Mr. KENNEY. Suppose that he has a blanket order to trade as he pleases with the customer's money?

Mr. MARLAND. That is what I mean, at discretion.

Mr. SPRAGUE. Well, that, I would say, is a rare case. I have never acted in that respect. I have never had a discretionary order going to a customer of my own. We receive many discretionary orders at times which are in effect market orders, where we are supposed to operate fairly for both parties concerned. In once case, if I operate for both sides of the order, I must justify my act, if I am buying the stock, for a customer on a discretionary order and another broker handles the selling price, then I am trying to get the best execution for my customer.

Mr. MARLAND. That is all on that question. I have one other question, Mr. Chairman, if you please.

The rule of the exchange now is that a specialist may not disclose his books to a broker. Why should not a specialist be required to disclose to a broker who wants to buy stocks, how much stock he has on his book for sale and at what price?

Mr. SPRAGUE. Why?

Mr. MARLAND. Why should not he do that? He has goods for sale. Why should he not tell an intending buyer how much he has to sell and at what price?

Mr. SPRAGUE. Mr. Marland, I would answer that this way, that if you mean that he should disclose all his orders, that would take market orders as well as limited orders. That would then become public knowledge. It might be violated by somebody. If you had given me a thousand shares

Mr. MARLAND. This is a public stock exchange.

Mr. SPRAGUE. Yes, sir. I would like to explain this, if you had given me a thousand shares of stock to sell at the market, and under your proposed idea, a broker came in and asked me how much stock there was, or to disclose the book, up to a certain point, I would have to disclose to him that I had a thousand shares to sell at the market. Now, if he was a seller, he could come in and compete with me against your order. He is under no restriction. He is not bound by any rule. While we have knowledge of that order, we are bound by a rule and cannot operate for our own account.

I do not see any particular advantage in disclosing the book, because orders change. They do not stay put. They are in flux. So, what you might tell a man or show

Mr. MARLAND. But, there is this, the specialist has a certain amount of stock, articles, at a certain price on the shelf for sale. Mr. SPRAGUE. At price.

Mr. MARLAND. Why should not any buyer be given that information?

Mr. SPRAGUE. The intending buyer, Mr. Marland, can ascertain the market. He can get the actual market existing. We do not disclose above or below.

Mr. MARLAND. He can get the market on 100 shares, last bid and asked for 100 shares.

Mr. SPRAGUE. He can get a quoted market, of say 5, to a half; we can give him the bid and the size of the bid, or offer, at his request. He has an opportunity then to judge the size of the current market.

Mr. MARLAND. Well, why should the intending buyer be denied that knowledge and that knowledge held exclusively in the specialist? Mr. SPRAGUE. We do not have the exclusive market, Mr. Marland. We have the exclusive orders on our books, but we do not hold all the orders on our books. Many sizable orders are held by brokers. Many times discretionary orders are held by brokers, which we have no knowledge whatsoever of. We simply would inform anybody as to the actual orders on the books. and there are many orders on the books which would be removed if such was the case. An important order, or an important customer, certainly would say: "I do not want that made public."

Mr. MARLAND. Will you tell this committee that since the specialist has that information and is not allowed to disclose it, that he does not have an advantage, cannot have an advantageous position as to that stock, if he is permitted to deal for himself?

Mr. SPRAGUE. I do not think that is an advantageous position, Mr. Marland, and as I tried to tell you, I have placed before you in the record three books, and if you will look at book A, you will see on that book orders totaling 31,500 shares with prices ranging between 38 and 57; total number of shares of that company are 4,932,762 shares.

Mr. PETTENGILL. Excuse me. Sears, Roebuck & Co., is that it?

Mr. SPRAGUE. That is right.

This means this book is one of

Mr. PETTENGILL. And, this you say is an actual book?

Mr. SPRAGUE. That is an actual book. They were all in at one time.

Mr. PETTENGILL. Some are to buy at 38 and others are orders to sell at as high as 56, you say.

Mr SPRAGUE. Yes; above 57; 57%, to be exact.

Mr. PETTENGILL. All right, go ahead.

