The service given by our local Connecticut houses to their communities as such is no mere figure of speech. May I draw to your attention a single illustration? During the past 2 years several of our Connecticut municipalities were upon occasions in dire financial distress because the market for new issues had practically disappeared. Under the leadership of Connecticut firms, who are also members of the New York Stock Exchange, the necessary financing was accomplished locally so that not one of our cities or towns in need of financing has been left uncared for. I submit that, if prior to that time our Connecticut firms had been obliged to elect as to which type of business they would do, and had elected to do solely a brokerage business, this service to our Connecticut municipalities would not have been performed. While we had implicit confidence in our communities and in their ability to recover, I maintain that it required an attitude of service and a real sense of responsibility to our communities to accomplish what was done.

The above merely illustrates one service performed during a short period of time. Many others might be related. Therefore, with all the seriousness and with all the force that I am able to command, I wish to state that our group believes that some way must be found to permit the broker, dealer, and underwriter relationship to continue to exist, if any but the very largest cities of the country are to be served in their municipal and industrial financing, and if a complete investment service is to be afforded to our Connecticut investors.

Section 7, subdivision (c): My comments in reference to section 10 apply also to subdivision (c), of section 7, which prohibits brokers in listed securities from placing any of their firms' capital in securities to be held for their own account. Obviously, if section 10 should be modified to permit investment firms to function both as brokers in listed securities, and also as dealers in unlisted securities, this part of section 7 will have to be modified to conform with any change made in section 10.

Section 14 and section 18: These sections provide for regulation by the Federal Trade Commission of the business of dealing in unlisted securities both with respect to the terms on which dealers may market them and also with respect to the information required to be filed with the Commission by the corporations who have in the past issued these securities. In other words, the effect of the two sections combined is to make it possible for the Commission to apply to local and other over-the-counter securities now outstanding the same requirements which the corporations involved would have to meet if such corporations were now to issue new securities in accordance with the terms of the Federal Securities Act of 1933. Should the Commission exercise to the fullest extent the power so given, the market for a large part of these securities might be entirely destroyed by reason of the fact that the corporations might fail to furnish the complete financial statements required by the Commission and consequently all transactions in securities of such companies would be placed under a ban. Furthermore, even if difficulty did not arise in this form, restrictions on the making of a market for these securities might be so burdensome as to make dealers reluctant to handle any transactions in issues in which the volume of trading is not large enough to justify the expense involved by compliance with the regulations imposed.

At this point I wish to say that our group does not believe that the Commission will use their power arbitrarily or unjustly, but we do wish to point out that these sections impose on the Commission duties, the wise administration of which will be very difficult, indeed, if not impossible.

Section 6, subdivision (a): This provision prevents a member of an exchange or anyone transacting business through such member from extending credit on unlisted securities. This means that a client who has a margin account with a member of an exchange may not use as collateral to protect his account any unlisted securities no matter how high grade or how highly liquid they may be. This restriction would exclude as collateral certain obligations of the United States Government as well as municipal and State bonds, railroad equipment bonds and other over-the-counter securities which, in the past, it has not been customary or feasible to list on a national exchange. This seems to us to work an unnecessary hardship on the margin trader in listed securities and at times of an emergency, it might imperil his position and also that of his broker. This could occur in spite of the fact that a client possessed adequate and satisfactory resources, for, in times of emergency, circumstances might well make it impossible to arrange promptly with banking institutions for separate credits on his unlisted collateral.

In Connecticut, where investors have a substantial portion of their resources invested in our own manufacturing, utility, and insurance stocks, this restriction could be especially burdensome and dangerous. Here again, we have an illustration of the inadvisability of completely segregating business in listed securities from all other security transactions.

