tions as the Commission may adopt in order to carry out the purposes of this section."

Section 16: Omit entire section.

The substance of this section will be included in section 16, formerly section 18.

Amend section 17 so as to read:

“ SEC. 15. (a) Any person, including any director, officer, accountant, or other expert, who, with intent to deceive, shall make or be responsible for the making of any statement in any application, report, or document filed pursuant to this Act or any rule or regulation thereunder, which statement is false or misleading in respect of any material fact, shall be liable to any person (not knowing that such statement was false or misleading) who shall have suffered loss by reason of having purchased or sold a security in reliance on such statement and the person so injured may sue in law or in equity in any court of competent julisdiction for the damages caused by such false or misleading statement.

“(b) (No change.)

"(c) No action shall be maintained to enforce any liability created under this section unless brought within two years after the violation upon which it is based.”

Section 18: Subsections (1), (2), (3), and (4) no change, except to renumber section as SEC. 16."

Amend subsection (5) to read as follows:

“(5) If after appropriate request in writing to a national securities exchange that such exchange 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, and to this end the Commission may require any national securities exchange to adopt rules and regulations with respect to:

(a) Market letters, advertising, or other publicity 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 ;

“(0) The amount and nature of the capital employed in his business by a member of such national securities exchange carrying margin accounts and the ratio which must be maintained of such capital to the liabilities of such member;

(d) The short sale of any security upon such national securities exchange;

"(e) The acceptance and execution of stop-loss orders by members of such national securities exchange;

(f) The hypothecation of securities carried for the account of any customer by a member of such national securities exchange or the lending of such securities without the written consent of such customer or the use of such securities for delivery on any contract in which such member is, directly or indirectly, interested ;

(9) The fixing of a fair settlement price in respect of any contracts in any security registered on such national securities exchange which has been cornered or of which any person or persons have acquired such a control that such security cannot be obtained for delivery on existing contracts except at prices or on terms arbitrarily dictated by such person or persons;

(h) The books and records to be maintained by members of such national securities exchange and the repcrts to be filed by the members of such exchange and the duty of such members to permit the officers or representatives of such national securities exchange and of the Commission to examine such books and records."

Section 19: Subject to the reservation contained in comment below. No change except to amend section number to read section 17.

Section 20: No change except to amend section number to read section 18. Section 21: No change except to amend section number to read section 19. Section 22: No change except to amend section number to read section 20.

Section 23: Subject to the reservation contained in comment below. No change except to amend section number to read section 21.

Section 24: Amend section number and first two sentences of (a) as follows: “ SEO. 22 (a). Any person aggrieved by an order issued by the Commission in a proceeding under this Act to which such person is a party and any person aggrieved by any rules or regulations of general application made effective as prescribed in section 20 may obtain a review of such order or of such rules and regulations in the Circuit Court of Appeals of the United States, within any circuit in which such person resides or has his principal place of business, or in the Court of Appeals of the District of Columbia, by filing in such court, within sixty days after the entry of such order, a written petition praying that such order or such rules and regulations of the Commission may be modified or set aside in whole or in part. A copy of such petition shall be forthwith served upon the Commission and thereupon the Commission shall certify and file in the court a transcript of the record upon which such order was entered or such rules and regulations were adopted." Section 25: Amend to read as follows:

SEC. 23. Any person who with intent to deceive makes any false or misleading statement as to a material fact in any application, report, or document required to be filed under this act, or any rule or regulation adopted by the Commission thereunder; and any person, including a director, officer, or accountant, who willfully and knowingly is responsible for the making of any such statement, and any person who willfully violates any provision of section 8 (a), subsections (1) to (5), inclusive, shall upon conviction he fined not more than $- or imprisoned not more than years, or both, except that when such person is an exchange a fine not exceeding $- - may be imposed.”

The penalties provided by the bill are manifestly excessive and should be made more reasonable.

Section 26, section 27, section 28, and section 29. No change except to amend section numbers to read, respectively, section 24, section 25, section 26, and section 27.

Section 30. Omit section entirely.
Section 31. No change except to amend section number to read “SEC. 28."

Section 32: Amend section number to read section 29. No other amendment is suggested although we believe that the commission or authority charged with the regulation of stock exchanges should be a separate body having no other function and composed at least in part of persons who are thoroughly familiar with the operation of stock exchanges and the security business.

Section 33: No change except to amend section number to read section 30.

