Section 12 provides for annual, quarterly, and monthly reports, in such form and in all detail prescribed by the Commission. The Commission may call for additional reports to the end that “the security holders interests shall not be prejudiced by the using of information for the advanage of any special group or interest.” Failure to provide information requested by the Commission is ground for removal of the registered security from the exchange.

It requires no very thorough analysis to determine the viciousness of this section of the act, nor of the large expense involved in meeting the requirements of the Commission. Neither is it difficult to understand the concern of industry over the broad powers given to the Commission.

Section 13 deals with proxies and makes it unlawful for any person to solicit any proxies or consent or authorization in respect of any security registered on any exchange, unless at some time prior to such solicitation permission shall be secured from the Commission.

Section 14 deals with over-counter markets and provides that it shall be unlawful to deal in over-counter securities, except under regulations prescribed by the Commission.

Section 15 deals with transactions by directors, officers, and principal stockholders. Every officer, director, and stockholder owning more than 5 percent of any registered security must file with the exchange and the Commission at the time of registration the amount of the securities he owns. Corrections must be made in such lists within 10 days after the close of each month. No director, officer, or stockholder may buy registered securities with the intention of selling them within 6 months. If he realizes a profit on any possible transaction, the corporation may recover such profit from him. The profit is the difference between the highest price at which the security has been sold and the lowest price at which it was purchased by the officer, director, or stockholder within 6 months. If the corporation fails to bring suit within 60 days, any person holding the security may sue and recover in the name of the corporation. The section further provides that it shall be unlawful for any officer, director, or stockholder to sell a security which he does not own. The deliveries must be made to the buyer within 5 days after the sale. No officer, director, or stockholder may give confidential information concerning a registered security. The corporation may recover from the giver of the information.

Section 16 provides among other things that a representative of the Commission shall have access to the promises of any exchange, as well as the right to attend any meetings or proceedings of the exchange or any committee thereof. Provision is made for the keeping of accounts, memoranda, correspondence, papers, books, and all other records for delivery to the Commission.

Sections 17, 18, 19, and 20 provide for the liability for misleading statements, set forth the special powers of the Commission, places the liability of controlling persons and provide for suspension or withdrawal of registration of an exchange or of a security. Any person, including director, officer, accountant or agent of such person responsible for making any statement in any document filed with the Commission which is in the light of circumstances under which it was made false or misleading is liable to the purchaser, who may sue in equity in any court of competent jurisdiction for damages. The damage shall not be less than the difference between the price for which the purchase was made and the lowest price for which it was sold within 90 days preceding, and 90 days following such purchase. The burden of proof to show that he has exercised reasonable care is upon the person held accountable. Every person who is assumed to control another person by agreement, stock ownership, or agency is personally liable for all violations of the act by the controlled person, both civilly and criminally. If the act is violated through securities transactions by husband or wife or child or parent of a person subject to the act, he will be assumed to be guilty of the violation, unless he can prove that it was not accomplished with his approval or with intent to evade the law.

The Commission is empowered to adopt any sort of rule and regulation which it deems necessary to the enforcement of the act. It has the right to provide in detail for the preparation of accounts in connection with the appraisal or valuation of assets or liabilities and the determination of depreciation and depletion, in the differentiation of recurring and nonrecurring incomes and in the preparation of consolidated balance sheets or income accounts of any person directly or indirectly controlling or controlled by the user or any person under direct or indirect control with the issuer; to carry on any type of investigation which seems wise; to subpena witnesses or records.

The Commission may set the trading hours of any exchange without notice or hearing. It may suspend trading by an exchange as a whole or in connection

with any particular registered security, without notice or hearing, for a period of 90 days. After notice or hearing, it may suspend an exchange for 12 months or withdraw its registration, or the registration of a security.

The Commission may seek an injunction in any district court in the United States or District of Columbia to enjoin the threatened violation of the law or rules of the Commission. Likewise, it may apply for a writ of mandamus, commanding any person to comply with the act or any of its orders.

