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high-minded. I really thiok that to be so, and I have met a very, very small percentage of those who were not actuated by highmindedness; but, let us go back to this thing: You say, or you propose a problem, where a man, or a firm, has got some stocks that he bought.

Mr. PETTENGILL. It happens, does it not?

Mr. NEWBOLD. It may be happening in my office at this very moment. I do not know. I am not there to watch them.

But, supposing he has these things.

Mr. PETTENGILL. All right; what would he do with them? Now, supposing that he has no way of disposing of these things, except to a customer; the only way that he can get rid of them is to a customer, or to another dealer. Is not the temptation going to be strong for him to pass them on to a customer? Mr. NEWBOLD. Given that there is that temptation, which I say

I think is much exaggerated in the public mind, is he not going to have a greater temptation to do that if he has nothing else that he can sell that man, out of which he can make a profit?

Mr. PETTENGILL. Yes.

Mr. NEWBOLD. In my business, I say, if I get stuck, I do not have to sell the thing that I am stuck with I can keep that. I never bought it without believing that it had merit, and that at some time I would get out of it. I can switch and sell municipal bonds, or other bonds. I happen to have moderately adequate capital for my business. That is, as compared with a very small business, where the capital is restricted, and that is something, gentlemen, I wish to really dwell upon that if the dealers have to confine themselves to owned securities the list of offerings that they can put before their customer will be so inadequate that the investor is going to suffer. The dealer cannot list more than 25 or 30 items if he has a limited capital. You are going to be driven to make your customers select from that; that is, the customer is going to suffer.

Mr. PETTENGILL. Going to suffer?

Mr. NEWBOLD. Going to suffer. If, on the contrary you can buy a half a dozen different types, then you can have them, and if on examination of your list, or his list, you find that he has those things, or something like them, in the same locality, same neighborhood, subject to the same business conditions or trade conditions, or something of that kind, then if you happen to be a broker, you can say, “Why don't you buy A. T. & T. bonds or stock? You can get those on the exchange and keep your money in that particular stock for 6 or 8 months, until things are more satisfactory or until we find something that we think is absolutely appropriate for you.”

If you are a broker, you can do that. You can engage in commercial business, but I maintain if you are limited, if you are only a broker, you are limited to what a broker can do, and you lose sight of the investor's necessities in the permanent value. You tell him something as a broker which has a temporary or evanesecnt value, because that is what is identified in this country with brokerage commission businesses. I do not know whether I have made it clear.

Mr. PETTENGILL. I think that you have quite answered my question, even with respect to a house that has a large capital, and a large diversification.

Let us assume that situation, and let us assume that even a house has bought some securities which it wishes it had not bought. What is it going to do with them?

Mr. NEWBOLD. Well, in the first place, one marks it down on one's books to what is one of two things, either what you believe the intrinsic value of the security is, and which it will realize when sold perhaps a year from now, or else if that is difficult, you mark it down to a market price which is established by what somebody else in the business will give you, another dealer will give you, and you sell it.

Mr. PETTENGILL. You sell it.
Mr. NEWBOLD. You sell it, if you think you should.
Mr. PETTENGILL. Who do you sell it to?
Mr. NEWBOLD. To another dealer.
Mr. PETTENGILL. Or, your customer?

Mr. NEWBOLD. The best thing I ever did in my life, was once we had to lighten our load. This was long before the war. My partners and I decided that we would mark everything down and take quite a considerable loss to well, a little bit below what the market price was, and then I said, “Gentlemen, I do not think it is fair that just because we have customers they should be deprived of what we consider is a bargain sale, and before we sell these things to dealers I want to call up our customers and offer these bonds to them.” Well, they took them, and they all made a great deal of money. They were bonds, very high-grade bonds. It was just a case where we had to lighten.

Now, that is what happens. You either sell them to your customers when you think you should sell to them. Of course, you cannot sell to your customers at a higher price than you can sell them on the outside. I do not think it is necessary for me to dwell on that. It is the market price that is the thing that you determine is your price to your customers. Of course, if it is an obscure security, it is often hard to find a market price, and in that obscurity, I think, lie a good many of the things that seem to be crooked on the part of the dealer. It is difficult, sometimes, to express it; but I am answering you. When you sell, first you mark down to ascertain your losses, and you decide then whether you are financially able to carry that, and not fool yourself at all about the value. You have got to mark it down. You have the market price. Your accounts are all right to be carried on until you decide whether you will sell it to the world at large, through dealers, or to your customers, on the basis that it is a bargain; but at the price that you could sell it elsewhere.

