These men are not the lackeys of rich men. They are not the protégés of the privileged. They are servants of justice. They are the champions of the people, as Jefferson and Lincoln were. Thank you. Mr. HEALY. I was just a little aroused by the attack that was made upon them, and I wished to make that statement. The CHAIRMAN. We had two young men here last year who helped us unselfishly and with great wisdom on the Securities Act. One was Mr. Landis, now Federal Trade Commissioner, and Mr. Cohen, who is now present and who has devoted day and night to this question, and he has been a people's counsel and we have Mr. Tom Corcoran, and Mr. Corcoran has devoted all of these days and nights to this work, with the representatives of the Treasury and with the Federal Reserve Board, and we have gotten, through those counsels, the endorsement of the Federal Reserve Board. We will have Mr. Landis at 2 o'clock, who will endorse the bill. I have here a telegram from Trowbridge Callaway, chairman of the investment house group; a letter from Paul J. Engel; a petition on behalf of the specialists of the New York Stock Exchange, and a letter from the committee of put-and-call dealers of New York, which will be inserted in the record. (The matter referred to is as follows:) [Telegram] NEW YORK, N.Y., March 24, 1934. Hon. SAM RAYBURN Chairman, House Committee on Interstate and Foreign Commerce, New House Office Building, Washington, D.C. The new bill for the regulation of stock exchanges introduced by Mr. Rayburn (H.R. 8720) on March 19 is a substantial improvement over the original bill (H.R. 7852). The investment house group, of which the undersigned is chairman, being concerned primarily with the maintenance of the existing broker-dealer organization has directed its efforts mainly toward improving the broker-dealer provisions of the proposed stock-exchange legislation. The original bill by its drastic segregation clauses would have largely destroyed the long-established brokerdealer organization in the United States. The new bill permits the continuation of this organization, and its provisions, relating to the broker-dealer, with some changes in phraseology designed primarily to clarify what seems to be their intent, would be satisfactory to this group. The amendment of section 10, suggested by Mr. Richard Whitney on March 22, insofar as it relates to the broker-dealer, with some adjustment of phraseology, would also be satisfactory. This group has not concerned itself with section 10 as it relates to floor traders, specialists, and odd-lot dealers. It seems to us unwise to make rigid margin requirements and certain other matters by statute, except to such extent as may be necessary to remedy existing evils which are to be prohibited by law. The margin requirements of the new bill, while apparently better and more elastic than in the original bill, have elements of inflexibility which are unavoidable if the margin requirements are to be imbedded in statutory law. Furthermore, it is feared that these complicated requirements will prove impracticable in operation. We are, therefore, in accord with the viewpoint of Mr. Whitney's statement of March 22 that margin requirements would be more wisely left to the Federal Reserve Board. This course would provide the requisite flexibility and would insure that this margin problem, which is of great importance to our national economy and to the recovery program, would be dealt with by governmental authority in harmony with the broad banking and monetary policies of the country and without the embarrassment of the rigidity and inflexibility inherent in the fixation of margins by statute. Certain of the provisions of the new bill, very unwisely it seems to us, become effective on July 1, or August 1, 1934. This has an important bearing on section 14 which throws the whole over-the-counter market into the control of the Federal Trade Commission. The Commission may feel compelled to establish rules for the regulation of this large and important market for a huge mass of outstanding securities by August 1 of this year. It will be impossible properly to prepare these rules within so short a space of time. The uncertainty as to what regulation may be estalished makes for unsatisfactory market conditions which would largely deprive holders of unlisted securities of their market, for people will not readily buy unlisted securities when the future market for these securities is clouded with uncertainty. This uncertainty will in itself tend to occasion the liquidation of unlisted securities while a free over-the-counter market still exists. It would seem wiser to postpone legislation as to the over-the-counter market until regulation can be considered in the light of operation under the new investment banking code which is about to be put into effect. TROWBRIDGE CALLAWAY, Chairman. Investment house group consists of the following: Chas. D. Barney & Co., Callaway Fish & Co., Cassatt & Co., Clark Dodge & Co., Field Glore & Co., Hallgarten & Co., Hemphill Noyes & Co., A. Iselin & Co., Kidder Peabody & Co., Ladenburg Thalmann & Co., Laurence M. Marks & Co., G. M. P. Murphy & Co., Riter & Co., L. F. Rothschild & Co., Edward B. Smith & Co., Spencer Trask & Co., Tucker Anthony & Co., White Weld & Co. NEW YORK CITY, N.Y., March 22, 1934. COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, House of Representatives. GENTLEMEN: I wish to submit to you that the