speculative business, into the hands of a regulatory body acting under limitations so broad (I refer to the words "with such rules and regulations as the Commission may prescribe") as to be practically nonexistent. It cannot be wondered at then that responsible investment bankers and dealers view the situation with grave concern. The "over-the-counter" markets in their functioning are no less complex than those of the stock exchanges. These, as you have heard from Mr. Whitney, have solved their difficulties of control through the powers reposed in the board of governors and the business conduct committees, which are broadly analogous to those vested in committees in private clubs, where continued membership is based on considerations of conduct befitting a gentleman, prompt payment of financial obligations, and in general, observance of the constitution and bylaws. As Mr. Whitney said in effect, there is no effective legal recourse against the dictum of the exchange. In the "over-the-counter" market there is, and I believe, cannot be effective control over the vast stretch of our country, in transactions interstate, intrastate, and foreign through rules and regulations imposed on the business, unless such have the force of law in interstate commerce. This raises at once a question of constitutionality, as to whether the Congress has the right to delegate its authority without setting the limits of such delegation in such precision as to fit the innumerable variety of cases that might occur. As far as intrastate business is concerned, which probably comprises the greater part of transactions, there can be I believe, no effective control by such procedure. However, please do not misunderstand me. There should be and there are effective safeguards for the public interest The Securities Act of 1933 affords such, insofar as interstate transactions are concerned; and the code of fair practice of the investment banking business extends its protection to the investing public, both in interstate and intrastate transactions, in a way I believe no rules or regulations can do, in that it reached or can be made to reach through emendations made as necessity dictates, those elusive cases where the imponderable considerations of fair practice rather than the bald, bare facts, are the essence in forming the judgment of the Code Committee sitting. And let me say right here that it is my conviction that the investment banking code committees mean business in cleaning house. Four years of public condemnation have borne their fruit. In many cases such condemnation was warranted, in many not, but whether or not, the investment banker today is showing by his drastic code, with which you gentlemen of this committee should familiarize yourselves, even though the final draft has not been signed, in order to get proper orientation on this question of section 14, that he is in earnest in his determination to put the business on a high, ethical plane, not only because it is "good business" and more profitable (as it undoubtedly is) but because most of them are instinctively decent in their business relations. To the recalcitrants under the Code, I say "Beware!" So it is my hope that the control of the "over-the-counter" markets will be left to the securities act and the Code and that you will not impose thereon a third source of regulation. WALDO S. KENDALL. GEORGE W. H. ALLEN, Cazenovia, N. Y., February 20, 1934. Hon. FRANCIS D. CULKIN, Washington, D.C. DEAR MR. CULKIN. The National Securities Exchange Act for 1934 recently introduced into Congress while obviously drawn with the intent of protecting investors, appears to me to be very dangerous legislation. The bill seems to me to be so drastic that it defeats its own purpose. Subdivision (b), section 6, calls for heavy liquidation of customers' accounts to the great detriment of security prices and to the recovery program. Subdivision (a) of the same section discriminates against small or local enterprises which are not listed on any exchange and makes all unlisted securities worthless for margin purposes. Section 8 enables persons who claim they have been injured by manipulation when as a matter of fact no loss has been incurred, to recover vast sums which would be in the nature of penalties. This, in my opinion, might work a great injustice on innocent parties. Section 9 prohibiting short selling except under the specific rules and regulations of the Federal Trade Commission and prohibiting stop-loss orders brings up a much mooted question. I am not in accord with Mr. Presley in his views of short selling as I have always considered this practice a brake on overspeculation. Of course, short selling is often carried too far but I think its advantages offset to a large degree what disadvantage there is in the practice to an investor. I have never been a short seller myself. I cannot see in any way, shape or manner why stop loss orders should be prohibited. Section 10 prevents "over-the-counter" activities by members either in local or unlisted securities. It also destroys the odd lot business. Is it not a fair question to ask where this section aids the small investor? Section 17 I consider to be dangerous in that vital statistics in regard to American industry would be available to foreign interests and would work a great detriment to the best interests of the country. Section 14 in connection with section 10 completely destroys the market for unlisted securities of which literally hundreds of millions of dollars are outstanding in the hands of investors both large and small. Section 16 frankly seems very arbitrary to me in that the Federal Trade Commission has the power to impose heavy expenses for examinations whether or not such examinations are necessary. I feel that the wording of this section and the spirit of it are socialistic and confiscatory. Section 18, subdivision (c) together with section 20, subdivision (b) (II) (III) puts the Federal Trade Commission in as a board of governors over all exchanges with the power to expel any member or officer of the exchange whom the commission feels has violated any of the rules or regulations which it may adopt. This, in my opinion, would lead to a situation where through an inadvertant mistake the work of a lifetime might be ruined, and disgrace heaped undeservedly upon an honest