The CHAIRMAN. Will you give your name and qualifications?

Mr. CASSATT. Robert K. Čassatt. Mr. Chairman and gentlemen, I represent the group of investment bankers in the city of Philadelphia who are also, all but one of them, engaged in the brokerage business. That is to say, they are all members of one or more stock exchanges.

When the first bill was presented to this committee, or when it was under discussion before this committee, Mr. Newbold came down and spoke for this group before this committee, and with the permission of the chairman I would like to read a brief statement as to certain features of this bill which we consider deserving of further consideration.

The undersigned group of investment dealers, engaged in the business of selling investment securities to their clients in the city of Philadelphia, Pa., were given the privilege of appearing before the House Committee on Interstate Commerce when consideration was being given to House bill 7852. At that time objections were made to ceratin sections of the bill as then drafted, which were discussed with the committee by Mr. John S. Newbold, of Philadelphia, on behalf of this group.

The result of amendments made to that bill has produced a new bill in the form now before this committee, which is H.R. 8720. This bill shows that, as to certain of the sections of the original bill, material relief has been granted, but as to others no substantial change has been made, and for reasons herein stated, objection will now be made to the bill in its revised form in order to show to the members of the committee the need for granting relief to a greater degree than has been afforded.

The attention of the committee is directed to provisions of six of the sections of this bill, and six only, which in the judgment of the undersigned, need further amendment and revision.

The first is section 6, which has been under discussion, and we have this to say on that provision.

This section is still in the form which, if enacted into law, will prove most disturbing to the securities business. It seems to those who have given serious consideration to the provisions of this section, since they desire to aid in properly accomplishing the major purposes of the bill, that the arbitrary and inflexible control over margins and credits is unwise, unworkable and will prove harmful. It is suggested that in place of the section as written, the control over margins and credits should be vested in the Federal Reserve bank of each district, in order that the problems may be met in accordance with the needs of the several sections of this country without imposing upon business generally the burdens which the application of the formula set forth in section 6 will most certainly produce.

And I will say here, gentlemen, that while this recommendation bears some relation to the recommendations made yesterday by Mr. Whitney in his testimony, this brief was prepared before Mr. Whitney testified before this committee.

The Chairman. Let me ask you a question. Do you want to leave it to the Federal Reserve banks absolutely?

Mr. CASSATT. Yes, sir.

The CHAIRMAN. Without any qualifications?
Mr. Cassatt. Yes, sir.

The CHAIRMAN. You would therefore deprive it of all uniformly and put it under the influence of the district in which the Federal Reserve bank was located, without any appeal or any suggestion from the Federal Reserve Board?

Mr. CassaTT. Oh, no; I do not go that far.
The CHAIRMAN. Why do you not?
Mr. Cassatt. I think that the Federal Reserve Board

The CHAIRMAN. I am just asking you. I asked you if you wanted to leave it absolutely in their hands, and you said yes.

Mr. Cassatt. Well, I should qualify that, Mr. Chairman. Naturally, the general condition of the country should be taken into consideration, and the advice of the Federal Reserve Board should certainly pass on the Federal Reserve bank's views.

The CHAIRMAN. Under your provision of the law, it would not necessarily do so.

Mr. Cassatt. I beg your pardon.

The CHAIRMAN. If the Federal Reserve bank, under your suggestion, did not desire to report back to the Federal Reserve Board, they would not have to.

Mr. CASSATT. Of course, in my opinion

The CHAIRMAN. And if it does have to do that, why not, without going through all of that, leave it to the Federal Reserve Board to begin with

Mr. Cassatt. Well, if you asked me personally—this is the brief our group agreed upon—if you asked me personally, I certainly would not object to putting the entire power in the Federal Reserve Board, and I also think that if you leave out the inelastic provisions of this bill, as to margins, the Federal Reserve Board has today under this act, and under the Glass-Steagall Act, ample power to control speculative loans.

In the first place under this bill, brokers, such as we are, are now prohibited from borrowing on anything but registered securities. We are also prohibited from borrowing from anyone, except a bank, a member of the Federal Reserve System.

The CHAIRMAN. I beg your pardon. Go ahead.

