WASHINGTON, D.C., March 8, 1934. Hon. Sam RAYBURN, Chairman Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C. MY DEAR CONGRESSMAN: The National Association of Building Owners and Managers, representing an industry with $6,000,000,000 of invested capital, has a direct and vital interest in the National Securities Exchange Act of 1934, now under consideration by your committee. Our membership consists of Federated Associations in 41 cities and of associate members in 90 other cities of the country.

We call your attention to the fact that the issues involved in this proposed legislation affect much more than the operation of security exchanges, and will have far-reaching influence upon the industry this association represents.

We would point out that regulations so drastic as to restrict greatly the security business and endanger the transaction of many legitimate enterprises related thereto, would have a ruinous effect upon property accommodating financial institutions in all of the principal cities of the country.

Specifically, such curtailment of the security operations would result in our industry in loss of tenants, contraction of space occupied by such tenants, and obsolescence of special equipment and facilities provided for their use, which, with the difficulty of adapting much of this space to other purposes, could not fail to produce further impairment of real estate values. The investment in properties devoted to these uses in many communities is sufficiently great to make this a matter of far-reaching consequence.

Furthermore, the industry, as you must know, has suffered, and is still suffering, severe distress. Our recent survey of rental conditions, covering 1,900 office buildings, in 35 cities, shows a total vacancy of 48,447,161 square feet, and an average vacancy for these buildings of 27.57 percent. In addition to this, our inquiries have shown a delinquency in the payment of rent to the extent of 15 percent of a year's rental. This 15 percent delinquency has the same effect upon current income as if vacancies were increased by this game percentage, so that practically all office buildings of the country have a combined actual and potential vacancy of 40 percent. From 1929 to 1933, the income for the industry decreased $217,000,000, while operating expenses, not including taxes, decreased $58,500,000, or only about one quarter as much as the decline in income. result of the drastic shrinkage in operating net income, hundreds of buildings have been forced to default on their bonds, have been unable to pay their ground rent, and in many cases have insufficient funds to meet tax bills. A survey of 929 buildings in 16 cities shows that 24.3 percent of these buildings are in financial default.

It may commonly be assumed that the effects of legislation regulating stockexchange operations would concern only those cities in which important exchanges are located. The point we desire to emphasize is that in our industry alone, they will affect all of the larger and many of the smaller cities of the country. In the limited time at our disposal, we have canvassed the opinion of member-organizations, and a substantial majority of the cities affected have thus far registered disapproval of those features of the act which would tend to restrict seriously the volume of security business.

You have already been informed by the representatives of the Real Estate Board of New York, Inc., that the building occupancy of stock-exchange tenants in that city represents at least 5,000,000 square feet of space, with a rental value of $15,000,000 annually.

A survey of similar conditions in Chicago, Detroit, Indianapolis, Los Angeles, Denver, Spokane, Louisville, Baltimore, and Pittsburgh reveals that in these nine cities 105 office buildings would be affected, with 2,987,270 square feet of space occupied by tenants engaged in the security business, the invested capital represented by such occupancy being estimated at $69,700,680.

We are opposed to those features of the proposed legislation, which by reason of drastic requirements, would bring about a serious curtailment in the operations of this business, and strongly recommend that material modifications be made in the act with respect to restrictions so imposed.

We ask-as I am sure you are disposed to do—that in the consideration of this legislation you weigh fully the contingent effects upon this, as upon other avenues of business throughout the Nation, Very sincerely yours,


As a

WASHINGTON, D.C., March 7, 1934. Hon. Sam RAYBURN, Chairman Interstate and Foreign Commerce Committee,

House of Representatives, Washington, D.C. MY DEAR MR. CHAIRMAN: I respectfully request that the enclosed statement be interested in the record in connection with the hearings on the National Securities Act of 1934.

