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NATIONAL SECURITIES EXCHANGES REGULATION

WEDNESDAY, MARCH 21, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

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

The CHAIRMAN. The committee will come to order.

We will hear Assistant Secretary Smith of the Treasury Department.

STATEMENT OF TOM K. SMITH, ASSISTANT TO THE SECRETARY OF THE TREASURY, WASHINGTON, D.C.

The CHAIRMAN. We would like, Mr. Smith, for you to qualify by telling us what has been your experience as a business man for the last 10 years.

Mr. SMITH. I have been in the investment and banking business nearly 30 years. This is my thirtieth year. At the present time I am president of the Boatmen's National Bank of St. Louis, temporarily acting as Assistant to the Secretary of the Treasury.

With the indulgence of the committee, I should like to make a brief statement, after which I shall be at liberty to attempt to answer any questions you care to ask.

The major objectives of the National Securities Exchange Act of 1934 appear to be:

First. To establish Federal supervision over securities exchanges; Second: To prevent manipulation of security prices, and to protect the public against unfair practices;

Third: To prevent excessive fluctuations in security prices due to speculative influences;

Fourth: To discourage the use of credit in the financing of excessive speculation in securities.

With these general objectives, the Treasury is in full accord.

I was requested to study the bill to ascertain whether certain of its provisions might have a needlessly adverse effect upon the Government's financing operations or upon the financial structure of the

country.

With the limited time at my disposal, I have made a study of the bill from this viewpoint, and have submitted to the committee's counsel numerous suggestions and changes, most of which have been incorporated in the bill H.R. 8720, which has just been introduced.

I believe that for the most part the matters about which we were principally concerned have been corrected by those changes.

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The enactment of any regulatory measure of this scope affect so many different people and activities that it is difficult to foresee all of its possible consequences. Therefore, I have also seriously considered whether the provisions of the bill which affect Government financing and the financial structure of the country might operate to delay or obstruct business recovery. I believe that the language of those sections of the bill has been so revised as to minimize this danger.

Our study has necessarily been somewhat hurried, and we should, of course, hope to have the privilege of submitting to the Committee any further suggestions that may occur to us after we have had more time to study the bill.

Mr. BULWINKLE. Mr. Chairman

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Mr. Smith, you did not draft or assist in drafting the bill?

Mr. SMITH. No, sir.

Mr. BULWINKLE. You merely studied it?

Mr. SMITH. Certain features of it.

Mr. BULWINKLE. Would you mind, for the committee, telling what sections you studied?

Mr. SMITH. It would be easier, Mr. Bulwinkle, for me to tell you the sections we did not study, if I may answer that way.

Mr. BULWINKLE. All right.

Mr. SMITH. For the sake of brevity.

Mr. BULWINKLE. All right.

Mr. SMITH. We were directed to discard the sections having to do with or dealing solely with the control of the exchange and fixing the margins and sections of that sort.

Mr. BULWINKLE. So you did not have anything to do or you did not pass upon the question of whether or not specific margin requirements should be included in the bill?

Mr. SMITH. You mean the rate of margins?

Mr. BULWINKLE. Yes, sir.

Mr. SMITH. That was not submitted for our consideration.

Mr. BULWINKLE. Did you have any discussion about that section? Mr. SMITH. Nothing formal. There may have been some informal discussion.

Mr. BULWINKLE. Did you express your views?

Mr. SMITH. Would I?

Mr. BULWINKLE. Yes, sir.

Mr. SMITH. I am representing the Treasury. I prefer not to express any personal views.

Mr. BULWINKLE. Well, you were representing the Treasury as an official of the Government in order, as you say, to find out if certain of its provisions might have a needlessly adverse effect upon the Government's financing operations, upon the passage of this bill?

Mr. SMITH. The section under discussion-you will note the qualification in the statement.

Mr. BULWINKLE. Yes. What was your view of it as to the effectiveness of the credit control vested by the bill in the Federal Reserve Board?

