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the first bonds they would exempt will be State bonds. Now, you can go just a certain distance in legislating details, and for that reason we felt that the Federal Trade Commission could be relied upon to take satisfactory action in that matter.

Mr. HOLMES. Well, insofar as State obligations are concerned, why should not they be included in the bill?

Mr. SMITH. It is a matter of degree. The Federal Trade Commission will be called upon to make certain securities exempt, and I think it is perfectly obvious that the first name on the list would be the proper kind of State bonds. Of course, there might be some kinds of State bonds, you know, that would not be exempted. You could not exempt State bonds in their entirety.

Mr. HOLMES. My opinion is that the State bonds ought to be exempted.

Mr. SMITH. All of them?

Mr. HOLMES. That they should have the same rights.

Mr. SMITH. All?

Mr. HOLMES. Yes; practically all of them.

Mr. SMITH. Then, they had better correct their practices, some of them.

Mr. HOLMES. Of course, that is true. No one knows where we are headed at the present time.

Mr. SMITH. You would not want to exempt them, with some of the States in default, as some of them.

Mr. HOLMES. That may be, as to some of the States. But, not many of the States are not in that position. I think that may be applied to all securities all down the line. There are many securities in default.

Mr. SMITH. Then, you would not want to exempt them, I should think.

Mr. HOLMES. Well, the bill works both ways.

Mr. SMITH. Our feeling was that we might rely on the Federal Trade Commission to properly classify the exempted securities.

Mr. HOLMES. Well, that is true, but I am worried about the States and municipalities that have always enjoyed exceptionally good credit, and I can see, unless they are included in this bill, allowed the same latitude as the United States Government, that they are going to have difficulties in their financing; it will be more difficult and more costly for them.

Mr. COLE. Mr. Chairman, may I ask one question?

The CHAIRMAN. Mr. Cole.

Mr. COLE. Mr. Smith, I understood you to state that you have given a great deal of study to section 6 and section 7, very important provisions of the bill. With those two sections before you I want to ask you this question: Do you understand that under section 7 (a) a broker and/or dealer may borrow from a member bank of the Federal Reserve System and other members and/or brokers or dealers in accordance with such rules and regulations as the Federal Reserve Board may prescribe under the same credit conditions as brokers and/or dealer is permitted to extend to his customers under subsection C of section 6 and, if so, can the lender accept the statement of the borrower that the amount of loan requested is in accordance with subsection C of section 6?

Mr. SMITH. That is correct.

Mr. MARLAND. Mr. Chairman-
The CHAIRMAN. Mr. Marland.

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Mr. MARLAND. I want to make a statement rather than ask & question. It is my opinion that paragraph of this act, as drafted, will have a very serious effect on future Government financing. I believe that the Treasury Department should study this bill with that possibility in mind and give this Committee their opinion on this subject.

The CHAIRMAN. Do you have anything further?

Mr. SMITH. I have nothing further to say.

The CHAIRMAN. We are very much obliged to you, Mr. Smith. Mr. SMITH. Thank you.

The CHAIRMAN. The Committee is now going to have to go into a short executive session.

(Thereupon, at 11:25 a.m., the committee proceeded to the consideration of other business, after which it adjourned to meet the following morning, Thursday, March 22, at 10 a.m.)

NATIONAL SECURITIES EXCHANGES REGULATION

THURSDAY, MARCH 22, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

We decided late yesterday that we will use this morning in hearing the representatives of the exchanges.

Mr. Whitney, you may proceed.

STATEMENT OF RICHARD WHITNEY, PRESIDENT, NEW YORK STOCK EXCHANGE, NEW YORK, N.Y.

Mr. WHITNEY. Mr. Chairman and gentlemen of the committee: The notice has been a little short and many of us have been up all night trying to get something to properly present to you, but I want to ask your forgiveness, if in our haste, there have been, well, omissions, or perhaps errors in what I am going to tell you, although we have tried to check very carefully.

The New York Stock Exchange is opposed to H.R. 8720 for the same reasons it was opposed to the Fletcher-Rayburn bill. The bill now pending before you contains modifications of some of the provisions of the original bill. However, our basic objections to the old bill apply with equal force to the new one. There is not time to discuss all of its provisions and I shall, therefore, confine my remarks to the most vital sections. I shall deal only with sections 6 and 7, which refer to margin requirements and the restrictions on members' borrowings; section 10, which deals with segregation of the functions of broker and dealer; sections 11 and 12, which deal with the requirements for the registration of securities and the reports which will be required of corporations whose securities are registered on an exchange; and section 18, which deals with the powers of the Commission over exchanges. There are many other sections of the bill which, in my opinion, should be amended.

Before discussing any provisions of the bill I want to make my position absolutely clear. I think this bill is unworkable and will have destructive effects not only upon stock exchanges but also upon the value of securities and the business of the country. I do not believe that sound legislation can be based on the framework of this bill. However, I understand that the committee desires constructive suggestions for the improvement of the bill. I shall, therefore, suggest specific amendments to the sections of the bill which contain the most

harmful and unworkable provisions. In making these suggestions, I do not wish to be understood as qualifying in any way my fundamental objections to the bill.

