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directly and substantially affected by the activities of the securities exchanges. The securities markets compete with the banks for the funds of the investors. If those investors are lured by the hope of speculative gains, the banks will not have sufficient means with which to finance the needs of industry and their usefulness in this respect will be seriously impaired. The solvency of the banks is directly affected by fluctuations in the market values of the securities which they hold. In the very recent past many banks have been forced into receivership by depreciation in their bond accounts, although their other assets have not depreciated to any extent whatever. Furthermore, in times of speculative activity in the securities markets the funds of banks throughout the country are drawn to the exchange cities, to be invested in “call loans” at rates of interest so higii that the borrowers could only hope to pay them with the profits of speculation. This accumulation of funds in the exchange cities is inconsistent with sound banking and has aggravated the seriousness of all financial crises in the past. The decentralized plan of the Federal Reserve System itself was devised for the purpose of preventing the concentration of the wealth of the Nation in a few financial centers. That sin of the Federal Reserve System has not been fully achieved and the call money market in the years prior to the depression attracted to the exchange cities the funds of banks throughut the country. If the securities exchanges of the country are so regulated as to check speculative activity; then the financial resources of the Nation will not be absorbed in the exchange cities and the banking system will be stronger.
The effectiveness of control by the Federal Reserve Board over the lending policies of the member banks is seriously affected by the activities of the securities exchanges. A change in the rediscount rate has little effect where the banks can lend money on call loans at high rates of interest to finance stock market speculation. Similarly the open-market operations of the Federal Reserve banks may also be made ineffective by conditions in the securities markets. The selling of Government bonds in order to contract credit cannot check credit inflation during a speculative boom in the securities market.
We have demonstrated above the extent to which Congress can act to safeguard and make effective its power to coin money and to borrow. It can establish a semiprivate commercial bank and subscribe to a portion of its stock. It can assert a prior right upon the assets of an insolvent to satisfy its own claims. It can tas out of existence competing currencies issued under the authority of State governments. It can establish a land bank system if the banks forming that system are merely granted power to act as fiscal agents of the Government. That the great securities exchanges of the country are intimately connected with the fiscal system of the Government and the credit of the Government can hardly be denied. On this ground alone, it would therefore seem clear that the Congress has ample authority to regulate the securities exchanges, to check the flow of credit to the securities exchanges and away from industry, and to eliminate the evils of speculation.
IV. ADDITIONAL BASES FOR REGULATION Regulation of the securities exchanges by the Federal Government may be justified as a means of protecting the taxing power of the Government. The quotations of the prices of securities upon the exchanges of the country are used as bases for determining taxes due to the Government. Capital gains and losses for income tax purposes are computed according to securities market prices. lo the same way the value of assets for inheritance-tax purposes is computed on the basis of current quotations for securities. It is important to the Government that prices quoted upon securities exchanges reflect true values rather than artificial values affected by speculation. Legislation to achieve this result would seem to be justified as a "necessary and proper" means of protecting the taxing power.
The effect of securities market speculations upon the transportation system of the Nation may be disastrous. Market conditions, as a result of speculative activity, may be such that a railroad is forced to pay a high rate of interest for money which it borrows. As a result rates must be raised and the flow of interstate commerce impeded. If is is impossible for a railroad, because of advers market conditions, to float a refinancing bond issue, it may be forced into receives. ship. The securities markets also afford opportunities for small groups to acquire control of a railroad or to consolidate a whole system of railroads against the interest of the general public.
The securities markets afford similar opportunities for small groups to acquire control of a public utility or consolidate a whole system of such utilities against
the interest of the general public. In this connection it should be noted that Congress has power under the commerce clause to prevent monopolies in restraint of trade generally.