Mr. SMITH. That was satisfactory to us.

Mr. BULWINKLE. That is all I care to ask you.

Mr. LEA. To what extent do you believe it is practicable for the Federal Reserve to control credit in restraint of speculative investments on the stock exchanges?

Mr. SMITH. That is a rather broad question. Now, let me be a bit deliberate about it.

We were asked to consider the specific control submitted by this bill, and it seemed to us that the arrangement made in that section was satisfactory.

Mr. LEA. Of course, this bill purports to place a restraint on speculative investments, and it has been suggested here that that restraint should be exercised through the Federal Reserve instead of through the regulatory body.

Mr. SMITH. Instead of through the Federal Trade Commission? Mr. LEA. Yes. What is your view upon that, if I may ask you? Mr. SMITH. As to whether we prefer one or the other?

Mr. LEA. Well, not that. It is a question of whether the proper authority

Mr. SMITH (interposing). We were not asked that.

Mr. LEA (continuing). Is exercised in the restraint of credit? Mr. SMITH. The bill, as submitted to us, placed that control in the Federal Reserve Board, we were asked whether that met with our approval, and we said yes.

Mr. LEA. But you had no further suggestions to make?

Mr. SMITH. That is the only consideration that we have given to it, Mr. Lea.

Mr. LEA. Well, did you give no consideration to the question of control of the credit policy involved in this bill?

Mr. SMITH. The controls that are set out in the part of it that was submitted for our consideration were considered and approved.

Mr. LEA. But no alternative method of control was considered? Mr. SMITH. We were not asked to submit alternative methods. We were asked to give our opinion of the measure as submitted. Mr. LEA. And as submitted it was satisfactory?

Mr. SMITH. Yes, sir.

The CHAIRMAN. Well, Mr. Smith, your authority certainly went to the extent of making any suggestions with reference to those provisions that you thought would be helpful to them?

Mr. SMITH. Along the line

The CHAIRMAN (continuing). Or cutting out anything in the provisions that you thought might be harmful?

Mr. SMITH. That is correct, Mr. Chairman.

The CHAIRMAN. And after those discussions, in which suggestions were made, you approved this bill?

Mr. SMITH. Yes, sir. We approved the part under discussion.
The CHAIRMAN. These sections of the bill?

Mr. SMITH. The point I wanted to make was, we were not asked where the control should be, whether it should be in the Federal Trade Commission or in the Federal Reserve Board. We were asked whether the arrangement of the sections placing control in the Federal Reserve Board was satisfactory, and if we thought the section could be improved or corrected. We offered suggestions which were accepted, and that answers your question, does it not, Mr. Chairman?

The CHAIRMAN. In other words, after a discussion on these amendments and after the bill was completed, the Treasury approved it? Mr. SMITH. Yes, sir; we approved the part under discussion. Mr. BULWINKLE. May I ask a question?

The CHAIRMAN. Yes, Mr. Bulwinkle.

Mr. BULWINKLE. Mr. Smith, you read the former bill this committee had before it for consideration?

Mr. SMITH. I did not; no, sir. Our consideration commenced with the first redraft a week ago Saturday morning.

Mr. BULWINKLE. The reason I asked you that is because I notice in your statement that the bill, as revised and redrafted, minimizes dangers.

Mr. SMITH. Well, that is for the purpose of identifying this as compared with the original bill.

Mr. BULWINKLE. Yes.

Mr. SMITH. We were called in on the first revision, and since that time it has, for study purposes, been rewritten several times.

Mr. BULWINKLE. Well, from the statement that you made to the committee, there still lurks in your mind a suspicion that there is a danger even in this bill?

Mr. SMITH. In the sections under consideration?

Mr. BULWINKLE. I am talking about the entire bill.

Mr. SMITH. I am not prepared to answer any questions, Mr. Bulwinkle, except in regard to the sections that were submitted for our consideration.

