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examinations and have always been foremost over other lines of business in such efforts.
In summarizing let me say that we have not attempted to go into many features of the bill which we still feel are vitally objectionable to the continued existence of the local stock exchanges.
We have dwelt upon these in a previous statement, and the fact that they are not again being stressed should not be construed as indicating that our protest is thereby minimized.
We wish to emphasize our serious objections to the placing of the regulation of the stock exchanges under the Federal Trade Commission, even though it is to be an enlarged Commission; we do not believe that the Commission, or any other commission or body which is not specially organized and its personnel carefully selected for the character of work it will be called upon to perform, is constituted to deal with a business so highly technical and surrounded by so many ramifications requiring prompt specialized treatment.
We wish again to go on record as favoring a coordinating authority in which the stock exchanges shall have a voice in their own management. It is our belief that any regulatory body made up entirely of those not representative of the stock exchanges cannot and will not function in a way that will be to the best interests of the public and certainly not to the best interests of the stock exchanges.
The CHAIRMAN. We have a situation in the House this afternoon, and I do not know whether we are going to be able to get away or not. So we will now recess until 2:30, and if we are still tied up with matters there, this hearing will have to go over for the afternoon. If we get through with those matters there, we will go on at 2:30 o'clock.
Mr. MALONEY of Connecticut. If it is in order, Mr Chairman, I would like to insert in the record a very brief statement from the Connecticut Investment Bankers Association.
The CHAIRMAN. Yes.
(The statement referred to is as follows:) MEMORANDUM REGARDING THE REVISED NATIONAL SECURITIES ExchaNGE ACT OF 1934 SUBMITTED ON BEHALF OF THE CONNECTICUT INVESTMENT BANKERS' ASSOCIATION MARCH 22, 1934
In offering suggestions for further modifications in this bill, the Connecticut Investment Bankers' Association desires to recognize that the revised bill is free from many of the defects found in the bill as initially introduced. The changes which have been made will greatly benefit the investing public and make the bill much more workable, without diminishing in any important respect the measure of protection afforded to investors. The association wishes to assure the members of the committee in charge of this bill and all members of both the Senate and the House of Representatives that it has no desire to detract in any way from the safeguards set up for the benefit of investors. At the same time the association feels that its knowledge of and experience with local corporations and municipalities, as well as the investors who own their securities, enable it to point out to the committee members the need for certain additional modifications if the proposed legislation is to avoid doing very serious injury where it is hoped that only benefits will be conferred. Specifically, the association considers that the bill must give definite recognition to the position of the smaller corporations and municipalities, as well as to the owners of local securities. It seems to the association that this can best be accomplished by making changes in section 14, section 6, and section 3 (a), paragraph 13, so as to specifically authorize both the Federal Trade Commission and the Federal Reserve Board to recognize that local securities, in which the market interest is predominantly intrastate, may, under appropriate circumstances, be classified as "exempted securities.”
SECTION 14 The revision of this section has extended and made more specific the powers of the Commission to regulate over-the-counter markets. The Commission is empowered in effect to require the filing of registration papers covering unlisted securities already outstanding comparable to those which would be required for the issuance of new securities. It is further empowered to prescribe the terms on
which transactions in such securities may be made. Compliance with detailed regulations in these two fields is bound to be burdensome and costly in all cases, but the effect on the market for local securities issued by the smaller municipalities, as well as corporations, may well be ruinous. In the opinion of the association, no compensating good will be accomplished to offset the serious injury of local interests which it regards as inevitable.
In considering this point it is recogni that the fundamental reason for placing the securities business under Federal regulation is to protect the investor in two ways:
(1) From being misled by misinformation regarding the intrinsic worth of the security he is asked to buy or sell;
(2) From manipulation of markets, pool operations, etc.
Elaborate and costly Federal regulation of local markets in Connecticut securities is unlikely to afford additional protection to Connecticut investors for the following reasons:
(1) Because of their acquaintance with the record of local communities and business enterprises, and their personal acquaintance with the officials and management, local investors are already as well informed regarding local securities as they are ever likely to be, no matter what financial information is filed in the office of the Federal Commission.
(2) Opportunity for important marketing abuses in local securities is almost nonexistent, because the volume of trading is too limited; in other words, the turnover is too small and the buying is principally for cash rather than on margin. A situation like this does not lend itself to pool operations or other price manipulation by insiders. The market is made by the real investor and not by wash sales or any other similar transactions.
In an earlier statement made in behalf of this association on this bill as initially introduced, it was pointed out that section 14 as it then stood empowered the Commission to regulate the market for local securities in the elaborate manner described above, but it was also stated that the association did not believe the Commission would use its powers arbitrarily or unjustly. Furthermore, it was pointed out that this section imposed upon the Commission duties, the wise administration of which will be very difficult indeed, if not impossible. Now, that the revised form of this section authorizes the Commission specifically to regulate unlisted securities in a manner in which it was hoped the Commission would consider inapplicable to local securities, the association is strongly of the opinion that this section should authorize the Commission to recognize that certain local securities may be recognized as “exempted securities."
