change is principally a local market filling an important local need. Nearly all of its active listed securities are those of Maryland corporations, and they are largely held locally. Our market is a cash market, where buying and selling orders meet. We know, and Maryland corporations and investors feel, that we fill a vital need in the business life of our city.

We have 65 full members, only 11 of whom are also members of the New York Stock Exchange. Of the remaining 54, 40 actively conduct a general brokerage and dealer business.

Section 10 of the proposed bill would force our members to choose between two closely allied functions of their business; namely, the handling of brokerage orders in securities on the one hand and the purchase of securities and their resale to the investing public_on the other. The bill would not permit one member to do both. We do not believe there exists or would exist in our community sufficient business in either of these two functions apart from the other to give our members a fair opportunity to earn a living for themselves and their employees.

They would not be able to maintain the statistical departments and other features which many of them have for the convenience of their customers. The small broker and dealer has an entirely different problem from that of the larger broker with many branches or from that of an underwriting house. He executes commission orders for his customers, and when he can buy a block of securities he considers sound at an attractive price he buys them for his own account and then undertakes to distribute them to the investing public, making a reasonable profit between a wholesale and retail

situation.

There is no reason why he cannot fill both of these functions without detriment to the public interests. There have been times when there were no investors brave enough to buy good securities at any price, and when but for the willingness of some broker-dealer to take a commitment for such securities there would have been a situation where a seller who had to sell could not find a buyer at any price. We had a case recently where a block of bonds of one of the political subdivisions of the State of Maryland was held by a county bank upon which there was a run. The bank was enabled to dispose of these securities only because of the willingness of a broker-dealer to take them on for his own account and hold them for resale to investors when the skies had brightened.

If the local broker-dealer is required to confine himself solely to commission orders and is not permitted to aid in the making of a satisfactory market in local securities, it will be increasingly difficult for such local enterprises to finance and refinance their normal business requirements.

Another part of the bill, section 7, works, what we believe, additional undue hardships on the small broker. Many of our members handle no margin accounts, carry no inventory, and require little capital. They take no part in syndicates. They conduct a cash business as broker and dealer in listed and unlisted securities.

Should one of these members secure from a bank or insurance company an order for a quarter of a million Government bonds upon which he can make one thirty-second of 1 percent, he would be unable to handle the order, if this bill becomes law. His capital

employed in the business is usually less than $25,000 and his loan capacity under the bill would be too limited to finance the deal. At present he would have no difficulty in having a bank or correspondent receive and pay for these bonds for his account, delivering and collecting for them from his customer and crediting him with the profit on the deal of $78.13.

Again the small broker and dealer would be unduly handicapped and might be eliminated entirely by the prohibition against his borrowing from a broker-correspondent, which is often the most convenient method of clearing cash trades.

We also call to your attention those portions of the bill which would entail considerable added expense to all brokers. In many cases this additional cost would mean the difference between profit and loss at the end of the year.

Returning to the position of the smaller exchange, it is, of course, true that the existence of the exchange depends upon that of its members. Outside of dues from members we have only listing fees as income. Many of the small corporations whose securities are listed on our exchange could not afford the heavy accounting fees which would be necessary to enable them to keep their securities listed. They might, however, withdraw their securities from listing and thus deprive the many small holders of their stocks and bonds from having a free and open market for their holdings.

We fear that new listings would be few and far between. The corporation executives will have to decide whether to subject themselves to the cost and risks of listing under the Federal Trade Commission and thus secure a free and open market for their securities, or to deprive their stockholders and bondholders of such a market by not listing.

We are convinced, and I am sure you gentlemen will agree with us, that in the interest of public protection an open, free, and public market in securities is much to be preferred over unknown, undisciplined dealings which could never be adequately regulated. We fear that such undesirable dealings will supplant our exchange on the date this proposed bill becomes law.

We urge, in lieu of this bill, a more flexible method to accomplish the end sought. Recent experience with prohibition has taught us that human nature cannot be changed by law. The purpose of prohibition was to eliminate certain evils practiced by only a comparatively few of our 120 million citizens. The effect was to substitute new evils greater than those sought to be eliminated.

The purpose of this act is the elimination of certain other evils apparently practiced by a few unscrupulous people. By this rigid law, affecting millions of honest corporation executives and employees, investors, dealers, and brokers, we might force the abandonment of the nefarious operations of the few; but this same law would also destroy all that is good in our markets which have grown up in over a hundred years of free trading, and we may find ourselves confronted with troubles and problems many times worse than the old. We cannot change the hearts of crooks and thieves by this legislation, but will send them to clever allies to figure out new ways to carry out their depredations.