Section 34: Amend section number to read section 31. The effective dates proposed by the act should be extended. This is essential unless the amendments we propose in regard to sections 11 and 12 are adopted. It will be practically impossible for the nearly 900 corporations listed on the New York Stock Exchange to prepare and file registration statements prior to August 1, 1934.

A number of sections deal with subjects which do not directly affect the work of stock exchanges. We have refrained from making any comment on such sections, but this fact must not be considered as indicating approval by stock exchanges of the substance of these sections. This is particularly true of section 15, insofar as it deals with the liabilty of principal stockholders; of section 19, which deals with the liability of controlling persons; and of section 23, which deals with the public character of information. The first two of these sections will impose liability upon persons merely because they are the owners of property and will almost certainly interfere with the free flow of capital into industry. The last will require corporations whose securities are dealt in on exchanges to disclose highly confidential information which will be of value only to competitors both foreign and domestic,


The following is an addendum suggested to the proposed amendments by counsel for the San Francisco exchanges which is designed to make provision for banks which are members of exchanges. The suggested addendum meets with the approval of all exchanges.

Add to paragraph 3 (a) 3 at beginning, “subject to paragraph 7."
Amend section 3 (a) (7) to read :

"(7) The term 'broker' or 'dealer’ shall not include a bank, except as hereinafter set forth, or any person insofar as he buys or sells securities for his own account and not as a part of a regular business; the term 'member'shall include a bank member of a national securities exchange, but only to the extent that it shall act as broker or dealer."

(The following is a telegram received by the chairman and submitted for the record :)

NEW YORK, N.Y., March 23, 1934. Hon. DUNCAN U. FLETCHER, Chairman Senate Committee on Banking and Currency,

Senate Office Building, Washington, D.C.: The new bill or the regulation of stock exchanges, introduced by Mr. Rayburn (H.R. 8720) on March 19 is a substantial improvement over the original bill (H.R. 7852).

The investment house group, of which the undersigned is chairman, being concerned primarily with the maintenance of the existing broker-dealer organization has directed its efforts mainly toward improving the broker-dealer provisions of the proposed stock-exchange legislation. The original bill, by its drastic segregation clauses would have largely destroyed the long-established broker-dealer organization in the United States. The new bill permits the continuation of this organization, and its provisions, relating to the broker-dealer, with some changes in phraseology designed primarily to clarify what seems to be their intent, would be satisfactory to this group.

The amendment of section 10, suggested by Mr. Richard Whitney on March 22, insofar as it relates to the broker-dealer, with some adjustment of phraseology, would also be satisfactory. This group has not concerned itself with section 10 as it relates to floor traders, specialists, and odd-lot dealers.

It seems to us unwise to make rigid margin requirements and certain other matters by statute, except to such extent as may be necessary to remedy existing evils which are to be prohibited by law.

The margin requirements of the new bill while apparently better and more elastic than in the original bill have elements of inflexibility which are unavoidable if the margin requirements are to be embedded in statutory law. Furthermore, it is feared that these complicated requirements will prove impracticable in operation.

We are, therefore, in accord with the viewpoint of Mr. Whitney's statement of March 22 that margin requirements would be more wisely left to the Federal Reserve Board. This course would provide the requisite flexibility and would insure that this margin problem, which is of great importance to our national economy and to the recovery program, would be dealt with by governmental authority in harmony with the broad banking and monetary policies of the country and without the embarrassment of the rigidity and inflexibility inherent in the fixation of margins by statute.

Certain of the provisions of the new bill, very unwisely it seems to us, become effective on July 1 or August 1, 1934. This has an important bearing on section 14, which throws the whole over-the-counter market into the control of the Federal Trade Commission. The Commission may feel compelled to establish rules for the regulation of this large and important market for a huge mass of outstanding securities by August 1 of this year. It will be impossible properly to prepare these rules within so short a space of time. The uncertainty as to what regulation may be established makes for unsatisfactory market conditions which would largely deprive holders of unlisted securities of their market, for people will not readily buy unlisted securities when the future market for these securities is clouded with uncertainty. This uncertainty will in itself tend to occasion the liquidation of unlisted securities while a free over-the-counter market still exists. It would seem wiser to postpone legislation as to the over-the-counter market until regulation can be considered in the light of operation under the new investment banking code which is about to be put into effect.

