whether the person with whom I am doing business is financially able? Mr. WHITNEY. I claim, Mr. Wolverton, that you are entitled to get that information from the exchange and can, and it will be given to you, but that all of the private affairs involved in the accounting reports of a member firm, I do not think is proper to be given publicity. There is a small distinction, perhaps. Mr. WOLVERTON. It seems that way to me. Mr. WHITNEY. But I refer to that same thing further on in my statement here with regard to corporations. There are certain things, if divulged as to the affairs of the member firm, that might allow unfair knowledge to competitors, or of similar import, and I just do not see what is gained Mr. WOLVERTO. Will you tell me why you have the examination made by your auditing group? Mr. WHITNEY. For the very reason you state, for the protection of the public which deals with those firms. Mr. WOLVERTON. But the public does not know anything about it unless an individual inquires, and as you say, they may or may not receive the information. Mr. WHITNEY. Except in those very few instances. Mr. WOLVERTON. And, if I, as an outsider, who never traded with a particular brokerage house, made the inquiry, I would be refused the information, would I not? Mr. WHITNEY. I beg your pardon. I did not get that. Mr. WOLVERTON. I say, if I had never traded with a particular house with which I contemplated trading with, and made the inquiry I am now speaking of, it would not be given? Mr. WHITNEY. To the New York Stock Exchange, if you made the inquiry of the New York Stock Exchange? Mr. WOLVERTON. What information would be given; what would be the nature of it? Mr. WHITNEY. That the particular person or firm asked about was in good standing and met the requirements of the business conduct committee. Mr. WOLVERTON. Yes. But that would be the opinion of that particular committee. Mr. WHITNEY. No, sir; it would be a fact. Mr. WOLVERTON. Well, then, how do you account for the fact that so many have failed? Mr. WHITNEY. I do not grant that so many have failed. Mr. WOLVERTON. I was rather inclined to believe that they had. Mr. WHITNEY. No, sir. Mr. WOLVERTON. In other words, no member of the stock exchange has failed? Mr. WHITNEY. No, sir; I did not say that. I said "so many", and I would like to present our record as to failures as against that of the national banks and State banks. Mr. WOLVERTON. Then, the examination that you conduct promotes a greater stability than that which is now provided for national banks and State banks; is that the idea? Mr. WHITNEY. Not necessarily, sir. I am not trying to draw an unfortunate, in any way, comparison, such as that, but this is a private institution that has far greater powers, as I see it, in many ways, than can any administration under the law, and we do seek, sincerely, to keep our members in such a condition that the public may trade with them without risk. In any human agency, naturally, there will be failures; but there are precious few failures on the New York Stock Exchange, sir, that are not attributable to fraud, in answer to the questionnaire of the exchange, and I think the honest and fair thing to say is that no agency, State or Federal, or individual, or human, can prevent crookedness; and any bank can report to the State or Federal authorities facts that are untrue and no one will know until a later time of them. I have never known an instance where a report has been made by a member of the stock exchange that was untrue that it was not eventually found out, because we have our own auditors going into those books. Mr. WOLVERTON. What was the total number of members that did fail since 1929, to the present? Mr. WHITNEY. That, sir, I have not got here, but I will be very glad to get it for you. Mr. WOLVERTON. Could you say approximately? Mr. WHITNEY. The total number? Mr. WOLVERTON. Yes. Mr. WHITNEY. I would say between 6 and 15; but I have the figures here in Washington and can get them for you later. Mr. WOLVERTON. What was the total amount of liabilities that appeared on their books? Mr. WHITNEY. That I have no idea of at the moment, nor have I any idea of what actual losses were suffered by any customers. Mr. WOLVERTON. What provision is made by the stock exchange to protect the individual who purchases on margins and whose stocks have been hypothecated by the member to the banks? Mr. WHITNEY. Protected in the matter of insurance against losses? Mr. WOLVERTON. Yes. Mr. WHITNEY. None, if I understand you rightly, except the investigation which we have been talking about. Mr. WOLVERTON. Yes. Now, if I should purchase stock on the margin and that stock is taken by the member and hypothecated, is it possible for me, under the practices that prevail, in the event of the failure of that member, to pay to the bank with which it