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We suggest a change in the heading, “Segregation and limitation of the functions of broker, specialist, and dealer", on page 21 to read "Segregation and limitation of the functions of broker and specialist.'

It has been stated before your committee that the segregation of "broker" and "dealer” was to give greater security to the clients of brokers, reciting the failure of four New York Stock Exchange firms, chiefly because of their dealer" commitments. Compare the remarkably low percentage of failures of private banking firms to other failures and we believe you will agree that their is no apparent need to prescribe such stringent regulations as would destroy the necessary part of our financial structure as would be the result of the proposed segregation of broker and dealer.

We strongly urge the elimination of the first sentence of section 10.

We appreciate the opportunity you have given us to appear before you and express our views on the pending legislation.

John C. LEGG, JR.,

Representing 18 broker-dealers of Baltimore, Md.

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March 12, 1934.
Chairman Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C.
MY DEAR CONGRESSMAN: In response to your letter of March 10, concerning an
opportunity to be heard on the bill proposing to regulate stock exchanges, we
regret that time will not permit us to be heard directly, but in accordance with
your suggestion we are enclosing to you a copy of the statement presented by us to
the Senate Committee on Banking and Currency concerning the same subject.
We request that you will make this statement a part of the record before your
committee and that it be considered by the committee when the bill is taken up
in executive session.
Sincerely yours,

L. K. ComsTOCK, President.



MARCH 1, 1934. The Merchants' Association of New York, representing some 4,500 business enterprises and touching almost every branch of business and industry in the Nation, is profoundly disturbed by some of the provisions of the Fletcher-Rayburn bill to regulate security exchanges (H.R. 7852; S. 2693).

It is disturbed primarily by the extent to which the terms of these bills would subject all business and industry, both large and small, in this country to arbitrary bureaucratic control, and secondarily to the restrictions which would be placed upon the open market for corporate securities.

The association frankly recognizes that the period of economic depression which we are now experiencing has emphasized faults and abuses in the financial system under which we were operating in the preceding period of prosperity. It has no desire to condone the abuses nor to perpetuate the faults, but it does insist that in the effort to remedy these faults and abuses we should not cripple legitimate business, stifle initiative, destroy the liquidity of securities or place our private business at the mercy of bureaucratic inquisitors operating under blanket authority.

As business men, we believe that under any sound, advanced form of financial organization, we are entitled to a market to supply our needs for long-period capital and to an organization capable of transferring ownership rights in already existing securities properly and efficiently.

The Federal Securities Act, through its too drastic restrictions, liabilities, and penalties, has to a dangerous extent deprived us of the opportunity to obtain new long-period capital on reasonable terms. The Federal Banking Act of 1933, by requiring the divorce of banking affiliates from our large commercial banks, has greatly restricted the organizations engaged in or capable of carrying on invest. ment banking. This association approves of the divorce of banking affiliates, but

it desires to point out that this proper act, taken in connection with the restrictions of the Federal Securities Act and the provisions of the Fletcher-Rayburn bill prohibiting the exercise of the functions of broker and underwriter by the same persons or companies, will so greatly restrict the capacity to perform the functions of investment banking as to make unnecessarily difficult the supply of long-period capital which is absolutely essential for the return and maintenance of industrial and business prosperity.

We are also mindful of the fact that labor is indirectly concerned with this aspect of the matter because when there is insufficient capital available to a company it cannot employ as many workers as it otherwise would.


Lodging the control over the securities market in the hands of the Federal Trade Commission is open to very serious objections. Since its creation over 20 years ago the Federal Trade Commission has been given various duties from time to time.

The most important of these duties were imposed by the Federal Securities Act of 1933. These duties are sufficiently important to require all the time and ability which the members of the Commission may possess without adding thereto the task of supervising and preparing regulations for the conduct of an extremely technical, delicately adjusted business with manifold ramifications into every part of the world.

We respectfully submit that if a Federal regulatory body is to be set up at all it should be set up for the sole and specific purpose of regulating security exchanges and that a large majority of its members be men thoroughly familiar with the problems of security markets.

We also urge, inasmuch as by far the greater part of the securities exchange business is concentrated in New York City, that the office of whatever regulatory body is set up should be located in New York City, the business capital of the country, in order to relieve business men from the expense and delay inseparable from transacting business with a regulatory body located in Washington.


It is common knowledge that the reports required by the Interstate Commerce Commission impose a tremendous cost upon the public utilities now under its regulation. It is also common knowledge that the Federal Trade Commission had from time to time required corporations to expend huge sums gathering information for that body from which little or no constructive results are discernible.

We are fearful that, if the body charged with the regulation of security exchanges and of securities listed thereon is given the blanket authority proposed in the Fletcher-Rayburn bill to require information of the issuers of all securities listed on exchanges, it will result in great waste and extravagance for the compilation of information which will have little or no real value when submitted.