V. DELEGATION OF POWER
The Supreme Court has never held an act of Congress unconstitutional on the ground that it made an invalid delegation of power to an executive agency. On numerous occasions the court has upheld delegations. Among the powers delegated by Congress which have been attacked on that ground and sustained by the Court are the following:
The power of the Interstate Commerce Commission to prescribe uniform methods of accounting, Interstate Commerce Commission v. Goodrich Transit Co. (224 U.S. 194); the power of the Federal Reserve Board to authorize a national bank to act in a fiduciary capacity, First National Bank v. Fellows (244 U.S. 416); the power of the President to adjust tariff rates on the basis of comparative cost, Hampton & Co. v. U.S. (276 U.S. 394); the power of the Secretary of Agriculture to prescribe maximum charges of commission men under the Packers and Stock Yards Act, Tagg Bros. & Moorehead v, U.S. (280 U.S. 420).
The requirement expressed in the cases is that there must be standards prescribed by Congress for the guidance of the administrative agency. The degree of definiteness required cannot, of course, be defined for all cases. But the attitude of the Supreme Court on this question has been very liberal, as is pointed out by Judge A. N. Hand of the United States Circuit Court of Appeals for the second circuit, in Frisher & Co. v. Elting (60 F. (20) 711, 713), involving section 316 of the tariff act.
“The contention that section 316 is unconstitutional because it delegates legislative power to the President is answered by such decisions as Bulifield v. Stranahan, (192 U.S. 470, 24 S.Ct. 349, 48 L.Ed. 525), Field v. Clark, (143 U.S. 649, 12 S.Ct. 495, 36 L.Ed. 294), and Hampton, Jr., & Co. v. United States, (276 U.S. 394, 48 S.Ct. 348, 72 L.Ed. 624). By the last decision, section 315 (c) of the Tariff Act of 1922 (19 U.S.C.A. secs. 154-159) was sustained as a proper delegation of power. This section authorized the President to increase or decrease duties so as to equalize differences which, upon investigation, he might find to exist between costs of production in this end in foreign countries. The only possible question about the validity of section 316 is whether Congress laid down an adequate standard for the President to apply, when it declared unlawful "unfair methods of competition and unfair acts in the importation of articles or in their sale
the effect or tendency of which is to destroy or substantially injure an industry.
The terms are general and vague, but the Federal Trade Commission Act, which has uniformly been recognized as valid, declared "unfair methods of competition in commerce' unlawful and directed the Commission to prevent persons
from using' those methods. Federal Trade Commission Act, section 5 (U.S.C.A. sec. 45); Federal Trade Comm. v. Cratz (253 U.S. 421, 40 S.Ct. 572, 64 L.Ed. 993); Fed. Trade Comm. v. Eastman Kodak Co. (274 U.S. 619, 47 S.Ct. 688, 71 L.Ed. 1238). In similar vague terms the Shipping Board has been empowered to approve such agreements as it shall not find 'unjustly discriminatory or unfair
or to operate to the detriment of the commerce of the United States.
Congress could hardly have left the Shipping Board with more general powers or launched it with less definite sailing orders; yet its jurisdiction as a fact-finding body has been sustained in the broadest way. U.S. Nav. Co. v. Cunard S. S. Co., 281 U.S. 759, 50 S.Ct. 410, 74 L.Ed. 1169.
“We can have no doubt that section 316, which empowers the President to determine what acts in the importation or the sale of imported articles are unfair and to determine under what conditions these subjects of unfair trade should be exported, is entirely valid, and we so hold.”
The standards prescribed for the Federal Trade Commission in the FletcherRayburn bill make the grant of power to it well within the limits of permissible delegation as outlined above. Section 11, on registration statements, authorizes the Commission, in prescribing rules, to demand only such information as it deems “necessary or appropriate in the public interest or for the protection of investors”; and the kind of information demandable is carefully described. Similar standards are fixed for the requirement of periodical and other reports, in section 12, and the regulation of the use of proxies, in section 13. Section 14, on overcounter markets, requires that the rules be “necessary or appropriate to insure to investors protection comparable to that provided by and under authority of this act in the case of national securities exchanges." Similar standards are prescribed throughout the bill.
