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If we get an application for unlisted trading, again, so-called, we have before us the official audit or a copy of the official audit of an independent auditor of the company itself and the committee, the unlisted department, sends that audit to the certified public accountant representing the exchange who goes through the report and gives his own report to the committee as to what he thinks of the accounting methods, and breaks down, if necessary, the balance sheets, and the profit and loss statements.

We also put in an agreement that we would not audit to trading a stock unless 100,000 shares have been issued; 100,000 shares have been issued or $5,000,000 of bonds. In other words, the minimum of admission to trading to the exchange, on the exchange, would be companies of that size.

Furthermore, we provided that a security would not be admitted to unlisted trading without prior notice to the company itself in order that it might appear before us and present objections to the admission of trading upon our exchange.

If the committee after hearing those objections consider those are objections which would be against the interest of the public, the investing public, or against the interest of the company itself, the company will not be admitted.

If, however, the objections lie rather to indifference or because it is feared that the market on the exchange will perhaps interfere with prices in the outside market, then the committee will not feel that the wishes of the company are binding upon it.

Those are among the changes which were added following the examination of the attorney general.

We felt they were all fundamental for the protection and information of the investor. We sought to provide, in our exchange, records for the examination of any one who wished to purchase the securities thus admitted, records which were far more ample than they could normally find anywhere else. And, also, information which was based upon the accounting methods which have been generally approved.

That is not perhaps the accounting methods, but the system of having indpendent public accountants audit reports.

Mr. KENNEY. Mr. Chairman

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. How does the curb exchange compare with the stock exchange with respect to the number of shares dealt in?

Mr. LOCKWOOD. I should say, roughly, about a quarter, a quarter to a fifth of the number of shares.

Mr. KENNEY. Does the curb exchange have specialists?

Mr. LockwoOD. Yes, sir.

Mr. KENNEY. That is all.

Mr. PETTENGILL. Mr. Chairman

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. On the matter of margins, does the curb exchange have any rule with respect to margins, that is promulgated by its governing board?

Mr. GRUBB. Yes, sir.

Mr. PETTENGILL. As binding upon the brokers?

Mr. GRUBB. Yes, sir.

Mr. KENNEY. That are admitted to trading on the exchange?

Mr. GRUBB. Yes, sir.

Mr. PETTENGILL. What is the present minimum margin?

Mr. GRUBB. Thirty percent on accounts of $5,000 and over, and 50 percent on debit balances of accounts less than $5,000.

Mr. PETTENGILL. The same as the New York Stock Exchange?

Mr. GRUBB. Yes, sir.

Mr. PETTENGILL. How long has that been in effect?

Mr. GRUBB. For 2 or 3 months.

Mr. KENNEY. The curb exchange deals in certain stocks upon which banks will not make loans?

Mr. GRUBB. Some of them, yes, sir; some that you have to pay cash for, of course. It all depends upon the character of the stock. Mr. KENNEY. Where bank loans are not available, do you have any other money market where customers may obtain credit to trade on margin?

Mr. GRUBB. We have a money post on our floor, sir, but of recent years it has been very inactive.

Mr. KENNEY. Do the brokers on the curb exchange ever finance their customers out of their own funds?

Mr. GRUBB. For trading purposes?

Mr. KENNEY. Yes.

Mr. GRUBB. You mean to customers?

Mr. KENNEY. Yes. If a customer wants to buy stock on the curb exchange, and the banks will not loan on the stock, how can the customer buy the stock on margin?

Mr. GRUBB. Well, there is very little margin business on our exchange, sir; very little, because you see a great number of our stocks sell for less than $10 a share at the present time, and there is not any bank, any bank, that will take stock of that category, practically, at all, and that necessarily means that a man buying, or trading in them pays cash, and that practically eliminates our margin equirements in that respect.

Mr. KENNEY. Do you require cash to be paid in every instance, or is there a way of obtaining margins?

Mr. GRUBB. If the broker can borrow money from the bank on securities; yes. In a great many instances, a great majority of the instances, they cannot, and the person buying the stock pays cash for it.

Mr. KENNEY. If he cannot pay cash and the banks will not loan on the collateral, is there any money market available for him? Mr. GRUBB. None that I know of.

