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Section 16: This section gives to the Commission the power to verify the reports and statements of members of the national securities exchanges, brokers and dealers, by a detailed examination by representatives of the Commission of the records and accounts and papers of any particular broker or dealer, and provides that,

The reasonable cost of such examinations, including the compensation of the examiners, may be assessed by the Commission and when so assessed shall be paid by the person examined.

The committee is earnestly urged to strike these words from this section. There is no limit to the number of such examinations nor the extent nor cost of the same, and such examinations may easily develop into persecutions. Even if made to accomplish what the Commission might deem to be proper purposes, the expenses to the person examined might be a serious financial burden. There would seem to be no more reason why this cost should be imposed upon the person examined than any other cost of conducting the operations of the Commission.

The act contemplates and provides for an annual payment by the national exchanges, the funds for which are necessarily furnished by the members, and this contribution to the general expense of the Commission with regard to the subject matter of this legis

. lation would seem to be the limit that any individual subject to the jurisdiction of the Commission should be called upon to assume.

Section 34: In the event that section 6 is modified as herein sug. gested, this group has no objection to making the effective date of this act earlier than the original bill provided for, namely, October 1, 1934. If, however, section 6 shall provide a formula for margins and credits similar to that now written in it, a substantial period of time should be afforded to those engaged in the securities business to prepare the required statistical information and to establish the complicated business machinery for all loan departments which will be needed to permit the business to be conducted in accordance with such formula for margins and credits.

Then there follows the names of the houses which I represent, Mr. Chairman. (The names are as follows:)

Year established Biddle, Whelen & Co.

1764 E. W. Clarke & Co..

1837 W. H. Newbold's Son & Co.

184 Bioren & Co..

1805 Cassatt & Co.. Edward B. Smith & Co. Graham, Parsons & Co. Elkins, Morris & Co...

1906 Janney & Co. Yarnall & Co.

1925 Mr. Cassatt. As to the houses which I represent, Mr. Chairman, I would like to call your attention to the fact that with the exception of one of them, they have all been in business in the city of Philadelphia over 25 years, many over 50 years, and one over 100 years, and they are still doing business at the same old stand. We have always done a brokerage and dealer business, and we take pride in feeling that the citizens of Philadelphia with whom we have dealt have no cause to complain or our action in the past.

1872 1892 1896

1907

Mr. BULWINKLE. Do you approve of basing margin requirements on earnings as suggested by Mr. Clark in his testimony?

Mr. Cassatt. No, sir; I do not.
Mr. BULWINKLE. Will you state why not?

Mr. Cassatt. To base margin requirements on earnings, again, would require some method of determining how much should be loaned on the security with reference to the earnings, and let us take, for example, that it were proposed that we could loan three times the average earnings, for the past 5 years. In the first place, take the last 5 years.

There would be many very estimable securities which have earned nothing in the last 5 years. They would be valueless as collateral.

In the second place, I do not believe that the true measure of loan value has anything to do with past earnings. I think the future of the corporation and the actual price which may be obtained for its securities is a far better measure than past-earning basis.

Mr. BULWINKLE. That is all.

Mr. Cassatt. I know that it could easily be said that prices are manipulated. I think the provisions of this bill if carried out will go a long ways toward eliminating the manipulation of prices, and under those circumstances, it is my definite opinion, no better measure of value of any security is obtainable, on any property, than what you can get for it.

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. On page 1 of your memorandum you say that you think that section 6 would be disturbing and prove harmful.

When you say prove harmful, do you mean to those engaged in the business or to the business of the country generally?

Mr. Cassatt. I mean to the business of the country generally.
Mr. PETTENGILL. Now, what leads you to that conclusion?

Mr. CASSATT. My conclusion is that this set method of calculating margins in the first place, it is deceptive, because the bill contains an arbitrary date of July 1.

Now, we all know that that arbitrary date is going to run out very rapidly and end in 3 years. !f we went back to 3 years ago, from today, you would find that the provision that you made for lending 100 percent on the lowest price the stock has sold for in 3 years would operate in every case so that you would not be able to borrow more than 40 percent of the present-day value. In other words, the protective provision would become inoperative and it is only because of this bill containing a provision to start from July 1, that the argument holds that you can borrow a reasonable amount today on the securities that are in the market.

