want to take up your time going into these details of technical matters unless you wish me to do so.

Senator KEAN. Have you figures for all these margins that would be required under this bill ?

Mr. BUTCHER. Yes, sir. I stated the last time I appeared before your committee that I thought the margin requirements were fantastic.

Senator KEAN. Well, are they still fantastic under the revised bill, or are they better under this bill?

Mr. BUTCHER. This is more reasonable. The Federal Reserve Board under certain circumstances may have something to say, but very little. If they were all left to the Federal Reserve bank, I would be satisfied. These margin requirements are too great in some cases and not as great as my firm would require in other cases. It should be elastic. If you want the business to be continued to be conducted, it must be elastic. That, Senator Kean, is a thing that would compel my firm to close. We could not do business under it as it is written in the revised bill. And if you were to look into the matter of the margin requirements, you would find them very satisfactory as now required under the rules and regulations of the exchanges.

Senator Adams. What percentage of the business going through your firm is now a margin business?

Mr. BUTCHER. That varies very much according to the activity of the market and the year. If we were to speak of 1933, while I have made no particular study of it, I should think that very much more than three fourths of our business has been for cash, and that only about one fourth of the business has been on margins. The amount of money we were lending to our clients in 1932 was about 7 percent of that loaned in 1929. And the fact that we could liquidate down to that point shows that we carried proper margins.

Senator GORE. Have you taken much by way of losses?

(Before the witness could answer, the next question was propounded, as follows:)

Senator TOWNSEND. Mr. Butcher, I have a letter from a very large corporation saying if this bill were enacted into law they would have to withdraw from the exchanges; that is, withdraw their stock. He does not give the reasons. Could you assign any reason why that would have to be done?

Mr. BUTCHER. I think that would be because the presidents of companies would want to stay out of jail. These provisions from a corporation standpoint, I think, are almost prohibitive. I mean that a corporation man

Mr. PECORA (interposing). Can you specify in what respect they are prohibitive? Tell us what provisions particularly you think would lead to a withdrawal of securities of a big corporation from the New York Stock Exchange.

Mr. BUTCHER. The obligations imposed on them in reference to registering their securities. If there should be some little bit of a slip occurring somewhere, and perhaps a perfectly honest mistake, they face a penalty of 10 years in jail and a fine of $25,000. No corporation man is going to take that chance, if he values the welfare of his family and his own reputation.

Mr. PECORA. Don't you realize that one little slip would not be a criminal act; that it would have to be a willful violation; and that it is just exactly what this bill states?

Mr. BUTCHER. Mr. Pecora, I took that point up with you the last time I was here, and we came to the same conclusion. This bill is so drawn that any act is a willful act. For instance, if the corporation continues to exist it continues to exist willfully.

Mr. PECORA. I beg pardon. Look at the penalty section of the bill and see for yourself.

The CHAIRMAN. If the officer of a corporation tells the truth and sets forth the facts, do you mean he is a criminal?

Mr. BUTCHER. Under this bill he could very readily be declared a criminal.

Mr. PECORA. Section 25 of the bill is the one providing the penalties, and it starts off with the sentence: Any person who willfully violates any provision of this actMr. BUTCHER. Well if a person signs a report, and that report

Mr. PECORA (interposing). It says: or any person who willfully and knowinglyis responsible for any statement in any application which is false or misleading. But it has got to be willfully false, and a mere slip would not be a willful violation.

Mr. BUTCHER. I am sorry but I cannot agree with you. And the language of your bill does not protect one from an innocent mistake.

Mr. PECORA. Then you are closing your eyes to the language of the bill which says:

Any person who willfully violates any provision of this act.

Mr. BUTCHER. Yes; I say that word "willful ", and I understand what willful means, I think-and I might say that I have by my wife been accused of being willful, but

Mr. PECORA (interposing). With all due respect to Mrs. Butcher, I might say that she probably hasn't a judicial mind.

Mr. BUTCHER. Well, judicial to the extent of being the last word in that matter. [Laughter.]

Senator Adams. Perhaps your wife may be carrying the burden there.

Mr. BUTCHER. Well, she is always right. I know that. And, Mr. Pecora, the “ willful ” part here is all right, perhaps—and now please don't think I am trying to be personal in saying this, but this is simply what I call å "technicality", and I just don't like technicalities.

