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Subdivision (c) of section 6 makes it unlawful for any person to extend or maintain credit upon any security registered on a national exchange which has been acquired by the borrower within 30 days of the date of the loan, except in an amount not exceeding that which a member of a national exchange may lend to his customer pursuant to the provisions of the bill. In effect, this section makes the rigid margin requirements set up by subdivision (b) applicable to all banks, and other lenders, in respect of securities listed on exchanges which have been purchased within 30 days. As I believe the minimum margin requirements, which the bill imposes on brokers' loans, are unsound, I naturally feel that the same provisions are equally unsound if applied to bank and other loans. Further, this provision, while establishing rigid minimums for securities listed upon exchanges, apparently permits all lenders of moneys, except members of exchanges to advance credit on unlisted securities on such terms as they may think wise. This discrimination against listed securities seems clearly unsound. Stocks and bonds, which are listed on exchanges, and enjoy an active market, have been proved to be the best and safest type of collateral for loans. The bill apparently completely disregards the experience of the past in this respect and permits banks, and other lenders of money, to advance more credit on unlisted securities than they can advance upon listed securities which have been purchased within 30 days.

Some of the effect of this provision are anomalous. For example, a security which the issuer proposes to list on an exchange cannot be registered with the Federal Trade Commission until 30 days after the registration statement has been filed. During this waiting period the security cannot be dealt in on an exchange and, therefore, would not be deemed to be a registered security coming within the provisions of the bill. It is possible, therefore, that a security of this kind might be the basis of liberal credit advances by banks until the effective date of the registration, when, automatically, the bank would have to call its customer for additional margin merely because the security had become entitled to a public quotation.

I have already mentioned that the mandatory provisions of the bill in regard to minimum margins would force the liquidation of a substantial part of the $1,390,000,000 of debit balances currently carried by brokers for their customers. These same mandatory provisions would, likewise, force the liquidation of part of the $3,500,000,000 of loans which banks have made to their customers against security collateral. The effect on bank loans may be less severe than upon brokerage accounts because many of the securities held as collateral by banks have undoubtedly been held by the borrowers for more than 30 days. On the other hand, there still remains the problem arising from the common practice of persons who have borrowed money from a bank to sell a security held by the bank as collateral and to reinvest the proceeds in another security which is thereupon substituted as collateral for its loan. Such substitutions will be subject to the bill and, therefore, changes of investment by persons who have borrowed from banks may become practically impossible.

It is difficult, if not impossible, to forecast precisely what the result will be, but it seems probable that a substantial amount of liquidation of bank loans will be caused by these provisions of the bill.

Subdivision (d) of section 6 gives the Federal Trade Commission power to determine how margins shall be computed; when they shall be paid and what notice shall be given or method employed in closing out accounts. These powers would apparently apply not only to brokers but also to banks and other lenders of money. The length of notice which must be given or the method to be used in closing an account can seriously affect the safety of a loan. Such unlimited powers should not be vested in an administrative body.

Section 7 of the bill deals with restrictions on members' borrowing and contains six subdivisions. The first prohibits any member of an exchange or any person who transacts a business in securities through such a member from borrowing from any person other than a member bank of the Federal Reserve System. The second subdivision prohibits such member or person from incurring indebtedness which, in the aggregate, will exceed ten times the net current assets owned by the borrower and employed in his business. These two provisions affect primarily the relation between brokers and banks. I understand that the committee will hear from persons who are more expert than I in regard to the effect of these provisions upon our banking system. From the brokers' point of view, the first subdivision seems unnecessary and it will undoubtedly prohibit many small loans which are currently made between brokers. I refer particularly to "odd-lot loans” which involve the borrowing and lending of sums of less than $100,000.

As far as the limitation upon borrowings by a broker in relation to the amount of his capital is concerned, if the term "net current assets” means the capital of the broker employed in his business, the provision of the bill is less severe than the requirements of the business conduct committee of the New York Stock Exchange. In spite of this fact, I think the provision is a bad one because of its mandatory and inflexible nature. In the experience of our business conduct committee, the capital ratio of members has sometimes fallen below our minimum requirements. In such cases the business conduct committee insists that additional capital be secured or then that the liabilities of the firm be reduced by transferring customers' accounts to other firms which have the necessary capital. This provision, which makes it unlawful for a person to borrow more than 10 times his capital and allows a person who exceeds this arbitrary limit no opportunity to readjust his affairs, will force the insolvency of firms which might otherwise be saved and put again upon a solid foundation. An insolvency is a serious matter for customers even if they are ultimately paid in full, because it deprives them, at least temporarily, of the use of their securities and property.

