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operation if we are to accomplish what is expected; what the public thinks should be accomplished.

Now, if you can give us constructive and helpful suggestions, that would be helpful.

In presenting arguments with regard to this bill, statements were made in the zeal of making a case against this bill that would not hold water, are unwarranted by the language in this bill; but there are some very substantial, meritorious objections to this bill that I readily appreciate.

Now, if you can help us to pick out the substantial, real objections in this bill, and aid us in this purpose of doing what is right by the legitimate business, and, on the other hand, helping us to eliminate these undesirable provisions, you will perform a good service to your exchanges, I believe.

Mr. Thompson. I have, Mr. Lea, tried to point that out to the committee in what I have just done.

Mr. PETTENGILL. But what abuses have you admitted exist, except that you have been lax as to the requirements of listings?

Mr. THOMPSON. I say that the local exchanges have not been as strict as the New York Exchange has been with regard to listing requirements. That may be due more or less to thefact that it has not been necessary. There are conditions in New York, as I said a moment ago, in a national market and with a large volume of listings, larger capital of each corporation, larger number of shares, that makes the conditions different from those in our local markets. Our local markets do not have the large volume of speculative buying. Very few of them have a large buying or speculative business, such as in New York. Our conditions in the local exchanges are quite different in that respect. I should say that three fourths of our exchanges are more or less what we might term investment markets wholly--not speculative.

Now, as to the point of pointing out just exactly what the evils are

Mr. BULWINKLE. Mr. Chairman-
Mr. HUDDLESTON (presiding). Mr. Bulwinkle.

Mr. BULWINKLE. Mr. Thompson, if you will pardon an interruption, in your general statement, when you commenced this afternoon, you conceded that the stock exchanges were much maligned.

Mr. THOMPSON. Yes, sir.
Mr. BULWINKLE. You stated that the abuses had existed.
Mr. THOMPSON. Not abuses, but lasity of regulations.
Mr. BULWINKLE. And that those abuses have been corrected?

Mr. THOMPSON. Yes sir; if you term them abuses they have been, or will be.

Mr. BULWINKLE. Now, will you state to the committee what abuses there were? And what abuses there are now, and what abuses you are correcting, and what abuses you have corrected, and when you corrected them?

Mr. THOMPSON. I stated to you that I had made a visit to the stock exchanges throughout the country and that I had discussed with the officials of the various local exchanges, practically all of them, the conditions prevailing upon their exchanges, and that all of them expressed a desire and willingness to do anything they

could, and their exchanges also, to improve their protection to the public.

Mr. BULWINKLE. Yes, sir; I realize you stated that; but let us come back to this proposition. What abuses have the stock exchanges corrected?

Mr. Thompson. Well, I am just saying to you, that so far as the local exchanges are concerned, we have put into effect a number of changes in the way of protecting the public, such as listing requirements.

Mr. BULWINKLE. Let us right there get the statement as to that.

Mr. THOMPSON. Such as our listing requirements, which is one of the big things.

Mr. BULWINKLE. That is one.

Mr. THOMPSON. Practically the biggest one. It is the most important.

Mr. BULWINKLE. All right.

Mr. THOMPSON. Some exchanges did not need to make any changes because they had made them already. The question of trading between members in the execution of orders, where the same broker had orders to buy or sell the same stock. The broker has to offer at a price and has to bid another price, and give notice of the fact that the sale is going to be made so that there can be no "wash trades.”' There were possibly 18 or 20 minor suggestions, such as those, which the public might feel were opportunities for the exchange to take advantage of them in such a way that they, not knowing of them

Mr. BULWINKLE (interposing). Now, when were these changes made? Do I understand they were made after this visit you made to the exchanges?

Mr. THOMPSON. Some of them; some before. They were not made or suggested as a result of that visit, because some of the exchanges recognized them before.

Mr. BULWINKLE. Would you mind putting in the record, the abuses and suggestions? I am not attempting to embarrass you—I am attempting to find out for this committee what we can do and what we should do, and I do not have them.

Mr. Thompson. I will be very glad to furnish you a memorandum of the suggestions that have been made to the exchanges.

Mr. BULWINKLE. I want it in the record.
Mr. THOMPSON. All right.
Mr. BULWINKLE. You can furnish it for the record later on.
Mr. THOMPSON. I will be glad to do so.

