We already have a bill that is being considered by a committee of Congress, at the present time, which is approved by the administration. The President sent a special message down to the committee, asking it to make a favorable report on a bill, the intent of which is to curtail the domestic sugar production in our country. Now, supposing we get to that point where the administration would say, “We . have got enough steel industries.” “We have got enough railroads." "We do not think that you ought to expand or build any more."

The Federal Trade Commission, under this act, of course, has the power to stop the sale of those stocks or securities on stock exchanges, have they not?

Mr. WHITNEY. I would believe so.

Mr. COOPER. Well, then, unless a company could float their securities, they could not expand; that is, if they do not have the cash, and most corporations do not have.

Mr. Whitney. I know of no other way of obtaining the necessary cash, unless it were through loans at banks, and I cannot believe that type of credit would be extended.

Mr. COOPER. Now, in the district in which I live, our banks hold a lot of steel companies' stocks. Now, if that steel stock could not be any longer sold on stock exchanges, could not be listed, what is going to happen to the banks that are holding those securities?

Mr. WHITNEY. The liquidity of that collateral will be very much hurt.

Mr. COOPER. Those are the things I am interested in here, outside of the regulation of the stock exchange.

Mr. WHITNEY. Mr. Chairman, I think, in view of the time limit, I will ask you to hear Mr. Gay.

The CHAIRMAN. I think that that is a very good idea. I think that some of the members would very much like to hear your attorney on the legal aspects of this bill.



Mr. Gay. Mr. Chairman and gentlemen of the committee; I will say for the purpose of the record that my name is Thomas B. Gay. I am a practicing attorney at law in the city of Richmond, Va., and a member of the firm of Hunten, Williams, Anderson, Gay & Moore.

The CHAIRMAN. What place in Virginia?
Mr. Gay. Richmond, Va.

The consitutional aspects of this bill are so serious and far-reaching that Mr. Whitney has asked me, on behalf of the New York Stock Exchange, to present to you some of the views which, in our opinion, render it, to say the least, a matter of gravest doubt whether there exists in the Constitution the power of Congress to enact this bill.

It is, of course, unnecessary for me to call to your attention the fact that ours is a dual system of Government, and from some of the questions that I have heard asked Mr. Whitney, I think largely by laymen on this committee, may I make bold to comment that they originate apparently from the conception that ours is a national and not a Federal Government, national in the sense that it possesses inherent powers rather than Federal, in the sense that it exercises delegated powers.

Now, our Federal Government is a Government, as I have said, of delegated powers, and the constitutionality of any act of this august body must, under the decisions of our Supreme Court, find their authority in some power expressly conferred or rent by necessary implication for the purpose of carrying out the powers expressly conferred.

The hearings before this committee were opened by the statement of Hon. J. M. Landis, a commissioner of the Federal Trade Commission, to which the bill would be delegated.

This in our opinion is probably the most far-reaching regulatory power, so called, that has yet emanated from Congress. Mr. Landis, it seemed to me, made a most fair and frank statement at the very beginning of his testimony when he said:

At the threshold of this question, there seems to me to lie the question of national power over the changes. I think this committee has to meet that and face that before it can go any further. The question is not free from doubt.

Now, in the interest of one of the instrumentalities which will be most seriously affected by the enactment of this law, we bespeak most earnest consideration for this vital question, which the proponents of the measure admit is not free from doubt and which we respectfully submit for the reason that I had hoped to have an opportunity adequately to present to you, in obviously true.

Now, the title of this bill indicates the basis upon which the proposed power is to be exercised:

To provide for the registration of national securities exchanges operating in interstate and foreign commerce and through the mails and to prevent inequitable and unfair practices on such exchanges, and for other purposes.

In the economy of time, I shall pass by what might possibly be said in relation to the phrase "and for other purposes", and confine myself to a discussion of the theory on which the bill is apparently predicated, from a constitutional aspect, which would permit regis tration of national securities exchanges, because they operate in interstate commerce and through the mails.