No statutory provision can guarantee the solvency of brokers. Constant care and watchfulness are the best protection against insolvency. The experience of our business conduct committee throughout the entire depression amply demonstrates the truth of this statement. The questionnaire system, which the exchange established in 1922, and which has from time to time been revised and extended and the examination of member firms which the business conduct committee currently makes in order to verify the answers to these questionnaires, have been the means by which the exchange has been able to guard against the insolvency of members. There have been a num

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ber of insolvencies but the record of the members of the exchange in this regard is certainly an outstanding one and if the committee is interested in these statistics I will submit for the record a tabulation showing in comparative form the number of insolvencies of members of the exchange and of national banks and State banks.

The third subdivision of section 7 prohibits a member of a national exchange or a person engaged in the securities business through such a member from using his capital, if he be acting as a broker, to carry or finance securities for himself or for any partner or employee. It is not quite clear whether this prohibition is intended to prevent a broker from investing his own capital in securities or from contributing capital to his firm in the form of securities. If this subdivision should be given any such broad interpretation, it would operate most unfairly and would, in effect, require a broker to use in his business only cash capital.

In any event, violations of these provisions should not be made criminal offenses, because as soon as such a penalty is attached any person lending money to a broker might find himself involved in a criminal act.

Subdivisions (d) and (e) of section 7, which deal with the hypothecation of customers' securities, are the same as the existing law of the State of New York and the rules of the New York Stock Exchange. Subdivision (f), which deals with the lending of a customer's securities without consent, makes effective another ruling of the New York Stock Exchange.

Mr. BULWINKLE. Mr. Chairman-
The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. I wonder if you could furnish the members of the committee with copies of the rules of the New York Stock Exchange?

Mr. WHITNEY. Gladly, sir, all of them; yes. I will be pleased to

do so.

Mr. PETTENGILL. Mr. Chairman
The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. I understood that you have no objection to paragraphs (d) and (e).

Mr. WHITNEY. No, sir: none at all.

Mr. MAPES. Mr. Chairman, as long as the witness has been interrupted, I should like to ask a question for information.

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. You spoke about restrictions on brokers and the provisions in the bill requiring brokers to make all of their loans from Federal Reserve banks. Would that prevent brokers loaning to one another? And is that a very extensive practice?

Mr. WHITNEY. At times; yes, fairly extensive. I would say it varies. It is very extensive at times.

Mr. Mapes. Is it customary for a broker to put up collateral when borrowing from another broker?

Mr. WHITNEY. Yes, sir; those loans are made at what is called the money desk on the exchange, where demand borrowers go in and where offerings are furnished, both from brokers, members, and also from clearing house banks and others, and at such times as the two may meet, and the broker's money may be loaned out, or the bank's money, as the supply and demand applies.

At times, it is fairly extensive.

Mr. Mapes. I missed a part of your statement, after the recess of the committee. If you have touched upon this, I do not care to have you go over it again, but I was

curious in regard to the margin requirement of the stock exchange. How do you adjust the margin from day to day or week to week, after a loan is once made and the 30-percent margin, which the stock exchange requires, is met on the making of the loan, if the stock goes up or down, what or how do you adjust the margin?

Mr. WHITNEY. If the stock goes up, unless the customer calls for a part of his margin, then the situation remains as it is, unless what we call real excess margin becomes the situation in the account, and then that must be placed in segregation in another box of the broker, and labeled in the name of the customer.

If the margin, the price, declines and the margin is under 30 percent, then a call must be sent by the broker for additional margins, and give a reasonable time for the customer to present additional margins. After that reasonable time, the account must be sold out.

In other words, that is the maintenance of the margin.
I would like to ask-
Mr. Mapes. I want to ask you--
Mr. WHITNEY. I beg your pardon.
Mr. Mapes. If you are not through, I do want to interrupt.
Mr. WHITNEY. I can add it later.

