broker could lend. But when the loan is made not for the purpose of carrying or purchasing securities it may be made without reference to margin requirements, so long as it is made under such rules and regulations as the Federal Reserve Board prescribes to make certain that the excess loan will not be used to carry and purchase securities.

Mr. Mapes. Unless the bank knows that the funds are to be used for speculative purposes, it may make such loans as it sees fit, if it complies with the regulations.

Mr. CORCORAN. Of the Federal Reserve Board.

Mr. MAPES. Of the Federal Board. What obligation is placed upon the bank to ascertain whether or not that the loan is wanted for speculative purposes?

Mr. CORCORAN. That is up to the Federal Reserve Board.

Mr. Mapes. As to whether or not the funds are to be used for speculation?

Mr. CORCORAN. That is up to the regulations of the Federal Reserve Board.

Mr. KENNEY. Mr. Chairman
The CHAIRMAN. Mr. Kenney.
Mr. KENNEY. What section are you referring to?

Mr. CORCORAN. We are talking, sir, about subsection (e) of section 6, which begins on page 17.

Mr. WADSWORTH. May I ask a question?
The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. To clear it in my own mind, Mr. Corcoran, I call your attention to the sentence which commences in line 6.

The CHAIRMAN. Where?
Mr. Wadsworth. On page 18.

The provisions of this subsection shall not apply to a person making a loan other than in the ordinary course of business.

Mr. CORCORAN. Yes.
Mr. Wadsworth. Will you clarify that, clarify my mind on that?

Mr. CORCORAN. That was to meet the situation, sir, suggested here of a friend wanting to lend money to a friend to help on a margin account, not as a business loan but to make sure that the account could be carried-a father making a loan to his son, where the trans

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action is not really a commercial loan in the ordinary course of business.

Let me be clear about one thing. You will notice that this section, subsection (e) limits banks only on the amount they can lend on listed stocks. On unlisted stocks, the banks can lend anything they want to. The bank examiner takes care of the problem of overvaluation of unlisted stocks.

Mr. MAPES. Even though the funds are to be used to speculate with?

Mr. CORCORAN. Yes. A broker cannot lend on unlisted stocks at all.

Mr. MAPES. So that the limitations in the other draft, that were put upon banks making loans for use primarily for business purposes are substantially removed?

Mr. CORCORAN. Yes; that is true.
Mr. Mapes. There is no limitation in that respect in the new draft?

Mr. CORCORAN. You see, value of unlisted securities is never exactly known, except in unusual cases of a highly organized market such as the New York bank stock market. In the case of little family corporations, such as we have in New England, there is really no market for that unlisted stock. It is too closely held. A bank which lends on it has to be outside the scope of any specific margin requirements.

Mr. CROSSER. Mr. Corcoran, would you mind restating as concisely as possible your justification for applying this bill to transactions that have already occurred?

Mr. CORCORAN. The provisions of the bill do not apply to transactions that have already occurred.

Mr. CROSSER. Well, you are giving 5 years.
Mr. CORCORAN. Five years?
Mr. CROSSER. I mean, why apply that at all?
Mr. CORCORAN. You mean, why the 5-year limitation?
Mr. CROSSER. Yes.
Mr. CORCORAN. That was inserted-

Mr. CROSSER. I do not mean that, at all. You have misunderstood me.

Why have it apply to these matters at all, even by requiring them to be closed up at the end of 5 years?

Mr. CORCORAN. That limitation, sir, was put in at the suggestion of the banking authorities in the Treasury, who thought that the banks should be given warning that at the end of 5 years they would have to have made some final adjustment on accounts now under water. The banks would have 5 years in which to work out those loans, but would definitely understand that at the end of 5 years the loan had to be out of the bank. Mr. Crosser. Why, particularly, did you provide 5 years?

Mr. CORCORAN. A suggestion, sir, was made for 3 years and then it was loosened up to 5. I should think the Treasury wanted, sir, as part of the new banking program, to prevent banks carrying bad loans indefinitely. At the end of a certain period the bank would have to wipe the loan off its books.

