to the Federal Reserve System. That may be exercised to prevent the use, the undue use, of such credit, and in turn, as I see it, it can be used to prevent what is deemed to be unwise or excessive speculation in that regard.

We are heartily in sympathy to prevent unwise and excessive speculation. We want no more 1929 booms and depressions following them. They are terrible.

Mr. LEA. Mr. Whitney, as we approach this question, I take it for granted, that we are all agreed that the exchanges perform a useful and necessary purpose in our business structure; but it is the general opinion, I think, of public sentiment, that great evils have grown up under the use of facilities of the stock exchanges of the country.

Now, without reference to the magnitude of those evils, I think you would recognize the fact that there have been evil practices under the stock exchanges of recent years.

Mr. WHITNEY. I do, with the qualification there, sir, that we are the market place and a great many evils, as you described, or abuses have been perpetrated there, but not all of them engineered by our members or for which our members are responsible.

Mr. LEA. I would entirely agree with that; but isn't it also true that your members have been to a large extent beneficiaries of unconscionable practices on the exchanges of the country? I am not trying to throw slurs, but just to candidly view the question that confronts us. Mr. WHITNEY. Well, I do not really understand your question. "Unconscious"?

Mr. LEA. I say "unconscionable"; but your members, of your stock exchange, are beneficiaries of whatever these evil practices may be at the present time. That is undoubtedly true, is it not?

Mr. WHITNEY. Why, no, sir; I do not think that is true. Mr. LEA. Well then, they are in part. I do not say entirely. Mr. WHITNEY. I think it is to the great detriment of the members of the New York Stock Exchange and other exchanges that abuses and evils have occurred in those exchanges. It works against our interest. We are blamed for things for which we may be-well, in some part accountable, but I think there is a very general feeling that people have that we are entirely accountable for things we have been doing our utmost to prevent, and which are without our power of preventing.

Mr. LEA. Now, I would agree that from the long-time viewpoint it is detrimental to the members of the exchange and as a body and as an institution to have the evil practices to which the country has been subjected in recent years; but when we deal with the specific problems, I think you have to admit that members of the exchange have been beneficiaries of the unwarranted practices on the New York Stock Exchange as well as other exchanges. They are beneficiaries of whatever evils there are in this system, are they not?

Mr. WHITNEY. I do not think you have specified as to what you term evils. I will grant, of course, that execution of orders on exchanges accrue by commission to the earnings of our members and those on other exchanges.

Mr. LEA. Suppose we take the pooling of the alcohol stock: The members of the New York Stock Exchange participated to a degree in the benefits of that pool, did they not?

Mr. WHITNEY. Certain members, I believe, had options, but frankly, my personal observations in the spring of 1933 and with particular reference to the alcohol stocks is that there was a craze of speculation that went over this entire country and I think the testimony that we have heard has shown that the majority of the pools with options had their stocks taken from them, and the stock went many, many points higher, because the public sought and insisted in buying them.

Mr. LEA. But, was not the public advised by letters addressed to them, and misleading statements and misinformation, to buy those stocks?

Mr. WHITNEY. I do not think that that is the case. I think that there was a speculative craze in the spring of 1933 and I do not think that that can in any way be contributed to the members of the stock exchange.

Mr. LEA. Then, they were participants in part of the benefits of the pool, were they not?

Mr. WHITNEY. Individuals.

Mr. LEA. Individually; yes.

Mr. WHITNEY. Yes; but as a total group; no.

Mr. LEA. Well then, when we come to this question as to regulation, as to what extent we shall regulate the exchanges, we are confronted with the situation that the members of the exchange which really constitute the exchange are beneficiaries of the evil practices this bill seeks to eliminate.

Mr. WHITNEY. We have passed, sir, recently, after some years of investigation and study, certain rules with regard to pools, syndicates, and joint accounts which seek through any device to unfavorably influence the market prices, and if it is that point on which you are specifically speaking, we are entirely in agreement with you.

It is important not to have such practices indulged in, whether they be indulged in through nonmembers, or members. Over the former, we have no control, and over the latter we are seeking, and have sought, to put additional control.

Mr. LEA. Well, does that not lead us to the conclusion that regulation must be left to a body that represents the public rather than a group like the stock exchange that represents itself, to a degree, an adverse attitude to the public? I mean that as a justification for public regulation of the stock exchanges.

Mr. WHITNEY. I have said this many times before, sir: I question whether any regulation of stock exchanges can control the evils for which stock exchanges and their members are in no way responsible and I do not think that such evils as have existed and been brought out in investigations, recently, or in the recent past, can be attributed solely or even in the main to the stock exchange members.

The CHAIRMAN. There is a roll call of the House, and we will recess until 5 minutes past 3.

(Thereupon, a recess was taken as above indicated, for the purpose of permitting the Members to answer the roll call, after which the following proceedings were had:)

The CHAIRMAN. The committee will come to order. All right, Mr. Whitney, you may proceed.

Mr. WHITNEY. The real difficulty with these proposed margin requirements is that they attempt to set up a rigid formula for a

subject which, by its very nature, requires a very flexible rule, the determination of proper margins requires the exercise of sound discretion. It is impossible to substitute for this discretion a mechanical rule based upon percentages of existing or former values. A sound margin is one which will, in all probable circumstances, protect the lender of money from the danger of loss if security prices should decline. To arrive at a solution of this problem, many factors must be considered. The nature of the security, its activity in the market, the degree to which it is held on margin or as collateral for loans, are all considerations which must be taken into account. In addition, there are special situations which may affect the amount of margin which should be required. There are certain securities which because they fluctuate rapidly and by substantial amounts are considered volatile and therefore not entitled to as high a degree of value for collateral purposes as more stable securities. I could cite you many instances in which these special conditions have made prudent lenders refuse to advance even 40 percent of the current market value. In the face of all of these variable factors it is humanly impossible to adopt any law which will operate fairly in all possible circumstances.

I am convinced that the fixed minimums contained in subdivision (b) of section 6 are utterly unworkable and will certainly operate in a manner which will be detrimental to the public.

In discussing these margin requirements I have not overlooked the fact that the Federal Trade Commission is given authority to fix lower loan values for any stated period of time or in respect of any specified class of securities. This power, while it would allow the Commission to make higher margins mandatory, does not go far enough to give real flexibility. I have already pointed out how special considerations affect particular securities. There is no power, as I see it, given to the Commission by this section to provide that any one security should have a lower loan value than the rest of its class and yet that is precisely what banks and other lenders of money do in actual practice. For instance, in 1901, at the time of the Northern Pacific panic, the proper loan value for Northern Pacific stock was only a fraction of the price at which it was selling, but that did not mean that railroad securities, in general, had to be written down for loaning purposes by an equal amount. The same was true of radio stock when it advanced very rapidly in price a few years ago and there have been numerous similar instances in the recent past. If it should be suggested that this objection might be met by giving the Federal Trade Commission power to fix the loan value of any particular security, I think the provision would still be unworkable because of the practical impossibility of any single administrative body being in sufficiently close touch with all of the security markets of the country and sufficiently familiar with the factors affecting the value of each security dealt in on exchanges to determine promptly and soundly the value which should be attached to each stock or bond for margin purposes. In the last analysis, the problem of fixing the loan value of particular securities is a local one which must be dealt with by persons who are thoroughly familiar with local market conditions and who are in constant daily touch with all the factors on which loan values depend.

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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