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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 on.

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.

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

thing about them in the past 10 days; there is a great deal more for us to learn, and the men whom you are consulting

Mr. MAPES. I am not trying to be controversial, but for one I should like to have before the committee the testimony of men like yourself who are willing to say that specific provisions in this bill are all right

Mr. Smith (interposing). If you will ask me about anyone. We did not consider all.

Mr. Mapes (continuing). Or not.

Mr. Smith. I will answer any definite question about definite proposition of the bill.

Mr. MAPES. Well, I am asking you about that one.

Mr. SMITH. That was not submitted to the Treasury for consideration. Mr. MAPES. And you passed no judgment upon it? Mr. SMITH. That is correct.

Mr. Mapes. The provision on page 30, Mr. Smith, relating to specialists acting as brokers, and as dealers.

Mr. SMITH. That section of the bill was submitted to us as being a part of the procedure to eliminate the floor trader and

Mr. MAPES. As I understood you, you do not express an opinion as to whether the floor trader should be eliminated or not.

Mr. Smith. We are not expressing an opinion upon that phase of the bill.

Mr. MAPES. Mr. Smith-
The CHAIRMAN. May I make a statement.

During the hearings here that lasted about 3 weeks, there constantly came up, and it was very properly brought up, that the committee would like to know from the Treasury and the Federal Reserve Board, what they thought about the provisions of the bill having to do with banks, banking credits, Government financing, and so forth, and I told the President that, and he communicated with Mr. Smith and with Governor Black and asked them to study the bill with reference to those sections and when Mr. Smith says that he was not asked to do things, other things, it was not that anybody who had anything to do with the drafting of the bill was not perfectly willing to submit anything to the Treasury or the Federal Reserve Board; but on the specific questions that had been raised by the committee, the President asked the Treasury and the Federal Reserve Board to study this bill.

Mr. SMITH. And, of course, we did.

The CHAIRMAN. I understand what Mr. Smith is stating to the committee, which is entirely a frank statement and entirely a true statement, that is, after they studied this bill for 8 days, with reference to those particular things, that it is satisfactory to the Treasury, so far as they are concerned, and that he did not go into a great many of the technicalities of the bill, because he was not asked to.

Mr. SMITH. That is correct, and I cannot express an opinion about anything that we did not study.

The CHAIRMAN. Exactly. And, there has not been any other condition, Mr. Smith.

Mr. Smith. No, sir; absolutely not.
Mr. CHAIRMAN. And, it was not, Mr. Smith

Mr. Smith. No; absolutely not.

The CHAIRMAN (continuing). That the sections of this bill that you have no practical knowledge that you disapprove them any more than you approve them.

Mr. Smith. That is correct. Mr. Mapes. I think I understand the position of Mr. Smith, Mr. Chairman.

The CHAIRMAN. Well, what I said was not in criticism of your statement at all. I just wanted to bring that out.

Mr. MAPES. I am in a good deal of the same position as Mr. Smith. I quite approve of the general purposes sought to be accomplished by this legislation, but in enacting it into law we have got to study individual and specific provisions and I was endeavoring to find out, to get Mr. Smith's judgment on some of the specific provisions.

Mr. Smith. You happen to be asking about the ones we did not study.

Mr. Mapes. You said that you studied section 10.
Mr. Smith. We did study part of section 10.

Mr. MAPES. In view of your general statements I have got to ask specific questions in order to get specific knowledge.

Mr. Smith. I will be glad to answer.
Mr. Mapes. I say again I do not want to be controversial at all.
Mr. SMITH. Surely. That is all right. It is a part of this life.
Mr. MAPES. Let me ask you, did you study section 11?
Mr. Smith. We did not.

Mr. MAPES. Mr. Smith, there is a provision in lines 23 and 24, giving the Federal Reserve Board apparently power to regulate loans to members of the stock exchanges.

Mr. Smith. Well, that is an independent transaction, previously announced in connection with another question.

Mr. Mapes. That is quite independent of banks, is it not, and I wonder just why that was put in.

Mr. SMITH. I could not tell you why it was put in. It was in there when the bill was presented to us.

Mr. MAPES. Do you think
Mr. SMITH (interposing). We offered no objection to it.
Mr. MAPES. You did not object to it?
Mr. Smith. No, sir.
Mr. Mapes. You did not suggest it yourself?

Mr. Smith. No, sir. I think that it was in there when the bill was presented. We did not make any suggestions concerning 11, I think.

Mr. MAPES. That seems to permit the Federal Reserve Board to go outside its banking connections.

Mr. Smith. What was the last question?

Mr. Mapes. I say, a hasty reading of that seems to indicate that it authorizes the Federal Reserve Board to go outside of its banking connections in regulating loans.

Mr. Smith. Well, the section as drafted was satisfactory to us. I mean that provision of the section. We did not consider the regulatory part of it at all.

Mr. Mapes. You see the following language reads: Provided, That the provisions of this paragraph in regard to lending shall not apply to a member bank of the Federal Reserve System.

That particular provision seems to authorize the Federal Reserve Board to make the regulations for brokers' loans.

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