This is a statement of Mr. Richard G. Babbage, representing the Real Estate Board of New York. Mr. Babbage appeared before the Senate committee on March 6, and would like to have his statement included also in the House hearings for the consideration of your committee. Sincerely yours,




The Real Estate Board of New York is a corporation organized under the laws of the State of New York, having its place of business at 12 East Forty-first Street, New York City. Its membership of 2,348 is made up of owners of New York City real estate and of management agents and brokers. It is the representative real estate association of the Borough of Manhattan in said city.

As a result of an investigation, we find that the Stock Exchange tenants occupy at least 5,000,000 square feet of space in the city of New York. At an average price of $3.40 per square foot, this would produce a rental of $15,000,000. In this space there are employed over 35,000 employees, who, it is reasonable to suppose, receive an average salary of $1,500 a year, whieh would make the aggregate salaries amount to $52,500,000.

Another great class interested in this real estate are those who hold the mortgage securities issued against it. It is impossible to state the number, but these securities are held by savings banks, life-insurance companies, and individuals in all walks of life.

Anything that affects the value of real estate affects these owners and holders of mortgages. A serious vacating of space at the present time might cause the rentals to be insufficient to carry the properties.

The Real Estate Board having given consideration to the provisions of the proposed bill is of the opinion that the Act would greatly deflate the securities industry, if it would not destroy it. All the interests, therefore, represented by the Real Estate Board would sustain a very serious loss in connection with the devaluation of their properties.

We do not contend that the Stock Exchange does not need regulation but we do contend that it is unnecessary to pass a law which would be so serious in its effects that it might destroy that organization. We have the impression on the act that its draftsman was not so much concerned over curing the evils in the exchange alone but was seeking to bring around governmental operation of the industry and of the listed corporations, and to make it so difficult and expensive for them to carry on business that the industry would be dissipated. An act of this character should be drafted by some unprejudiced person. It is to be hoped that the act, when amended, will be the result of a competent, intelligent, and sympathetic draftsmanship and will be confined to its alleged purpose of curing the evils instead of fixing absolute Government control upon the stock exchange and the corporations listed on it. The provisions making it difficult and dangerous to do business under the act and imposing unnecessary expense should be eliminated.

The different provisions of the act have been subject to so much discussion that I shall not attempt to take them up again with the committee. To sustain the foregoing statements, I will call attention to one or two of them, which, I think, illustrate the general character of the act.

The provision in relation to proxies is so written that it would be practically impossible to hold a corporate meeting under it. The requirement for filing a statement with a list of stockholders and the later requirement that you are to send a copy of that statement to every stockholder from whom you desire a proxy is entirely impracticable and out of line with all corporate practice. It is elementary that the purposes of the meeting are stated in the notice of meeting and that the proxies should enable persons holding them to vote for any question that can be legally brought before the meeting. It is necessary in order to obtain a quorum that some system of obtaining proxies should be adopted.

The other provision, forbidding the disclosure of any confidential information, which is intended to prevent officers of the corporations from giving to some favored few information which may affect the value of the stock, will do away with the great improvement which has taken place of late years in relation to the contact of officers of corporations with their stockholders. This contact should be encouraged and in my opinion the stockholder should be furnished with all information in relation to the corporation's activities that he may desire. Under the provision, however, the officers of a corporation, especially those against whom the section is aimed, will find a ready excuse for not furnishing a stockholder with information, except through public statements, while the confidential information is carried in some indirect way to the favored few. Any information than an officer may give in relation to his company is liable to have some bearing upon the value of its stock and might, therefore, be held to be confidential.

The provision in relation to registration is also extremely onerous. Why should a corporation agree to comply with the law? It has to comply with the law, if the law be constitutional. The documentary evidence which will have to be produced in connection with the registration of a corporation would incur a heavy burden especially as the officers of today would become responsible if there were any inaccuracies in the accounts of past generations. It is a very serious thing for a corporation to agree to comply with any rules that a public body may hereafter promulgate.

