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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 he, 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, hut 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 bill.

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.

At the other end of the scale are exchanges where the unlisted trading privilege is just a dodge to create a quotation.

The only intelligent resolution of the difficulty you can make at the present time is to give the Commission power to determine between the conditions on which unlisted securities are admitted to trading privileges; let the Commission pick out those exchanges on which the safeguards for unlisted trading privileges are now half decent, and let those exchanges continue for 1 year in those trading privileges the securities so privileged just before the act goes into effect for a year. In the meantime have the Commission study the problem and report to Congress by the opening of the next Congress. Congress will then have disinterested advice how to handle this problem of the unlisted trading privilege, and the exchanges will have had an intervening time in which possibly to work out the problem for themselves.

Mr. LEA. Well, now, as to the status of those unlisted securities that have the trading privilege after next January, assuming that Congress takes no further action than passing this bill as it is, what would be their status?

Mr. CORCORAN. This bill gives them sufferance until next March. That would give 3 months in which Congress can do something. If Congress does not act, they could no longer be traded under the privilege, and must simply have to list or go to the over-the-counter market.

Mr. LEA. They would then be denied the privilege of trading on the markets?

Mr. CORCORAN. And in that time, you are considering-
Mr. LEA. On the exchanges, of course.

Mr. CORCORAN. You will find that is covered in the first full sentence on page 35 of the bill. You consider them as if they were listed securities. The problem is a very difficult one, sir, because you have all gradations of requirements by exchanges for this curious animal called an “unlisted security” admitted to trading privileges.

Mr. LEA. So if a stock is listed on the exchange in New York, could it be sold on the Chicago exchange without listing in Chicago, under this bill?

Mr. CORCORAN. This bill, sir, says that if at the present time it is sold without listing in Chicago, say, on the Chicago Curb, it may continue so to be sold. That is, the bill preserves the status quo for a year while the problem is being worked out.

Now, the New York Stock Exchange makes corporations which list with it agree not to permit, so far as the corporation can, unlisted trading in the corporation's securities on other exchanges. The theory of the New York Curb is that if a security is listed on any exchange, any other exchange ought to be free to trade in it without the necessity of requiring the security to be listed on the second exchange.

Mr. LEA. Well, looking at it from the long-time viewpoint, say, take the situation 4 years from now, if this bill becomes a law, a stock is listed on the New York Stock Exchange, and somebody wants to list it for trading purposes on the Chicago exchange. Will that be permitted?

Mr. CORCORAN. The bill has nothing it in, sir, to prevent the security being so listed upon the Chicago exchange. Even if Congress should not act before next March 1, there is no prohibition

against the stock being listed on the Chicago exchange if the issuer will list it as he listed it on the New York exchange, and if the issuer is permitted, by the rules of the New York Stock Exchange, to list on the Chicago exchange. They are cutting across this matter both the rules of the exchanges and the law.

The New York Stock Exchange does its level best to prevent the listing of any

stock listed with it upon a second exchange, so that the market is concentrated on the New York big board.

The other exchanges, of course, fight the New York Stock Exchange on that point.

Mr. LEA. Well, if this bill becomes a law, will it permit the memers of the San Francisco Stock Exchange, for instance, to place on the San Francisco Stock Exchange, for trading purposes, a stock listed on the New York Stock Exchange?

Mr. CORCORAN. Unless the security had been admitted to unlisted trading privileges on the San Francisco Exchange on March 1 of this year; no. The present situation is kept in status quo. There could be no new unlisted stock traded in upon the San Francisco Exchange until the Commission's report and Congress' consequent decision. The problem is a very difficult one. The exchange does not have control over the issuing corporation when the security is not fully listed as it has when the security is fully listed. Someone from the outside, usually a broker, comes in and gives what the exchange considers adequate information. The exchange can check some of that information in Poor's and Moody's, but there is never a listing agreement between the corporation and the exchange, by which the exchange has a contract with that corporation, as there is in the case of listings on the New York Stock Exchange.

Mr. LEA. From the standpoint of the public, when a stock is shown as qualified by being registered on any listed exchange, in accordance with the regulations of the Federal Government, why should not the stock be sold on any listed exchange?

Mr. CORCORAN. We are talking now, sir, of a case where a stock is listed, say, on the New York Stock Exchange, fully listed, and the problem is whether it can be traded in on any other exchange.

Mr. LEA. Yes; in other words, if a stock establishes its right to be presented to the public for purchase, when it once obtains a listing under the rules of the Federal Government which provides for that?

Mr. CORCORAN. That, sir, depends upon a consideration of whether the first exchange, the only one upon which the stock is fully listed, can really maintain control of the issuing corporation if the stock is traded in on a half a dozen other exchanges, too. The theory of the New York Stock Exchange is that it cannot keep adequate control of the situation if it does not have all of the trading in the stock concentrated through itself.

The claim of the other exchanges is that there is no reason why Detroit should not be able to trade in New York Stock Exchange stocks if Detroit wants to. There are so many intricacies involved in the relationship between the exchanges themselves and between the exchanges and the listed companies, that no adequate answer can be made to the problem in a limited time.

So the bill freezes the situation for a year, tells the Commission to study the problem and to put the problem up to the next Congress.

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