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after notice and hearing, determine that the rules shall be changed, and if the stock exchange does not put the change into effect, the Commission can step in and itself put them into effect.

Mr. WOLVERTON. Then, the theory underlying the bill is similar to that which was contained in the Dickinson report, that the exchange should be permitted to regulate itself as long as it does so properly, and if it does not, then the reserve power exists in the Federal Trade Commission to do so?

Mr. CORCORAN. Well, I do not understand that the Dickinson report went so far as to specifically say that if an exchange did not change its rules, the Commission was in a position to step in and change the rules for the exchange. On the point of enforcement by the Commission in that respect, the report was very vague with the intimation that about all the regulatory authority would be permitted to do would be to suspend the license of the exchange.

Mr. WOLVERTON. Well, that would be the most practical way in which the Commission could enforce its own rules as to what should be done by the stock exchange.

Mr. CORCORAN. That is a rather impractical way, sir; I hardly think a commission would dare to suspend the New York Stock Exchange if the New York Stock Exchange put its back up and said, "We won't change this small rule, and if you want to go ahead and try to suspend us and bring about the catastrophic consequences because we will not, just go ahead and see what you can do.”

Mr. WOLVERTON. The thought I have in connection with this matter was confirmed by Mr. Dickinson when he was before the committee. I put the question to him in some such words as these:

Is it your thought that stock exchanges should be permitted to regulate themselves with a big stick held in reserve by the Federal Trade Commission?

And he said, “That states it succinctly."

Mr. CORCORAN. I am so glad that Mr. Dickinson agrees with us about something.

Mr. WOLVERTON. Well, do you agree with that?

Mr. CORCORAN. I did not hear Mr. Dickinson. I know what the theory is.

Mr. WOLVERTON. Has this bill been drawn on that theory?

Mr. CORCORAN. This bill has been drawn on the theory that if after a request by the commission an exchange will not change its rules, the commission can without having to suspend the license of the exchange, after a decent hearing, just walk in and change the rules.

Mr. WOLVERTON. So, at the present time you sort of freeze the situation by permitting the stock exchange to regulate itself, subject to the

Mr. CORCORAN. We permit it to do that as far as possible; yes.

Mr. WOLVERTON (continuing). Subject to the right to dictate changes that should be made?

Mr. CORCORAN. Yes, sir; certainly.

Mr. WOLVERTON. Mr. Chairman, there is one other thought that I have in mind, and I hope the witness may have an opportunity this morning to speak concerning it. I think it is very important. It is the question that has been raised by different representatives who have come here from the cities of Boston, Philadelphia, Chicago,

and San Francisco. They have stated that they carry on a brokerage business, general investment business, underwriting, and so forth. They were fearful that under the terms of the old bill they would not be permitted to carry on that kind of a business, and, if such was denied to them it would result disastrously to long-established business houses.

Now, I would like to know whether this new bill, in any way, changes that situation, and if so, to what extent.

Mr. CORCORAN. Sir, have you read the new section 10?
Mr. WOLVERTON. I did not get the bill until this morning.

Mr. Corcoran. It completely changes the situation on that point, sir, and I think substantially meets all of the worries of those who were afraid that the broker-dealer business would have to be broken up.

Mr. WOLVERTON. That is all.

Mr. CORCORAN. I do not know where to begin, Mr. Chairman. I think I was discussing margins.

The CHAIRMAN. We are going to have to adjourn.
Mr. Holmes. Mr. Chairman, may I ask one question?
The CHAIRMAN. Mr. Holmes.

Mr. Holmes. When you are talking about margins and banks, you mean member banks of the Federal Reserve System?

Mr. CORCORAN. No. When we are talking about margins we are talking about all banks.

Mr. Holmes. That applies to mutual savings banks over which the Federal Government has no control?

Mr. CORCORAN. It applies to all banks which are lending on registered securities, on securities which are listed on a national securities exchange and over which the power of the Federal Government reaches through the fact that those securities are so registered.

Mr. HOLMES. It does not reach mutual savings banks' loans to brokers?

Mr. CORCORAN. Yes, it does; the privilege or the right to make loans to brokers; it concentrates that completely. It deprives nonmember banks of the privilege of making loans to brokers unless there are no member banks available in the locality. May I show you , the section?

Mr. HOLMES. Yes.
Mr. CORCORAN. Section 7, sir. May I just read it for you?
Mr. HOLMES. Yes.
Mr. CORCORAN (reading):

Sec. 7. It shall be unlawful for any member of a national securities exchange or any broker or dealer who transacts a business in securities through the medium of any such member, directly or indirectly

(a) To borrow in the course of business as a broker or dealer on any security (other than an exempted security) registered on a national securities exchange except (1) from or through a member bank of the Federal Reserve System, or (2) in accordance with such rules and regulations as the Federal Reserve Board may prescribe to permit limited loans between members and/or brokers or dealers who transact a business in securities through the medium of a member, or to permit loans from or through others than member banks in localities where there are no member banks, or to meet emergency needs.

Most of the nonmember banks in the interior make their call loans on securities through a bank in New York, which is a member bank.

Of course, if a mutual savings bank which normally does not do business with brokers-cannot under the law-has available call-loan

money, what it normally does is to send that money to some callloan center like New York, where it may be lent in the market on broker loans through a member bank in New York, one of the big banks. That is the way most of the small banks' loans to brokers are made. That practice, of course, could continue under the bill.