We believe that the views which I have tried to make clear to you are entitled to your serious consideration, because in presenting them we have tried to show how the bill will have harmful effects on investors in Connecticut and also in other States. It seems to us that some way must be found to provide safeguards necessary to prevent abuses without depriving investors of the advantages they now possess. I refer to the markets which make liquid their over-the-counter securities and the services provided by responsible local houses equipped and permitted to conduct a general investment business. Unless this is done, the bill will fail to confer on investors the benefits for which it has been designed and which we all hope will be accomplished. We are keenly aware of how difficult it is to reconcile all of these matters and we are continuing to give the subject intensive study. It may be that some concrete proposals will be developed. In this event, and provided your committee will be interested in receiving them, we shall be glad to forward them to you.

The CHAIRMAN. We are very much obliged to you, Mr. McKeon. Mr. MERRITT. Mr. Chairman

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. Mr. McKeon, it is true, is it not, that in Connecticut, and throughout New England generally, there are great numbers of small corporations, manufacturing and otherwise, which have been going on for generations with their operations well known in their communities, and to the banks in general.

Mr. MCKEON. Yes, sir.

Mr. MERRITT. It would not pay them to have their stocks listed on the exchanges and go to the expense provided in this bill? Mr. MCKEON. That is quite so.

Mr. MERRITT. It is also true that those stocks are well known in their own communities, and are perfectly good collateral, and yet, owing to this bill, they might get in such a condition that the banks in New England could not accept such securities as collateral. Mr. MCKEON. I think that is true.

Mr. MERRITT. Therefore, in a general way, it is true that this bill, if enacted as it now is drawn, would lower the value of practically all such manufacturing stocks, and all municipal bonds, throughout all New England?

Mr. MCKEON. We are quite certain that would be brought about if the bill is enacted as it now is.

Mr. MERRITT. That is all, Mr. Chairman.

The CHAIRMAN. We are very much obliged to you, Mr. McKeon.

STATEMENT OF HON. JOHN DICKINSON, ASSISTANT SECRETARY OF COMMERCE, AND CHAIRMAN OF THE INTERDEPARTMENTAL COMMITTEE ON STOCK EXCHANGE REGULATION— Resumed

The CHAIRMAN. Mr. Lea, of California, says that he has to leave right soon, and he would like to ask you some questions, Mr. Secretary. Mr. DICKINSON. Yes, sir; Mr. Lea.

Mr. LEA. Mr. Dickinson, as I understand you, in your statement yesterday, you favor permitting the stock exchanges to have selfregulation so far as it is satisfactory.

Mr. DICKINSON. In the first instance.

Mr. LEA. And if that proves to be unsatisfactory, then regulation by the regulating body stepping in and asserting its power.

Mr. DICKINSON. Yes, sir.

Mr. LEA. Now, would carrying out this principle as you conceive it involve any action until there is some specific offender and then acting only against that corporation and in accordance with uniform rules?

Mr. DICKINSON. For instance, I think that I might illustrate what I have in mind by a particular example, returning to the basic thought that one of the evils that we have in mind is over-speculation and the undue enhancement of values by rigging operations. Suppose that on a particular stock exchange there was a sudden and very sensational rise of a particular security which would seem to be the smoke that might indicate some fire that lay behind, and there was no evidence of any activity by that particular stock exchange to look into what was happening behind that sensational rise of that security. I would suppose that under the scheme of regulation that I have in mind, that the regulatory authority-the Federal regulatory authority-would get into contact with the managers, the governing board, of that exchange and see what was being done in regard to investigating the situation that I have mentioned. Of course, the Federal authority would act through general rules just as all of our administrative boards do, so far as general rules are applicable, but there would have to be a range of discretion in respect of what might

be described as informal and cooperative acts that would not take place through the application of general rules.

Mr. LEA. Well, would not the commission or regulatory body necessarily have to have some definitions of its authority before it went down to the exchange to tell them what to do?

Mr. DICKINSON. Oh, yes, sir.

Mr. LEA. And Congress would have to define some rules for it to act under?

Mr. DICKINSON. Certainly.

Mr. LEA. And they could not go down there in the exercise of discretion without that?

Mr. DICKINSON. No, sir.

Mr. LEA. And state to the Commission what it should do?

Mr. DICKINSON. Certainly not.

Mr. LEA. Now, when it comes to the question of registration, would you be in favor of leaving to each exchange to determine what the requirements of registration should be?