Mr. CROSSER. Then it is for the purpose of taking care of the banks, rather than the stock exchange.

Mr. CORCORAN. Oh; yes, sir. Brokers will get out long before the 5 years.

Mr. MARLAND. Do you not think that that will have a tendency to freeze these loans?

Mr. CORCORAN. What do you mean by that, sir?

Mr. MARLAND. A borrower will point out to the bank that be, the banker, does not have to call the loan for 5 years.

Mr. CORCORAN. The bank examiner may keep shaking down the bank, sir.

Mr. MARLAND. Well, do you not think that that might happen?

Mr. CORCORAN. I have never before heard the objection made to this bill that it was too lenient. It is a very hopeful sign.

Mr. HUDDLESTON. May I ask about the application of this requirement on margins? The bill applies the provision to all past transactions, except that it gives the banks a special time of 5 years to close these transactions out?

Mr. CORCORAN. Yes, sir.

Mr. HUDDLESTON. Now, then, as I understand you, that is a banking provision, and has no bearing on the regulation of the stock exchanges. In short, the purpose of this limitation on margins is to prevent speculation?

Mr. CORCORAN. Yes, sir.

Mr. HUDDLESTON. Now, then, so far as past transactions are concerned, the bad effect has already resulted and there is no purpose with reference to speculation that can be served by dealing with past transactions at all?

Mr. CORCORAN. You are quite right, sir. This provision has been put in as a matter of banking policy.

Mr. HUDDLESTON. Why do we assume also to deal with banking legislation when we are dealing with an entirely different subject?

Mr. CORCORAN. Well, sir, when the representatives of the Treasury and of the Federal Reserve Board come down here, they can probably answer that question for you better than can I.

Mr. HUDDLESTON. But it was in the original bill?

Mr. CORCORAN. No, it was not in the original bill. The original bill applied to all transactions after October 1.

Mr. HUDDLESTON. Which you say has no relation to the regulation of stock exchanges, attempts to deal with past transactions has no relation to stock exchanges.

Mr. Corcoran. It has a relation, sir, because you have to permit substitution in accounts, and unless at some point you apply the new margin provisions, a man with an account now being carried at very low margins, could substitute in and out and really be running a continuing margin account on the old margin basis.

Mr. HUDDLESTON. I am talking about the provision applying to past transactions, would have no bearing upon speculation for the future.

Mr. CORCORAN. You suggest taking out the January 1, 1939, date?

Mr. HUDDLESTON. No, I do not refer to that at all. I am referring to the principles back of the original bill which you are undertaking to apply to margin limitations for past transactions.

Mr. CORCORAN. Not to past transactions, sir, but to existing accounts, which are still alive, of course.

Mr. HUDDLESTON. You have not confined it to substitutions, or to the repledging of collateral, or new collateral, or anything like that. You have applied it to previous pledges, by the original bisl.

Mr. CORCORAN. I know, sir, but an account is apparently existing fact. It is an account, no matter when

Mr. HUDDLESTON (interposing). It is not an account you are dealing with. It is collateral pledged for an account.

Mr. CORCORAN. Yes.

Mr. HUDDLESTON. And to that you apply in your original bill, and with this exception, in this bill, to past transactions.

The CHAIRMAN. Well, is it not rather to new transactions in the old matters?

Mr. CORCORAN. There are constant changes in accounts.

Mr. HUDDLESTON. But it is not the new transactions, or the current transactions, that you forbid by the bill that was brought in here originally. It was forbidden that a loan previously made be .continued on a certain margin of collateral previously pledged.

Mr. CORCORAN. That is true, sir. Now, do you want to go from there to the question about this bill?

Mr. HUDDLESTON. That is all I wanted to ask.

Mr. CORCORAN. May I go on now and talk about these margin provisions as a whole?

The CHAIRMAN. Yes.

Mr. LEA. I want to inquire as to the status of unlisted securities under this bill, and particularly as to their right to be sold on exchanges.

