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STATEMENT OF RICHARD WHITNEY, PRESIDENT NEW YORK

STOCK EXCHANGE, NEW YORK CITY-Resumed

The CHAIRMAN. Mr. Whitney, you wrote me a letter, which I might put in the record, asking to be heard on this matter; and you stated, I think

I shall be glad to appear before your committee at any time you may designate and state the reasons for my conclusions. I am also prepared to suggest to the committee the changes which would be necessary to make the bill workable without in any way limiting the power to control credit and regulate stock-exchange practices.

That is very interesting, and we will be glad to hear from you, Mr. Whitney. (The letter is as follows:)

NEW YORK STOCK EXCHANGE,

Eleven Wall Street, March 21, 1934. Hon. DUNCAN U. FLETCHER, Chairman Committee on Banking and Currency,

Senate Office Building, Washington, D.C. MY DEAR SENATOR FLETCHER: I am informed that the new Rayburn bill, now pending in the House committee, will be considered by your committee. Recalling your statement that when amendments to the original Fletcher-Rayburn bill were prepared persons interested would be given a hearing, I respectfully request that time be allowed to me to state to the committee the objections of the New York Stock Exchange to the new measure.

I believe that the new bill will prove unworkable in essential features and will seriously affect security markets and security prices. It differs from the original bill in its treatment of many important points, but its effects will be almost as destructive as those of the original bill.

As this bill is of vital concern not only to stock exchanges but also to all business and industry, it deserves the most serious consideration.

I shall be glad to appear before your committee at any time you may designate and state the reasons for my conclusions. I am also prepared to suggest to the committee the changes which would be necessary to make the bill workable without in any way limiting the power to control credit and regulate stock-exchange practices. Faithfully yours,

RICHARD WHITNEY, President. Mr. WHITNEY. Mr. Chairman, I haven't a very long statement to make. I do think if it could be made consecutively without adjournment, it would be better for all of us. Would you prefer having me appear tomorrow, or may we have about an hour

The CHAIRMAN. I think we had better go on now, Mr. Whitney.
Senator Adams. How long a statement have you?
Mr. WHITNEY. Depending upon the questions, Senator Adams.

The CHAIRMAN. I think you better make your statement without interruptions.

Mr. WHITNEY. I am very glad to be interrupted as much as

you wish.

The CHAIRMAN. We can ask questions afterwards.

Senator WALCOTT. I suggest, Mr. Chairman, he be allowed to read straight through and then have the questions asked afterwards.

The CHAIRMAN. Yes; that is the proper thing to do, to save time.

Mr. WHITNEY. I understand that the bill introduced in the House of Representatives by Mr. Rayburn and numbered H.R. 8720 is being considered by this committee as if it were an amendment to the Fletcher-Rayburn Bill. The New York Stock Exchange is opposed to the new Rayburn bill because it contains in substance the same objectionable features as the Fletcher-Rayburn bill. The Rayburn bill, which for the purpose of this discussion I will consider as a bill pending before this committee, contains modifications of some of the provisions of the original bill. Our basic objections to the old bill apply, however, with equal force to the Rayburn bill.

There is not time to discuss all of its provisions and I shall, therefore, confine my remarks to the most vital sections. I shall deal only with sections 6 and 8, which refer to margin requirements and the restrictions on members' borrowings; section 10, which deals with segregation of the functions of broker and dealer; sections 11 and 12, which deal with the requirements for the registration of securities and the reports which will be required of corporations whose securities are registered on an exchange; and section 18, which deals with the powers of the Commission over exchanges. There are many other sections of the bill which, in my opinion, should be amended.

Before discussing any provisions of the bill I want to make my position absolutely clear. I think this bill is unworkable and will have destructive effects not only upon stock exchanges but also upon the value of securities and the business of the country. I do not believe that sound legislation can be based on the framework of this bill. However, I understand that the committee would like to have constructive suggestions for the improvements of the Rayburn proposal. I shall, therefore, suggest specific amendments to the sections of the bill which contain the most harmful and unworkable provisions. In making these suggestions I do not wish to be understood as qualifying in any way my fundamental objections of the bill.

