In years gone by whenever acts of individuals or practices in general were developed contrary to equitable trade, steps were taken by bankers and the exchanges to remedy the matter and there has been built up as a result a better situation than existed before. From time to time new situations and unfavorable. practices must be met and corrected. Such matters, however, cannot be handled by Government machinery such as the Federal Trade Commission, which in its operation, would naturally be too slow to accomplish any effective results. We have had on the statute books of New York State a law against fictitious or wash sales, but in my experience of over 30 years I know of only one prosecution under the statute, but have seen the activities of many firms and individuals who engaged in these practices ended by the exchanges. Governmental regulations and enforcement agencies in such business matters are of no value and while it would undoubtedly be an excellent thing to have upon the statutes, Federal or State, the regulations now in force on the exchanges, such governmental laws should not be made without the cooperation and help of the persons engaged in the business who understand the business thoroughly and have its real interest at heart.

I am writing this statement in view of having read in the daily papers that bill H.R. 8720 has the approval of the Treasury Department which to me is beyond belief as to its entirety. That the Treasury Department and the present Administration want a law enacted is quite conceivable, but certainly to meet with their approval, there must be a law which will not destroy business or react unfavorably upon the great efforts being made to return us to national prosperity. Respectfully submitted.

PAUL J. ENGEL. MARCH 22, 1934.



House of Representatires, Washington, D.C. GENTLEMEN: The undersigned members of the New York Stock Exchange respectfully invite your attention to the far-reaching effect which we believe certain provisions of the pending stock exchange regulation bill would have on the fortunes of 20 million investors in the United States.

We refer to the provisions in section 10 of the bill for the practical elimination of the present market “specialist”, who, as he now operates, is an indispensable factor in assuring the liquidity of investments and, in turn, the liquidity of commercial banks and other financial institutions throughout the country.

The specialist, as the members of the committee are doubtless well aware, is a member of the exchange who deals exclusively in one or more stocks and is thus able to execute with the utmost diligence all orders entrusted to him for the purchase or sale of such stocks. Any member of the exchange may become a specialist if he so desires.

Because of the active and varied operations on the floor of the exchange, it is physically impossible for the broker who directly represents the commission house to execute all transactions committed to him. In line with the intensive specialization which has taken place in every field of modern activity, the vocation of the specialist has been developed over a period of years to fill the obvious need of a man of expert knowledge and financial and moral responsibility who can give instant execution to orders entrusted to him for the purchase or sale of specified stocks. The specialist is primarily a broker's broker.

The specialist, however, under the present practice, is more than a broker's broker. He is also a dealer, and his activity as a dealer is indispensable to his effective functioning as a broker. It is our understanding that your committee, while recognizing the useful services performed by the specialist, seeks to impose certain limitations upon his activities in accordance with the committee's general purpose of regulating the exchange on behalf of the public interest.

The members of the exchange, as already reported to your committee, are heartily desirous of cooperating in any measure that would make the exchange a more effective market for public securities. We feel, however, that the present draft of the bill before your committee would essentially alter the character of the specialist as he actually exists and, in so doing, greatly diminish the facilities of the exchange in its service to the public.

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The specialist of today is the custodian or trustee of thousands of orders originating in this and many foreign countries. With a market order in his possession a specialist is barred from trading for his own account until that order is filled. He cannot give his personal interest precedence over that of his customer. No business is more carefully supervised, and there are no penalties in any other line of business endeavor more drastic than those meted out to a specialist if he violates the law of the exchange or if, as stated in the constitution of the New York Stock Exchange, he indulges in any practice “inconsistent with just and equitable principles of trade."

There seems to be a common belief that, because of the possibility of his acting either as a broker or dealer, the specialist has an opportunity to act contrary to the interests of the regular brokers and their customers and that he actually does

Nothing could be further from the truth. The greatest criticism directed against the specialist is that he works in a dual capacity, either as a broker for his customers or as a dealer for his own interests. As a matter of fact, he can never serve these two interests simultane. ously. Were he to do so he would be expelled from the exchange. Further, the minute a specialist steps into the capacity of a dealer, any trades which he may effect for his own account are, by the rules of the New York Stock Exchange, not binding except with the consent and approval of a representative of the firm with whom he trades. In other words, a specialist in trading for his own account buys from or sells to a broker who represents the seller or purchaser, as the case may be. It is the duty and interest of this other broker to see to it that his customer makes the best possible trade.

If at any time such a trade is seen to be “inconsistent with just and equitable principles of trade" that trade is canceled.

The new bill as now formulated provides two types of specialists: that of the dealer-specialist (one who trades for his own account and cannot accept commission orders) and broker-specialist (who executes orders for others and cannot trade for his own account). This means a division of the functions now performed by specialists. If this dual capacity is broken up so that there are two categories, viz: dealer-specialists and broker-specialists, a situation will arise which will have a broker-specialist working for the interest of his customers and a dealer-specialist who has no responsibility except to himself.