Mr. CORCORAN. Unlisted securities, sir?
Mr. LEA. Yes.

Mr. CORCORAN. You are thinking of the problem of the New York Curb?

Mr. LEA. Yes; or the San Francisco Curb.
Mr. CORCORAN. Unlisted trading privileges?
Mr. LEA. Yes.

Mr. CORCORAN. Well, we have provided for that over on page 34 in section 11, sir, page 34, subsection (f).

That section relates to unlisted securities which at the present time have been unlisted, have trading privileges on the exchanges like the New York Curb Exchange, and the San Francisco Exchange. Those securities that already have unlisted trading on such exchanges are left alone, for 1 year, so that no harm is done to the present situation. In the meantime, I think that we had better read the subsection because it is rather complicated (reading]:

(f) The Commission is directed to make a study of trading in unlisted securities upon exchanges and to report the results of its study and its recommendations to Congress on or before January 3, 1935. If the Commission deems such action necessary or appropriate, for the protection of investors, it may by rules and regulations prescribe terms and conditions under which, upon the application of any national securities exchange, such exchange may continue until March 1, 1935, or until such earlier date as may be prescribed by law, unlisted trading privileges to which a security had been admitted on such exchange prior to March 1, 1934, and for such purpose exempt such security from the provisions of this section 11 and section 12. A security for which unlisted trading privileges are so continued shall be considered a "security registered on a national securities exchange" within the meaning of all other sections of this act. The rules and regulations of the Commission relating to such unlisted trading privileges for securities shall require that quotations of transactions upon any national securities exchange shall clearly indicate the difference between fully listed securities and securities admitted to unlisted trading privileges only:

The difficulty in a nutshell is simply this: You have three grades of securities. The first is those which are fully listed—the New York Stock Exchange will not trade in securities that are not fully listed. The second is those not listed but admitted to trading privileges. The New York Curb Exchange is a big exchange on which there is a great deal of trading in such unlisted securities. You understand, sir, what the difference is. In the case of fully listed securities the corporation issuing the securities itself applies for the listing, and as part of the listing application agrees to furnish information and afford certain protection to stockholders. In the case of securities only admitted to unlisted trading privileges, the security is never formally listed on the exchange, nor does the issuing company itself ever come within the jurisdiction of the exchange. But if a broker who wishes to trade in the security will vouch for it himself and furnish certain information about the security (and in the case of the New York Curb Exchange, if the issuing corporation consents, although it never comes within the jurisdiction of the exchange) trading is allowed to go on in the securities on the floor of the exchange in the same manner as with fully listed securities. To mark the difference between the added protection given the investor, where the corporation itself lists securities, as distinguished from the situation where somebody else merely applies for trading privileges, the New York Curb clearly marks with an asterisk in the trading quotations those securities which are fully listed and those which are not.

You have therefore three grades of securities. First, those fully listed, in which you have maximum protection for the public. Second, those which have unlisted trading privileges. For these the stockholders of the corporation have, so far as the market is concerned, although not as far as the information is concerned, approximately the same benefit he would have if the corporation had fully listed the security. Third, securities traded in an over-the-counter market, securities not listed anywhere at all.

The New York Curb makes this argument, if you will not recognize unlisted securities on exchanges, securities admitted to unlisted trading which should be preferred to over-the-counter securities will go to the over-the-counter market, where they will be even more difficult to regulate. But the danger is that if you encourage unlisted trading privileges in securities, which in the market sense alone will be substantially satisfactory for the stockholders, you will make it easier for a management that wants to duck the provisions of the bill about information to de-list fully listed securities and arrange through a broker for their admission to unlisted trading privileges.

There is no resolution of that argument possible right away. Different requirements for unlisted securities admitted to trading privileges are maintained by different grades of exchanges. Some exchanges may be brought to surround securities admitted to unlisted trading privileges with quite adequate protection although they cannot be as completely adequate as those protecting securities fully listed on the New York Stock Exchange.

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