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Another injury would be that the investor's security would have little or no value as collateral. The severe civil and criminal penalties imposed on directors, officers, and principal stockholders by section 15 and section 17 will tend to discourage registration, thus leading to a distinct impairment of borrowing power on

collateral for legitimate purposes.

The ability to secure loans on unregistered securities through banks or private capital may be doubtful. It is easy to foresee the unlimited possibilities of liquidation of security loans in banks, in the event that these restrictions are enacted into law, with the inevitable impairment of confidence on the eve of recovery. In fact, if margin requirements are raised, the result necessarily will be a renewal of deflation. This development would be especially serious for the numerous banks which are still carrying collateral loans which exceed the value of the securities pledged.

The proposed bill emphasizes considerably the dangers of short selling. This practice has been exceedingly rare in the San Francisco Exchange due largely to the absence of pooling and other manipulating practices.

Triere are other indications that the framers of this legislation were not familiar with the peculiar conditions on the Pacific coast.

Because of the time differential, varying as daylight saving is operative in the eastern States, the San Francisco market is regularly open from 3 to 4 hours after New York markets are closed. As a result, the San Francisco Stock Exchange has frequently served as a buffer for world news, the announcement of which comes after the close of eastern markets.

The most serious consequences from the standpoint of the public are that markets for nearly all securities will be impaired. The bill assumes that corporations will stand the expense of frequent independent audits and reports, that corporation officers will be willing to take the responsibility for the information which they are compelled to furnish; and that most of the existing exchanges will be able to live under the restrictions; and that over-the-counter trading can be successfully regulated among reputable firms, instead of being driven to irresponsible quarters. However, as stated, many corporations are too small to stand the expense connected with listing, and if listings are cut down, the existing service supplies by reputable firms cannot be maintained. Inevitably, the, marketability for a large number of issues will be reduced and a large portion of the security business will be driven into the hands of unlicensed and irresponsible agents. Also, by preventing participation by many small investors through limitation of odd lot transactions, not only does the act discriminate in favor of large investors, but it largely destroys this tremendous source of new capital.

The cost of capital to small firms will then be almost prohibitive. For years the San Francisco Exchange has been the means of attracting capital into enterprises which have developed the oil, mining, timber, and agricultural resoures of the coast and supplied most of the shipping, banking, and public utility service of that region. Without the market facilities of this exchange, the expansion of practically all these enterprises will be severely checked.

Mr. MERRITT. Mr. Chairman, may I interrupt?
Mr. HUDDLESTON. Mr. Merritt.

Mr. MERRITT. What proportion of the members of your Exchange do dual service as brokers and as dealers ?

Mr. SHAUGHNESSY. Well, if I might explain that to you, the word dealer" and the word "broker” are rather confusing terms.

Personally I am regarded as a broker. That is, I deal for individual clients, but if I so choose, I can act for my own account on the floor. A dealer is a man who usually deals on his own account as a trader in securities on the floor and is not

Mr. MERRITT. I understand that. What I am trying to get at is this section 10, which would hit very many members of your exchange, would it not?

Mr. ShaUGHNESSY. It would hit us this way, if the man rightfully follows his line of work. It would hit the member of every exchange. For instance, you say to me, “Shaughnessy, go buy me 100 shares, or 200 shares of Standard Oil" at a certain price. Now, if there should be a bid on the floor standing at say 41, offer 43, and the best offer is 43, I in turn would buy that for you at the lowest price, say at 42%, or 427 or I might make a bid in excess of your order limit in trying to determine the market, which liability I would have to take.

Now, if I sold 100 shares of stock, or I bought 200, I am buying 100 shares for you and 100 shares for my own account, I then become a dealer, and that is not allowed to me, under the proposed act. A specialist in trying to determine the market, has to make bids and has to make offers.

Mr. MERRITT. What I am trying to satisfy myself about is in cases of exchanges of the size of yours, whether the effect of this section 10 would be materially to affect the business of the members of your exchange?

Mr. SHAUGHNESSY. Well, our exchange now is a development of many years. Formerly we had the call system and the present system is the outgrowth of that and the specialist plan is part of the present system.

Now, necessarily under this system we could not deal any other way but that. So that at times the specialist must be a dealer for his own account.

