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would be desirable. Destroy the stock exchanges, and out of the confusion wrought there surely will arise something to take their place; and that something, call it by any name you like, will still bestock exchanges.

Please understand that I am attempting to make no clean bill of health for stock exchanges. They are not perfect. Nevertheless, I say that they have been maligned far beyond their deserts in the agitation which has led up to the situation confronting us today. After all, the exchanges were and are, as I have said, mere market places for approved securities—nothing more than that. They exist for an important and legitimate purpose. They are controlled by men who are good citizens by every test that can be applied.

The exchanges—the market places—were open for business, and business came to them, as we know, in avalanche proportions in those memorable days previous to the catastrophe of 1929. But were the exchanges reponsible for this? I submit that they did not create the conditions in the country which caused the banks and savings institutions and insurance companies to be loaded down with vast amounts of unemployed money. For the cause of this you will have to look deeper than anything that rightfully can be laid on the doorstep of the exchanges. They did nothing to create the desire on the part of bankers everywhere to put to work the money which was in their keeping. They were not responsible for the concentration of the financial resources of the country at places of availability for speculation. They did not fix interest rates for brokers' loans. All of these things were of the nature of conditions precedent to anything of an unusual character that transpires within exchanges themselves.

The provisions of this bill before you and as now drawn, in the opinion of our group, will restrict the free flow of corporate capital to an extent that great and irreparable harm will be done. It must be obvious to all who have studied even superficially into the situation that the stock exchanges, under their own guidance and by their own rules and regulations, have been one of the mightiest of all the factors in the bringing out of funds for the corporate development of the country's industrial resources.

It so happens, even as these deblierations are in progress, that corporate capital is needed in vast amounts for the refunding of maturing obligations. When the general business conditions have improved, even larger amounts will be required to continue the development of our industrial, agricultural, and commercial resources. This bill will not be conducive to the maintenance of a free and open market for the flow of this needed capital. Instead of being a measure for the protection of the investor in corporate capital it may prove to be the most damaging legislation of its character that Congress has ever enacted.

We have experienced in this country within recent years spasmodic outbursts of public opinion against the Government engaging in business or controlling the conduct of business. The present reaching, out by Congress to control our industries through the proposed legislation now under consideration is a matter of the gravest concern. Already it has retarded and it will continue to retard the investment of corporate capital. There is anxiety and unrest on the part of security owners as to the next move that may

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be made, and should the bill be passed there is certain to follow an avalanche of selling—or efforts to sell—such as we have never before witnessed.

Investigations by Congress of stock-exchange practices, lasting over a year, have brought to light only a comparatively small number practices that can rightfully be condemned. We offer no defense for bad practices. The exchanges do not want them any more than you want them. Since the beginning of the inquiry by the Senate Banking and Currency Committee, in my capacity as President of the Associated Stock Exchanges, I have visited the local stock exchanges of the country. On these visits I conferred with the governing officers of the various organizations. Among these gentlemen I found a general and a very earnest desire on the part of all of them to consider those things which have been intelligently and advisedly condemned. But that is not all. The exchanges have recognized the desirability of uniform practices insofar as they can be made compatible with local conditions; and also in this situation long and salutary strides have been made. I tell you this so that you will know that we have been neither standing still nor have we drawn about us any cloak of pretended righteousness as a protection against just and constructive criticism,

We desire an opportunity to call attention to the several matters uppermost in our minds, and these with your permission we will deal with by sections.

The first is section 6, subsection (a).

The prohibition designed to estop a member of a national securities exchange or any person who transacts a business in securities through the medium of any such member, either directly or indirectly, from extending or arranging credit to or for any customer on any securities not registered upon a national securities exchange, would tend to restrict many transactions on the local exchanges. It should be borne in mind that there are stocks of numerous banking institutions, insurance companies and other corporations, all high-grade securities, which are not listed upon any exchange; and in addition there is a large number of bonds of Federal farm-loan organizations, the obligations of States and their political subdivisions, as well as many others that are not listed. To deny the use of such issues for credit purposes manifestly would be not only a discrimination against the securities themselves, but it would be, if you will permit the expression, unfair and unsound legislation.