If you went back, for instance, 3 years, as we have got to from 1936 on, we have got to take the low for the full 3 years. Now, there is a mechanical reason for not adopting this provision, which is very serious, not only on all brokers, but all banks who are going to lend on securities, and that is that from day to day you must have before you the low price for the past 3 years on every security that is dealt in on every exchange in this country, and if I should inadvertently lend more than is called for by those specific provisions, we would be subject to a very heavy fine, very heavy penalties.

Now, it is almost impossible to take a long list of securities as contained in many customers' accounts, and to be sure that you are not

lending more, we will say, than 100 percent of the lowest price that the securities sold for in the past 3 years, when that tabulation changes from day to day. Tomorrow it will be different from what it is today, and the day after that it will be different again.

Mr. PETTENGILL. I think that the broker probably would protect himself with a certain margin, I mean a certain cushion to protect himself from violating the law and thus make a margin requirement which was actually more rigid than that written into the law.

Mr. Cassatt. He would be bound to do that, make it more rigid, because we could not afford to get close to the line at all; but the main difficulty from a practical viewpoint is that the whole list of securities changes every day, because the low price may be today or may be tomorrow.

The CHAIRMAN. Is that all?
Mr. CASSATT. Yes.

The CHAIRMAN. That same argument applies to the Federal Reserve Board, if it fixed the amount, would it not?

Mr. Cassatt. Yes, sir; if they used that formula. The CHAIRMAN. I think you have said that you would be perfectly willing for them to do it. Now, would you not have the same fear if the Federal Reserve Board did that? You know, a figure is a figure.

Mr. Cassatt. I realize that, but I am relying on the belief that I do not believe the Federal Reserve Board will use the lowest price for the last 3 years in its method of calculation. If they do, we would have to do the best we can with it.

Mr. PETTENGILL. You think that a continuing judgment is apt to be better than a closed judgment?

Mr. CASSATT. Yes, sir.
Mr. PETTENGILL. On matters of this sort?
Mr. Cassatt. Yes, sir.
Mr. PETTENGILL. That is all.

Mr. MARLAND. Mr. Cassatt, as a result of your experience in dealing with securities, is it your opinion that the passage of this act as written would cause a general decline in stock market values?

Mr. Cassatt. Under the same conditions; yes. Of course, I cannot look into the future. They might have a depressing effect for the moment, but there might be a counter action that would cause the stocks to go up. I should say the stocks would sell lower with these margin requirements than they would with the requirements which might be put in effect by the Federal Reserve Board.

Mr. MARLAND. Granting that, what effect would that have on the future Government finances, sale, or future sales of Government securities?

Mr. Cassatt. Well, it would have some effect, as I think Mr. Smith testified the other day. Personally I do not think it would be very severe.

Mr. MARLAND. Do you think that it would help the sale of Government securities, or hinder their sale?

Mr. CASSATT. Well, if there were
Mr. MARLAND. A decline in the market generally?

Mr. Cassatt. If this bill caused a decline in the stock market, it undoubtedly would affect Government securities.

Mr. MARLAND. How?

Mr. Cassatt. Because when all securities are down, naturally the rate the investor gets on his investment rises and the Government like everybody else has to pay a higher rate for money.

Mr. Marland. Well, if there were a general decline in stock-market prices would the Government securities sell more readily or sell less readily? Mr. CASSATT. I think that they would sell less readily.

The CHAIRMAN. Now, we have had a situation for the past several years for securities that have not sold for quite as much as they did in 1928 or 1929. What effect has that had on Government securities?

Mr. CASSATT. The effect has been in the last few years that the Government has been borrowing money cheaper than it did before.

The CHAIRMAN. Yes; and a man who has some money to invest in times like that, puts his money into Government bonds. Is that not true? And the Government borrows money at a very low rate, and is borrowing money at a very low rate now, is it not?

Mr. CASSATT. Yes, sir.

The CHAIRMAN. Because people do not want to put their money in something that they think is highly speculative in times like these, when they are afraid of practically all stock, right now.