We therefore call these matters to the attention of the committee and the serious damage which may be done to the interests represented by us, and we trust that the committee in its wisdom may confine the proposed bill to remedying such evils as may exist but not to approve in its final form an act which will be bo rigid and severe that the industry of our public exchanges will be crippled or destroyed.


2695 AND H.R. 7852 Attendance at five hearings before the Interstate and Foreign Commerce Committee of the House, followed by attendance at nine hearings before the Banking and Currency Committee of the Senate, leads us to believe that most of the sections of the National Securities Exchange Act of 1934 have been adequately discussed, but also leaves us in doubt as to whether there is a clear understanding of a few sections upon which we desire to comment.

We do not come with apologies for the profession in which we are engaged. We know that our business is essential and any regulations which would seriously hamper its normal operations would unfavorably affect the public. Those interested in securities must, of necessity, have someone to whom they can turn for advice. My own firm, in association with two other banking firms, just completed what I believe to be one of the largest refunding operations of its kind ever attempted in the United States. A plan was worked out with the assistance of the Reconstruction Finance Corporation for the refunding by two large surety companies of approximately $80,000,000 of bonds secured by mortgages which had been guaranteed by those surety companies. Seven hundred and eighty security dealers located in 45 States and the District of Columbia cooperated with us in this plan and more than 39,000 certificates of deposit were issued to 29,395 investors. The significant fact of this achievement is that thousands of bondholders relied upon the advice of those dealers to the extent of approximately 94 percent of the bonds affected. This is only one illustration of what is constantly going on throughout the country; investors depending upon their local dealers for advice and counsel. Years of experience, constant study and the expenditure of a substantial part of gross earnings on statistical departments are necessary to give adequate service to clients. The cost, time and expense involved precludes any but very substantial investors from maintaining adequate statistical organizations, making it necessary for smaller institutions and investors to seek the advice of security dealers.

The representatives of recognized stock exchanges scattered throughout the United States have testified here that an overwhelming majority of their members are both brokers and dealers in securities.

To our mind the first sentence of section 10 is especially objectionable. It is necessary for a broker and dealer to combine their two functions in the smaller financial centers, and the smaller the city or town the more necessary this becomes if the broker-dealer is to have sufficient revenue to afford the overhead costs essential to provide the character of service desired by the investing public. In this act there is a clause which does not allow an investment banking house to have any affiliation with the brokerage business, meaning the selling or buying of securities for their clients either on a cash or part-cash basis. This bill, if unchanged, will force out of business the great majority of the bond and brokerage houses in the smaller financial centers, which in the aggregate number more than 6,000 firms, employing many thousands of people. Merely to act as dealer and underwriter and distributor of new issues would not bring them enough income to keep their businesses going. Who, then, would remain to underwrite and distribute new securities and perform the useful function of dealing in securities now outstanding?

Conditions of the securities markets may be such that at one time most activities in securities would be centered in the brokerage department of a brokerdealer, while at another time the major activities are confined to the investment and over-the-counter departments, and only occasionally are conditions of the securities market such that all departments are active at the same time.

The right to exercise both functions tends to keep the income from the business at a more uniform level than would otherwise be the case, which permits the broker-dealer to employ an average force much larger than if he is permitted to act as broker only, and, in doing so, gives much better service to his clients.

It may be roughly estimated that of all transactions in bonds only 10 percent is made on the New York Stock Exchange, the remaining 90 percent being made on other exchanges and on over-the-counter markets, which are largely dealer transactions.

Very careful consideration should be given to the position in which the buyer of unlisted securities would be placed by segregation. Billions of dollars of securities—including State and municipal bonds—are traded in only over-the-counter. If the broker-dealer retains his membership in an exchange, he is prevented from exercising his latter function—that of dealing in securities and so his clients who buy or sell such securities are forced to transact their business elsewhere with a nonmember—a person unregulated except as the Federal Trade Commis. sion may at some future date prescribe. The Dickinson report and statements made here by Mr. Corcoran emphasize the difficulty in formulating effective control of over-the-counter markets. In what possible way can this segregation be called a safeguard for the public? The activities of the broker-dealer as a member of a recognized exchange are under supervision and his methods scrutinized. On the other hand, if we interpret the proposed law correctly, the nonmember dealer will be comparatively unregulated.