Mr. PECORA. Oh, no. It is not a technicality at all. It is a very substantial provision, and is intended to mean just what it says. There is a great difference between a willful violation of a penal statute and an innocent violation of it. Yes; there is all the difference in the world between the two.

Mr. BUTCHER. Well, Mr. Pecora, I am not an engineer and I am not an expert accountant, although I have spent some time on accountancy matters. But suppose somebody who goes over some property makes an engineering report and makes a mistake in his figures of, say, 100,000 pounds in relation to the weight of a certain piece of machinery, a perfectly honest mistake on his part. Then he

other way.

sends in his engineering report, and it goes on down the line, and the president and treasurer of the corporation sign it. If the president signs that report that is a willful act.

Senator ADAMS. Oh, no.

Mr. PECORA. Do you mean if he signs it with knowledge of its falsity?

Mr. BUTCHER. Oh, no.

Mr. PECORA. Do you think that would be a willful violation of the act ?

Mr. BUTCHER. I do not see how it would be considered in any Mr. PECORA. It depends on whether he willfully does the thing.

Senator ADAMS. Mr. Butcher, your construction of "a willful act” would seem to refer to the fact that he had the will to do it but without any intention to do a wrong:

Mr. BUTCHER. It is my idea that this bill is written with that idea in view.

Senator Adams. And in this section there is another limiting statement:

Which statement is, in the light of the circumstances under which it was made, false or misleading in any matter sufficiently important to influence the judgment of an average investor.

In other words, the trifling errors you speak of would not come within that provision. Mr. BUTCHER. Have you ever seen the average

investor ? Senator Adams. Well, I think I have been one. Mr. BUTCHER. Well, I think you are above the average. Senator Adams. I appreciate the compliment and wish it were true.

Senator KEAN. In regard to these margins, I have a letter from Edward B. Smith & Co.—and they are large brokers in your city, aren't they?

Mr. BUTCHER. Yes, sir; and in good standing.

Senator KEAN. They say that under the figuring in this bill if one were to buy 100 shares of General Motors at $36 per share, and borrowed on it, they would then have to put up 331/3 percent. Under the present custom of the exchange you would put up $1,200 as a margin, but under this bill they would have to put up $900 more. Is that the way you figure it?

Mr. BUTCHER. I haven't figured it.

Senator KEAN. This would mean a 150 percent margin. Is that the way you figure it? Or you can take the letter and read it. After you have read the letter, I should like to propound that question

(While Mr. Butcher was reading the letter, the following occurred :)

The CHAIRMAN. What do you want Mr. Butcher to do, Senator Kean-confirm the statement made by Edward B. Smith & Co.!

Senator KEAN. Yes. And I want to put the letter in the record.

Senator BULKLEY. There would be no purpose in the witness confirming it unless the letter is put in the record.

The CHAIRMAN. Let the letter go in and it will speak for itself.

Mr. BUTCHER (after reading the letter). Do you want me to say anything, or do you just want me to present the letter?

to you.

Senator KEAN. I will ask you about the letter.

Mr. BUTCHER. I have read the letter hastily and believe it to be correct.

The CHAIRMAN. The letter may go in the record.

Mr. BUTCHER. The 150-percent margin referred to is on the debit balance, not on the market price of the stock.

Senator KEAN. Let the record be completed by inserting the letter. (The letter is as follows:)


15 Broad Street, New York, March 22, 1934. Senator HAMILTON F. KEAN,

Senate Office Building, Washington, D.C. DEAR SENATOR : In reference to our conversation over the telephone this morning and in connection with the hearings which I understand are to be reopened upon the “National Securities Exchange Act of 1934”, I wish to point out a question which we discussed in reference to section 6 of the bill, which I believe is causing some confusion not only in Congress but in the minds of exchange members. Section 6 of the bill allows the member of an exchange to loan 40 percent of the market price of a security which is qualified as collateral within the meaning of the act. It is the universal practice among brokers to speak of the margin requirement in terms of the percentage of the debt balance, or in other words, the amount which the borrower owes when he purchases the security that he intends to use as collateral for his loan with the broker. For example, take the case of a customer who wishes to buy 100 shares of General Motors at the present price of $36 per share the total purchase price of this stock would be $3,600. The broker would, under the present requirement with the customer, i.e., that the equity be 3343 percent of the debit, require upon such purchase that the customer deposit one third of $3,600, or $1,200. This would mean that the customer has an equity in the account of $1,200 and owes to the broker $2,400. This would leave the account just adequately margined.