Mr. PETTENGILL. One more question, Mr. Chairman.

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. If the debit balance is $5,000 he must have a 50 percent margin?

Mr. GRUBB. Yes, sir.

Mr. PETTENGILL. Or $2,500.

Mr. GRUBB. Yes, sir.

Mr. PETTENGILL. If the debit balance is $5,100, then the 30 percent rule would apply, and in that case he would only have to put up $1,530.

Mr. GRUBB. But, that margin means that must be kept good, sir. Mr. PETTENGILL. Both margins, whether 50 percent or 30 percent, must be kept good.

Mr. GRUBB. Oh, yes, sir; but I mean, in other words

Mr. PETTENGILL. Therefore, a man can defeat the 50 percent margin to the tune of nearly $1,000, by making his commitment $100 larger.

Mr. GRUBB. Yes; in that rate he could, I suppose; but I mean, that would be the minimum on the exchange, and he has to keep right on that margin, right on the margin. That is to the broker's own self-interest to do that, sir.

Mr. LEA. Would it be substantially true that the broker's credit depends on his banking credit? In other words, the standard of credit is set by the bank rather than by the broker.

Mr. GRUBB. Well, yes. The answer to that, I think, is yes; because the banks scrutinize all loans very carefully.

Mr. LEA. And, the brokers are not disposed to go beyond the banks in extending credit?

sir.

Mr. GRUBB. No, sir. Maybe I did not understand that question,

Mr. LEA. The idea was this: Suppose we have a stock the banks would not loan money on. Are the brokers disposed to advance

credit on those stocks?

Mr. GRUBB. No, sir.

Mr. LEA. And, if the banks do advance credit on a stock, are the brokers disposed to grant more credit than the banks grant?

Mr. GRUBB. No, sir.

Mr. MARLAND. Mr. Chairman

The CHAIRMAN. Mr. Marland.

Mr. MARLAND. If I may interrupt you.

Mr. GRUBB. Yes, sir.

Mr. MARLAND. The curb exchange sometimes admits to listing stocks that cannot be listed on the big board?

Mr. GRUBB. Yes, sir. You mean, admitted to trading.

Mr. MARLAND. Yes.

Mr. GRUBB. Yes, sir.

Mr. MARLAND. Admitted to full listing?

Mr. GRUBB. Full listing.

Mr. MARLAND. Yes, sir.

Mr. GRUBB. Yes, sir. I imagine that that is possible in some instances.

Mr. MARLAND. Are there not certain types of stocks, that the New York Stock Exchange will not admit to listing and that you do have listed?

Mr. GRUBB. Yes, sir; we are a primary market.

Mr. MARLAND. You list investment trusts on the curb?

Mr. GRUBB. Yes, sir.

Mr. MARLAND. The New York Stock Exchange has some rule against listing of investment trusts, does it not?

Mr. GRUBB. I do not think so, sir.

Mr. MARLAND. You list real estate corporations on the curb, do you?

Mr. GRUBB. That, I will have to check, sir. I am not fully familiar with the question as to whether we list real estate corporations or not.

Mr. MARLAND. And, the New York Stock Exchange does not list real estate corporations?

Mr. GRUBB. That, sir I am not familiar with. I can check it. Mr. MARLAND. You said in answer to a question by Mr. Kenney, a moment ago, that you have specialists on the curb.

Mr. GRUBB. Yes, sir.

Mr. MARLAND. In your prepared statement, do you describe the functions of the specialist?

Mr. GRUBB. Yes, sir. With respect to our odd-lot situation, which is different in a great degree from the stock exchange. That is explained in this first pamphlet.

Mr. MARLAND. I would like to ask one question with regard to operations of specialists. I have heard no explanation of it.

Mr. GRUBB. I will be very glad to have you ask it, sir.

Mr. MARLAND. Well, we will assume that a specialist in the exchange receives two orders to execute at the opening of the market, 1 to sell 100 shares of X stock at the market, not less than 5. Mr. GRUBB. A limited order, you mean, sir?

Mr. MARLAND. To sell 100 shares at the market.

Mr. GRUBB. I beg your pardon.