Mr. Cassatt. Section 7. Attention is directed to paragraphs (c) and (d) which seem in conflict and may be the result of hasty draftsmanship. Paragraph (c) seems to prohibit what paragraph (d) permits with the written consent of the customer. These paragraphs read as follows:

(c) To hypothecate or arrange for the hypothecation of securities carried for customers' accounts except free and clear from the liens of other creditors or to commingle any of such securities with those of any person other than a bona fide customer.

(d) To hypothecate or arrange for the hypothecation of any securities carried for the account of a customer under circumstances that will permit the commingling of the securities of one customer with those of any other person, without the written consent of such customer.

It is suggested that either paragraph (c) be stricken from the section, or if there is a real purpose for it, that it be modified by adding to it the words “without the written consent of such customer."

Now, the only explanation I have had as to that is that it is intended to prevent us from borrowing on the securities owned by the customer.

If that is the purpose, we have no objection to that section, because we are perfectly willing that loans made on our own securities shall be made in different places and secured by different notes.

Section 10 was the one that this group was particularly interested in when we first came down here, because we were all interested in doing the same thing, a brokerage business and a dealer business.

SEC. 10. The provisions of section 10, as revised, dispose of the objections made to this section in its original form in language which in substance is as satisfactory as can be hoped for in an effort to compromise the views that have been expressed concerning the subject matter of this section.

The committee's attention is directed, however, to paragraph (d) (2), to which attention has heretofore been called by those who have appeared before the committee recently.

The language of this subsection is not clear and will cause confusion in practice. As a substitute for this subsection the following is submitted:

(d) (2) unless, if the transaction is with a customer, he discloses to such customer in writing at or before the completion of the transaction whether he is acting as dealer on his own account or as broker for the account of the customer.

The houses I represent are entirely willing and anxious that the customers shall at all times know whether we are dealing in securities we own, or whether we are merely acting as brokers, and this merely suggests by way of clarification.

Sec. 14. This paragraph remains in substance as it was written in the original bill, and the same reasons which were urged for the elimination of it when this group presented their objections through Mr. John S. New bold, are now urged with equal sincerity against the continuance of this section in the new bill. For the convenience of the committee, so much of the memorandum as was filed heretofore is presented again:

The provisions of section 14 prohibit the making of over-the-counter markets for unregistered securities unless such market is made in accordance with rules and regulations promulgated by the Federal Trade Commission.

If the purpose of this section is to prevent speculation in unregistered securities, consideration should be given to the character of securities now commonly sold in the over-thecounter markets. This class of securities are dealt in largely by investors and not by speculators. They do not lend themselves easily to speculation, as may be realized when it is known that they consist largely of Federal land bank bonds, Home Owners' Loan Corporation bonds, other Government securities, State, county, school district, and municipal obligations, bank and insurance company stocks, railroad equipment trust certificates, and bonds secured by trust mortgages upon real estate. În addition to such unlisted securities, the over-the-counter markets afford an opportunity for transactions in large blocks of listed securities primarily for the benefit of institutional investors. The over-the-counter markets afford little opportunity for uncontrolled speculation, not only because of the character of the securities traded in and the transactions occurring there, but because of the type of customer with whom the investment dealer has the majority by volume of such transactions. These customers are such as insurance companies, savings banks, national and State banks and trust companies, educational and charitable institutions, and corporate trustees. These customers are advised by persons of long and extensive experience in the purchase and sale of such securities who are frequently as familiar with the marker values as the representatives of the investment dealers trading with them. The purchases made are for investment and not for speculative profit, and almost invariably are cash transactions and not on marginal accounts. The problems arising out of such transactions are clearly not comparable to those which trading upon the national stock exchanges present, and a totally different treatment is required to control such practices, if any, that may have been indulged in by a small minority of the dealers.

Section 16: This section gives to the Commission the power to verify the reports and statements of members of the national securities exchanges, brokers and dealers, by a detailed examination by representatives of the Commission of the records and accounts and papers of any particular broker or dealer, and provides that,

The reasonable cost of such examinations, including the compensation of the examiners, may be assessed by the Commission and when so assessed shall be paid by the person examined.

The committee is earnestly urged to strike these words from this section. There is no limit to the number of such examinations nor the extent nor cost of the same, and such examinations may easily develop into persecutions. Even if made to accomplish what the Commission might deem to be proper purposes, the expenses to the person examined might be a serious financial burden. There would seem to be no more reason why this cost should be imposed upon the person examined than any other cost of conducting the operations of the Commission.