Mr. MERRITT. In other words, you cannot deal under the terms of section 10?

Mr. SHAUGHNESSY. Would you mind reading that? Would you mind telling me what the exact wording is of section 10?

Mr. MERRITT. You have it right there before you. Mr. SHAUGHNESSY. No, I have not. Mr. MERRITT. It is a long section. Sec. 10. It shall be unlawful for any member of a national securities exchange or any person who is a broker, transacts a business in securities through the medium of such member, to act as a dealer in or underwriter of securities, whether or not registered on any national securities exchange.

Mr. SHAUGHNESSY. Yes, that probably would, because he would have to, every broker becomes a dealer.

Mr. MERRITT. That would affect every member of your exchange, would it not?

Mr. SHAUGHNESSY. I think it would.

Mr. COOPER. Mr. Shaughnessy, I did not get your last statement. Did you say that you believed that the passing of this bill

and the power given to the Federal Trade Commission might seriously affect industry, business, and progress of your community?

Mr. SHAUGHNESSY. If I did not, I intended to; I intended to convey that impression.

Mr. COOPER. You believe that?

Mr. ShaUGHNESSY. It would seriously interfere with our business and virtually dry up the San Francisco Stock Exchange.

Mr. COOPER. Well, I am talking about private capital and business industry.

Mr. SHAUGHNESSY. Yes; I believe it would. Not only would industry be harmed indirectly, but I believe that very serious results would follow because it goes beyond stock exchanges. It goes right to the regulation of the corporation itself, and indirectly to the securing of funds for the corporations. I think it would be most drastic upon corporations.

Mr. COOPER. And the Federal Trade Commission could set up any rules and regulations that it desired to make under the provisions of this bill?

Mr. SHAUGHNESSY. Under this bill, they may.
Mr. LEA. Mr. Chairman-
Mr. HUDDLESTON. Mr. Lea.

Mr. LEA. If a member of your exchange acts in a dual capacity, of owner and broker, you require him to disclose to his customer the fact he may be acting in that capacity in handling his stock?

Mr. SHAUGHNESSY. Mr. Lea, that gives me a thought, and I misunderstood Mr. Merritt over here. We do not permit members of our exchange to act as a dealer on any stock that is listed on the stock exchange. If you give me orders, as I said, to buy 100 shares of Standard Oil, I must buy that for your account, and I cannot do anything else. I must render you a bill and charge you a regular commission. Otherwise, I would be violating the rules. It only seems that the result would be this, that if you told me to do something and I did not do it, either through error, or negligence, I would have to give you a report that I was selling you 100 shares of Standard Oil, and in that case I would be a principal, but I could not be a principal in any stock that is listed on the stock exchange unless I so disclosed to the man I am acting for.

Mr. LEA. What is the reason for that rule?

Mr. SHAUGHNESSY. It gets right back to the old reason, of principal and agent that if a man tells you to do a thing, and pays you a commission, you must do that. You must not take advantage of the confidential relationship that exists between you and that particular man.

Mr. Lea. In other words, you cannot serve two masters.

Mr. SHAUGHNESSY. No, you cannot serve two masters. It is the old thing of confidence and the relationship of trust.

Mr. LEA. Does your exchange have a minimum requirement on margins?

Mr. SHAUGHNESSY. Yes, we have. You see that again gets to the point where conditions almost dictate what the margin should be. As a matter of fact, during the buying boom we should have had much more stringent margins and at the very depth of the depression they should not have been so severe. Right now we are generally getting about 50 percent margins.

Mr. LEA. You have a fixed margin from time to time, as the circumstances may be.

Mr. SHAUGHNESSY. No, we do not have a fixed flat rate, or a fixed minimum.

Mr. LEA. I mean a minimum.
Mr. SHAUGHNESSY. Not necessarily a fixed minimum; no.

Mr. LEA. How do you fix the value of unlisted stocks for the purpose of or in connection with margins?

Mr. SHAUGHNESSY. Well, as a general thing, a broker will not take an unlisted stock unless it has a market.

Mr. LEA. Does the exchange have any rule governing that?

Mr. SHAUGHNESSY. No; the exchange has an auditor to help us so that we can get the values on that particular stock. We very often go to a bank and the bank will know usually what the shares are worth and tell us about it and we try to arrive at a value on the unlisted stocks, which have a market value.