Does that answer that? You asked me where the things were sold.
Mr. PETTENGILL. Yes.
Mr. MERRITT. Mr. Chairman-
The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. If you separate the functions of broker and dealer, so that the dealer cannot act as broker, you increase the temptation of the dealer to sell what he owns?

Mr. NEWBOLD. You have stated just what I meant to say, sir. Now, I would say, Mr. Merritt

Mr. PETTENGILL. Excuse me, right there.
Mr. NEWBOLD. Yes.

Mr. PETTENGILL. When a man is acting only as a dealer with customers in the transactions, then they deal as two principals at arm's length, I would say.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. But when the relationship of broker and customer, principal, and agent lasting over a period of months or years is established.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. Then, there is a fiduciary relationship that creeps in between the two.

Mr. NEWBOLD. Yes.

Mr. PETTENGILL. A trust relationship, and it seems to me then that the situation is a little different than it would be in the case of a man who has something to sell like a hardware merchant and his customer.

Now, when people go to banks, and they have got a little money to invest, they are not dealing at arm's length. They think that the bank is giving them disinterested advice, in a quasi-fiduciary capacity.

Mr. NEWBOLD. Could I ask you a question?
Mr. PETTENGILL. Yes, sir.

Mr. NEWBOLD. What could be done in a situation of this kind: A man telephones, a regular customer, an individual, telephones and says, “I have got some money to invest and want you to make some suggestions." I get out his list and look over it and find that possibly at this juncture, in view of his list, that he ought to buy, we will say, a second-class railroad bond, or high-grade railroad bonds, which are going up. I find he has got enough of them. I think, and I hope you believe it, that it is not until then that I do look over my list as to what we have to sell, and to find out whether we happen to have anything of what I think that he should have.

We will say, suppose, we have. So then I will call him up and say, “I will come to see you, and talk to you about an investment.” I take up two descriptions, two lots of bonds of which I have five each, you see, and we talk it over, and he says, “Well, I like that. I like that." "I think that that is a very wise thing for me to have.” “I do not like this other one at all. We will throw it out." I say, “All right."

And then he says, “I have got $9,000. I would like to buy nine of these bonds.” And then I say, “Oh, I am sorry. We can sell you five, but that is all we can do. That is all we have.” Then he says, “Won't you go out and buy me four more?I say, "Oh, no; I cannot do that. I am not allowed to do that, on commission.

Now, I think that does not seem to me quite a reasonable way of conducting a business. It gets even worse if we say that he has $6,750. He says, "I will take those five", and then I find I have". he will say, "37 shares of General Motors. Now, supposing you buy some of those. I want to build that up to 50 shares." And I say, "No." I say, “I cannot invest your $1,750 in General Motors, because I am not allowed to do that. You will have to go to a broker."

And then I let the customer go to a man who has got very little investment interest, who is interested in trading.

I think that that presents a difficulty in keeping your customers, and if your customers slip away, they will not give the same confidence to several people that they will to one.

Mr. WOLVERTON. Mr. Chairman.
The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. If I understand your position correctly, Mr. New bold, it is this, that you are not objecting to regulation as pro

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vided for, or suggested in the Dickinson report, but you do object to a segregation of the business activities of a broker and a dealer.

Mr. NEWBOLD. I do; yes, sir. I am not, may I say, I am not certain that ways cannot be found to accomplish the purpose; but it will take a great deal of study. We have had it before us in our minds for a long time. It will take a great deal of study to do that. To do it with one blow, I think will produce chaos.

Mr. WOLVERTON. So your remarks are not directed to an objection to regulation, but to segregation.

Mr. NEWBOLD. Yes, sir; that is the thing. We have other individual objections. I have other objections to the bill, and I think that all of us have, but that is not the subject. We did not feel that we knew enough about it to tell you anything about that.

Mr. WOLVERTON. What would be the effect of this section, so far as dealing in municipal bonds is concerned?