The act contemplates and provides for an annual payment by the national exchanges, the funds for which are necessarily furnished by the members, and this contribution to the general expense of the Commission with regard to the subject matter of this legislation would seem to be the limit that any individual subject to the jurisdiction of the Commission should be called upon to assume.

Section 34: In the event that section 6 is modified as herein suggested, this group has no objection to making the effective date of this act earlier than the original bill provided for, namely, October 1, 1934. If, however, section 6 shall provide a formula for margins and credits similar to that now written in it, a substantial period of time should be afforded to those engaged in the securities business to prepare the required statistical information and to establish the complicated business machinery for all loan departments which will be needed to permit the business to be conducted in accordance with such formula for margins and credits.

Then there follows the names of the houses which I represent, Mr. Chairman. (The names are as follows:)

Year established Biddle, Whelen & Co..

1764 E. W. Clarke & Co...

1837 W. H. Newbold's Son & Co.

1844 Bioren & Co..

1865 Cassatt & Co.

1872 Edward B. Smith & Co.

1892 Graham, Parsons & Co..

1896 Elkins, Morris & Co.--

1906 Jannev & Co..

1907 Yarnall & Co...

1925 Mr. CASSATT. As to the houses which I represent, Mr. Chairman, I would like to call your attention to the fact that with the exception of one of them, they have all been in business in the city of Philadelphia over 25 years, many over 50 years, and one over 100 years, and they are still doing business at the same old stand. We have always done a brokerage and dealer business, and we take pride in feeling that the citizens of Philadelphia with whom we have dealt have no cause to complain or our action in the past.

Mr. BULWINKLE. Do you approve of basing margin requirements on earnings as suggested by Mr. Clark in his testimony?

Mr. CASSATT. No, sir; I do not.
Mr. BULWINKLE. Will you state why not?

Mr. CASSATT. To base margin requirements on earnings, again, would require some method of determining how much should be loaned on the security with reference to the earnings, and let us take, for example, that it were proposed that we could loan three times the average earnings, for the past 5 years. In the first place, take the last 5 years. There would be many very estimable securities which have earned nothing in the last 5 years. They would be valueless as collateral.

In the second place, I do not believe that the true measure of loan value has anything to do with past earnings. I think the future of the corporation and the actual price which may be obtained for its securities is a far better measure than past-earning basis.

Mr. BULWINKLE. That is all.

Mr. Cassatt. I know that it could easily be said that prices are manipulated. I think the provisions of this bill if carried out will go a long ways toward eliminating the manipulation of prices, and under those circumstances, it is my definite opinion, no better measure of value of any security is obtainable, on any property, than what you can get for it.

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. On page 1 of your memorandum you say that you think that section 6 would be disturbing and prove harmful.

When you say prove harmful, do you mean to those engaged in the business or to the business of the country generally?

Mr. CASSATT. I mean to the business of the country generally. Mr. PETTENGILL. Now, what leads you to that conclusion?

Mr. CASSATT. My conclusion is that this set method of calculating margins in the first place, it is deceptive, because the bill contains an arbitrary date of July 1.

Now, we all know that that arbitrary date is going to run out very rapidly and end in 3 years. !f we went back to 3 years ago, from today, you would find that the provision that you made for lending 100 percent on the lowest price the stock has sold for in 3 years would operate in every case so that you would not be able to borrow more than 40 percent of the present-day value. In other words, the protective provision would become inoperative and it is only because of this bill containing a provision to start from July 1, that the argument holds that you can borrow a reasonable amount today on the securities that are in the market.

If you went back, for instance, 3 years, as we have got to from 1936 on, we have got to take the low for the full 3 years. Now, there is a mechanical reason for not adopting this provision, which is very serious, not only on all brokers, but all banks who are going to lend on securities, and that is that from day to day you must have before you the low price for the past 3 years on every security that is dealt in on every exchange in this country, and if I should inadvertently lend more than is called for by those specific provisions, we would be subject to a very heavy fine, very heavy penalties.

Now, it is almost impossible to take a long list of securities as contained in many customers' accounts, and to be sure that you are not

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