man. It might be argued that an honest man would have nothing to fear, but it is the possibility and not the probability which makes for good or bad legislation. Section 29 represents another heavy burden on the stock exchange business in that it provides for a fee on the aggregate amount of all business transacted on any exchange during the calendar year. I believe that the Federal Trade Commission under this bill would, among other exchanges throughout the country, strangle the New York Stock Exchange which is known to be one of the greatest, if not the greatest, institutions of its kind in the world. I have tried in this letter to honestly present my views without endeavoring to mince matters and I have done so drawing upon an experience of more than 15 years of private investing for my family and myself both as an individual and a trustee, and there are many people who depend on me for advice on financial matters. The ideas embodied in this letter are given in all due respect to our great legislative organizations and merely express the opinions of a citizen who believes he speaks with some knowledge of the subject. Very sincerely yours, GEORGE W. H. ALLEN. STATE OF NORTH CAROLINA UTILITIES COMMISSION, Hon. SAM RAYBURN, Copies also have been forwarded to Hon. Duncan U. Fletcher, chairman of the Senate Committee on Banking and Currency. I would like to have this statement considered and placed in the records. The expression of public sentiment locally is almost unanimous in support of the passage of your bill in its present form. Sincerely yours, STANLEY S. WOHL, Executive Assistant in Charge of Securities. STATEMENT BY STANLEY S. WOHL, EXECUTIVE ASSISTANT IN CHARGE OF SECURITIES, NORTH CAROLINA UTILITIES COMMISSION, IN SUPPORT OF UNITED STATES SENATE BILL 2693; PLACED IN THE RECORDS BY UNITED STATES SENATOR DUNCAN U. FLETCHER, CHAIRMAN COMMITTEE ON BANKING AND CURRENCY A careful survey has just been made by the securities division of the North Carolina Utilities Commission of the Fletcher-Rayburn bill, S. 2693, better known as the National Securities Exchange Act of 1934." Its enactment is urged. This proposed legislation has been in preparation for more than 3 years, and represents the work of many recognized experts in the field of finance, law, accountancy, and economics. Disclosures being made before the Senate Committee on Banking and Currency have revealed an actual demand for the immediate enactment of this bill in its present, or in a more drastic form. Introduced in both Houses of Congress at the direction of the President, it would forever prevent such disasters that wrecked the securities markets in 1907 and 1929, resulting in destitution to millions of people, and bringing total unemployment and poverty to many millions more. Four long and bitter years have passed since November 1929, and the Nation is still struggling along with the combined efforts of a courageous administration and one gigantic emergency measure after another to regain its footing. In the light of what vast damage was done, and how it was done, and with the present knowledge that the old gambling-speculative machinery can be destroyed without further harm; the National Securities Exchange Act of 1934 must be included as an indispensible link in the emergency program, with the assurance to the people that another 1929 collapse cannot occur again. Ignore theories and actually see what was the real propelling force that caused the securities markets to crash without warning in October and November 1929. With fair financial, industrial, and business skies overhead; President Hoover, Secretary Mellon, and many of the foremost and trusted men and institutions proclaiming soundness; the great army of investors and speculators, big and little, did not dream that they could be suddenly destroyed, and the United States itself could be shaken to its very foundations in a very short time. How could such a thing happen? Forced selling, drastic, ruthless, and confiscatory calls for margin with but a few hours notice. When funds were not received in New York or other centers in response to the instantaneous demands, millions upon millions of shares of stock were automatically dumped upon stockexchange floors for what they would bring. At the same time, during the waves of forced and distressed selling, there were few or no bids for shares. Brokers flatly refused to accept orders to purchase unless the full amount was deposited in cash in New York before the buying instructions were given. In many cases, 100 percent was insisted upon. The American people were trapped. The New York brokers were selling them out, and into a bottomless pit. Where were the stock-exchange specialists then? Many brokers sold short for their own account huge blocks of securities that they were carrying for their customers, only to sell those same customers out a short time later and then repurchase their own short sales at handsome and quick profits, and with no risk to themselves. The Fletcher-Rayburn bill will put an immediate stop to this practice. It is a singular fact that during all the crash and panic in 1929, not a single stock broker failed, while millions of investors, speculators, and many institutions and estates of long years standing were virtually ruined. In just 1 month, the values of listed and unlisted securities had depreciated more than $50,000,000,000. The speculative machinery that permitted such a pyramid and such destruction still exists, and will continue to exist so long as it is not controlled and regulated by law. The various committees that govern the activities of the New York Stock Exchange have always functioned in the interest of the members as against the rights of the investing public. In the late summer of 1929, the combined total of all bank deposits in the United States was $55,000,000,000. Much of this amount represented duplication of deposits. In 1 month it was estimated that stock brokers and bankers demanded of the public $30,000,000,000 in margin calls and sell-out notices, or considerably more than half the amount of money there was in all of the banks in the United States. Of course, no such sum could have been withdrawn, so the selling of stocks was urgent and intensified to such an extent that no statement of confidence from the President himself could even check