Section 21 provides that all hearings before the Commission shall be public.

Section 22 provides that all reports, documents, and memoranda filed with the Commission are public records, and consequently may be used by anyone.

Section 23 provides for court review of orders and that applications for court review will not stay any order of the Commission unless the court so directs.

Section 24 outlines the penalties in addition to those cited in connection with specific sections above. Any person violating any provisions of the act or rule of the Commission shall, upon conviction, be fined not more than $25,000 or imprisoned 10 years, or both. A fine not to exceed $50,000 is provided for violation of exchange rules.

Section 25 has to do with jurisdiction of offenses and suits. Section 26 has to do with the effect on existing law. Section 27 relates to the validity of contracts. Section 28 relates to foreign exchange. Section 29 provides for registration fee to be paid to the commission before March 15 of each year, to an amount equal to five one-hundredths of 1 percent of the aggregate dollar amount of the sale of securities transacted.

Section 30 provides for the employment and fixing the compensation of employees of the Commission.

Section 31 is a separability-of-provisions clause.
Section 32 places the effective date of the act as of October 1, 1934.



No proposal in recent years has gone further toward the socialization of industry than has the so-called “stock exchange bill." Its real and lasting effect is not so much upon the stock exchanges as upon the corporations whose securities are listed. It should be noted that listing becomes inevitable in the case of all concerns. It should be noted that the liability of officers, directors and stockholders is placed far beyond the liability which ought to exist. The Federal Trade Commission is placed in an ultra bureaucratic position with broad and unassailable power to do what it wills. Penalties are unduly heavy. It appears that there is need for regulation of the stock exchanges, to the end that some of the practices of the past may be discontinued, but the entire house need not be burned in order to roast the pig. To place in the hands of any governmental commission such complete discretionary power over industry should not be countenanced. Honest business cannot be so handicapped if it is to prosper and give employment to the thousands who need employment.


New York City, March 1, 1934.
Chairman House Committee on Interstate and Foreign Commerce,

Washington, D.C. DEAR SIR: Enclosed please find copy of a resolution adopted by the Eastern Broker Division. As the members of this unit of the Commercial Telegraphers' Union of North America feel that their interests would be vitally affected by the passage of its present form of the measure referred to in the resolution, we are an us to have the resolution made a part of the records of the hearing of your committee on this bill.

Trusting that you will be good enough to include the accompanying resolution in the records of your hearing, I remain Yours very truly,

WM. J. Ryan,




Whereas there is now pending before the Congress of the United States a measure known as the “Fletcher-Rayburn bill,” the purpose of which is the regulation of stock and other exchanges; and

Whereas the enactment into law of this measure in its present form would seriously curtail legitimate transactions in securities and commodities, because of the requirement of unreasonable margins and other restrictive features; and

Whereas such curtailment of legitimate trading undoubtedly would force many reputable brokerage concerns out of business, and be followed by the return of the nulawful and disreputable bucket shop, with all its attendant evils, to prey upon and fleece those of moderate means who wish to trade in securities and commodities; and

Whereas such curtailment also would impose additional hardships upon the members of our craft, who have suffered for several years as the result of irregular employment or no employment at all, because of the unsettled condition of markets due to economic conditions during that period; and

Whereas practically all business is conducted on a credit basis, it being possible to buy anything from an automobile to a first-class hotel on an initial investment (margin) of from 10 percent to 25 percent: Therefore be it

Resolved, That the Eastern Broker Division, Commercial Telegraphers' Union of North America, embracing within its jurisdiction Morse and automatic broker telegraphers in the States of New York, New Jersey, and Connecticut, hereby respectfully petitions the honorable members of the congressional committee having this measure under consideration, to give their especial consideration to the above outlined facts, to the end that the unnecessarily rigid features of this measure may be modified, so that the necessary and useful functions of securities and commodity exchanges may not be imparied, or legitimate transactions in securities and commodities be subjected to undue and harmful restrictions, and that the general unemployment situation be not further aggravated by the contraction of corporate activities in all branches of industry, due to the hampering of the medium thi which is provided the means for meeting the natural ebb and flow of corporate financial needs.