securities issued by corporations in any line of business or by any political division in the world circulate freely in world trade just as commodities, such as cotton, sugar, grain, etc. The particular location of the market where transactions are effected does not interfere with sales, irrespective of where the buyer or seller may be, in or out of the country. Regulations at any one point or in any country proposed by authorities will only tend to shift the trade to exchanges located elsewhere in the country or in the case of national regulations to points outside of the country. From June 1, 1906, to the outbreak of the World War in August 1914, I was engaged at the cable desk on the floor of the New York Stock Exchange and the cable service enabled us to send a message to the floor of the London Stock Exchange with a total of elapsed time for the message to reach London and the reply to return to New York and be in my hands of from 1 to 3 minutes. The same cable service is available now, but the business has not been so heavy as before the war, with England or the Continent, as at that time we were a debtor Nation, whereas since the war we have been a creditor Nation. In the past few years with improved financial conditions in Europe more business has been done in our securities by persons living abroad and they can trade as readily in our market here as if they were residing here, and if our principal markets in securities were transferred abroad, people here could trade as readily as they do now, while the market is here. The extra expense of wire service would not be a factor considered by persons making investments or taking speculative commitments. Since the war we have been proud of the position taken by our Nation in the financial affairs of the world, but the outlawing of security markets here would more than destroy what we have built up since the beginning of the war. Money loaned upon securities must be loaned only in the light of good banking practice and for Congress to enact a law with regulations as to a definite amount of money to be loaned upon securities is ridiculous to say the least, for not definite percentage of loan value is applicable to all classes of securities or to each security in each class. Brokers engaged in carrying securities on margin are guided by what they in turn can borrow from the banks, and consequently it is the banker acting in his proper sphere in business activity who determines how much shall be loaned on each security and what amount of cash capital shall be maintained by a broker in relation to the volume of business that he carried. To enact a law with limitations and prohibit these matters is an act beyond common business sanity and can only react at once to the definite retardment of the free flow of capital in our country and be a serious obstacle to the return of normal business at the present time being greatly helped by Government measures of the past year. In years gone by whenever acts of individuals or practices in general were developed contrary to equitable trade, steps were taken by bankers and the exchanges to remedy the matter and there has been built up as a result a better situation than existed before. From time to time new situations and unfavorable practices must be met and corrected. Such matters, however, cannot be handled by Government machinery such as the Federal Trade Commission, which in its operation, would naturally be too slow to accomplish any effective results. We have had on the statute books of New York State a law against fictitious or wash sales, but in my experience of over 30 years I know of only one prosecution under the statute, but have seen the activities of many firms and individuals who engaged in these practices ended by the exchanges. Governmental regulations and enforcement agencies in such business matters are of no value and while it would undoubtedly be an excellent thing to have upon the statutes, Federal or State, the regulations now in force on the exchanges, such governmental laws should not be made without the cooperation and help of the persons engaged in the business who understand the business thoroughly and have its real interest at heart. I am writing this statement in view of having read in the daily papers that bill H.R. 8720 has the approval of the Treasury Department which to me is beyond belief as to its entirety. That the Treasury Department and the present Administration want a law enacted is quite conceivable, but certainly to meet with their approval, there must be a law which will not destroy business or react unfavorably upon the great efforts being made to return us to national prosperity. Respectfully submitted. PAUL J. ENGEL. MARCH 22, 1934. PETITION ON BEHALF OF THE SPECIALISTS OF THE NEW YORK STOCK EXCHANGE, WASHINGTON, D.C., MARCH 24, 1934 COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, House of Representatives, Washington, D.C. GENTLEMEN: The undersigned members of the New York Stock Exchange respectfully invite your attention to the far-reaching effect which we believe certain provisions of the pending stock exchange regulation bill would have on the fortunes of 20 million investors in the United States. We refer to the provisions in section 10 of the bill for the practical elimination of the present market "specialist", who, as he now operates, is an indispensable factor in assuring the liquidity of investments and, in turn, the