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the Federal Reserve System; it is likewise unfair to banking institutions which are not members of the Federal Reserve System to take from them the privilege and opportunity of making such loans.

PAGE 21, SECTION 8, SUBSECTION 2, LINES 22, 23 AND 24 Attention is called to the words, “or a false or misleading appearance in respect of the market for such security or securities." In its import and its operation this language is unfair to brokers. A broker may act in the purchase or sale of securities, and in so doing, but not by his design or purpose, there is created a false or misleading appearance in respect to the market. Why, under such circumstances, should the broker be held accountable when he has only been given orders to purchase or sell? In the case of limited markets, there is almost certain to be that which might be described as false or misleading appearances in respect to the market in the minds of many persons. The vagaries of the human mind are not often changed by legislative enactments. In this connection, in the same section, on page 22, subsection 3, line 5, are the words, "for the purpose of raising or depressing the price." It would be exceedingly difficult for a broker, or for anyone else for that matter, to interpret the meaning and the intent of a customer when he has been called upon to execute either a buying or selling order which is bound to have the effect of raising or depressing prices in limited secties markets.

In subsection 5, line 24 on page 22 and lines 1 and 2 on page 23, we read that it will be unlawful to make any statements inducing a securities transaction which is, in the light of the circumstances under which it is made, “false or misleading in respect of any matter sufficiently important to influence the judgment of an average investor." If this language is allowed to remain in the bill, there will be many days of anxiety on the part of brokers and dealers until they can feel that they may do business without this liability hanging over them.

We direct attention to subsection 8, page 29, line 21, which deals with the proposition of "pegging, fixing, or stabilizing the prices of securities in contravention of such rules and regulations as the Federal Trade Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors or without having prior thereto reported to the Commission such information regarding the purpose and nature of such transactions or operations, the details thereof and the person or persons interested therein as the Commis. sion by rules and regulations may prescribe as appropriate or necessary in the public interest or for the protection of investors.' There is likelihood here of great harm being done, perhaps where not intended, by denying an investor the right to support securities in which he has a particular interest, or against which he may have loans, or in the purchase of which he is moved by a desire to accumulate the securities for investment purposes.

SUBSECTION 9, ITEMS (I) AND (11) These provisions fail to give to a broker or dealer the right to acquire options for the purpose of liquidating large blocks of securities held, say, by estates, or against bank loans, etc., where the work of distribution involved is considerably greater than if the broker were merely selling stock on the exchange for a commission. Unless proper provision is made to care for such classes of transactions there will be many instances where estates and banks holding large loans will suffer through inability to obtain the services of dealers or brokers in such liquidations.

PAGE 27, SECTION 10, ITEM (B) This item provides that the rules of the proposed national securities exchange may permit a member to be registered as an odd-lot dealer and as such he will be permitted to buy and sell for his own account so far as may be reasonably necessary to carry on such odd-lot transactions; it also provides that it shall be unlawful for an odd-lot dealer to act as a broker. Evidently in this particular no consideration has been given to the character of business conducted on the smaller exchanges throughout the country and on which nearly every broker does an odd-lot business. As a matter of fact the great bulk of transactions on the local exchanges are in odd lots. This section should be changed or clarified so that the business now transacted on the smaller exchanges will not be taken away from them. Some of the member exchanges already have advised us that if this provision becomes a law they will for forced out of business.

45381-34-48

SECTION 10, LINE B, PAGE 28 It provides here that it shall be unlawful for any member (meaning a member of a national securities exchange) either with or without the privilege of acting as a dealer (except an odd-lot dealer or a specialist dealer) and, while on the trading premises of an exchange, to effect any transaction for his own account, or, as a broker, to give an order to another member to be executed for his own account. The commission is given the power, when it has been shown that the rules of the exchange prevent excessive trading by members, to permit exchange members to effect transactions for their own account, subject to such terms and conditions as the commission may prescribe as necessary or appropriate for the protection of investors. I cannot see why the facilities of an exchange should be denied to its members unless it is able to show that its rules prevent excessive trading by members. Just what is meant by excessive trading certainly is not clear. Such a law would undoubtedly tend to drive legitimate trading from the exchanges.

PAGE 30, SECTION 10, ITEM (E) The rules of the proposed national securities exchange bill may permit the registration of a specialist as a dealer or as a broker; but it shall be unlawful for a specialist registered as a dealer to act as a broker, or for a specialist registered as a broker to act as a dealer. It should be understood that brokers who now act as specialists do not devote their entire time to that line of activity; they act as specialists in certain classes of securities only and this occupies, usually, merely a small portion of their time. The rest of the time they act, of course, as brokers. Due consideration should be given to this class of business which apparently was not clearly understood by the framers of the bill.

PAGE 34, SECTION 11, ITEM (F) The commission, by this provision, is directed to make a study of trading in unlisted securities on the exchanges and to report the results together with its recommendations to Congress on or before January 23, 1935, but it also appears that in the event Congress does not take action before that time, the exchanges may continue unlisted privileges only until March 1, 1935, unless an earlier date is prescribed by law. It is quite evident that what has been developed into a publicly quoted market for certain unlisted securities will be destroyed unless the Commission is given authority to extend the time until Congress has had an opportunity to act upon the recommendations.

PAGE 36, SECTION 12, ITEM (B) It is noted that the present bill retains the provision requiring the Commission to prescribe methods to be followed in the preparation of accounts, in the appraisal and valuation of assets and liabilities, and in the determination of depreciation and depletion. We heartily endorse full and free statements, but we submit that the Federal Trade Commission, or any other regulatory body, should not have the power to appraise and determine the valuation of assets and liabilities or to determine depreciation and depletion. Such authority as given undoubtedly would cause many corporations to de-list their securities from the smaller exchanges.

PAGE 33, SECTION 14, LINE 20 Regulation and control of over-the-counter transactions appear too indefinite for a dealer to have any comprehension of just what he may or may not be permitted to do. The whole regulation is left in the hands of the Commission and as a guide in this connection the Commission is to use such necessary protection as is comparable in the case of national securities exchanges. We cannot see the fairness of attempting to regulate those engaged in the business of buying and selling securities while allowing those who are not engaged to go out and conduct transactions without any restrictions.

PAGE 41, SECTION 16 We submit that the business of selling securities should not be subjected to any more outside examinations than other lines of business. The expense for income tax information and other reports is already a burdensome charge upon the business, and to levy further charges for additional examinations is beyond the realm of fairness. The exchanges are amply able themselves to cover the matter of 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."

SECTION 6

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.)

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