it. And the public support and buying orders of the Rockefeller family were swept away and had no effect. No wonder there was a panic and the resulting years of decline and depression. Yet, at the same time, no banks, brokers, or large institutions failed, but later many failed as a result of it. Once the panic had spent its force, the same New York stock brokers discharged thousands of employees and the first breadlines appeared in 1929 in Wall Street. In 3 years New York Stock Exchange member firms closed 500 offices, or more than 30 percent of the total. The brokers in that short month had liquidated the greater portion of their $12,000,000,000 speculative borrowings, the very step that started the flood that followed, and continued right on up to the day that President Roosevelt issued his first Executive order that closed every bank in the land. Speedy enactment of the Fletcher-Rayburn bill will return the securities markets to the investors. It will prohibit speculation by officers, directors, and large stockholders of corporations, and will put an end to inside rigging and manipulation which only benefits those in positions of confidence and power. Congressional investigations going on at the present time show the absolute unfairness of this practice. The greatest evils which the Fletcher-Rayburn bill proposes to correct have been outlined, but many others exist which this legislation will eliminate. The claim of the stock exchanges that they could self-discipline their members of tightening their rules, and thus correct the abuses, has been totally ineffective and without material result. The experiences of May, June, and July 1933 and the speculative excesses followed by a well engineered collapse in July is too fresh in the minds of the American people. Had it gone much further, it could have easily halted the national recovery activity and program that was well under way; as it was the recovery was considerably slowed up. The truth in Securities Act of 1933 has been acclaimed by individuals, institutions, estates, and investors everywhere as a great financial protective and safeguarding measure. However, it is not complete, and must be supplemented by the proposed National Securities Exchange Act of 1934, which will effectively regulate and control the vast markets, the proper administration of which is so vital to the financial life of our country. All the damage has been done. Only good can result from the enactment of the Fletcher-Rayburn bill as presented to the House and Senate. Senator Fletcher asserts that his bill represents a "middle-of-the-road" policy. Personally, through 20 years experience in the field of markets, prices, exchanges, and securities, I am convinced that it could have been made far more drastic. However, in its present form, had it have been the law in 1929, no such overextension of speculative credit and no forced panic could have occured. I am convinced that this is a safe and sound piece of legislation for this and future years. I expect to be called before the Senate or House Committee after the stock exchanges have been heard. The claim that the National Securities Exchange Act will impair the liquidity of the markets is absurd. There is no pool speculation in the investment bond market. Bonds, bank and insurance stocks, stocks traded in over the counter, and listed issues on the so-called "out-of-town" stock exchanges, such as Philadelphia, Boston, Chicago, San Francisco, and others are not ordinarily carried on margin at all, and yet, by comparison these other market places have proven just as liquid as the New York Stock Exchange. The adjustment of loans to meet the 60 percent minimum margin requirement will be spread out over more than 6 months and will affect less than a billion dollars. Compare this with 1929 when New York brokers demanded this sum overnight and kept it up for more than a month. FEBRUARY 23, 1934. STANLEY S. WOHL, Executive Assistant in charge of Securities. (Thereupon, at 11:48 a.m., an adjournment was taken until the following Tuesday, March 6, 1934, at 10 a.m.) NATIONAL SECURITIES EXCHANGES-H.R. 7852 TUESDAY, MARCH 6, 1934 HOUSE OF REPRESENTATIVES, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding. The CHAIRMAN. The committee will come to order. STATEMENT OF HON. JOHN DICKINSON, ASSISTANT SECRETARY OF COMMERCE AND CHAIRMAN OF THE INTERDEPARTMENTAL COMMITTEE ON STOCK-EXCHANGE REGULATION The CHAIRMAN. Mr. Dickinson, will you qualify by giving your name you are Assistant Secretary of Commerce-but also your relation to this study, for the record. Mr. DICKINSON. Yes, sir. I am Assistant Secretary of Commerce. I was chairman of the committee appointed last summer by the Secretary of Commerce, Secretary Roper, which sometime ago made a report to Secretary Roper on the subject of stock-exchange regulation, and that report has been frequently referred to in the hearings before you as the "Roper report." I may say that the Department of Commerce has received a request from the Senate Committee on Banking and Finance for a departmental report on Senate bill 2692, which is the same bill as House bill 7852, that you are now considering. That departmental report on the bill is not yet ready for submission, and I simply want to make it clear that pending the submission of that report I am not speaking here officially for the Department of Commerce, but am speaking simply in the capacity in which I suppose I was invited to come here, namely, as chairman of the Roper committee. I want to say at the outset that, personally, I am heartily in favor of action by the Federal Government at the present time to regulate securities exchanges. I think it not merely desirable, but necessary, and the desirability and necessity of such regulation is emphasized in the so-called "Roper report. The conditions which have been disclosed in connection with the marketing of, and the trading in, securities illustrate the need for improvements in the interest of protecting the public against unfair practices, and also protecting the general economic health of the country against undue speculation, and those reforms deal with a problem which extends far beyond State lines, transcends State boundaries, is national in scope, and, in my opinion, and in the opinion of the committee, can only be dealt with by Federal action. |