Mr. SPRAGUE. If you will look at the book before you

The CHAIRMAN. Now, I will tell you, I do not think that you have time go to through all of this.

Mr. SPRAGUE. It is rather important, Mr. Chairman.

The CHAIRMAN. You were granted 15 minutes, Mr. Sprague and you have already had about 25. You have a colaborer here in the same business you are in?

Mr. SPRAGUE. Yes; I have.

The CHAIRMAN. Well, we will have to continue with him at another time, because there are two gentlemen following you.

Mr. PETTENGILL. Mr. Chairman, could the witness be permitted to put in his extended remarks, a little greater detail as to these examples?

The CHAIRMAN. Surely, and we will be very glad to have him do that.

Mr. SPRAGUE. What I intended to do was to follow book B through, an actual day, and give the exact performance.

Mr. PETTENGILL. You have that?

Mr. SPRAGUE. Yes; I have that. It is a little technical and it would be better if it were explained in words that are understandable. The CHAIRMAN. I understand that you have to leave today? Mr. SPRAGUE. I would like to get back, sir.

The CHAIRMAN. It is all right. We will try to hear from your colaborer a little later but we must close very soon. We try to run as near to schedule as possible.

Mr. SPRAGUE. I understand that, sir.

The CHAIRMAN. We are very much obliged to you, sir.

Mr. SPRAGUE. I wonder if I might present a representative of the commission houses to talk on that for a minute?

The CHAIRMAN. Not today.

We are going to hear Mr. Harriman, president of the Chamber of Commerce of the United States, and after him, I see our old friend, ex-Mayor John Fitzgerald, of Boston and we will get to him, I am sure, and we will be glad to hear him for a few minutes.

STATEMENT OF HENRY I. HARRIMAN, PRESIDENT OF THE CHAMBER OF commerCE OF THE UNITED STATES, WASHINGTON, D.C.

Mr. HARRIMAN. Mr. Chairman and gentlemen of the committee, my statement will have at least one merit. It will be brief.

The Chamber of Commerce of the United States has not yet taken any definite position on the bill. It has not had an opportunity to do so; but after discussing it with many of my directors, I feel that I am justified in presenting these general views. I am not going to attempt to analyze this very long and complicated bill, which has been presented to you. You have already had that presented in great detail.

So far as I know, our membership does object to the bill in its present form on three fundamental grounds.

In the first place, we feel that any regulation of exchanges should be regulation and not a hard and fast regulation. We do not believe that it is possible to foresee all of the circumstances and conditions which can arise and cover them by a law and we believe it is infinitely better to leave to the commission wide discretionary powers along very definite lines.

You have had discussion just now on one phase of the subject, the specialist.

Now, I can conceive that the commission charged with the regulation of the exchanges and with seeing that the exchanges have fair rules, could, from time to time, modify those rules as to specialists, if and when they discover faults.

In the second place, under the guise of regulating exchanges, there is regulation of securities, there is regulation of corporations, there is regulation of banks.

I do not believe that it is wise to put them all under one general category.

In the third place, I gravely doubt the constitutionality of certain features of the bill. There is a provision, if I understand it rightly, that corporations whose securities are listed must enter into an undertaking or contract to abide by such rules and regulations as might be subsequently framed.

Now, I think that is clearly unconstitutional, because if an order were issued in the future that was unconstitutional, that took property without due process of law, that deprived a corporation of rights which it otherwise would have had, and that would deny it the right

to go to the courts because it entered into a contract or undertaking to abide by the rules, it clearly could not be sustained or enforced.

Those are the three broad grounds on which I object to the bill. There are many technical details that might be taken up but, as I said previously, I do not think that it is necessary to do so. But I do feel that we should all recognize that there is a real need of proper supervision and regulation of exchanges, to the end that speculation and the sale of securities may be honestly conducted, and the dice not loaded. It seems to me that a commission, working on the general lines of the Dickinson report, could go far to see that such speculation and such selling of securities is honestly and fairly conducted.

I have no doubt that, from time to time, as conditions change, it will be found advisable to modify the rules of the exchanges.