Mr. BULWINKLE. All right, sir.

Mr. MAPES. Mr. Smith, will you specify a little more definitely just what those sections were? You have said, as I understood you, that you did not consider that part of the bill which had for its distinct purposes the regulation of stock exchanges.

It has occurred to me that there were some things in this bill that did not regulate stock exchanges, and I have wondered if they were necessary to accomplish the general purposes of the legislation. I should like to know just what sections you considered, and what ones you did not consider.

Mr. SMITH. I should be delighted to make that perfectly clear.
The CHAIRMAN. Mr. Smith-

Mr. SMITH (interposing). I have no desire to dodge the questions. Now, would it serve your purpose to ask whether we considered certain questions, or certain sections?

Mr. MAPES. Your statement is very general. You have stated that you considered the bill from the standpoint of its effect upon Government functions only.

We have had a good deal of blanket approval of the bill and a good deal of blanket disapproval of it. That is not very helpful to those of us who have got to settle concretely whether the different provisions of the bill will stay in it or not. I should like to know just what sections you approve.

Mr. SMITH. What I had in mind is that you could ask whether we studied certain sections, and let me answer, or I will attempt to go through the bill.

Mr. BULWINKLE. Maybe I might assist by just suggesting, Mr. Mapes, have you a memorandum in your file as to which sections were submitted?

Mr. SMITH. I can tell you from the bill I have. I have noted them. on the bill.

Mr. MAPES. I should be glad to have you do that.

Mr. SMITH. Well, we did not consider section 3. Of course,

did not consider 1 and 2.

Mr. KENNEY. Will you please refer to the pages?
Mr. SMITH. I am referring to the sections.

we

Mr. KENNEY. Will you please refer to the page first; will you please

do that, so we can follow you better?

The CHAIRMAN. Section 2 is the title.

Mr. SMITH. We did not consider section 2.

That ends on page 4.

We did consider section 3 insofar as it definitely referred to banks,

types of securities, and things of that character.

That takes us over to

Mr. KENNEY. You did not consider 4, on page 10?

Mr. SMITH. Nor 5.

Mr. KENNEY. Page 13?

The CHAIRMAN. Section 6.

Mr. SMITH. Section 6 was considered only in connection with the Federal Reserve supervision and the flexibility of bank lendings. Mr. MERRITT. I did not quite get that.

Mr. SMITH. We considered that part of section 6 referring to the Federal Reserve supervision and flexibility of bank loans. Mr. MAPES. And you approved that provision?

Mr. SMITH. Yes, sir.

Mr. MAPES. Of course, that is the section stating or fixing the amount of the margin.

Mr. SMITH. It is not a margin; it is the amount of the original price that you may lend as distinguished from a margin.

Mr. MERRITT. You did not take into account the effect of those

margin provisions of the legislation as drawn?

Mr. SMITH. You do not mean the margins. They do not fix the margins. They fix upon a percentage of the original cost.

Mr. MERRITT. You did not consider the effect of that?

Mr. SMITH. That was not submitted.

Mr. MERRITT. Upon business?

Mr. SMITH. No, sir; that was not submitted.

The CHAIRMAN. Let us

Mr. SMITH. This was eliminated from our consideration.

The CHAIRMAN. Let us be a little bit more specific about that.
Mr. MERRITT. Yes.

The CHAIRMAN. Mr. Merritt asked you a question, if you considered it, in reference to section 6 here, just now. You did consider what the effect anything in section 6 would have on banks and bank credits.

Mr. SMITH. I misunderstood the question. I thought he asked, if I understood the question, whether we considered the effect the rate at which a broker might lend on securities as fixed in this sectionThe CHAIRMAN. But you did consider in section 6 all that has to do with banks and bank credits, under this section?

Mr. SMITH. And the question of Federal Reserve supervision: Section 7. Of course, that obviously came under our supervision insofar as the members, borrowing from financial institutions is concerned. We believed that the provisions were satisfactory.

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