Our great railroad corporations find the expense of filing information for the Interstate Commerce Commission a serious item. Compilation of similar records for the Federal Trade Commission would be a very serious burden upon businesses of ordinary size and might be particularly burdensome if called for in periods of seasonal activity. The tendency to require too voluminous and repetitious information would be particularly strong if the regulatory body were made the Federal Trade Commission and the Commissioners themselves were so preoccupied with their many other duties that the actual work of investigating and analyzing reports on business organizations was left to subordinates.

We, therefore, strongly urge that the power of the regulatory body to demand information be sharply restricted.


The very broad definitions of “member", "broker”, and “dealer" contained in section 3 make the requirements of section 6 unnecessary restrictive of credit on the securities of companies not listed on an exchange.

While New York is, of course, the headquarters for very many large companies as the most important center of commercial business and is the largest manufacturing center in the country, it is also the home of an even greater number of comparatively small and medium-sized companies whose securities are not listed on any exchange, but which are thoroughly sound and profitable. Their securities are certainly entitled to some credit facilities from persons who are acquainted with their worth. This criticism is even more pertinent if the definition of a “member" includes a bank buying or selling securities for its own account or as agent for its customers.

The weaknesses and limitations of the margin requirements proposed in subdivision (b) of section 6 have been thoroughly discussed by others, and the Merchants' Association, in this respect, will merely record its concurrence in the objections already raised, except that it particularly objects to the adoption of any restriction which would lead to a wave of deflation through forced liquidation of loans.

We are strongly inclined to believe that the present margin restrictions of the New York Stock Exchange are sound and reasonable, and that the control of margin requirements should be left in the hands of this body on the ground that it is thoroughly conversant with past experiences in this field and able to act quickly and effectively to remedy faults in the situation as they arise because of its intimate acquaintance with daily developments. Certainly if any margin requirements are to be written into law they should only be of the most flexible nature.


The provisions of sections 7 (c) and 10, which prohibit a broker from acting as a principal, apparently would so restrict his activities as to make impractical the odd-lots business which is the only means by which many thousands of legitimate investments can be made. We cannot see any legitimate objection to a man investing in less than 100 shares of high-grade stocks nor any reason for penalizing him other than the small premium required by the rules of the New York Stock Exchange for purchasing less than a round lot. A purchase of 90 shares of American Telephone & Telegraph Co. stock, for example, involves over $10,000, but if the odd-lot business is practically destroyed, as is reasonably argued it would be under the terms of this bill, a man would be practically prohibited from making use of such an investment to finance his business and he would be thereby encouraged to invest in lower-grade stock. We are firmly of the opinion that any advantage which may be gained by separating completely the operations of a broker and of a dealer would be more than offset by the penalty placed upon millions of legitimate investments, particularly those of men and women of small means or businesses of moderate size.


We believe that the provisions of section 13, which require any person soliciting a proxy to send to the person solicited, the names and addresses of persons from whom similar proxies are being solicited, is another instance in which the disadvantages outweigh the possible advantages. The necessity for printing a stockholders' list every time a stockholders' meeting was held would be a considerable item of expense without conpensating advantage in a great majority of cases. We recommend that this provision be eliminated.

OVER-THE-COUNTER MARKETS The Merchants' Association objects, on behalf of the many small companies which are not listed on any exchange, but which within narrow circles are well known, to the provisions of section 14 insofar as they would prohibit dealing in unlisted securities without complying with all the rules and regulations which the Commission might see fit to prescribe.







OF EXAMINATIONS The Merchants' Association questions the desirability of the provisions of section 16, which would permit the Federal Trade Commission to require the preparation of any accounts and records which it sees fit and to assess the expense of any examinations made by its order against the company examined. This is very broad inquisitorial power bordering closely on deprivation of property without due process of law. It is obviously open to great abuse at the hands of subordinates and could be carried to an extent which would make a given business unprofitable through too great an increase in its overhead.

EMPLOYEES OF THE FEDERAL TRADE COMMISSION This association further objects to the exemption of the employees of the Federal Trade Commission from the requirements of the Federal civil-service law as provided in section 30. Past experience with newly created Federal agencies has proven that such an exemption provides a large amount of political patronage and that the efficiency of any agency staffed in this manner is greatly reduced. We respectfully submit that any regulatory body set up with broad powers over security exchanges and

general business must be as free from political influence and the inevitable inefficiency which goes with political patronage as possible. We, therefore, strongly urge that this section be amended to require that all of the employees of the regulatory body, with the possible exception of a few technically qualified chief subordinates, be recruited under the restrictions of the Federal civil-service law.

CONCLUSION In conclusion the association believes that unless this bill is substantially modified in the directions outlined above, its enactment would do more harm than good both to the business community and the investment public by causing deflation of sound loans, by unduly restricting the investment market for long-term capital, by unwarranted restrictions upon credit facilities for the securities of small companies and small investments, and in the laudable endeavor to protect the investing public against fraud, will so cramp that same public with bureaucratic methods and control as to destroy or reduce the value of sound securities far more than the sum which may be saved by reducing fraud.

We most earnestly urge that the importance of the question involved is such as to warrant the most careful consideration for every proposed phase of this subject and the enactment of legislation after mature deliberation. Above all whatever statute is enacted should not be punitive in spirit nor intended to substitute Government supervision and control for the initiative and detailed knowledge which can only come from long and intimate acquaintance with the manifold forms of business organization and needs.