Mr. Holmes. They would have to go under the same margin provisions?

Mr. Corcoran. They would have to go under the same margin provisions.

Mr. Holmes. I understand that quite a number of mutual savings banks utilize brokers' loans as a secondary avenue of investment.

Mr. CORCORAN. Yes.

Mr. Holmes. And, so far as that phase is concerned, I do not know of any mutual savings bank ever having lost anything on a loan of that kind.

Mr. CORCORAN. The theory of the bill, sir, is to bring all brokers' loans under the control of the Federal Reserve, which by the GlassSteagall bill is given very wide discretion over call loans. The loans you are speaking of, sir, are still perfectly possible under this act, because these mutual savings banks normally send their funds to New York, where they are lent for the accounts of those banks through member banks of the Federal Reserve System. Mutual savings banks do not usually make call loans directly.

Mr. Holmes. This does not make any stipulation so far as unlisted securities of local corporations are concerned, and loaning upon them by mutual savings banks?

Mr. CORCORAN. No.
Mr. HOLMES. It does not?
Mr. CORCORAN. No.
Mr. HOLMES. All right.

The Chairman. We will adjourn until 10 o'clock tomorrow morning.

(Thereupon, at 11:50 a.m., an adjournment was taken until 10 o'clock the following morning, Wednesday, Mar. 21, 1934.)

NATIONAL SECURITIES EXCHANGES REGULATION

WEDNESDAY, MARCH 21, 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 will hear Assistant Secretary Smith of the Treasury Department.

STATEMENT OF TOM K. SMITH, ASSISTANT TO THE SECRETARY

OF THE TREASURY, WASHINGTON, D.C.

The CHAIRMAN. We would like, Mr. Smith, for you to qualify by telling us what has been your experience as a business man for the last 10 years.

Mr. Smith. I have been in the investment and banking business nearly 30 years. This is my thirtieth year. At the present time I am president of the Boatmen's National Bank of St. Louis, temporarily acting as Assistant to the Secretary of the Treasury.

With the indulgence of the committee, I should like to make a brief statement, after which I shall be at liberty to attempt to answer any questions you care to ask.

The major objectives of the National Securities Exchange Act of 1934 appear to be:

First. To establish Federal supervision over securities exchanges;

Second: To prevent manipulation of security prices, and to protect the public against unfair practices;

Third: To prevent excessive fluctuations in security prices due to speculative influences;

Fourth: To discourage the use of credit in the financing of excessive speculation in securities.

With these general objectives, the Treasury is in full accord.

I was requested to study the bill to ascertain whether certain of its provisions might have a needlessly adverse effect upon the Government's financing operations or upon the financial structure of the country.

With the limited time at my disposal, I have made a study of the bill from this viewpoint, and have submitted to the committee's counsel numerous suggestions and changes, most of which have been incorporated in the bill H.R. 8720, which has just been introduced.

I believe that for the most part the matters about which we were principally concerned have been corrected by these changes.

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The enactment of any regulatory measure of this scope affect so many different people and activities that it is difficult to foresee all of its possible consequences. Therefore, I have also seriously considered whether the provisions of the bill which affect Government financing and the financial structure of the country might operate to delay or obstruct business recovery. I believe that the language of those sections of the bill has been so revised as to minimize this danger.

Our study has necessarily been somewhat hurried, and we should, of course, hope to have the privilege of submitting to the Committee any further suggestions that may occur to us after we have had more time to study the bill.

Mr. BULWINKLE. Mr. Chairman-
The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Mr. Smith, you did not draft or assist in drafting the bill?

Mr. Smith. No, sir.
Mr. BULWINKLE. You merely studied it?
Mr. SMITH. Certain features of it.

Mr. BULWINKLE. Would you mind, for the committee, telling what sections you studied?

Mr. Smith. It would be easier, Mr. Bulwinkle, for me to tell you the sections we did not study, if I may answer that way.

Mr. BULWINKLE. All right. Mr. Smith. For the sake of brevity. Mr. BULWINKLE. All right. Mr. Smith. We were directed to discard the sections having to do with or dealing solely with the control of the exchange and fixing the margins and sections of that sort.

Mr. BULWINKLE. So you did not have anything to do or you did not pass upon the question of whether or not specific margin requirements should be included in the bill?

Mr. Smith. You mean the rate of margins?
Mr. BULWINKLE. Yes, sir.
Mr. Smith. That was not submitted for our consideration.
Mr. BULWINKLE. Did you have any discussion about that section?

Mr. Smith. Nothing formal. There may have been some informal discussion.

Mr. BULWINKLE. Did you express your views?
Mr. Smith. Would I?
Mr. BULWINKLE. Yes, sir.

Mr. Smith. I am representing the Treasury. I prefer not to express any personal views.

Mr. BULWINKLE. Well, you were representing the Treasury as an official of the Government in order, as you say, to find out if certain of its provisions might have a needlessly adverse effect upon the Government's financing operations, upon the passage of this bill?

Mr. Smith. The section under discussion you will note the qualification in the statement.

Mr. BULWINKLE. Yes. What was your view of it as to the effectiveness of the credit control vested by the bill in the Federal Reserve Board?

Mr. Smith. That was satisfactory to us.

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