Mr. NEWBOLD. If-I do not know how to put that—under segregation it were possible to continue with the active lists of the customers that they have, at present under the dual arrangement, I think it would be possible for dealers to buy all of the municipal bonds as they have in the past, but most of us feel it would be just a question of a little time, perhaps 2 or 3 years, if the dealers stood on their own feet entirely when they would begin to disappear and they are the only people who could really handle municipal bond issues, if we are right in considering that the broker is not investment-minded and, nobody buys municipal bonds who are not genuine investors, because the rate of return is so low, you see.

Mr. WOLVERTON. Of course, those of us who live in the vicinity of Philadelphia and know the high class of firms that have been joined together in the brief that you have presented, can appreciate somewhat your position in the matter, but what this bill is seeking to do is to deal with the situation, that exists where the business is not conducted by people as high minded and honorable and whose integrity is as unquestioned as the firms who are represented in your brief.

Now, what do you feel could or should be done with respect to that situation?

Mr. NEWBOLD. Well, it is difficult to say. I think that the more support and help the investment dealers who have high ideals receive, the more they are strengthened, the more they can bring about any reform that you might seek in their own lines, rather than being punished, innocent and guilty alike, by a legislative fiat.

This code to which reference has been made, which will probably come before the President very shortly, is a source of the deepest gratification to those of us who have been in the business longer, because it gives an opportunity of enforcing standards of performance that we have sought for years, by persuasion and blacklisting of people, if you want to call it that. I mean, refusing to deal with certain people because we did not think that they were straight. That code, I think, will accomplish more good by strengthening the hands of the honorable dealers than you could accomplish by, as I say, a legislative fiat, wiping all out, good and bad alike.

Mr. WOLVERTON. Are you prepared to say on behalf of those for whom you are speaking, whether you approve in a general way, the recommendations and suggestions made in the Roper-Dickinson report?

Mr. NEWBOLD. I think the fact- I have not had an opportunity of reading to you the last part of my memorandum--the fact that we again quote from the Dickinson report in reference to section 14 indicates that we are for it as a group.

I may say that I personally, and Mr. Cheston, who represents Edward B. Smith & Co., and my nephew, a partner of mine, Mr. Taylor, we all are for it enthusiastically, and I doubt if any of the others feel differently; but it was not discussed. In fact, we all agreed when we produced this thing and quoted the Roper report twice, and nobody said that is the only part of the Roper report I stand for, that we did agree.

Mr. WOLVERTON. I was prompted to ask the question because you rely on the suggestions of the Roper report so far as sections 10 and 14 are concerned and I was, therefore, interested in knowing whether you had the same feeling with respect to the balance of the report.

Mr. NEWBOLD. I think we three may say that individually. Mr. Cheston can speak for himself.

Mr. CHESTON. I would say that the rest of the group, speaking for the rest of the group, we are very strongly in favor of the RoperDickinson report.

Mr. WOLFENDEN. May I ask a question?
The CHAIRMAN. Mr. Wolfenden.

Mr. WOLFENDEN. Should section 10 be omitted from the bill, should not the customer know in what capacity you were acting, namely, as a broker or a dealer?

Mr. NEWBOLD. Should not the customer know? Mr. WOLFENDEN. Yes. Mr. NEWBOLD. Why, yes, sir. Of course he ought to know. He ought to know the moment he gives you an order, whether he is going to buy it from you directly, or you are going to buy it for him. Of course, I think that every bill of confirmation states that. I know it has ever since I used to make them out myself; that you are to sell to so-and-so; you buy from so-and-so and you are acting then as dealer, or else you sell for so-and-so, and you are acting then as a seller selling for so-and-so's account.

Now, I think that it would be very helpful if that were insisted upon, and I think the code does insist upon it. I would go further myself and make it necessary to establish that fact when the order is given rather than wait until the order is consummated. Is that an answer to your question?

Mr. WOLFENDEN. Yes.

The CHAIRMAN. Mr. Lea would like to ask a question, and then we are going to have to close with your statement. You have gone over your time now.

Mr. LEA. Would you agree that one of the greatest, if not the greatest, evils in reference to stock sales in recent years has been the dumping of poor stocks on the uninformed?

Mr. NEWBOLD. That is a difficult question to answer.
Mr. LEA. I am simply seeking information.

Mr. NEWBOLD. I do not know. I would be inclined to think that very closely is balanced by the informed willfully buying too many of the things than they thought were good, more than they probably were justified in buying.

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