liquidity of commercial banks and other financial institutions throughout the country. The specialist, as the members of the committee are doubtless well aware, is a member of the exchange who deals exclusively in one or more stocks and is thus able to execute with the utmost diligence all orders entrusted to him for the purchase or sale of such stocks. Any member of the exchange may become a specialist if he so desires. Because of the active and varied operations on the floor of the exchange, it is physically impossible for the broker who directly represents the commission house to execute all transactions committed to him. In line with the intensive specialization which has taken place in every field of modern activity, the vocation of the specialist has been developed over a period of years to fill the obvious need of a man of expert knowledge and financial and moral responsibility who can give instant execution to orders entrusted to him for the purchase or sale of specified stocks. The specialist is primarily a broker's broker. The specialist, however, under the present practice, is more than a broker's broker. He is also a dealer, and his activity as a dealer is indispensable to his effective functioning as a broker. It is our understanding that your committee, while recognizing the useful services performed by the specialist, seeks to impose certain limitations upon his activities in accordance with the committee's general purpose of regulating the exchange on behalf of the public interest. The members of the exchange, as already reported to your committee, are heartily desirous of cooperating in any measure that would make the exchange a more effective market for public securities. We feel, however, that the present draft of the bill before your committee would essentially alter the character of the specialist as he actually exists and, in so doing, greatly diminish the facilities of the exchange in its service to the public. The specialist of today is the custodian or trustee of thousands of orders originating in this and many foreign countries. With a market order in his possession a specialist is barred from trading for his own account until that order is filled. He cannot give his personal interest precedence over that of his customer. No business is more carefully supervised, and there are no penalties in any other line of business endeavor more drastic than those meted out to a specialist if he violates the law of the exchange or if, as stated in the constitution of the New York Stock Exchange, he indulges in any practice "inconsistent with just and equitable principles of trade." There seems to be a common belief that, because of the possibility of his acting either as a broker or dealer, the specialist has an opportunity to act contrary to the interests of the regular brokers and their customers and that he actually does So. Nothing could be further from the truth. The greatest criticism directed against the specialist is that he works in a dual capacity, either as a broker for his customers or as a dealer for his own interests. As a matter of fact, he can never serve these two interests simultane. ously. Were he to do so he would be expelled from the exchange. Further, the minute a specialist steps into the capacity of a dealer, any trades which he may effect for his own account are, by the rules of the New York Stock Exchange, not binding except with the consent and approval of a representative of the firm with whom he trades. In other words, a specialist in trading for his own account buys from or sells to a broker who represents the seller or purchaser, as the case may be. It is the duty and interest of this other broker to see to it that his customer makes the best possible trade. If at any time such a trade is seen to be "inconsistent with just and equitable principles of trade" that trade is canceled. The new bill as now formulated provides two types of specialists: that of the dealer-specialist (one who trades for his own account and cannot accept commission orders) and broker-specialist (who executes orders for others and cannot trade for his own account). This means a division of the functions now performed by specialists. If this dual capacity is broken up so that there are two categories, viz: dealer-specialists and broker-specialists, a situation will arise which will have a broker-specialist working for the interest of his customers and a dealer-specialist who has no responsibility except to himself. The present specialist lives because of the fact that if he does not at all times make a just and ample market, the commission houses will speedily introduce a competing specialist in his field and his business will be cut down. He, therefore, does everything in his power to make such a market. Let us assume for the moment that the broker-specialist operating as provided in the bill cannot trade for his own account and a dealer-specialist may. The dealer-specialist has no customers, is responsible to no one save himself, and it is inconceivable that he would have the same interest as the present specialist in the maintenance of a continuous fair market for securities. The specialist's success depends upon the efficiency and intelligence with which he serves his clientele; without that efficiency and intelligence he would shortly find himself without orders. The fact that the business of the specialist has been developed over a period of time and