Mr. MAPES. You spoke this morning about customers being allowed a reasonable time to meet the demands of the brokers for further margins, and you have just spoken about a reasonable time in this connection. In looking over the rules of the exchange, if I read this one rule correctly, it seemed to me that the "reasonable time” is very limited as I understand the rule, that if a broker calls for additional margin at 2 o'clock, or before 2 o'clock, in the afternoon, that the customer has to come across with it, before 2:30. Is that correct?

Mr. WHITNEY. No, sir; no, that is not correct, not that I have ever known of. A reasonable time naturally has got to have leeway, depending upon where the customer is and the many circumstances surrounding each and every particular case.

Mr. MAPES. Perhaps you know what I am referring to. There is some such regulation as that in the bylaws or the constitution of the stock exchange, is there not?

Mr. WHITNEY. That is not, sir; between customers and brokers, That is between brokers.

Mr. MAPES. That is between brokers.
Mr. WHITNEY. Yes, sir.

Mr. MAPES. If one broker calls upon another before 2 o'clock in the afternoon for additional funds, the other broker must produce those funds before the close of the stock exchange at 3 o'clock?

Mr. WHITNEY. With relation, sir, to existing contracts between those brokers. The same thing applies to banks, on the part of banks, who have loans to brokers. The custom is to give notice, as I understand, before 11 o'clock in the morning, and unless that additional collateral is put up on the bank loan, the bank will sell it out before the day is through.

The other point that is more specifically, perhaps, referred to a little while ago by Congressman Lea was with regard to our minimum requirements. I am sorry I have not got the rules right here. Our minimum requirement is 30 percent. That is on active stock, sir. We demand, as I told you, that each and every account must stand on its own footing. Our rule goes also into the fact that inactive securities and unlisted securities may have no regular market. On those, further and additional margins must be required. And certain classes of stocks are not allowed as margins, because they will not stand on their own footings in bank loans.

Then, last July, at the exchange's request, the banks in New York got together and on volatile stocks, those that had big ups and downs, set a definite loan value. Prior to that time most of them had that, but not with any cohesion between them. In July they got together and agreed then, and have ever since, on what were the volatile stocks and the setting of uniform loan value at which at stock could be put into a loan and the 30-percent margin taken off from that.

Each and every broker upon inquiry either at the business conduct committee or from any of the banks, can find out what those prices are, and he will find it out if he tries to put in loans at higher prices anywhere, and he is forced by the exchange to carry on that loan value price to his customers, and again operating under the rule that the customer's account must be capable of banking itself. Am I at all clear, sir?

Mr. LEA. The volatile character of the stock is established by a rule, is it?

Mr. WHITNEY. No, sir; that is established by the representatives of the banks in consultation with the representatives of the business conduct committee, and it is established, I would say, by the previous action of the particular stocks that are in that category.

Mr. LEA. So you require higher margins in those cases than on the ordinary stocks?

Mr. WHITNEY. Yes, sir. In other words, I am trying to carry out what I said to you about the flexibility and necessity of the margin section.

Mr. PETTENGILL. Mr. Chairman-
The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. On that point, it is not quite plain to me whether your objection goes to the amount of the margin or the fact that it is rigid and arbitrary. Your present 30 percent requirement is a rigid and arbitrary rule, is it not?

Mr. WHITNEY. As a minimum.
Mr. PETTENGILL. As a minimum.

Mr. WHITNEY. As a minimum on accounts having collateral of usual activity and stability; yes.

Mr. PETTENGILL. So, as between that or 40, or 50, or 60 percent, on the question of rigidity, there is no difference in principle, is there?

Mr. WHITNEY. No; but if I may be so bold as to say so, it is 30 percent, as against 150 percent.

Mr. PETTENGILL. I appreciate that. I say in the principle involved.

I wish to ask you whether your real objection is to the amount of the margin in this bill, or the rigid feature of this provision?

Mr. WHITNEY. Both.

Mr. PETTENGILL. But you do not object, in fact, you see the necessity of having the rigid arbitrary minimum?

Mr. WHITNEY. Yes.
Mr. PETTENGILL. Which you fix?

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