The present specialist lives because of the fact that if he does not at all times make a just and ample market, the commission houses will speedily introduce & competing specialist in his field and his business will be cut down. He, therefore, does everything in his power to make such a market. Let us assume for the moment that the broker-specialist operating as provided in the bill cannot trade for his own account and a dealer-specialist may. The dealer-specialist has no customers, is responsible to no one save himself, and it is inconceivable that he would have the same interest as the present specialist in the maintenance of a continuous fair market for securities.

The specialist's success depends upon the efficiency and intelligence with which he serves his clientele; without that efficiency and intelligence he would shortly find himself without orders.

The fact that the business of the specialist has been developed over a period of time and requires a high degree of alertness and specialized knowledge for its efficient functioning, and the fact that it involves the livelihood of several thousand people, including the necessary staffs, cannot, of course, be a primary concern of your committee. But your committee is rightly concerned with the maintenance of a liquid or immediately accessible market to the investor, which in turn means an opportunity for the Nation's industry to finance its development. We believe that the specialist performs an essential function in that branch of national economy.

If the liquidity of the market is at any time impaired it will unquestionably mean that collateral would necessarily be more difficult of disposal. Banks would accordingly be reluctant to accept stocks as collateral for loans which might be needed for productive enterprise. The effect, in truth, would be to impair a capital market on all exchanges in the United' States where securities may now be either obtained or sold, with the inevitable consequence that other world markets would be utilized.

The end and aim of commercial banks is, at all times, to have such a degree of liquidity that they may accomodate the short-term needs of business. Destroy the liquidity of the market and the ability of the banks so to function would be proportionately curtailed. There are many examples today of the inability to

quidate in other lines of business.

We believe the intricate and complex functions of the specialist should not be disturbed as they now exist, and we respectfully submit the suggestion that the members of your committee visit the exchange to observe these functions in actual operation.

The corporate structure of American business has resulted in the issuance of hundreds of millions of shares of stock held, it is said, by over 20,000,000 people. These are the people who, in the last analysis, “make the market.” If the prospective legislation is followed to its logical conclusion, the functions now performed by the New York Stock Exchange would seriously be curtailed. This would not only impair the savings of millions of people but also throw many thousands into unemployment.

Therefore, it is respectfully petitioned that section 10 of the bill be amended in accordance with the recommendation of Richard Whitney, Esq., President of the New York Stock Exchange, made to your honorable body at a public hearing on Thursday, the 22d of March, 1934.

Section 10, as thus amended, would read as follows:

“Section 10. (a) It shall be unlawful for a member of a national securities exchange while on the trading premises of such exchange to act as a dealer and broker in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

“(b) Subject to such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to insure compliance with the provisions of this subsection, the rules of a national securities exchange may provide for the registration of members with the privilege of acting as dealers, and any member so registered shall have the privilege of acting as a dealer and as a broker within the limitations of this subsection. It shall be unlawful for a member with the privilege of acting as a dealer who also acts as a broker to effect any transaction in a security by use of any facility of a national securities exchange or otherwise, (1) if in connection with any such transaction he directly or indirectly extends or maintains or arranges for the extension or maintenance of credit for a customer on any security (other than an exempted security) which was a part of a new issue offered to the public by him as a dealer or distributor within 6 months prior to such transaction, or (2) unless, if the transaction is with a customer, he discloses to such customer in writing any interest he may have in connection with the security which is the subject-matter of the transaction and offers the customer a reasonable time not exceeding 10 days to refuse the transaction after the disclosure if the disclosure is not made at the time of the taking of the order and confirmed in writing substantially simultaneously therewith.” Respectfully, BLAIR S. WILLIAMS.





BENJAMIN H. BRINSON. The specialists of the New York Stock Exchange are assisted in their labors by 1,290 employees who support 2,481 dependents. The annual salaries of the employees total $2,166,708. The specialists pay in real estate rentals or in lieu of rent $1,846,999 per annum.


March 24, 1934. Hon. Sam RAYBURN,

House of Representatives, Washington, D.C. DEAR SIR: On March 2, 1934, we submitted to the committee of the House of Representatives a brief in regard to the National Securities Exchange Act of 1934.

The committee of “put-and-call” brokers at that time pointed out and tried to make plain the economic inportance of “puts and calls” and endeavored to show the difference between the so-called manipulative options and those dealt in openly by the "put-and-call” brokers and dealers in this country.

We were then, and are now, of the opinion that section 8, paragraph 9, as it appears in the proposed law, as well as in is revised form, only applies to such options which are acquired in conjunction with the actual purchase or sale of stock. Such puts, calls, and straddles are clearly manipulative options.