Now, Mr. Landis, with equal frankness, has said, in discussing the question of the extent of power:

I speak primarily of the interstate commerce power, because I do not believe that legislation of this kind can be based effectively upon any other power than the congressional power over interstate commerce.

He later said that the invocation of the power to control the mails was directed incidentally as a prop to support the main power upon which the bill is supposed to rest.

Now, addressing myself for a moment to the question of whteher the bill would constitutionally exert a power lying within the Constitution, because of the supposed relation of exchanges to interstate commerce, I want to address myself briefly to the provisions of the second paragraph which are entitled: “Regulation of exchanges using the channels of interstate commerce and the mails necessary in the public interest.

The paragraph, Mr. Chairman and gentlemen, you will recall Mr. Landis said constituted an argument in support of the bill, and he said, and I think with great truth, that insofar as it embodied factual findings it would have great weight in the courts in showing that Congress deemed, because of those facts, a necessity existed for the conferring of the Federal power or control; but this paragraph does not confine itself, if I may be permitted to say so, to factual findings.

It also contains assertions which, in my humble opinion, are pure conclusions of law and therefore binding upon no court when we come to test the constitutionality of the measure.

These paragraphs, if I may briefly refer to them, are as follows: The first sentence:

Transactions in securities as commonly conducted upon securities exchanges by means of the mails or instrumentalities of transportation or communication in interstate commerce are affected with a national public interest.

That makes an assumption that begs the question, which is whether the transaction in securities upon exchanges by means of the mails and instrumentalities of transportation is interstate commerce, and until you have answered that question, what follows must be, of course, unsupported by the premise, unless it is sound.

Another sentence says:
Such unreasonable fluctuations,

Speaking of the cases of abuses that arise out of control and manipulation of pricesconstitute an obstruction to and a burden upon interstate commerce and upon the national banking and Federal Reserve System.

Let us assume that to be a fact. As one of the members of the committee yesterday very aptly said, you recognize that exchanges are instrumentalities of service It may be assumed that some of the practices are contrary to the public interest. The question arises, however, from what source of power are these practices to be regulated and controlled?

The next sentence is:

Transactions in securities upon exchanges create a flow of securities in interstate commerce to and from the places where such exchanges are located.

Which is an assumption of facts, which begs the question as to whether or not the flow of such securities is interstate commerce, and so I revert to my statement that what Mr. Landis described as argument in this second section, involves factual findings, of course, highly influential upon the minds of any court, but, more importantly, upon the question to which I am now addressing myself, conclusions of law which are not in any sense controlling upon any court.

Now, to understand the constitutional question that I am undertaking to briefly present, some brief knowledge must be had, or some reasonable information must be presented as to the manner in which the business of exchanges is conducted, and that of its members. I am not talking about the technical aspects of trading. I am talking about the exchange as an instrumentality and its relation to this so-called flow of securities in interstate commerce.

The exchange is a building. It has its status in a community Speaking for my client, the New York Stock Exchange, it is located on Wall Street, as you gentlemen know. Its members are all residents of that city.

Now, trading is done upon the floor of that exchange. Deliveries and payment for securities bought and sold upon this exchange must be made either through the exchange corporation, a subsidiary of the exchange, or between offices of the members in the neighborhood of the exchange.

The securities sold on that exchange, if they are bonds, must be payable in the city of New York, both as to principal and as to interest. If stocks, they must be transferable in some office in the city of New York.

Now, having regard to those fundamental physical facts, looking for a moment, if you will, with me to what I think to be the three kinds of transactions only that could evolve out of those facts.

First, we have a contract between a citizen of the city of New York given to a broker who is in the city of New York, who purchases stock from a broker in the city of New York, and that broker sells the security to a resident of the city of New York. Can there be any possible grounds for saying that that transaction involves a flow of securities in interstate commerce? It does not seem to me necessary to argue that.

The second transaction would be where a broker received a communication from a customer in some other State, for example, for execution on the New York Stock Exchange, and it is sold there to a broker who is buying for an account of a customer outside of New York. But it is common knowledge that a great many transactions upon the exchange involve no movement of securities out of the city of New York. The broker holds the evidence of it right in the form of a certificate or bond in his box, or at times passes it along with a New York bank.