The amendments which I shall propose did not emanate solely from the New York Stock Exchange. They were discussed with representatives of the New York Curb Exchange, the Boston Stock Exchange, the Chicago Stock Exchange, and also with the president of the Association of Stock Exchanges, which is composed of 18 stock exchanges located in all parts of this country. The representatives of these exchanges have indicated to me their entire approval of the suggestions which I am about to make.

Section 6, with regard to margin requirements: Section 6 of the bill purports to vest control of margin requirements in the Federal Reserve Board. However, it restricts the power given to the Federal Reserve Board by prescribing rigid minimum margin requirements, which are based upon percentages of current market value or of the lowest price which a security has reached within 3 years preceding the date of the loan, provided, however, that until July 1, 1936, the lowest price at which a security has sold since July 1, 1933, may be taken in lieu of the lowest price in the 3-year period preceding the loan. Different minimum margin requirements are established for the initiation of a loan and its maintenance.

Furthermore, there is a provision to the effect that loans existing on the date of the enactment of the bill will not be subject to the minimum margin provisions until January 31, 1939. This last provision was admittedly intended to prevent a forced liquidation of existing loans, which would necessarily follow if the margin requirements of the bill became immediately operative. Let me call to your attention that declining markets resulting from the enactment of this bill would bring in their train the very liquidation you seek to forestall by this provision.

I have already said that I consider the margin requirements of the original Fletcher-Rayburn bill excessive. While the margin requirements of the pending bill are more liberal at this moment due to prevailing market prices, they would in the event of a rise in security values reach the same excessive level as was fixed in the FletcherRayburn bill. In brief, the margin requirements of this bill and the Fletcher-Rayburn bill are both defective, in that they base credit solely upon a percentage of market value or upon the lowest market price reached within arbitrary periods of time.

Earnings, likewise, cannot be used as the sole criterion of value for securities. The loan value of a security must be determined by a consideration not only of earnings and market value but of the size and activity of the particular issue, its distribution among investors, the extent to which it is held in loans or margin accounts, the volatility of the security and the general condition of the market and of the industry in which the security represents an interest. These are the factors which reasonable men must consider in determining the amount of credit which can be advanced upon security collateral, and they cannot be reduced to a formula.

The control of credit necessarily involves the use of judgment, and excessive speculation in securities can only be prevented if the persons controlling credit are thoroughly familiar with credit conditions and have full power to raise or lower margin requirements as circumstances may require. In our opinion, therefore, the Federal Reserve Board, which is already vested with power to control the credit resources of the country and which now has the responsibility for such credit control, should be given full power to fix such margin requirements as it may deem necessary in view of economic conditions.

To accomplish this result, I suggest that section 6 of the bill be amended to read as follows:

SEC. 6. It shall be unlawful for any member of a national securitiis exchange or for any broker or dealer transacting a business in securities through any such member, directly or indirectly, to extend or maintain credit to or for any person in contravention of such rules as may be adopted from time to time by the Federal Reserve Board for the purpose of preventing the excessive use of credit for speculation.

Another section which directly refers to credit conditions is subsection (a) of section 7, which deals with brokers, borrowing from nonbanking institutions. We believe that the Federal Reserve Board should likewise be given full power over this subject, and we, therefore, suggest that section 7 be amended so as to read :

Sec. 7. It shall be unlawful for any member of a national securities exchange or for any broker or dealer who transacts a business in securities through the medium of any such member, directly or indirectly, to secure the repayment of any money borrowed by the pledge or hypothecation of any securities in contravention of such rules and regulations as may be adopted from time to time by the Federal Reserve Board for the purpose of preventing the excessive use of credit for speculation.

We suggest that the substance of the other subsections of section 7 be transferred to section 18 of the bill, which I will discuss later on.

Section 10 dealing with the functions of broker and dealer: Section 10 of the bill deals with the segregation and limitation of the functions of broker, specialist, and dealer. It has been changed so as to permit members to combine, under certain safeguards, the functions of dealer and broker, provided they do not act as dealers on the floor of the exchange.