Mr. MARLAND. At 5, or better.

Mr. GRUBB. Well, yes.

That is a common order.

Mr. MARLAND. At a certain price or better.

Mr. GRUBB. Yes, surely.

Mr. MARLAND. And then he has another order to buy 100 shares. of the same stock at the market.

Mr. GRUBB. Yes, sir.

Mr. MARLAND. At 5% or better.

Mr. GRUBB. Yes, sir.

Mr. MARLAND. At 51⁄2, not more than 5%.

Mr. GRUBB. Yes, sir.

Mr. MARLAND. What does he do in a case like that?

Mr. GRUBB. Well, he has two market orders. He naturally simply executes the orders.

Mr. MARLAND. Which order does he execute?

Mr. GRUBB. Well, both; the margin is the same, substantially the same figure, at the same time, at opening.

Mr. MARLAND. Well, what does he do?

Mr. GRUBB. Well, he has an order to buy.

Mr. MARLAND. Yes, sir.

Mr. GRUBB. It seems to me, sir-I beg your pardon.

Mr. MARLAND. Go ahead.

Mr. GRUBB. He has an order to buy 100 shares at the market and he has an order to sell 100 shares at 5 or better, which in this case, you say, would be a market order. Therefore, those orders simply match, and he gives

Mr. MARLAND. He is a broker. better, and has an order to buy at he do?

He has an order to sell at 5 or 5%, or better. Now, what does

Mr. GRUBB. Well, it all depends. If those are the only two orders he has, he might depend on his odd-lot situation, so far as our curb is concerned.

Mr. MARLAND. If those are the only two orders he has, what does he do?

Mr. GRUBB. Open the stock at a fair price.

Mr. MARLAND. Using his judgment?

Mr. GRUBB. Yes, sir.

Mr. MARLAND. Well, what do you do, or what would the specialist do, if he had those two orders?

Mr. GRUBB. Well, I would take it, in the case, it would depend upon how the stock closed the night before, and how the stock was on the beginning, with reference to actual orders, and I would open as near as the stock closed last night.

Mr. MARLAND. Would you let the buyer have this stock at 5 or the seller get 5%?

Mr. GRUBB. I think that I would split the difference and get 5%, and that would be fair to both of them.

Mr. MARLAND. So, as a specialist, it is entirely at your option, and in your judgment, as to what price the buyer should pay and what price the seller is going to get.

Mr. GRUBB. In that case, we would have a question of doing the fair thing to both the buyer and the seller.

Mr. MARLAND. The whole matter would be left to your judgment as a specialist, is that correct?

Mr. GRUBB. In that case; yes, sir.

Mr. MARLAND. That is all.

Mr. GRUBB. May I continue, sir?

The CHAIRMAN. Yes; go ahead.

Mr. GRUBB. It is true that a requirement for company listing is that the company must agree with the exchange to maintain certain standards of accounting and to furnish the exchange with information in respect to options and other material corporate purposes. Thus the exchange exercises control, important to stockholders and to the investing public, over certain company activities. At the same time, the seeming defect in the case of securities admitted without company agreement is more technical than real. Insofar as new applications for unlisted trading are concerned, the companies must have established and continue the practice of periodic audits by an independent public accountant. An official statement must be furnished as to options outstanding. With the securities already admitted, these factors are not enforceable. But public opinion and conceivably statutory provisions may well compel corporate compliance with these requirements. Moreover, many of the companies whose securities are admitted to unlisted trading cooperate with the exchange to a high degree both in the furnishing of information and in the acceptance of suggestions from the exchange. Those which are listed upon other recognized exchanges will be held by such exchanges to a strict observance of exchange rules. Those who are unlisted anywhere, so long as they may be traded in over the counter or unlisted on an exchange, present rather a legislative than an exchange problem. If corporations generally were compelled to follow certain specified rules of accounting and to publish or to file with public authorities full information of corporate activities, the public would be in a position to judge much more intelligently corporate structures, earnings, and acts. That is what the present bill undertakes, except that it confines the filing of information to fully listed securities only. So long as companies may be organized with unlimited charter privileges and so long as these securities may be bought and sold, it is a protection to the public to have them dealt in upon an exchange.

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