The restrictions against loans on securities not listed upon an exchange would be burdensome upon local exchange brokers. The owners of small incorporated industries would find themselves seriously hampered in obtaining loans upon well-secured collateral even though unlisted collateral.

It would appear that an unlisted broker could extend credit in full on unlisted securities (if he were doing no listed business), and this obviously would create unfair and extremely dangerous practices by forcing holders of such securities to seek credit and trade with unlisted brokers; and under these conditions, it hardly is necessary to point out, the country soon could be overrun by security loan sharks and security bootleggers.

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

Mr. PETTENGILL. Mr. Thompson, I want to ask you a few questions. You spoke about Federal farm-loan bonds. What about Federal home loan bonds?

Mr. THOMPSON. They will be in the same class.
Mr. PETTENGILL. They will be in the same class?
Mr. THOMPSON. Yes, sir.

Section 6, subsection (b): This subsection provides certain restrictions as to marginal transactions, and presumes to establish, at the moment the law becomes operative, a margin ratio which may be out of all proportion to the needful protective requirements under other conditions than those presently prevailing or, for that matter, under any future conditions. True the Commission is given power, when deemed appropriate in the public interest, to establish lower loan values, which could mean only higher and not lower marginal requirements. We submit that the one making a loan should be a better judge of the quality of the loan and the collateral than could be a disinterested party or even a Government official empowered to establish values and ration at a specific time. Then, too, if it should be determined that a bank handling business for its customers comes under the classification of dealer, the bank would be compelled to abide by the same requirements as those provided for a broker. It is a fact that insurance companies and other organizations requiring liquidity of capital frequently enter the loan markets when they have surplus funds they do not desire to invest permanently. It is not uncommon for such funds to be placed through the medium of one who is either a broker or a broker and dealer. It is not difficult in this situation to apprehend the likelihood of loans being diverted to Canada and other foreign countries.

There is also in this clause a discrimination definitely in favor of persons of wealth who may have paid for their securities in full more than 30 days prior to the making of the loans; whereas the person of moderate means is denied these advantages because he has not the capital with which to pay for his securities 30 days before seeking the loan. A drastic deflation of accounts will take place when this becomes effective.

That matter has been very ably presented by Mr. Whitney, and we would like to add our endorsement to what has been said by him.

Section 6, subsection (d): It is provided here that the commission shall by rules and regulations prescribe the times and the specific methods for calculating values for purposes of loans, the times at which initial and subsequent payments shall be made by the customer, the notice to be given to the customer, and the method to be followed in protecting the broker or dealer in closing out the account. This section may prove harmful to a broker carrying an account by barring him from taking the steps necessary to protect himself against loss; and also the customer might be injured by the creation of an additional indebtedness, through the operations of rules and regulations which have not yet been determined upon but which later are to be promulgated and made a part of the law itself. It would appear that there is a distinct contradiction between subsection (d) and (b), in that subsection (b) definitely says what the marginal requirements shall be for a loan unless the Commission shall prescribe a lower value. The relationship existing between customer and broker, under the provisions, is separated by a barrier which

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likely would make the broker a mere automat and give him no latitude at all in assisting his customer in the event of an active declining market.

Section 7, subsection (a): This item apparently prohibits a broker from carrying an account for a dealer; no loans could be obtained on registered securities except from member banks of the Federal Reserve System. Here again we have a serious restriction against which the local exchanges strongly protest. The provision removes the opportunity which always has been open to brokers in the smaller centers to borrow from private sources.

Its effect would not only materially hurt the small broker, but the restriction would be a gratuitous discrimination against unregistered securities. The centralizing of money power in the larger centers soon would follow should this subsection be enacted into the law.

Section 7, subsection (b): This section would operate unfairly against the smaller houses by automatically reducing the amount of business they can transact with the amount of capital presently at their disposal although completely solvent. In addition it restricts any growth of their business unless it were possible for them to raise additional capital, which is obviously difficult to do under existing conditions. The past records of brokers clearly show this section to be too drastic. It accomplishes nothing except to put a premium on capital and thus again further centralize money power.