Washington, D.C., March 15, 1934. Hon. SAMUEL RAYBURN, Chairman Interstate and Foreign Commerce Committee,

House of Representatives, Washington, D.C. DEAR SIR: By direction of the chairman of the committee on legislation of the National Association of Railroad and Utilities Commission, I desire to make certain suggestions concerning H.R. 7852; and I request that this letter be made a part of the printed record of the hearing on that bill.

First, with respect to section 18 of the bill. That section gives to the Federal Trade Commission very broad power affecting exchanges and corporations which issue securities listed upon exchanges. The commission is empowered to prescribe accounts and the methods for determining depreciation. Care is taken, however, to guard against conflict between the requirements of the Federal Trade Commission and the regulations imposed by the Interstate Commerce Commission for carriers subject to the jurisdiction of the latter commission. Lines 8 to 13 of the section, both inclusive, on page 34 of the bill as printed, provide as follows:

But insofar as they (the methods prescribed by the Federal Trade Commission) relate to any common carrier subject to the provisions of section 20 of the Interstate Commerce Act, as amended the rules and regulations of the Commission with respect to accounts shall not be inconsistent with the requirements imposed by the Interstate Commerce Commission under authority of such section 20."

This provision has been thought necessary, by those who drew this bill, to protect the authority of the Interstate Commerce Commission to regulate the accounts and depreciation practices of carriers subject to its jurisdiction.

The State regulatory commissions feel that Congress ought to be, and they believe it will be, just as solicitous to protect State regulatory agencies in the exercise of the powers which have been granted them as to public service corporations subject to their jurisdiction under State laws. They, therefore, ask that the following language be added to paragraph (b) of section 18:

"Provided, That nothing in this act, and no rule or regulation made hereunder, shall operate to relieve any common carrier or public utility from keeping any accounts prescribed under State law or from obeying any order or regulation made or imposed under the law of any State in which such common carrier or public utility shall be engaged in intrastate business."

I have also been requested by Mr. A. R. McDonald, who is chairman of our executive committee and a member of the Public Service Commission of Wisconsin, to make certain other suggestions to the committee, which are designed to protect the powers of those State commissions and boards which operate for the protection of investors in securities, commonly known as "blue-sky" commissions.

In Wisconsin, the Public Service Commission is not only vested with power to regulate public service corporations but it administers the blue-sky law.

Mr. Adolph Johnson, chief counsel of the securities division of the Wisconsin commission, has made a study of this bill, and has made certain suggestions for its amendment, which are incorporated in a memorandum which Mr. McDonald has given me, with the request that I present the same to your committee. I attach the same hereto, and ask that the same be printed with this letter. Yours very truly,

John E. BENTON, General Solicitor.

PUBLIC SERVICE COMMISSIONER OF WISCONSIN Memorandum to the commission. Re: H.R. 7852, a bill to provide for the registration of national securities exchanges

operating in interstate and foreign commerce and through the mails, and to prevent inequitable and unfair practices on such exchanges, and for other purposes.

A question has been raised with reference to the possible effect, if the bill referred to in the caption hereof is enacted, upon State regulation of persons and companies engaged in the securities business in particular States.

The only reference in the bill to State laws or State authority is set forth in section 26 (a) which provides

“The rights and remedies provided by this act shall be in addition to any and all other rights and remedies that may exist at law or in equity, except that this act shall supersede such laws of any State as are inconsistent with the provisions or purposes of this act and such laws of any State as provide for the supervision or regulation of the administration or conduct of business on any exchange which is licensed by the commission."

There is no statute in Wisconsin providing for the supervision or regulation of stock exchanges in this State. The only stock exchange now located in Wisconsin is the Milwaukee Grain & Stock Exchange which has a relatively small number of securities listed. Therefore it appears that there is now no law of this State with reference to that subject which may be superseded by the proposed Federal enactment. However, if at any future time the State desired to regulate or supervise the operation of the Milwaukee exchange or of any other exchange within this State, it appears that the language above referred to would prohibit any legislation for that purpose.

However, the State does have legislation regulating the business practices and conduct of persons and companies engaged in the sale of securities in this State either as dealers or brokers. That legislation appears in the statutes as chapter 189, commonly known as the securities law." There is no specific provision in the bill considered herein which has the effect directly of superseding any provisions of the securities law. However, the bill does confer upon the Federal Trade Commission extremely broad powers to regulate and supervise brokers and other persons, and authorizes the Commission to adopt rules and regulations in the exercise of said powers. If such authority to the Federal Trade Commission and the rules and regulations adopted thereunder are construed as exclusive powers, it appears that the authority of the respective States to regulate brokers engaged in business therein would be practically emasculated.

To point out the possibilities in this connection, attention is directed to certain specific provisions of the act. Section 14 of the act contains the following language:

"It shall be unlawful for any person singly or in concert with others to make use of the mails or of any means or instrumentality of communication or trane portation in interstate commerce for the purpose of making or creating, or e

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