The Commission is given power in section 3 (a) (13) to exempt securities "by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors.' The power thus to grant exemptions is no more difficult to sustain than the power to make affirmative regulations. The Supreme Court has upheld the validity of the delegation of power to a commission to grant exemptions from a zoning ordinance, and it does not appear that the standards for such exemption were prescribed by the statute with as much definiteness as in the present bill. Coriab v. Fox (274 U.S., 603).
In any case, moreover, regardless of the language of the statute, an exercise of power by the Commission may be subject to review in the courts. If the exercise of power is found to be arbitrary or capricious, the language of the statute will not save the action from reversal. Likewise, a reasonable exercise of power will be upheld even though the statute might not in terins forbid an unconstitutional exercise by the Commission. When the constitutionality of a law or an administrative act is challenged, the complainant must show not only that he is affected by it, but that as applied to him in the case at bar it is unconstitutional. It is not enough that it might possibly be unconstitutional in other circumstances or as applied to other persons, See Albany County v. Stanley (105 U.S. 315, 514); Roberts & Co. v. Emmerson (271 U.S. 50, 54, 55); Liberty Warehouse Co. v. Burley Tobacco Growers' Cooperative Marketing Association (276 U.S. 71, 88).
In short, the delegation of power to the Commission is valid because adequate standards are prescribed for its action. And the constitutionality of particular regulations promulgated by the Commission must depend upon their reasonableness in a given set of circumstances; a statute cannot control in the decision of such questions.
It is well settled, moreover, that violation of an administrative regulation may be declared by statute to be a crime. See United States v. Grimaud (220 U.S. 506).
VI. PARTICULAR PROVISIONS OF THE BILL
A number of provisions in the bill necessarily go beyond the regulation of transactions immediately on the exchanges. Many of these provisions may be sustained, as has been shown, by virtue of the power of Congress over the mails and other instruments of interstate commerce. This is true of the sections, for example, on proxies and over-counter markets. But there is an independent ground upon which all these provisions must be held constitutional. The test of their validity is the appropriateness, in the reasonable judgment of the legislature, to accomplish the principal purposes sought to be achieved by the bill as a whole. The underlying purpose of the bill is to assure a sound, fair, and honest market for securities. This purpose, as we have seen, is within the legitimate powers of Congress. It remains to indicate the appropriateness of specific provisions to this central end.
Certain of the provisions are necessary in order to prevent simple evasion of the central requirements in the bill. Thus, for example, the provision in section 6 (a against loans by brokers on unlisted securities is essential in order that the margin requirements on list securities can be effectively enforced. Section 6 (a) prevents the confusion of collateral on a loan, which would enable & broker to lend more than the maximum amount on listed securities under the guise of partial collateral in the form of unlisted securities. In addition, section 6 (a) tends to prevent a trend away from the listing of securities and so away from the salutary listing requirements. Similarly, the application of margin, segregation, and borrowing requirements to persons doing business in securities through the medium of an exchange member closes what would otherwise be an easy avenue of escape from the regulations imposed on exchange members themselves.
Section 6 (e) requires every lender to observe uniform margin requirements for loans on registered securities, where the credit is extended or maintained in contravention of regulations prescribed by the Federal Reserve Board to prevent the excess being used for the purchase or carrying of any security. This provision is necessary to prevent evasion of the credit limitations imposed on loans made by brokers themselves. Again, the power given to the Commission in section 14 to regulate over-the-counter markets will tend to prevent a diversion of bus. ness from the exchanges to such markets, with a corresponding weakening of the effects of the bill. The provision tends to assure the maintenance of the sound, fair, and honest market in securities which the bill seeks to attain.
Another group of provisions turns upon the necessity of making effective the limitations on the volume of credit which can be absorbed in the speculative market. Section 6 (e), referred to in the preceding paragraph, imposing margin requirements upon all lenders on registered securities, is essential in order to
control the volume of speculative loans by banks. A prolific source of funds for the call market has been the nonmember banks, which send funds to member banks in exchange cities for use in the call market.