Section 7, subsection (f): There should be a clarification here making it possible to handle the routine business involved in the delivery of securities sold in order to cover the normal delay in deliveries due to distance from the exchange upon which the business is transacted. There should be an explanation of what is meant by “crediting of interest on account of loan” (lines 1, 2, and 3, page 16). From the language as now carried in the bill it appears that interest must be computed and credited by a broker when he has used certificates which he is carrying to make delivery against other certificates of the same stock, which he has sold for a customer at a distant point and which certificates are in transit. The question arises as to whose stock was used or "loaned" and to whom the credit should be given. The door of confusion is surely opened here, and also the door of discrimination.

Section 8, subsection (a), item 3: In lines 5 and 6 under this heading the bill uses the words, “or a false or misleading appearance in respect of the market for such security or securities." We submit that the execution of an order for a customer in which the broker causes false or misleading appearances in respect of the market has no place in this bill. We cannot too vigorously oppose this entire section. The civil penalties which are intended to protect persons who have been intentionally misled in the recovery of damages, opens the door wide not only to those who have suffered losses but also to those who may claim to have suffered loases when in fact they have suffered no losses at all.

Section 8, subsection (a), item 7: There should be a clearer definition of what is meant by pegging,” “fixing," or "stabilizing.” The language is susceptible of various interpretations. There are times when stabilization is helpful. The Government itself believes in the principle of pegging or stabilizing. It may be found that, for example, an investor is ready to buy all of a certain stock or bond issue he can obtain at a fixed price, perhaps at a concession from the prevailing market. Under this section he could do this only by disclosing his intent to the exchange and to the commission, and by such disclosure run the risk of defeating the accomplishment of the investment. Other reasons could be lted for objecting to the language of this section.

Section 8, subsection (a), item 8: This item deals with the practice of acquiring the floating supply of any particular security for the purpose of causing its price to rise on the exchange through control of the floating supply. The local exchanges strongly protest the language of this section. It is not uncommon for a member of a local exchange to buy all of a floating supply of stock, which will cause the price to rise in some cases very perceptibly. It should be observed that the execution by a broker of an order to buy at the market on some of our local exchanges can not result otherwise than to force a rise where there is only a limited amount of the stock for sale, which is frequently the case. A broker may be given an order to buy, say, 100 shares of a certain bank stock, or insurance stock, or high-grade preferred stock or an inactive high-grade industrial common stock, not knowing the intention of the customer; and then upon attempting to make the purchase be discovers that only limited offerings are available; but the customer insists that he wants the stock, which compels the broker to bid the stock up or else take the offerings which are available, and this immediately causes the price to rise. The language of the bill mentions merely the acquisition of the "floating supply" for the purpose of causing the price to rise. There isn't a broker in the country who could ever know where he stands with this language such as used in this item.

Section 8, subsection (a), item 9: It appears that this provision was designed to put an end to trading in “puts”, “calls”, and other purely speculative options or privileges. But the language is such that it involves another very important matter in the affairs of members of local exchanges. It has occurred frequently that a local exchange or local broker in the handling of large blocks of securities in closing an estate, and confronted with the necessity for liquidating sizable loans or other holdings, has found it impossible to distribute these securities on the exchange. The amount of work necessary in handling a transaction of this kind very often goes far beyond the compensation which is paid, this compensation in the form of a commission, of course being governed and fixed by the rules of the exchange upon which the security is listed. An attempt to sell on an exchange larger blocks of stock than is warranted by the size of the community in which the exchange is located, and without giving due consideration to local financial conditions, might prove to be not only a futile experiment but a very disastrous one. Push upon a market more than it is capable of absorbing and you have just one answer—declining prices.

Granting that puts”, "calls”, and so forth, for speculative purposes are wrong, we submit that legitimate options or privileges are required and are necessary in all lines of business. It will be found that options are a necessary part of the work of a broker in the liquidation of estates and in other situations where large stock and bond holdings must be closed out. This is a customary practice in the business and is just as legitimate and proper as any other branch of the brokerage business. Therefore, this section should be revised to permit options under proper conditions.

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