Mr. LEA. It is up to each broker to determine the value of unlisted stock?

Mr. SHAUGHNESSy. Pretty much, subject to the rules of the exchange.

The action presents tremendous administrative difficulties in regard to the effective functioning of the Federal Trade Commission, and to be administered at all it will mean an enormous increase in the already huge army of Government employees. Also, the restriction on exchange members against borrowing on any registered security from any person other than a member bank of the Federal Reserve System operates against many of the strongest banks in the large cities of the United States.

My time is up, so I will quit right now, but again I would like to state that the San Francisco Exchange has sent me on here to express the thought and the hope that the congressional committee will call a conference of all of the stock exchanges of the country and under the direction of this committee determine and arrive at à bill which will be just and will be fair to all the parties involved, because we know it can be done and we believe it can be.

Mr. MARLAND. Have you had an opportunity to read the suggestions made by Mr. Whitney?

Mr. SHAUGHNESSY. No, sir; I have not. I just arrived by airplane, and I did not have a chance to read them.

Mr. HUDDLESTON. We thank you, Mr. Shaughnessy.

STATEMENT OF W. G. PAUL, SECRETARY LOS ANGELES

STOCK EXCHANGE

Mr. Paul. Mr. Chairman, I think this committee should take judicial notice, or, congressional notice, that it would be particularly unfair for anybody to let a man from San Francisco talk without somebody from Los Angeles exercising the same privilege.

I personally want to draw to your attention something which I believe as an individual unit in my business, is working unfairly against me and my associates in all deliberations such as this, on occasions such as this, and that is this: I believe we are blamed, and I think any investigation will demonstrate it, for a great many things which we are not responsible for.

The statement was made here by some member in a question asking about the tremendous losses on the exchanges.

I wish it were possible to bring to this committee I know that it is not, I know that there is no source from which we can get it—the terrific deflation in prices of real estate and unlisted securities. It seems to me we, as listed brokers, are for instance asked to assume the responsibility for a great many evils which have been the result solely of those terrific deflationary activities.

And also, I know and you know this with me. I often pick up a paper in the morning, and see headlines which say, "Prominent broker involved”, and then when I read on, I find that he is a jobber in peanuts, or a real estate broker, and I believe that the net result has been a great unjustified public reaction against stock brokers, because of the fact that in every use of the word “broker” the public has grown to believe that it is a member of the New York Stock Exchange, or a stock broker. And I believe that should be taken into consideration.

I would like to explain one thing from my standpoint as vitally affecting members of stock exchanges, and that is along the line you asked, Mr. Merritt, the relationship between a broker and his dual capacity as a dealer.

I happen to be a one-man organization. I have 1 employee, 1 clerk. I also happen to be, for your purposes, exhibit A, a specialist on a secondary exchange.

Naturally I have some friends. I have people whom I might classify as clients, although my relationship with them is very personal. I act really in the capacity, at times, to the limit of my ability, as their adviser covering all investments. For instance, they may wish to purchase listed securities and I purchase them for them. Or, they may wish to purchase Government bonds, or a State obligation. I pick that, for as I interpret this act it means that I will have to say to every client of mine who wants to buy an obligation of the State of California, “I am sorry. You will have to go across the street to some other broker, because I cannot handle that business for you.” And, I say in all seriousness, that it would be disastrous to me, and I am using myself merely as an example, because it will deprive thousands of others who are in the same category of that additional revenue, from a business which we have always conducted, and I would say in defense of this that in California--and I rather imagine that it is true in most every place—we have statutes, provisions of law on the subject of principal and agent, and our own corporation commissioner, who corresponds to the securities commissioners in other States, himself has definite regulations under our securities act, covering the undisclosed relationship of principal.

We have in our own exchange regulations, definite rules, covering that situation and I submit to you that subjected as I am to stringent regulations of my own organization and with their powers of punishment, which are unlimited, that even if I were inclined to try to do anything improper in my relationship with a client, I am subjected to such possible punishment that I probably would not do so even though my own inclinations might be to the contrary, I would be governed by those laws.

In other words, I think that in California particularly, and I think it is probably true in other States, and it could certainly be true under

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