Mr. BULWINKLE. A list of the abuses, how they were corrected, and when they were corrected.

Mr. THOMPSON. I will be very glad to furnish a list of the suggestions that I have made to the exchanges, which cover all that I know. I do not say these abuses existed in or on each exchange. I do not want to convey that impression.

Mr. PETTENGILL. You think that some exchanges are perfect at the present time?

Mr. Thompson. I think there are many exchanges that are highly regulated, as well as they possibly can be. I say some. I cannot tell whether all of them are, because I do not know. I do not know the

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exact workings of each exchange, and can only tell you of my visits to them, which I have just explained to Mr. Lea.

Mr. PETTENGILL. When did you make the visits?

Mr. THOMPSON. I made the visits in November and December; the latter part of November and December; but I have visited them before. It was not unusual. I have been around to the exchanges on several occasions.

Mr. PETTENGILL. Is there an exchange in Philadelphia?
Mr. THOMPSON. Yes, sir.
Mr. PETTENGILL. One in Baltimore?
Mr. THOMPSON. Yes, sir.

Mr. PETTENGILL. Now, if the Philadelphia Exchange in the interest of honest business and protection of legitimate investors, adopted a higher standard and more stringent regulations, would not a great deal of their business tend to flow to the Baltimore exchange, which under my hypothetical question, might not have the same high standards?

Mr. THOMPSON. Well, I doubt that, Mr. Congressman. I think that the Baltimore business is more local. I think that each of the local exchanges have their own peculiar local markets. I would not say that Baltimore would do much trading in Philadelphia, either.

Mr. PETTENGILL. Well, it has been suggested that if certain legislation is passed, the exchange business would go to Canada.

Mr. THOMPSON. That may be.
Mr. PETTENGILL. Or go to Jersey City.
Mr. THOMPSON. That may be.
Mr. PETTENGILL. Well, it just occurs to me that there may

be some competition between exchanges as to each other's business.

Mr. THOMPSON. I think not.

Mr. PETTENGILL. I can conceive that it might be, in the line of your theory, but I can also appreciate that one exchange could easily drive business to another by establishing higher standards and that a statute of a national scope operating in 48 States of the Union might be to the benefit of legitimate exchange business in every State.

Mr. THOMPSON. Well, I would say that so far as taking the business from one city to another, because of changes in their requirements, I do not believe that that would be done. I think that each city has its own market, has its own listings, has its own securities,

You take the business in St. Louis; they have the securities that are peculiarly on their own markets. The same is true of Cincinnati, and practically the same thing exists all over the country.

We have representatives here of some of those exchanges.

Mr. PETTENGILL. You do not think then that any bill adopted by Congress of a national scope would serve any useful public purpose?

Mr. THOMPSON. I would not say that altogether. I do not say that we are opposed to regulation under certain conditions. I do say that this bill is unworkable, so far as local exhanges are concerned.

Mr. PETTENGILL. Let us grant that.
Mr. THOMPSON. I say that.

Mr. PETTENGILL. Let us grant that. What do you have to offer as constructive?

Mr. Thompson. Well, I have not had an opportunity to confer with all of the exchanges. The representatives present, of our local exchanges, and those I have had an opportunity to speak with, just casually, feel that we would look with favor on going back to our exchanges and recommending an approval of the suggestions made by Mr. Whitney. We have not had an opportunity to see nor had we heard of the suggestions before they were submitted here, and for that reason they were new to us as well as to you; but we look with favor upon going back to our exchanges for consideration and recommendation of something along that line.

Mr. PETTINGILL. Mr. Chairman-
Mr. COOPER. Mr. Chairman-
Mr. HUDDLESTON. Mr. Pettengill.

Mr. PETTENGILL. I am not quite sure that I understand you correctly, but if I understood you correctly, you object rather strenuously to the provision at the top of page 16, which I understand is now the rule of the New York Stock Exchange.

Mr. THOMPSON. What section is that?
Mr. PETTENGILL. Section 8 (a) 3.
That leads me to

Mr. THOMPSON. You mean with respect to false or misleading appearance with respect to the market. You did not cover that in your statement.

Mr. THOMPSON. Just a moment.

Mr. PETTENGILL. I am speaking now of false or misleading appearance with respect to a security or securities.