Mr. CASSATT. Yes.

The CHAIRMAN. I do not see how then you think that that is carried down through Government securities.

Mr. Cassatt. I do not think that is inconsistent, sir. There has been a different condition during these years of the depression which we have been through during the last 4 years and people have been afraid of all forms of investments, except what might be called ultra gilt-edged, and that has resulted in greater demand for Government securities, which in turn has reduced the rates; but with normal confidence restored, I think that a good market for all securities is helpful to the Government rather than otherwise.

The CHAIRMAN. Mr. Huddleston.

Mr. HuddLESTON. The present low rate of interest on Government securities is due not to the low price of other securities, but to the lack of confidence in other securities. Is that correct?

Mr. CASSATT. That is what I was trying to bring out. In the last 4 years there has been a lack of confidence in other securities.

Mr. HUDDLESTON. I want to ask you, Mr. Cassatt, what effect this bill would have on the listing of stocks; would corporations continue to maintain their listings and new corporations list their securities to the same extent as they have heretofore?

Mr. Cassatt. Mr. Huddleston, I must express only a personal opinion there. I should say not, and that is based upon certain conversations I have had with certain corporations who thought they would unlist their stocks if this bill went into effect.

Mr. HuddLESTON. There are some pretty drastic provisions in this bill relating to the operation of corporations and the liabilities of officers, and accounting, and various otherthings.

Mr. Cassatt. Yes.

Mr. HUDDLESTON. What would be the tendency of those provisions, to encourage listing or discourage it?

Mr. CASSATT. It would certainly discourage listing.

Mr. HUDDLESTON. And what would be their effect upon general business conditions, if a very marked withdrawing from listing and failing to list resulted?

Mr. Cassatt. I think very, very disastrous effect on investors of this country, because if many of the large corporations concluded they did not want to list under this act, their stockholders would be left without a really open market for their securities.

Mr. HUDDLESTON. What effect would that have upon the price of their securities?

Mr. CASSATT. I think it must be downward. I think that the prices must move downward.

Mr. Milligan. Mr. Cassatt, do you believe that there should be some Federal regulation of stock exchanges?

Mr. Cassatt. Yes.
Mr. MILLIGAN. That is all.
The CHAIRMAN. We are very much obliged to you, Mr. Cassatt.
Mr. CASSATT. Thank you.

STATEMENT OF HON. EUGENE R. BLACK, GOVERNOR THE FEDERAL

RESERVE BOARD

The CHAIRMAN. We will hear Governor Black.

To begin with, Governor, we would like for you to make such statement as you desire, and then the committee would like to ask you some questions on the bill.

Governor BLACK. Mr. Chairman and gentlemen of the committee. I desire to make a brief statement.

The staff of the Federal Reserve Board conferred for a week with representatives of the Treasury and with Mr. Pecora, Mr. Corcoran, and Mr. Cohen, attorneys, in reference to the provisions of the National Securities Exchange Act of 1934. Governor Black participated in some of these conferences, was in close touch with all of them, and kept the 'members of the Board fully advised. During these conferences the attitude of the Board was requested and the following expression of this attitude was given:

The Board is in thorough accord with the following purposes of the bill:

(1) To regulate national securities exchanges to the end that they may operate under fair practices only.

(2) That speculation be properly curbed and dishonest speculation be eliminated.

(3) That exchange credit be properly restrained and the undue use of credit in speculation be prevented.

(4) That necessary penalties be enacted to guarantee the accomplishment of these purposes.

The Board is not primarily concerned with the features of the bill with regard to the policing or regulating of the exchange but feels that these features should be fair and in accord with established American business principles.

If it is desired the Board will be glad to undertake the responsibilities of the bill regarding the fixation of marginal requirements upon loans based upon exchange equities, whether the loans are made by brokers or banks, provided power is vested in the Board to handle this subject in the public interest and to the protection of the investor. This function would usefully supplement the considerable powers vested in the Board under the banking act of 1933 to prevent the undue use of credit for speculative purposes and would, in the judgment oi the Board, furnish effective protection against the economic evils of speculation.

During these conferences very many changes in the original bill were recommended by the Federal Reserve staff. These recommenda

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