It seems to us that for the sake of clarity and sharper distinction that this paragraph should be drawn so as to leave no doubt as to the intention of allowing dealings in and the guarantee of legitimate puts, calls, straddles, etc., eliminating puts, calls, straddles, etc., used for manipulative purposes.

We also call your attention to the last part of section 8, paragraph 9, third subdivision, reading as follows: “Or if a member, directly or indirectly, to indorse or guarantee the performance of any put, call, straddle, option, or privilege in relation to any security registered on a national securities exchange. The terms put, call, straddle, option, or privilege as used in this paragraph shall not include any registered warrant, right or convertible security.'

We submit that this wording should be clarified so that there can be no doubt that the foregoing subdivision was meant to refer to manipulative options only.

We further recommend that the National Securities Exchange Act of 1934 shall provide that the Federal Commission will have the power to require, after an appropriate hearing, that all “put-and-call” dealers and brokers conform with rules and regulations adopted by the Commission, and that the effective date of section 8, paragraph 9, be changed from August 1, 1934, to some later date. We therefore respectfully request that such change be made. Very truly yours,


GEORGE A. LAMBELL. Chairman. The CHAIRMAN. We will recess until 2 o'clock.

(Thereupon, at 12:05 p.m., a recess was taken until 2 p.m., of the same day.)


The committee reassembled, pursuant to the taking of the recess, at 2 p.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.



The CHAIRMAN. Mr. Landis, I think that the committee would like to have your reaction to the bill H.R. 8720, in general, and specifically

Commissioner Landis. Mr. Chairman, I have had an opportunity to examine this bill. I had the opportunity, to start with, to associate with a number of experts on this subject, who, at the suggestion of Senator Fletcher, started in on the work of drafting a stock-exchange bill. Those experts and myself have watched the hearings on this bill with a great deal of interest and have tried to give them a great deal of consideration and study. The result of that has been, in large measure, this bill.

Mr. BULWINKLE. Would you mind, Mr. Landis, inserting in the record—I do not care to have it done now—but put in the record who the experts were, and what their qualifications are.

Commissioner Landis. Yes; I shall be glad to do that. Would you want me to insert that later?

Mr. BULWINKLE. Yes. I want the qualifications of the experts.
Mr. Mapes. With the emphasis on the qualifications.
Mr. BULWINKLE. Yes; with the emphasis on their qualifications.
Commissioner Landis. I will do that.

As I was saying, this bill is the result of that work. I do not want to take the time of the committee in going through the bill with a great deal of particularity, the committee having already had an opportunity to do that. I simply want to point out that I think this bill more generally and as well as it can be done, meets the suggestions that I made to this committee some days ago that the desirable kind of a bill to write about the stock exchanges is a bill which will get the proper degree of flexible administration together with a formal enunciation by Congress of what its principles are. I think that is a very important thing, because it is important to any administrative agency to know very clearly what the congressional policy is. It is also important to an administrative agency to be able to look at that policy and mark it out without fear of pressure, without the fear of being wrong.

This bill, I think, achieves that kind of a balance. It is a nice degree of balance to achieve and with the degree of flexibility that has been introduced in this revised bill, in my judgment, the criterion that I said was a desirable criterion has been met.

The feature about this bill to which I suppose you would really like me to address myself is the position of the Federal Trade Commission in this bill.

The revised bill, as distinguished from the original bill, divides the administrative authority between the Federal Reserve Board and the Federal Trade Commission. The Federal Reserve Board having dealt for many years with the problem of credit is intrusted with that problem. The Federal Trade Commission, having dealt for some 8 to 9 months now with the problems of the securities administration and having dealt for many years with the problems of investigating corporations, is intrusted with the administration of those features of the bill.

Judge Healy this morning had an opportunity to present aspects of the Commission's control over marketing practices and corporate accounts and spoke from a wide experience in that field. I think he demonstrated the necessity for some such control.

Now, I would like to make one point clear: There has been some talk about the autocratic power of the Commission; about the power this bill gives the Commission to run all industries. The Commission has had considerable administrative experience in connection with the provisions of the Securities Act, and the Commission, in the exercise of those powers, always makes an effort to call in the men directly interested with a problem, in order to give them the fullest opportunity for hearing and presentation of their views before a rule or regulation affecting them is promulgated.

We have had, and I would like to emphasize this, we have had the advantage of a high degree of cooperation from lawyers and bankers who have been affected by our rules and regulations. We have spent days with them working out our rules and regulations, sending them drafts, getting their criticisms back on those drafts, before finally adopting a draft in that revised form. In such a way we have been able to take care of what we conceived to be the real criticisms that have been raised during that process.

In other words, I would like to give this impression, that you can expect sympathetic, informed, and intelligent administration from the Commission.

The other matters on this bill that I would like to say something about are the administrative features. I have worked over some of those features. Some of the men associated with the Commission have been working over them. They have been drawn, in a large measure, from the Securities, Act which in turn was drawn from the

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