How much better it would be if, instead of such drastic action. we should create a commission composed of representatives of the

Government, the exchanges and the investing public, to oversee exchange activities, leaving to the exchanges, under such supervision, the power to control abuses in the most effective way, and granting to such commission broad powers over interstate transactions in unlisted securities.

America has grown great through the reinvestment of earnings. into new enterprises. This has been made possible largely through our exchange facilities for quickly turning securities into cash. We do not favor unbridled speculation but do favor every facility for investment, and we are convinced that this Senate bill, no. 2693, will dry up our security markets without accomplishing the aim sought. I thank you.

The CHAIRMAN. Mr. Gould, how many members have you?

Mr. GOULD. We have 77 memberships, or at the present time 65, and the others are grouped and held by four members. The others are held either in estates or one of the members has what is known as "taken the membership."

The CHAIRMAN. Your objections are more particularly to sections 7 and 10 of the bill?

Mr. GOULD. Yes, sir.

The CHAIRMAN. Have you any suggestions to make as to modifications or changes in the bill that ought to be adopted?

Mr. GOULD. I believe the real purpose of section 10 of the bill is that one which applies more forcibly, so far as the small broker is concerned, on the question of the small broker acting in some cases as the dealer, and in other transactions, but never in the same case, as a broker, that that should be prohibited by law; and that is, of course, against the laws of the stock exchange and against the laws of the State of Maryland. I mean for a man to be both a broker and a dealer in the same transaction. Orders that come in to our smaller brokers are executed as commission orders in the case of listed securities. But in addition to that, there being not enough of that business for the broker to make a living, he has to, through his knowledge of the business, pick out securities which he thinks are attractive, and if he comes across a block of 25 bonds which he thinks are very attractive for a bank or an individual, he buys those bonds for his own account, and then he turns around and goes out to call upon prospective customers. He has marked up the bonds one half point, and he goes out and sells those bonds to customers. And it is a perfectly proper and satisfactory transaction from every standpoint. But if this bill should become law he would then have to either confine himself to handling that kind of business, and would not be able to handle the commission business, or he would have to handle the commission business and not be able to handle the other business.

Senator GOLDSBOROUGH. That is what you wanted to bring more particularly to the attention of this committee?

Mr. GOULD. Yes, sir.

The CHAIRMAN. All right. If that is all, Mr. Gould, we are very much obliged to you for your appearance.

Mr. GOULD. And I wish to thank you gentlemen.

(Thereupon Mr. Gould left the committee table.)

(Thereupon, at 4: 40 p.m. Thursday, Mar. 1, 1934, the committee adjourned to resume at 10 o'clock on the following morning.)

STOCK EXCHANGE PRACTICES

FRIDAY, MARCH 2, 1934

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C. The committee met at 10 a.m., pursuant to adjournment on yesterday, in room 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman), Barkley, Bulkley, Gore, Costigan, McAdoo, Townsend, Carey, and Kean.

Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; also Roland L. Redmond, counsel to the New York Stock Exchange.

The CHAIRMAN. The committee will come to order, please. I believe we have a gentleman from Philadelphia who was promised to be heard. If he will just come forward to the committee table. Mr. NEWBOLD. Thank you.

STATEMENT OF JOHN S. NEWBOLD, JENKINTOWN, PA., A MEMBER OF THE FIRM OF W. H. NEWBOLD'S SON & CO., PHILADELPHIA, PA.

The CHAIRMAN. Mr. Newbold, will you please state your name, residence, and business or occupation?

Mr. NEWBOLD. My name is John S. Newbold, Jenkintown, Pa. The CHAIRMAN. And what is your business or occupation?

Mr. NEWBOLD. I am a member of the New York Stock Exchange, and we have been dealers for 90 years in general securities.

The CHAIRMAN. Have you examined this bill, S. 2693, that is pending before the committee?

Mr. NEWBOLD. Yes, sir.

The CHAIRMAN. We will be very glad to have you tell us your views about it.

Mr. NEWBOLD. I think I will stand, if I may, in presenting my views?

The CHAIRMAN. You may proceed in your own way.

Mr. NEWBOLD. For the sake of brevity and more concise presentation I have a memorandum to present concerning two provisions of the bill affecting investment dealers. I will first discuss section 10 of the bill.

The CHAIRMAN. Very well; you may proceed.

Mr. NEWBOLD. This group of investment dealers have engaged in the business of selling investment securities to their clients in