No security which is conceived to flow in interstate commerce moves out of the location where it was purchased. The only thing that has flown is the thought of the man who wanted to buy it and the thought of the man who is trying to sell it.

Now, I am not going to burden you with reading authorities, as I shall have to ask leave, Mr. Chairman, with the committee's permission, to submit a brief, in a brief presentation of my views.

Mr. COLE. Do you have that brief available now?
Mr. Gay. I have not, I am sorry, Mr. Cole.

Some brief decisions from our Supreme Court seem to me so apt as to make argument unnecessary.

Take, for instance, the instance I have just used, in the case of Hatch v. Reardon (204 U.S. 152), the Supreme Court of the United States upheld an act of the State of New York imposing a stamp tax of 2 cents on the hundred dollars of the face value of shares of stock when sold in New York, by a resident of Connecticut to a resident of another State, although executed in the city of New York. And what did it say as the basis of that view that that was not a burden on interstate commerce? The fact that the property sold is outside of the State, and the seller and the buyer are foreigners, is not enough for making it a sale, mark you, not enough to make it á sale under the provision of commerce with foreign nations or among the several States, and that is all that there is here, and that would be all there would be to a very large majority of transactions that flow through the New York Stock Exchange.

The other transactions of the third nature are those where there is actually transmission of securities or bonds from an owner in Richmond, Va., we will say, to his broker in New York, who in turn sells it to a broker doing business on the exchange, and shipped to a customer in Boston. That represents, in my humble judgment—and I think Mr. Landis clearly accepts that view—the only character of transaction which could present any aspect of interstate commerce.

Now, are stocks and bonds, which are mere choses in action, capable of being instruments—I will not say instruments, but commoditieswhich can constitute the subject of interstate commerce?

Interstate commerce consists of the instrumentalities by which it is conducted, such as the railroads, and the thing which moves by means of those instrumentalities between the States.

The question is presented therefore squarely, whether securities, whether stocks or bonds are such commodities as are capable of being instruments or commodities in interstate commerce.

The nearest illustration that can be afforded in support of the view that they are not such commodities, and in that I think Mr. Landis agrees, is the business of insurance. An agent of an insurance company writes an application, we will say, in Richmond, Va., upon my life, with the New York Life Insurance Co. in New York. He has no power to make a contract. He merely takes my application and I am examined as to the soundness of my health. That is fowarded to New York. The mails are used to conduct and carry on the transaction. Officers of the New York company determine upon the acceptability of my contract and a policy may in due time be issued and sent back to him for delivery.

Now, it is true that policies of insurance are not issued for purposes of barter and sale, but they are always issued, and I think in the days through which we have recently passed, there was no single element of value in our economic life which was more generally used as a basis of security than life-insurance companies' policies. The companies themselves loaned hundreds of millions of dollars on them, and they were very generally accepted, in great measure, by banking institutions in our country as good and sound security.

Now, some time ago when the matter of the LaGuardia bill was before the House, the New York Stock Exchange, it so happens, through its counsel in New York, asked Mr. Landis, who was then a professor, and I understand still is a professor on leave from Harvard Law School, for his opinion upon the constitutionality of the LaGuardia bill. The conception of that bill was that as to those corporations engaged in interstate commerce, Congress might exercise its power on them by controlling their securities, and this opinion was asked of Mr. Landis for the purpose of obtaining his view as to whether there was such a relation between securities of corporations so engaged and the business in which they were engaged as to justify the exercise of the power of Congress to control interstate commerce, and in expressing the opinion that was not so and that the bill was, in his opinion, unconstitutional, he has given reasons which in my opinion constitute a complete—Í may say with all kindness- a complete reversal of the qualified opinion he expressed before this committee on the validity of this bill, but which in the standpoint of reasoning and logic convincingly establishes the fact that the bill is not constitutional.

Mr. COOPER. Was Mr. Landis a member of the Federal Trade Commission when he rendered that opinion?

Mr. Gay. No, sir; I said that he was a professor of the Harvard Law School.

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