Mr. DICKINSON. There is a section on registration in the so-called "Roper Report", which gives the ideas of the members of that committee as they were worked out in the discussions at the committee meetings. It is the section on page 17, at the bottom of page 17 and at the top of page 18, and if you wish me to, I will summarize that section:

Your committee believes that each licensed exchange should be required to adopt listing requirements.

And the statute should go on to provide what, in general outline, those listing requirements should be.

The committee believed that the statute should require the licensed exchange to adopt listing requirements which would provide that at the time of listing balance sheets on both a corporation and consolidated basis should be required to be followed by periodical statement of income accounts and balance sheets, annually, and I believe quarterly.

That the corporation should have its accounts examined annually by independent certified public accountants and should file copies of such annual balance sheets and income accounts with the exchange, and should transmit copies to the securities holders; that the listing requirements should also provide that the corporations should list with the exchange and release for publication quarterly statements of its condition and income; that the corporation should notify the exchange and release for publication any purchase or acquisition by it of its own securities, and that it would not reissue such securities without due notice to the exchange.

That the corporation itself would not participate either directly or indirectly, or finance directly or indirectly, any pool trading in its own securities; that the corporation would require each director and officer not to reveal to any pool any information for the use of such pool, and that it would require every director and officer personally not to engage in any pool; that it would require each director or officer to file with the secretary of the corporation within 15 days after the close of each quarterly period a statement of all of his transactions in the securities of the company during the preceding quarter; and that the corporation would report to the stock exchange any option upon

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its stock within 48 hours after such option was granted, together with a copy of such option, which should be open to the public; that the corporation should report to the exchange within 48 hours any agreement to which it was a party or of which it had knowledge, for the purpose of pegging the price of any of its securities, and that it would abide by all of such rules as the stock exchange might promulgate with the permission of the commission.

Now, the idea was, as I understand it, that the statute would provide for those minimum listing requirements and that the exchange might in addition thereto provide any other listing requirements that it saw fit.

Mr. LEA. Do you not reach the same general principles and plans that are in this bill, and that is, in the first place, you must have a definition of the principles.

Mr. DICKINSON. Absolutely.

Mr. LEA. And in the next place, you must give the Commission a large degree of discretion.

Mr. DICKINSON. Yes, sir.

Mr. LEA. So that I take it that your criticism of this bill rather goes of necessity to some of the hard and fast rules prescribed as a matter of law and then possibly as to the undefined limits of regulations.

Mr. DICKINSON. I would put it this way, Mr. Lea. I think that there is no disagreement that any regulatory measure must provide certain rules, and in the statute for the action of the administrative body, and then leave a certain amount of discretion to the administrative body to apply and fill out those rules; but I think there is a decided difference between what I have read you and the provisions of the bill, in two respects. First, as you say, in what the specific rules shall be; and secondly, in this respect, that the scheme of the report provides that these listing papers which would have to be filed in connection with listing and so on, should be filed in the first instance with the exchange, and that the primary responsibility for seeing that the listing requirements were lived up to would be with the exchange, so as not to deluge the Federal agency at Washington with the large volume of individual transactions that it would have to keep an eye on under the terms of the bill as it stands.

Mr. LEA. Mr. Dickinson, I regret very much that I have to leave, but what I was seeking to bring out, is that in the end, we must reach toward uniformity of regulation; uniformity of registration requirements, and uniformity of accounting methods, not immediately-I do not understand that this bill requires that but ultimately.

Mr. DICKINSON. I think, Mr. Lea, that with that aim toward uniformity in control we can perhaps take a lesson from the way in which we have organized our courts. We have a State supreme court in each State, the object of which, in the last analysis, is to secure uniformity in the law of that State; but we do not make the supreme court the court of original jurisdiction for all cases in order that they may all be uniformly decided.

We do not make the Supreme Court the court of original jurisdiction because we want to have every case uniformly tried. Because we want uniformity does not necessarily mean that we have to bring every case in the first instance into the Supreme Court. We have a large number of courts that are handling their own matters and then