The amendments which I shall propose do not emanate solely from the New York Stock Exchange. They have been discussed with representatives of the New York Curb Exchange, the Boston Stock Exchange and the Chicago Stock Exchange and also with the president of the Association of Stock Exchanges which represents 18 stock exchanges located in all parts of this country. The gentlemen representing these exchanges are here today and will, I am sure, confirm my statement that these suggestions have their entire approval.

It is my understanding that Mr. Lothrop Withington, of Boston, is to appear as a witness after me this morning, one of those to whom I have just referred.

SEC. 6. Margin requirements: Section 6 of the bill purports to vest control of margin requirements in the Federal Reserve Board. However, it restricts the power given to the Federal Reserve Board by prescribing rigid minimum margin requirements, which are based upon percentages of current market value or of the lowest price which a security has reached within 3 years preceding the date of the loan, provided, however, that until July 1, 1936, the lowest price at which a security has sold since July 1, 1933, may be taken in lieu of the lowest price in the 3-year period preceding the loan. Different minimum margin requirements are established for the initiation of a loan and its maintenance. Furthermore, there is a provision to the effect that loans existing on the date of the enactment of the bill will not be subject to the minimum margin provisions until January 31, 1939. This last provision was admittedly intended to prevent a forced liquidation of existing loans, which would necessarily follow if the margin requirements of the bill became immediately operative. Let me call to your attention that declining markets resulting from the enactment of this bill would bring in their train the very liquidation you seek to forestall by this provision.

I have already said that I consider the margin requirements of the original Fletcher-Rayburn bill excessive. While the margin requirements of the pending bill are more liberal due to prevailing market prices, they would in the event of a rise in security values reach the same excessive level as was fixed in the Fletcher-Rayburn bill. In brief, the margin requirements of this bill and the Fletcher-Rayburn bill are both defective in that they base credit solely upon a percentage of market value or upon the lowest market price reached within arbitrary periods of time. Earnings, likewise, cannot be used as the sole criterion of value for securities. The loan value of a security must be determined by a consideration not only of earnings and market value but of the size and activity of the particular issue, its distribution among investors, the extent to which it is held in loans or margin accounts, the volatility of the security, and the general condition of the market and of the industry in which the security repre sents an interest. These are the factors which reasonable men must consider in determining the amount of credit which can be advanced upon security collateral and they cannot be reduced to a formula.

The control of credit necessarily involves the use of judgment and excessive speculation in securities can only be prevented if the persons controlling credit are thoroughly familiar with credit conditions and

have full power to raise or lower margin requirements as circumstances. may require. In our opinion, therefore, the Federal Reserve Board, which is already vested with power to control the credit resources of the country, and which now has the responsibility for such credit control, should be given full power to fix such margin requirements as it may deem necessary in view of economic conditions.

To accomplish this result, I suggest that section 6 of the bill be amended to read as follows:

SEC. 6. It shall be unlawful for any member of a national securities exchange or for any broker or dealer transacting a business in securities through any such member, directly or indirectly, to extend or maintain credit to or for any person in contravention of such rules as may be adopted from time to time by the Federal Reserve Board for the purpose of preventing the excessive use of credio for speculation.

Another section which directly refers to credit conditions is subsection (a) of section 7, which deals with brokers borrowing from nonbanking institutions. We believe that the Federal Reserve Board should likewise be given full power over this subject and we, therefore, suggest that section 7 be amended so as to read:

SEC. 7. It shall be unlawful for any member of a national securities exchange or for any broker or dealer who transacts a business in securities through the medium of any such member, directly or indirectly, to secure the repayment of any money borrowed by the pledge or hypothecation of any securities in contravention of such rules and regulations as may be adopted from time to time by the Federal Reserve Board for the purpose of preventing the excessive use of credit for speculation.

We suggest that the substance of the other subsections of section 7 be transferred to section 18 of the bill, which I will discuss later on. SEC. 10. Functions of broker and dealer: Section 10 of the bill deals with the segregation and limitation of the functions of broker, specialist, and dealer. It has been changed so as to permit members to combine, under certain safeguards, the functions of dealer and broker, provided they do not act as dealers on the floor of the exchange.

The section still prohibits the function of broker and dealer being combined by a member when on the floor of the exchange. This limitation will effectively put out of business all bond brokers because they customarily act as dealers and also all specialists. It will make it impossible for the odd-lot business to be carried on except on the New York Stock Exchange, which, alone of all the exchanges in the country, has some members who engage exclusively in the odd-lot business.

I cannot believe it is wise to make such a revolutionary change in the accustomed method of doing business until it is shown that any possible abuses cannot be eliminated in some less drastic manner. I suggest, therefore, that this section be amended so as to allow the Commission to adopt such rules and regulations as it may deem necessary in regard to members of an exchange combining the function of dealer and broker when actually engaged in business on the floor of the exchange. This suggestion will give the Commission full power to change and correct its rules as conditions may require. Such a power is essential to experimental regulation in so technical a field and is not possible under fixed rules of law.

The CHAIRMAN. You know, Mr. Whitney, there are a great many brokers, in New York, members of the exchange, who do not believe that we should relax this provision as much as we have. They think.

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