Although the Glass-Steagall Act prohibits member banks from acting as agents for nonbanking corporations in making loans to brokers, that act does not expressly forbid member banks from acting as agents for other banks for such purposes. It therefore remains necessary to control the amount of credit made available by nonmember banks for loans to brokers. This the bill is intended to do, in section 6 (e). The restrictions on borrowing by members of the exchanges included in section 7 are necessary to make effective the control of the Federal Reserve Board over credit available for the securities markets. Section 7 (a) provides that no member of an exchange or broker or dealer in securities may borrow except from or through a member bank of the Federal Reserve System.
The Federal Reserve Board is given the power, however, to permit limited borrowing between members and brokers or dealers in securities and to permit loans by or through nonmember banks to such members, brokers, and dealers in localities where there are no member banks. Since the Federal Reserve Board has no effective control over the activities of nonmember banks, the Federal Reserve Board could not regulate loans by and to members, brokers, and dealers if such members, brokers, and dealers could borrow without limitation from other brokers or from nonmember banks. Although this provision may appear superficially to discriminate in favor of member banks of the Federal Reserve System, the provision is essential in order to make effective one of the chief purposes of the bill, i.e., the control of credit used in the securities markets. That Congress has power, independently of any connection with securities market regulations, to reserve essential credit functions to banks which are a part of the national banking system or the Federal Reserve System, can hardly be doubted in view of the case of Veazie State Bank v. Fenno (8 Wall. 533), in which the Supreme Court held valid a Federal statute which placed a prohibitory tax upon money issued by state banks in order to drive such money out of circulation.
Another group of provisions deals with corporate issuers. These provisions all tend to make available accurate and adequate knowledge which is essential to the maintenance of a sound market for investors. Thus the registration requirements in section 11 comprise such information as is necessary to an intelligent understanding of the value of a security and its future prospects. The reports required by section 12 are designed to keep this information up to date. The requirements in section 13 concerning proxies are designed to make available to the investor reasonable information regarding the possibility of control of the corporation, or of a class of securities, by an individual or a group of individuals. Such information will help to assure a sound market.
Competent authorities have pointed out that the operation of pools is made possible by the fact that uninformed people afford a market for the stock in which a pool is being conducted; and that short selling likewise depends upon the existence of uninformed investors who unwittingly help to lift the price of a stock to an unreasonable and untenable level from which it will fall, or be made to fall, to the benefit of the short sellers. Adequate information about the true position of the company will go far to prevent the occurrence of these practices. The requirements in section 15 concerning transactions by officers, directors, and principal stockholders in securities of companies registered on licensed exchanges are designed both to give information to investors and to prevent manipulation and profits derived from knowledge gained in a fiduciary capacity. The effect upon public confidence in the securities markets of Mr. Wiggin's operations in the stock of his own companies is a matter of common knowledge.
The legal justification for all these provisions is clear. The Supreme Court on numerous occasions has upheld the power of the legislature to regulate or prohibit even acts which are in themselves innocent, where control over them is necessary to the effective control of abuses. These cases go further than does the bill, since the practices which the bill regulates have a substantial effect upon the condition of the market, which is the primary object of regulation. They are not isolated transactions. But even if they were unrelated in fact to the exchange markets, they might be regulated if deemed necessary for effective administration of the measure.
Thus, for example, it was not unconstitutional for a State, in forbidding the manufacture and sale of oleomargarine because it was considered unwholesome, to apply the prohibition to a product which was itself wholesome and nondeceptive (Powell v. Pennsylvania, 127 U.S. 678). Compare also the statement of Mr. Justice Holmes in Westfall v. United States (274 U.S. 258, 259), in which the law was upheld making it a crime to misapply funds of a State bank which is a member of the Federal Reserve System:
“Moreover, when it is necessary in order to prevent an evil to make a law embracing more than the precise thing to be prevented it may do so.'