Richmond, Va., March 6, 1934. Hon. Elton J. LAYTON, Clerk Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C. DEAR MR. LAYTON: I enclose six copies of my brief upon the question of the constitutionality of the Fletcher-Rayburn bill, known as the “National Securities Exchange Act of 1934”, leave to file which was granted me upon the recent hearings upon the bill. I have sent a copy to each member of the committee. Very truly yours,




Hunton, Williams, Anderson, Gay & Moore, Counsel. Thomas B. Gay, of




The apparent purposes of the National Securities Exchange Act of 1934, now pending before the Congress, are the regulation and control of stock exchanges and the business of their

members, the control of credit through restrictions upon the use of securities, and the control of all corporations through requirements for


the listing of their securities on exchanges, or, if not so listed, through limitations upon their use as a basis of credit.

Broadly speaking, these objects are sought to be accomplished in one or both of two ways:

First: The use of the mails, or of any means or instrumentality of communication or transportation in interstate commerce, for the purpose of using any facility of any securities exchange is prohibited by section 4 of the bill unless such exchange is registered as a national securities exchange under the provisions of section 29 thereof, and the registration fee therein provided for is paid.

Second: The use of the mails, or of any means or instrumentality of communication or transportation in interstate commerce, for making or creating & market for any security whether or not listed on any national securities exchange is prohibited under the provisions of section 14 of the bill unless compliance is had with such rules and regulations as the Federal Trade Commission may prescribe as appropriate in the public interest, or for the protection of investors.

Both means of accomplishing the desired objects are, therefore, predicated upon the power of the Congress over interstate commerce, or its control of the use of the mails. May either power be constitutionally exercised in the manner proposed? The purpose of this brief is to demonstrate that it may not.

In his testimony before the House Committee on Interstate Commerce, the Hon. J. M. Landis, Commissioner of the Federal Trade Commission, and one of the draftsmen of the bill, stated very frankly that:

“At the threshold of this question, there seems to me to lie the question of national power over the exchanges. 'I think this committee has to meet that and face that before it can go any further. The question is not free from doubt." (Tr., pp. 2-3.) (Italics supplied.)

The need for regulation, in view of many social and economic evils now alleged to arise from and exist by reason of practices indulged in by those engaged in the buying and selling of securities, whether as members of stock exchanges or in the over-the-counter markets, is being pressed upon the Congress as a jusification for the enactment of the proposed bill. Public necessity does not, however, give rise to Federal power.

The Government of the United States is not a National, but a Federal Government. Not national in the sense that it possesses inherent power, but Federal in the sense that it possesses only those powers expressly, or by necessary implication, delegated to it by the States. All powers not so delegated are by the tenth amendment to the Federal Constitution expressly reserved to the States respectively, or to the people.




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Article I, section 8, of the Constitution of the United States confers upon the Congress power “to regulate commerce with foreign nations and among the several States

Commissioner Landis, in his testimony before the House Committee on Interstate Commerce, testified in this connection that: “In order to spell out an appropriate power for Congress to deal with stock exchanges, you have to show the intimate relationship of these transactions on the exchange itself to interstate commerce.

I speak primarily of the interstate commerce power, because I do not believe that legislation of this type can be based effectively upon any other power than the congressional power over interstate commerce." (Tr., p. 4.) (Italics supplied.)

In justification of the attempted exercise of the power of the Congress over interstate commerce section 2 of the bill contains à recital of facts which are declared to make the regulation of exchanges using the channels of interstate commerce necessary in the public interest. To the extent that this section embodies findings of fact it will

, of course, go far in satisfying judicial inquiry into the need for such legislation, but to the extent that the section contains mere conclusions of law upon the facts recited therein, it establishes nothing and would have no controlling effect upon the decision of any court that might be called upon to decide whether such conclusions were, in point of law, correct.