is hypothecated the indebtedness which I owed to the member on that stock and thereby get it back, or am I treated as a common creditor and required to take my chances with all other creditors? Mr. WHITNEY. If that stock of yours was not owned outright andyou are now asking me a legal question-it is my personal opinion, without knowing from the legal point of view, that you are a general creditor. Mr. WOLVERTON. Do you think that there should be a provision in this bill that would protect the individual investor in such a case as that, so that he could obtain the stock which he had purchased on a margin by paying the balance that was due? Mr. WHITNEY. Again, sir, you are asking a legal question. Mr. WOLVERTON. Yes. Mr. WHITNEY. But it is my personal understanding that State laws differ in that regard, and I do not know whether a Federal law could supersede it. Mr. WOLVERTON. Well, I am assuming that it would be legally possible, and I am asking you as to the policy or the principle involved. Do you think, in the interest of the investing public, that the individual should have that right? Mr. WHITNEY. That is not the investing public; that is the speculating public. The investing public, that is, the individual who owns his stock outright, or other securities, as I understand, under the law of New York, may recover his shares, or at least is preferred in that regard. Again, that is a legal question. These questions, so far as their legality is concerned, I will have to pass ud. Mr. WOLVERTON. But there is no provision now of the stock exchange that would prohibit a member from borrowing from a bank a higher amount that that which I owed to him on that stock? Mr. WHITNEY. Yes, sir; there is, absolutely. Mr. WOLVERTON. And what steps are taken to check on that? Mr. WHITNEY. By the reports to the questionnaire, and by the individual investigations conducted by the accountants of the exchange periodically. Mr. WOLVERTON. Then, you have faith in the efficacy of your questionnaire? Mr. WHITNEY. We have, as long as fraud is not committed in its answer. Mr. WOLVERTON. Did the questionnaire which was recently put out with reference to sale of the aeroplane stocks produce the information that would determine whether there was a pool in that, or that any advantage had been taken of advance information on what was to be done with reference to cancelation of air-mail contracts? Mr. WHITNEY. Mr. Wolverton, that is not the type of questionnaire I have been referring to, you understand; not at all. Mr. WOLVERTON. Well, I am just speaking of the general principle of the questionnaires. I thought that you had faith in the efficacy of the questionnaires. Mr. WHITNEY. I do not think, if I may be permitted to say so, without meaning any discourtesy, I do not think that the comparison between the questionnaires you have been talking to and the questionnaire on that is in any way comparable. They are quite different. Mr. WOLVERTON. The point is, you are using the questionnaire system to obtain information. Mr. WHITNEY. Yes; and we got information. Mr. WOLVERTON. I beg your pardon. Mr. WHITNEY. We got the information, absolutely, sir, that we asked for. Now, what deductions or results would come of that after the compilation of all those questionnaires are put together is another situation entirely; but I certainly believe that our members answered those questionnaires honestly. That is what I thought you asked. Mr. WOLVERTON. Yes. That is all. Mr. PETTENGILL. Mr. Chairman- Mr. PETTENGILL. Mr. Whitney, in every competitive business there are some people who want to improve its ethical standards and others who do not. We all recognize that. And, that leads to a situation where people often say that, "We will improve our standards, if our competitors would, but because they do not, we cannot. If we do, we will drive business to our competitors." Now then, I would like your views on this matter: There are other stock exchanges in the United States, other than yours? Mr. WHITNEY. Yes, sir. Mr. PETTENGILL. Although I think that you take the position that yours is the most highly regulated exchange. It would seem to me as a layman, that some legislation which would bring all stock exchanges under reasonable regulation might be to the advantage of each one. In other words, if one exchange were to develop standards of ethics and ethical conduct too high certain business might go to other exchanges whether in the United States or Canada. Is that not so, that one exchange might drive business to another exchange? Mr. WHITNEY. I think that is very possible, Mr. Pettengill. Mr. PETTENGILL. Now, I want to ask about something-and, I am speaking in a friendly spirit, because I do not want to do anything that is too drastic with regard to legitimate business. I want to ask if you would be willing to submit