The power of the legislature to regulate or prohibit acts which are in themselves innocent, as a complement to the regulation or prohibition of evils, was fully discussed and sustained in Purity Extract Co. v. Lynch (226 U.S. 192). Mr. Justice Hughes delivered the opinion of the Court:
“It does not follow that because a transaction, separately considered, is innocuous, it may not be included in a prohibition the scope of which is regarded as essential in the legislative judgment to accomplish a purpose within the admitted power of the Government (Booth v. Illinois, 184 U.S. 425; Otis v. Parker, 187 U.S. 606; Ah Sin v. Wittman, 198 U.S. 500, 504; New York ex rel. Sils v. Hester. berg, 211 U.S. 31; Murphy v. California, 225 Ú.S. 623). With the wisdom of the exercise of that judgment the court has no concern; and unless it clearly appears that the enactment has no substantial relation to a proper purpose, it cannot be said that the limit of legislative power has been transcended. To hold otherwise would be to substitute judicial opinion of expediency for the will of the legislature, a notion foreign to our constitutional system.
“Thus, in Booth v. Illinois (184 U.S. 425), the defendant was convicted under a statute of that State which made it a criminal offense to give an option to buy grain at a future time. It was contended that the statute, as interpreted by the State court, was 'not directed against gambling contracts relating to the selling or buying of grain or other commodities, but against mere options to sell or buy at a future time without any settlement between the parties upon the basis of differences, and therefore involving no element of gambling. The argument was that it directly forbade the citizen 'from pursuing a calling which, in itself, involves no element of immortality. This court, in sustaining the judgment of conviction, said: 'If, looking at all the circumstances that attend, or which may ordinarily attend, the pursuit of a particular calling, the State thinks that certain admitted evils cannot be successfully reached unless that calling be actually prohibited, the courts cannot interfere, unless looking through mere forms and at the substance of the matter, they can say that the statute enacted professedly to protect the public morals has no real or substantial relation to that object, but is a clear unmistakable infringement of rights secured by the fundamental law.' It must be assumed, it was added, that the legislature was of opinion that an effectual mode to suppress gambling grain contracts was to declare illegal all options to sell or buy at a future time;' and the court could not say that the means employed were not appropriate to the end which it was competent for the state to accomplish (id. pp. 429, 430).
“The same principle was applied'in Otis v. Parker (187 U.S. 606), which dealt with the provision of the Constitution of California that all contracts for the sale of shares of the capital stock of any corporation, on margin, or to be delivered at a future day, should be void, and that any money paid on such contracts might be recovered. The objection urged against the provision in its literal sense was that the prohibition of all sales on margin bore no reasonable relation to the evil sought to be cured; but the court upheld the law, being unwilling to declare that the deep-seated conviction on the part of the people concerned as to what was required to effect the purpose could be regarded as wholly without foundation (id. pp. 609, 610).”.
Mr. Justice Hughes then discussed with approval the case of New York ez ri. Silz v. Hesterberg (211 U.S. 31), involving a New York statute which prohibited the possession of certain game during the closed season. The defendant was in possession of game which had been lawfully taken outside the State during the open season and had been brought into New York. It further appeared that the game were wholesome and could be distinguished from domestic game of the forbidden varieties. But the Court held that the legislature was the judge of the necessity or expediency of the measure adopted, pointing out also that the law tended to prevent the passing-off by dealers of domestic game under the claim that they were taken in another State.
Mr. Justice Hughes continued, in the Purity Extract case:
“It was competent for the legislature of Mississippi to recognize the difficulties besetting the administration of laws aimed at the prevention of traffic in intori cants. It prohibited, among other things, the sale of malt liquors. In thus des. ing with a class of beverages which, in general, are regarded as intoxicating, it was not bound to resort to a discrimination with respect to ingredients and proc. esses of manufacture which, in the endeavor to eliminate innocuous beverages from the condemnation, would facilitate subterfuges and frauds and fetter the enforcement of the law. A contrary conclusion, logically pressed, would save the