The section still prohibits the function of broker and dealer being combined by a member when on the floor of the exchange. This limitation will effectively put out of business all bond brokers, because they customarily act as dealers and also will put out of business all specialists. It will make it impossible for the odd-lot business to be carried on except on the New York Stock Exchange, which, alone of all the exchanges in the country, has some members who engage exclusively in the odd-lot business.

I cannot believe it is wise to make such a revolutionary change in the accustomed method of doing business until it is shown that any possible abuses cannot be eliminated in some less drastic manner. I suggest, therefore, that this section be amended so as to allow the Commission to adopt such rules and regulations as it may deem necessary in regard to members of an exchange combining the function of dealer and broker when actually engaged in business on the floor of the exchange. This suggestion will give the Commission full power to change and correct its rules as conditions may require. Such a power is essential to experimental regulations in so technical a field and is not possible under fixed rules of law.

I suggest, therefore, that section 10 be amended so as to read:

SEC. 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 of 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.

Sections 11 and 12, registration requirements for securities, corporate reports : Sections 11 and 12 deal with the registration requirements for listed securities and the reports to be made by listed corporations. These provisions are among the most vital in the bill. I have already expressed our opposition to them. In view of the technical nature of these provisions and particularly of those dealing with accounting, I have secured from Mr. J. M. B. Hoxsey, executive assistant to the committee stock list of the New York Stock Exchange, a memorandum discussing these provisions and suggesting the changes which in the light of his experience he believes necessary. Mr. Hoxsey has been engaged in active business for many years and has had a very wide experience in analyzing corporate accounts and corporate affairs. Since he came to the exchange about 10 years ago it has been his sole duty to analyze corporate accounting from the point of view of developing for the benefit of stockholders and investors the most informative type of corporate reports. As Mr. Hoxey's memorandum is quite lengthy, I shall not read it, but I have had copies of it prepared which I shall submit to you.

(Copies of the memorandum were distributed to members of the committee.)

In line with my attempt to make concrete suggestions, I am having these sections of the bill redrafted in order to carry out the recommendations made by Mr. Hoxey and I shall submit copies of these proposed amendments as soon as they are prepared.

The CHAIRMAN. May I ask, Mr. Whitney, if you will indicate when those will be presented ?

Mr. WHITNEY. The memorandum is here in printed form, and the others will be in your hands in printed form by Monday morning.

Mr. PECORA. May I take advantage of this interruption to ask you a question, Mr. Whitney? The last time I heard of Mr. Hoxsey was about 3 weeks ago, when Mr. Altschul, one of your board of governors, was before this committee. He then said Mr. Hoxsey was in South America. Has he returned !

Mr. WHITNEY. He has returned, yes. I think he got back about a week and a half ago.

Powers of Commission over exchanges; referring to section 18:

I have already suggested that certain provisions of section 7 should be transferred to section 18 which deals with the disciplinary powers of the Commission over exchanges. In order to carry out this suggestion and also to make clear that the Commission shall have power to require exchanges to adopt rules and regulations to prevent excessive speculation or unfair practices in security transactions, I suggest that subdivision (5) of section 18 be amended so as to read :

SEC. 18. The Commission is authorized

Then, gentlemen, leaving in the present subsections 1, 2, 3, and 4, we come to subsection 5:

If after appropriate request in writing to a national securities exchange that such exchange should effect on its own behalf specified changes in its rules and practices, and after appropriate notice and opportunity for hearing, the Commission determines that such exchange has not made the changes so requested, to require such exchange to adopt and enforce such rules and regulations as are necessary for the protection of investors or for the insuring of fair dealing in securities traded in upon such exchange. Without limiting the general power contained in this subsection, the Commission shall have power to require any national securities exchange to adopt rules and regulations with respect to

(a) Market letters, advertising, or other publicity by its members and the solicitation of business by its members or their employees.

(6) Pools, syndicates, and joint accounts formed for the purpose of stabilizing or otherwise influencing the market price of any security registered on a national securities exchange and also with respect to options, puts, calls, straddles, or other similar privileges.

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