a draft of what you think would be in the public interest with reference to the regulation of all the stock exchanges of the country. Mr. WHITNEY. Yes, sir. Mr. PETTENGILL. If requested by the committee? Mr. PETTENGILL. Or, would you volunteer that? Mr. WHITNEY. I will volunteer it. Mr. PETTENGILL. Now, with reference to fraud on the part of your own members, I notice that it met with considerable approval of the audience, your statement that the percentage of failures of brokers was less than that of banks. Might that not be attributed to the fact that the broker is in a position to sell out his customer on a moment's notice, and with all of the inside and other secret information that they possess, are in a much better position to protect themselves than banks who are dealing in stocks and bonds listed on securities exchanges, and are not in on the ground floor as to that knowledge and information? Mr. WHITNEY. Well, in the first place, I did not intend, consciously, to draw any unfortunate comparisons, Mr. Chairman. You have heard, perhaps, that our members were allowed to sell out accounts without due notice. That is not so. The usual practice is for a house to get a written consent, an agreement, signed by each customer when they open a margin account; but the rules of the exchange itself are that due and proper notice must be given to customers before their accounts may be sold out, except perhaps in times when the account suddently becomes violently under water and it would not make any difference whether the customer was notified, the account was so far under water that it did not make any difference what happened. Mr. PETTENGILL. But you would Mr. WHITNEY. I do not see where Mr. PETTENGILL (interposing). You admit that generally the stock brokerage house is in a better position to fortify itself against a situa tion of that sort than for instance a bank out at South Bend, Ind., which has stocks that have been put up as collateral in connection with customers' notes, and so forth, would you not? Mr. WHITNEY. Yes, sir; but now we are getting into the economic question. Theoretically, if I know anything about banking-which I do not a bank is supposed to buy securities that are not of the volatile type, at least inso far as or with relation to its meeting the demands of its depositors, and I do not think Mr. PETTENGILL. I am not referring to outright purchases of bonds, and so forth, but I am speaking of the collateral behind customers' notes. A bank cannot be as well advised about them as a brokerage house. Mr. WHITNEY. I suppose not, although the number of quotations given throughout the country to banks and individuals and insurance companies, by both brokers and bond brokers, is perfectly multitudinous. They are daily and oftener, every day, and I know of my own experience, of few banks, no matter where they are located, that do not have daily quotations, and perhaps more often than once a day on securities in which they are interested either through their own account or in collateral loans, provided that is of any interest to them at the time. Mr. PETTENGILL. If I understood you correctly you said that the failure of brokerage houses which had occurred in recent years was due in practically every case to fraudulent statements to the governing board. Mr. WHITNEY. So far as I can remember in almost every instance except possibly one that occurs to me where the condition of the market caused the insolvency, the quick dropping of the market, where the very thing we are speaking of did not apply to them, or else there was no market for what they owned, and one or two casestwo cases that occur to me-where there were such serious defalcations that insolvency resulted when discovered. Mr. PETTENGILL. With reference to failures which occurred and which were not capable of being prevented on account of fraudulent. statements to your own governing board, the exchange nevertheless has never recognized any responsibility to the customers of that brokerage house, despite the fact that in your article in the current number of Today you say: Every member of the exchange is fully liable to the extent of his entire fortune for the obligations of the exchange. But you do not recognize any responsibility to customers of a failed brokerage house who have imposed upon your own governing body by fraudulent statements. Is that right? Mr. WHITNEY. In the way of an insurance; no, sir; we do not; but every single dollar of worth of all of the partners of that concern, are liable to such customers. Mr. PETTENGILL. Has that liability ever been invoked? Mr. PETTENGILL. Have you ever had to make up the losses of anybody? Mr. WHITNEY. Have we? Mr. PETTENGILL. Yes. Mr. WHITNEY. Then, you misunderstood me. I say we do not insure, as an exchange, to the customers of failing, insolvent firms; |