This section further imperils the owner of local securities by making it impossible for him to use such securities to protect margined holdings of listed securities. In Connecticut a very large part of the resources of investors is placed in local securities. The business in these securities is done principally for cash and there has never been a pronounced tendency to trade in them on margin. This should not mean, however, that local investors should be deprived of the privilege of making use of these resources to protect margined holdings of listed securities. To point out that the revised bill permits local banks to extend credit on local securities does not justify depriving investors of the right to leave these securities as collateral with their brokers. Probably no broker would permit a customer to carry an excessive amount of local securities in a margin account. However, there are frequent occasions, either because of a sharp drop in the market or because funds for the purchase of listed securities are not immediately available, where it would work a great hardship if the broker is not permitted to extend credit on local securities. Negotiation for a separate and distinct extension of credit by a local bank is by no means a simple operation, nor one on which definite reliance can be placed in any situation which in the slightest degree resembles an emergency.
This defect could be corrected by specifically authorizing the Federal Trade Commission to classify local securities as "exempted securities”, and a similar authorization given to the Federal Reserve Board to permit, in its discretion, the carrying of a certain percentage of local securities to protect a margin account in listed securities.
In addition to the objections to section 6 insofar as it excludes local securities from use in margin accounts under any circumstances, the association believes that the margin requirements set up in the bill are too complicated to be práce
tical. It believes that the bill should not be so specific in fixing requirements and should grant a greater degree of discretion to the Federal Reserve Board. The association further believes that it will be regarded by investors, corporations, and municipalities as strikingly inconsistent for Congress to betray a lack of confidence in the trustworthiness of the Federal Reserve Board and at the same time expect these same municipalities, industries, and investors to place unlimited confidence in the wisdom and discretion with which the Federal Trade Commission will regulate that part of the securities business in which they are vitally interested.
SECTION 3A, PARAGRAPH 13 This section, in defining the term "exempted securities”, specifically mentions only obligations of the United States Government and its agencies, and provides that the Commission may make rules and regulations providing for the total or partial exemption from the operation of any one or more provisions of this act which they regard as inapplicable to "exempted securities.'
It may be said under the power here given the Commission and perhaps also the Federal Reserve Board may make any allowance which may prove necessary to prevent the market for local securities from being impaired. The association respectfully submits, however, that since this bill specifically directs the Commission and the Federal Reserve Board on so many points, failure to make any mention whatever of the serious predicament in which issuers and owners of local corporation and municipal securities will almost inevitably be placed might easily be interpreted to mean that Congress did not intend these agencies to make any allowance for the special position of local securities, the business in which is predominantly intrastate in character.
In conclusion, the association desires to state as its sincere conviction that local investors, corporations, and municipalities are bound vigorously to protest when they realize to what extent their position has been or is in danger of being impaired by the provisions of the bill as it now stands.
(Thereupon at 11:40 a.m. a recess was taken as above indicated.)
NATIONAL SECURITIES EXCHANGES REGULATION
FRIDAY, MARCH 23, 1934
HOUSE OF REPRESENTATIVES,
Washington, 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.
STATEMENT OF JAMES H. RAND, JR., NEW YORK CITY, CHAIRMAN
OF THE COMMITTEE FOR THE NATION, AND CHAIRMAN OF THE BOARD OF REMINGTON-RAND, INC.
The CHAIRMAN. Mr. Rand, the committee would like to hear your qualifications.
Mr. Rand. James H. Rand, Jr., 205 East Forty-second Street, New York City.
The CHAIRMAN. The Committee would like to hear your qualifications.
Mr. RAND. Chairman of the Committee for the Nation, and chairman of the Board of the Remington-Rand, Inc.
The CHAIRMAN. Mr. Rand, if it would suit you just as well, it would suit the committee much better if you would stand, because we can hear you better and see you better.
Mr. RAND. Mr. Chairman and gentlemen of the committee: I am not here in opposition to the avowed and legitimate objectives of this bill. Securities markets are a vital part of our economic mechanism. Their integrity and effectiveness mean much more to industry and to 10 million security owners than to brokers. Therefore, I appear to ask your consideration for the viewpoint of business men on this measure.
No industrialist loyal to the obligations of his position wants the securities of his company manipulated away from their true value. If depressed by bear raids his company's standing may be affected, his stockholders' values suffer, and his chances for obtaining new capital when needed are impaired. If the securities are inflated to a valuation in excess of earning power, the new buyer expects the management to earn impossible dividends. The reputation of the management suffers. It should be recognized that the managers of sound corporations whose securities comprise the great bulk of those listed on exchanges have a primary interest in correcting abuses that have been injurious to their own as well as the public's interests.