The findings of fact in this section that "transactions in securities as commonly conducted upon securities exchanges by means of the mails or instrumentalities of transportation or communication in interstate commerce, are affected with a national public interest”, are predicated upon the conclusion of law that transactions in securities by means of the mails or instrumentalities of transportation or communication are interstate commerce. If such is not the case, congressional declaration to the contrary does not make it so as a matter of law.

Again, the section provides that “Transactions in securities upon exchanges create a flow of securities in interstate commerce to and from the places where such exchanges are located.” Here, again, is found a conclusion of law that such flow of securities as may in fact result from stock exchange trading, constitutes interstate commerce. If such is not the fact, it isn't made any more so by congressional declaration. Finally, the section provides that “Regulation of transactions in securities conducted upon exchanges by means of instrumentalities of transportation and communication in interstate commerce or of the mails is imperative in the public interest for the protection of interstate commerce

The regulation of transactions in securities thus declared as imperative in the public interest, presupposes that the transactions so to be regulated constitute interstate commerce. If they do not, Congress cannot by legislative fiat ascribe to them legal characteristics which they do not otherwise possess.

Putting aside, however, what may be said to be a legislative attempt to give to the business of securities exchanges, and that of their members, factual char acteristics which they do not possess, but which are admittedly essential to any lawful exercise of the power of the Congress to control interstate commerce, a general statement of the nature of such businesses is necessary in order to properly determine whether they are in fact so interstate in character as to constitute interstate commerce. That they are not is fairly demonstrable.

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The business of a stock exchange is to centralize the purchase and sale of securities. Sales are made only between members of the exchange and, in the case of the New York Stock Exchange, the transactions occur only in its building in the city of New York. The purchases and sales made by members on the floor of the New York Stock Exchange are completed by actual delivery, either through the place for central delivery maintained by a subsidiary of the exchange or directly between the offices of the members which, under the rules of the exchange, must be located in its immediate vicinity. Therefore, the actual contracts of purchase and sale take place only in New York City, and all deliveries of securities and payments of money in connection with the performance of these contracts likewise occur solely in New York City.

The immediate objects of sale are bonds or certificates of stock. In the case of bonds listed on the New York Stock Exchange, not only are the instruments themselves evidences of debt, but, under the rules of the exchange, the issuing corporations must maintain offices or paying agencies in the city of New York at which both principal and interest are payable. In the case or certificates of stock, they are constituents of title and, under the rules of the exchange, the issuing companies must maintain transfer agents and registrars in New York City where such certificates may be transferred of record.

In the use of the exchange's facilities, transactions of three general classes

First: Transactions where seller and buyer are both residents of the city and State of New York. Transactions of this nature are obviously local in character and, therefore, solely within the control and regulation of State laws. Boothe v. Illinois (184 U.S. 425); Otis v. Parker (187 U.S. 606); Hatch v. Reardon (204 U.S. 152); Brodnax v. Missouri (219 U.S. 285); House v. Mayes (219 U.S. 270).

Second: Transactions where seller and buyer are residents of different States but no actual shipment of securities occur because payment for the buyer's account is effected through some means of financing requiring the securities to remain in New York. Marginal transactions are of this character.

In transactions of this nature nothing more than buy and sell orders pass between the States through use of the mails or other instrumentalities of communication, such as telephone or telegraph.

This form of interstate communication is sought to be made interstate commerce by the provisions of paragraph 16 of section 3 of the bill defining such commerce as

transaction in respect of any security shall be considered to be in interstate commerce if such transaction is part of that current of commerce usual in a security transaction whereby an order to purchase or to sell a security originates from a person in one state with expectation that it will or may be consummated by the receipt on an exchange of an order to sell or purchase the same security originating from another person in another State *




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