May I, then briefly outline what I conceive to be the proper foundation of and chief points that should be embodied in a measure for the regulation of the exchanges?

First. To utilize such constitutional powers as Congress may possess to provide for the Federal licensing of security exchanges for the purpose of regulating the business of such exchanges and of their members.

Second. To establish a Federal administrative authority with broad discretionary power to require the exchanges to adopt and enforce rules and regulations in a form satisfactory to said authority, and of such character as to establish a minimum standard of fair dealings on such exchanges.

Third. In the case of the violation of such fair rules, the "Federal administrative authority" should have power to deprive such exchange of its license or to suspend it, or to fine it, or to require it to change its governing personnel.

Fourth. The fair rules to be adopted by the stock exchange should include provisions governing such matters as pools, margin trading, wash sales, specialists, short selling, retailing methods, listing or withdrawal requirements, reports of corporations whose securities are listed, and so forth. The following are suggestive of rules which should be adopted. The first one of those would be:

(a) Borrowings for marginal purposes by members of the exchange should be regulated in at least two particulars: First, they should be limited, so far as practicable, to loans by banks operating under Federal or State laws, and second, they should be limited in the percentage of loan to the market value of the collateral, by classes of securities, unless in any case a higher percentage is specifically approved.

I think there is a perfect justification for requiring that different classes of securities have different margins. Obviously, Government bonds, high-grade railroad securities, or utility securities do not require the same degree of margining as a security that is highly speculative in its character.

(b) A member of an exchange should be prohibited from using securities left with him by the owner thereof as collateral for loans, unless the loan is for the exclusive benefit of the owner.

That is a very important point, as I see it.

(c) Corporations whose securities are listed should be required to file annually with the exchange a copy of an audit by an independent certified public accountant, presenting such information as the ex

change may prescribe. It should rest with the discretion of the exchange to require quarterly statements, in less complete form than the annual statement and without the requirement of certification by public accountant. The exchange should have the right, however, to call for special statements when will be in the public interest. The exchanges should have also the right to call for special reports whenever they have reason to believe that there has been a marked change in the condition of the company, and that the public interest requires immediate information as to what the conditions are.

(d) Dissemination by members of an exchange of false or misleading statements with reference to corporations or their securities should be made subject to fine by the governing body of the exchange, dismissal from membership in the exchange, and in case of grave offenses, criminal penalties.

(e) Members of the exchange should be prohibited from being parties in any manner to wash sales that are engaged in for the purpose of increasing the volume of transactions to establish a fictitious market situation.

I do not think that a broad general rule of that kind should be prescribed by law. I think that it should be left to the discretion of a commission. There are undoubtedly many cases where the stabilization of securities will warrant that. I have no doubt that the Government of the United States under authority coupled with the $2,000,000,000 fund for stabilization purposes, may very properly, from time to time, stabilize United States securities. So, I do not think that there should be a broad provision like that enacted into law, but I do think that is a matter that should come under very careful consideration the regulatory authority.

(f) The operations of specialists should be made subject to rigorous rules to avoid abuses, or if necessary prohibited.

But, I do feel that there are certain definite rules which may have from time to time, as experience shows, be changed, so that the regulatory authority should have the right to put out its rules of the exchange to govern such transactions.

(g) Short selling, pools, syndicates and stabilization efforts should be made subject to special rules designed to avoid stimulation of undue speculative activity.

Those are the types of rules that, it seems to me, Mr. Chairman, should come under the supervision of this regulatory authorityrules to be adopted by the exchanges themselves, finally. The Federal authority may be the Federal Trade Commission.

Fifth: The "Federal administrative authority" preferably should be a special agency established for the specific purpose of regulating exchanges, I would suggest that it consist of the Secretary of Commerce and at least four other members appointed by the President, including a representative of the Federal Trade Commission, a representative of the Federal Reserve System, and two persons, at least one of whom shall have had practical experience in the business of originating and marketing of securities and the operations of security exchanges; the President should designate the chairman.

Finally, Mr. Chairman, it would seem to me that the greatest power of all that could be exercised, would be the power of public opinion that would come from publicity of these matters.