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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, we did not consider 1 and 2.

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

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 section

The 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.

Section 8 did not—the provisions against manipulation of security prices-did not come under our jurisdiction.

Nor did 9, on page 26.

Section 10, on page 27, received very careful consideration. That is the question of segregation of broker-dealer.

Of course, the Treasury is very much interested in preserving for the country the distributing power of the dealer system that has grown up over this country in connection with our Government financing. The secondary market, which is a great market for Government financing, lies in that field. And, of course, we gave careful consideration to this section of this bill, and while it is a very intricate section

Mr. MAPES. I should like to ask you a question.
Mr. Smith. May I finish that sentence?
Mr. MAPES. Yes.

Mr. Smith. Your staff may find it necessary to clarify that section somewhat, because it has been hurriedly drawn. At the same time, we were in agreement as to what is proposed.

Mr. Mapes. I was going to say, so far as I am personally concerned, it seems to me that that is a rather technical section and I do not know enough about the functions of a broker and a specialist and a dealer, and the distinctions between them, to reach an intelligent conclusion as to whether that is a desirable section or not.

Now, could you, in a few sentences, throw any light upon that section? It would help me as one member of the committee to reach a conclusion about it.

Mr. Smith. That is some order, Mr. Mapes.
Mr. Mapes. We have got to pass upon it finally.
Mr. Smith. I will try to help all I can.

Mr. Mapes. In your statement, you asked for the privilege of making suggestions as they occur to you in the future.

Mr. Smith. Yes, sir. Mr. Mapes. The committee will soon be obliged to determine whether to take this language as it is or not, and I should like to get your viewpoint.

Mr. Smith. This means, in principle, that a broker-dealer may continue his dealer business and at the same time operate a brokerage business with a representative on the floor of the exchange. He may

Mr. MAPES. There is a limitation to that, is there not?

Mr. SMITH. There are two fundamental limitations: First, that he must always disclose his position at the time he sells his security. He must say that he owns the security or that he bought it on a commission for the purchaser—that is the publicity section-and, second, he must not extend credit on his own underwritings during a period of 6 months after the underwriting is first offered.

Third, that he cannot trade, execute orders, for his own account. That is, trade at the same time that he is acting as broker.

Now, those are the fundamental principles of the section.
Mr. MERRITT. Let me ask you a question there.

Mr. Smith (continuing). And we think that that will save to the Government and to the country, a secondary market for Government securities.

Mr. MERRITT. Suppose that a broker has knowledge that there is a certain large lot of bonds to be offered, and he desires to buy today. He desires to accumulate those bonds.

Mr. Smith. Yes.
Mr. MERRITT. Today at 11 o'clock, he has filled that order.
Mr. Smith. Yes, sir.

Mr. MERRITT. Now, does he have to go back to his office and return before he buys further bonds?

Mr. Smith. Whether he can buy bonds himself?
Mr. MERRITT. Yes.
Mr. Smith. Yes, sir. The answer is yes.
Mr. MERRITT. Yes, what?

Mr. Smith. He would have to go back to his office and come back to execute the order. That is the reason we desire the privilege of making further suggestions. We still have a great deal more to learn about a measure of this magnitude, and there is some smoothing out to be done.

Mr. MERRITT. May I ask a question, as a banker?
Mr. SMITH. What?

Mr. MERRITT (continuing). If you, as a banker, wanted to get a lot of bonds

Mr. SMITH. Yes, sir.

Mr. MERRITT (continuing). And you have a man in whom you have confidence, would you not have just as much confidence that he would beat you honestly, without this legislation, as he would with it?

Mr. Smith. Without the legislation in this section?

Mr. MERRITT. Yes. You would not think that any broker that you would trust at all, or to whom you would give any business, would use your order for his own advantage?

Mr. Smith. Do not misunderstand our position. We are not here in the position of advocates.

Mr. MERRITT. What?

Mr. Smith. I am not here advocating anything. I am here telling you that the measure as changed meets with our approval.

Mr. MERRITT. I am trying to get at what your approval was based

Mr. Smith. It is based on-I do not know exactly what you mean, Mr. Merritt.

Mr. MERRITT. I mean, whether it is because you are a member of the administration, or because you believe in it.

Mr. Smith. Well, my opinion represents the consensus of those of us who worked together on this for the Treasury, and it has been approved by the Secretary of the Treasury. That is the only way I can speak, of course. I am not dodging the question a bit. Do not think that I have any other opinion about this section.

Mr. MERRITT. I appreciate your position, very well.

Mr. MAPES. Do you think it is desirable to put that limitation upon the activities of the broker and the dealer.

Mr. Smith. That limitation was placed in the bill by the office, and was agreed upon by us.

Mr. MAPES. In other words, you do not think that that provision would affect the finances of the Government?

Mr. SMITH. I do not think so.

on.

Mr. MAPES. Do you think-
Mr. Smith (continuing). In a measure of this kind.

Mr. MAPES. Do you think it is a desirable regulation of the stock exchanges?

Mr. Smith. Now, wait, let me see what I think about it. First, I am going to say, of course, that certain undesirable consequences follow any measure as broad as this. We cannot get so comprehensive a measure through and not inconvenience someone. When you get a patient on the table for an operation there is bound to be some blood, and that is just what we feel about this. That is what we say in the statement.

Mr. PETTENGILL. You say in the statement that it would minimize the dangers.

Mr. Smith. Previous adverse effect. And this is based on the desire to eliminate the floor trader. Of course, you see what they are aiming at.

Mr. MAPES. Do you think that is a desirable provision?

Mr. Smith. I am not able to answer that question. We have not the

Mr. MAPES. We have got to answer it.

Mr. Smith. Yes. I am sorry but I have not, we have not made any studies on whether the floor trader should be eliminated or not. That is a question of control of stock exchanges.

Mr. Mapes. I have not been able to study this new draft as carefully as I should like, but I notice, I have put a question mark after this sentence, on page 17, line 21, "it shall be unlawful for odd-lot dealer to act as broker."

What are the arguments pro and con on that subject? Mr. Smith. That is something I cannot answer. That comes under whoever you are consulting about stock-exchange procedure. We did not think that the question of the odd-lot broker had anything very much to do with Government financing and banking and therefore did not consider it, because of the short time to study that part of the bill. I cannot answer, I am sorry to say.

Mr. Mapes. In other words, when you say that you approve of section 10

Mr. SMITH (interposing). I said-

Mr. MAPES (continuing). You approve of it simply as not interfering with Government financing, and pass no judgment upon the desirability or undesirability of it so far as a proper regulation of the stock exchanges and of the business of the country is concerned, is that correct?

Mr. Smith. That is not our opinion. Our opinion is, in general, and in principle, that this section is satisfactory to us. I do not think the question of the odd-lot broker has any general effect on what we are doing, or has any great bearing on it. That is our viewpoint.

Mr. Mapes. Do you think it will have any bearing on the public welfare in general?

Mr. Smith. Yes, some. You can work it out now through stockexchange experts. The thing we are interested in in this section is preserving the broker-dealer.

This committee is probably consulting someone concerning stock exchanges and practices on the exchanges. We have learned some

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