Upon the margin as required in the bill that the broker may loan 40 percent of the market price it would be necessary that the customer deposit 60 percent of $3,600, or $2,160, which would be the customer's equity in the account, and the account as previously adequately margined would need additional margin to the extent of the difference between $2,160 and $1,200, or $960, which the customer must deposit or render it necessary to sell a part of his stock in order to comply with the law.

This uncertainty in speaking of margin in one instance in the terms of the loan the act allows upon the stock, and in the other instance in terms of the amount that the customer owes the broker, is a question that is causing a great deal of confusion. Under the bill as it is now drawn when a broker may only loan 40 percent of the market value of the stock, the customer has an actual margin, according to our method of computation, of 150 percent, since the customer's equity of 60 percent is 150 percent of the debit balance of 40 percent which remains unpaid.

I believe it would be extremely helpful if some expression of opinion could be obtained from the Treasury Department or the Federal Reserve Board and possibly written into the bill which would clarify the question.

Please allow me to thank you for the opportunity of bringing this matter to your attention. With kindest personal regards. Yours sincerely,

(Signed) JOHN W. CUTTER. The CHAIRMAN. Is that all, Mr. Butcher ?

Mr. BUTCHER. Yes, Mr. Chairman; and I wish to thank you very much.

The CHAIRMAN. Are there any further questions by members of the committee?

Senator GORE. Mr. Butcher, you were discussing a minute ago the functions of specialists. I was talking to an old friend the other night who is a mere layman and yet he has given a good deal of thought to the pending bill. He used this illustration of what might result if too much limitation were placed upon specialists, dealers, and brokers. He said American Telephone & Telegraph might close some afternoon at 115, we will say, and the ordinary citizen buying it occasionally might take it for granted that it would open around that figure the next day, and yet under this bill he thought it might drop something like 15 or 20 points. Could that happen; and if so, why? And did you say the other day, Mr. Pecora, that that section had been amended ?

Senator KEAN. Mr. Pecora did not hear your question, Senator Gore.

Mr. PECORA. What was that, Senator Gore?

Senator GORE. You said the other day that the point I mentioned had been amended, but never mind. Mr. Butcher, will you answer the question?

Mr. BUTCHER. You are asking me a question which will take a moment or two to answer.

Senator GORE. My friend seemed to think that a specialist in that sort of case would make a market to protect the purchaser against such a drop as I have suggested, which he referred to as just a sinking spell. How about that?

Mr. BUTCHER. A specialist under the New York Stock Exchange regulations has the right to buy for his own account after the stock has first been offered to the group around him. In other words, after he has announced the offering he may take it himself if nobody else wants it. Or that is the way I understand it. But he always is at a disadvantage as compared with the group around him to the extent of one eighth or to the extent of no offering or no bid. He can only take a stock when it is not wanted by anybody else. That tends to bring the spread in the stock closer together. If American Tel. & Tel. closed at 119 and the next morning there is no bid, or a bid of only 114, and the stock is offered at the market, he could technically take it at 1141. But very likely under those circumstances he would take it a point away from the close of the night before, knowing that sooner or later somebody would come forward and there would be more activity. The specialist, instead of being one who abuses the public, is the man who helps the public. I do not believe it would be possible for the New York Stock Exchange to handle 2,000,000 shares a day without specialists, and if the New York Stock Exchange cannot handle the business and handle it right as it has done in the past, there is very serious injury being done to the general public.

Senator GORE. That is, the specialist is a sort of stopgap.

Mr. BUTCHER. Yes; and sometimes they win and sometimes they lose. But the specialist is there, and makes the market very often when nobody is prepared to do it. He hopes, of course, to win, but he takes his chances.

Senator GORE. As the market is operating now he would be in that situation a protecting influence against a tendency to drop 10 or 15 points if nobody was there to buy the stock.

Mr. BUTCHER. I do not quite understand your question.

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