requires a high degree of alertness and specialized knowledge for its efficient functioning, and the fact that it involves the livelihood of several thousand people, including the necessary staffs, cannot, of course, be a primary concern of your committee. But your committee is rightly concerned with the maintenance of a liquid or immediately accessible market to the investor, which in turn means an opportunity for the Nation's industry to finance its development. We believe that the specialist performs an essential function in that branch of national economy. If the liquidity of the market is at any time impaired it will unquestionably mean that collateral would necessarily be more difficult of disposal. Banks would accordingly be reluctant to accept stocks as collateral for loans which might be needed for productive enterprise. The effect, in truth, would be to impair a capital market on all exchanges in the United States where securities may now be either obtained or sold, with the inevitable consequence that other world markets would be utilized. The end and aim of commercial banks is, at all times, to have such a degree of liquidity that they may accomodate the short-term needs of business. Destroy the liquidity of the market and the ability of the banks so to function would be proportionately curtailed. There are many examples today of the inability to liquidate in other lines of business. We believe the intricate and complex functions of the specialist should not be disturbed as they now exist, and we respectfully submit the suggestion that the members of your committee visit the exchange to observe these functions in actual operation. The corporate structure of American business has resulted in the issuance of hundreds of millions of shares of stock held, it is said, by over 20,000,000 people. These are the people who, in the last analysis, "make the market." If the prospective legislation is followed to its logical conclusion, the functions now performed by the New York Stock Exchange would seriously be curtailed. This would not only impair the savings of millions of people but also throw many thousands into unemployment. Therefore, it is respectfully petitioned that section 10 of the bill be amended in accordance with the recommendation of Richard Whitney, Esq., President of the New York Stock Exchange, made to your honorable body at a public hearing on Thursday, the 22d of March, 1934. Section 10, as thus amended, would read as follows: "Section 10. (a) It shall be unlawful for a member of a national securities exchange while on the trading premises of such exchange to act as a dealer and broker in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. "(b) Subject to such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to insure compliance with the provisions of this subsection, the rules of a national securities exchange may provide for the registration of members with the privilege of acting as dealers, and any member so registered shall have the privilege of acting as a dealer and as a broker within the limitations of this subsection. It shall be unlawful for a member with the privilege of acting as a dealer who also acts as a broker to effect any transaction in a security by use of any facility of a national securities exchange or otherwise, (1) if in connection with any such transaction he directly or indirectly extends or maintains or arranges for the extension or maintenance of credit for a customer on any security (other than an exempted security) which was a part of a new issue offered to the public by him as a dealer or distributor within 6 months prior to such transaction, or (2) unless, if the transaction is with a customer, he discloses to such customer in writing any interest he may have in connection with the security which is the subject-matter of the transaction and offers the customer a reasonable time not exceeding 10 days to refuse the transaction after the disclosure if the disclosure is not made at the time of the taking of the order and confirmed in writing substantially simultaneously therewith." Respectfully, BLAIR S. WILLIAMS. PETER J. MALONEY. JOHN W. WALTERS. HENRY PICOL. ELI B. SPRINGS 2D. The specialists of the New York Stock Exchange are assisted in their labors by 1,290 employees who support 2,481 dependents. The annual salaries of the employees total $2,166,708. The specialists pay in real estate rentals or in lieu of rent $1,846,999 per annum. Hon. SAM RAYBURN, House of Representatives, Washington, D.C. NEW YORK, N.Y., DEAR SIR: On March 2, 1934, we submitted to the committee of the House of Representatives a brief in regard to the National Securities Exchange Act of 1934. The committee of "put-and-call" brokers at that time pointed out and tried to make plain the economic inportance of "puts and calls" and endeavored to show the difference between the so-called manipulative options and those dealt in openly by the "put-and-call" brokers and dealers in this country. We were then, and are now, of the opinion that section 8, paragraph 9, as it appears in the proposed law, as well as in is revised form, only applies to such options which are acquired in conjunction with the actual purchase or sale of stock. Such puts, calls, and straddles are clearly manipulative options. It seems to us that for the sake of clarity and sharper distinction that this paragraph should be drawn so as to leave no doubt as to the intention of allowing |