Mr. THOMPSON. We submit that in the execution of an order to buy for a customer in which the broker unwittingly creates a misleading appearance of the market, it is very unfair to penalize him. He is performing as an automat the buying of the securities, because his customer wants him to purchase them. In our local exchanges you could very readily run a stock up or down 10 points, or some stocks 20 points. It has a misleading appearance. It is not intended to be so, but it does mislead. Using the language of the bill, that would come within the penalizing clause.

Mr. PETTENGILL. On the matter of protecting the average investor, you say we cannot determine who the average investor is?

Mr. THOMPSON. No.

Mr. PETTENGILL. Now, in the law as to negligence, in writing legislation as to negligence, no one can write the standards of care in every single particular and in every situation, but it has been the common law for generations that the standard of care shall be the standard of care of the average reasonably prudent man, confronted with a similar situation.

Now, in those relations of life that involve the application of legal principles, we necessarily leave to somebody, whether a court or a jury, the determination of what is the average man's mind.

Mr. THOMPSON. Well, I cannot go with you on that. I am not a lawyer. The average man's mind is one thing that I cannot define. The average customer's business is something else. How are we going to say who is an average investor?

Mr. PETTENGILL. Well, the average potato is different from the average turnip. I will grant that. I still do not see why we could not lay down some rules of conduct with reference to dealing with securities that would be a protection to the average investor-not the specialist investor or the man who is cunning and shrewd, but the average man. We do that in the law of fraud-as to what is apt to mislead an ordinarily prudent man. I do not see that there is much in that objection.

Mr. COOPER. Mr. Chairman
Mr. HUDDLESTON. Mr. Cooper.

Mr. COOPER. Mr. Thompson, did you believe that the power given to the Federal Trade Commission in this bill, regarding the listing of securities, gives the commission the power to control private capital?

Mr. THOMPSON. I do.
Mr. COOPER. That is all.

Mr. THOMPSON. Mr. Chairman, the time which I understood was allotted to us, was to be divided up. Mr. Gradison, president of the Cincinnati Stock Exchange, will speak for a few moments, and then Mr. Shaughnessy, president of the San Francisco Stock Exchange, for about 12 minutes, followed by Mr. Paul, secretary of the Los Angeles Exchange.

We would like, with your permission, to have Mr. Whitney and his associates cover two or three points in which we are very much interested.

Mr. HuddLESTON. Whom do you wish to hear now?
Mr. THOMPSON. We would like for you to hear Mr. Gradison.
Mr. HUDDLESTON. We will hear Mr. Gradison, then.

STATEMENT OF W. D. GRADISON, PRESIDENT CINCINNATI STOCK

EXCHANGE, CINCINNATI, OHIO

Mr. GRAdison. As president of the Cincinnati Stock Exchange, I represent the Associated Stock Exchanges composed of the following members: Hartford, Minneapolis-St. Paul, Washington, Los Angeles Stock Exchange, and Los Angeles Curb, Cincinnati, Columbus, Cleveland, New Orleans, Salt Lake City, Baltimore, St. Louis, Detroit, Buffalo, Pittsburgh, San Francisco Stock Exchange and San Francisco Curb, and Philadelphia. In addition, I have been requested to speak for the Seattle, Richmond, Louisville, and Salt Lake City Stock Exchanges.

The general impression is that the National Securities Exchange Act of 1934 will only affect, to any great degree, the New York Stock Exchange. A careful study of the bill by all of the smaller exchanges in the United States shows clearly, should this bill be passed, that it may eliminate from existence most of these exchanges, and can conceivably put out of business almost 90 percent of its members. The small stock exchanges, which are local in nature, play an important part in the economic life of their communities, and it is necessary that there be local markets in order to raise capital for the industries in their localities through the sale of securities. Thousands of companies are dependent solely on local markets to raise capital which are unable to compete in the large financial centers. Unless there is a market providing a fair degree of liquidity it will be almost impossible for the local security dealers to function.

Investors generally will not purchase securities that are not marketable, and if the markets are destroyed it will be impossible for the small corporations throughout the country to finance themselves. Many of our small Midwestern cities are solely dependent on one or two local corporations for their support, and the closing of these plants because of lack of capital would eliminate the only means of

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