Trowbridge Callaway, chairman of investment-house group consist

ing of the following: Chas. D. Barney & Co., Callaway, Fish & Co.. Cassatt & Co., Clarke, Dodge & Co., Field, Glore & Co., Hallgarten & Co., Hemphill, Noyes & Co., A. Iselin & Co., Kidder, Peabody & Co., Ladenburg Thalmann & Co., Laurence M. Marks & Co., G. M. P. Murphy & Co., Riter & Co., L. F. Rothschild & Co., Edward B. Smith & Co., Spencer, Trask & Co., Tucker, Anthony & Co., White, Weld & Co.




Washington, D.C. The committee met in executive session at 10:30 a.m., pursuant to adjournment on Thursday, March 29, 1934, in room 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman), Barkley, Costigan, Rey, nolds, McAdoo, Adams, Townsend, Walcott, -Carey, Steiwer, 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.

The CHAIRMAN. The committee will come to order, please. This is a resumption of our executive-session hearings, and we have asked Judge Healy, chief counsel of the Federal Trade Commission, to come down this morning to give his views about certain phases of H.R. 8720.

Judge Healy, will you give your name, connection with the Government, and residence ?

Mr. HEALY. My name is Robert E. Healy. I am chief counsel of the Federal Trade Commission.



The CHAIRMAN. Judge Healy, how long have you held that position

Mr. HEALY. I came to the Federal Trade Commission in February of 1928.

The CHAIRMAN. Judge Healy, as chief counsel of the Federal Trade Commission have you had to do a good deal with the handling of securities, accounting, and that sort of thing, particularly I might say with reference to sections 12 and 12 (b) of this bill? Mr. HEALY. Yes; but I think I ought to say

The CHAIRMAN (continuing). Your experience has been in connection with that sort of question, I suppose?

Mr. HEALY. I think I ought to say that since the Securities Act of 1933 was passed I have had very little to do with the administration of that act. But I have had charge of the public hearings on S. Res. 83, the resolution which authorized the investigation of utility companies and holding companies; and in connection with that investigation I have seen a great deal of the accounting methods of cor

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porations by which asset statements, income statements, and surplus statements are built up.

I do not pretend to be an expert about stock-exchange procedure, or even about accounting, but I have seen some things about accounting methods of various corporations which seem to me to support certain provisions of this bill.

Senator ADAMs. Referring to your expression about accounting methods and how assets are built up”, that is quite an accurate statement, is it, Judge Healy?

Mr. HEALY. Yes, sir; that is also true of surplus statements and income statements of corporations. I do not know, Mr. Chairman, how much the committee wants to hear from me, but I will go along and if you are not interested in something I say, if you will just tell me I will stop.

The CHAIRMAN. That is all right. You may proceed with your statement.

Mr. HEALY. One of the most striking things we have come across in our utilities investigation, so far as it relates to market operations, was in the case of the Cities Service Co. The Cities Service Securities Co. staged a campaign for the selling of common stock of the Cities Service Co., and the securities company made contracts with various dealers, with distributors throughout the country, and it also made many of its own employees distributing agents, or salesmen. For example, there were 399 employees of the Cities Service Refining Co., including oil-station attendants, and so forth, in Massachusetts alone who were licensed to sell securities. They had literally hundreds, perhaps thousands, of them all over the United States.

These salesmen or distributors sold the stock of the Cities Service Co. by going into people's homes and into offices all around the country. The arrangement was that if a commission man sold the stock to an investor who resold his stock within a certain period of time the commission agent lost his commission. They were encouraged by means of literature put out by the company and by contract provisions not to sell in large lots but in small lots, and that is why we have been getting letters from people who write in pencil and who misspell words, people who bought 10 or 15 or 20 shares, and some of them put all the money they had into that stock because these salesmen and distributors solicited them. For instance, if a man anticipated his installment payments he could not get delivery of his stock until the time provided, the 10 months period, was up. So that I think our record indicates that every effort was made to keep the stock off the market.

Senator Adams. In connection with that, Judge Healy, did you include within your investigations their campaign for selling stock to employees of the Cities Service Co. and its various subsidiaries?

Mr. HEALY. Just far enough to learn, as I believe the evidence showed, that the stock was peddled around by employees. But you are talking about sales to employees, I believe?

Senator ADAMS. Yes.

Mr. HEALY. Yes. There is no doubt that employees were expected to invest a part of their earnings in Cities Service Co. securities. We have had information to that effect. But one of the effects of this particular manner of selling securities, with this provision about com

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