In February 1933, the bond market was completely demoralized. A sale of as few as five bonds would often cause a decline of several points from the last recorded sale. Bids at times were so far below last sales that frequently the stockexchange authorities would refuse to allow a sale to be made at the market but would fix a minimum price. Such action by the exchanges helped to stabilize the markets, but did not help the banks and insurance companies to raise the funds demanded by their depositors and policyholders. Frequently a broker-dealer would act as broker for his bank or insurance company customer and sell on the exchange as many bonds as the market would take at a fair price, and then in his capacity as dealer would negotiate with his client and purchase the balance of the block and through his own sales force distribute them.

A similar operation comes about through the functions of broker-dealer in distribution of stocks and bonds through options on securities which are worthy of recommendation to his clients. We have in mind a block of stock held in a bank loan. Careful investigation convinced the broker-dealer of the merits of the stock; a circular was issued and through their sales organization they distributed a substantial block of the stock. As broker they were able to stabilize the market by purchasing such stock as was offered for sale on the exchange and sell such stock as was wanted while the distribution was going on.

We believe the question of segregation, which involves over-the-counter transactions, is grave enough in its possibilities of harm to both the investing public and the broker-dealer and his employees to justify the appointment of a committee to study every phase of the proposed segregation.

Under “Margin requirements on long accounts," section 6 (a) may possibly have been designed to protect brokers, but would work serious hardships upon small corporations throughout the country and upon owners of their unlisted securities by destroying their collateral value. The burden of registration requirements under the act may force many small and medium sized corporations to remove their securities from listing on exchanges in smaller financial centers, thus aggravating the situation. The drastic and rigid margin requirements under section 6 (b) would in all likelihood prompt further substantial liquidation of securities. Those responsible for the writing of this bill, no doubt, were largely influenced by the revelations made before the Banking and Currency Committee of the Senate, and, as is often the case, when concentrating upon abuses and their correction the suggested remedy may do an incalculable harm. Will the commission at all times in the future be better able to regulate the amount that can be safely loaned on a given security than broker-dealers and the banks from whom they in turn borrow?

We believe that the volume of credit used by stock exchange members can be regulated under the banking act of 1933; the effective curb to undue speculation is the curtailment of credit. Prices of stocks cannot be advanced inordinately unless the purchases can be financed. Officers of banks with their knowledge of security markets who pass upon collateral loans, when acting solely in the interest of the depositors and stockholders, are able to place proper loan values on collateral offered. Thus unwise and destructive speculation can be better regulated.

It is our belief that the reasons for regulating stock exchanges and their members arose from the disclosures developed by the investigations of the Banking and Currency Committee of the Senate in the past 2 years. We believe that the overwhelming majority of the members of the New York Stock Exchange are in whole-hearted sympathy with your desire to eradicate any practice detrimental to the best interests of the public and believe if the governors of the New York Stock Exchange had been more fully advised of the feeling in different parts of the country toward practices that some regarded as detrimental to the best interests of the public, that remedial measures would have been adopted sooner.

If, as we recommend, the management of the exchanges is to be left to the exchanges with such regulation as Congress decrees, we believe the opinions of the various parts of the country should be expressed through representation on the board of governors of the New York Stock Exchange by members located in various parts of the United States.

We are convinced that the day to day management of the New York Stock Exchange must be conducted by governors available for immediate decisions. For that reason it may be inadvisable to enlarge the governing committee to a point where it would be difficult to obtain a quorum, but the out-of-town members selected could be formed into an advisory committee to meet frequently with the governing committee.

Following our belief that the proposed regulations are suggested as a result of the disclosures of certain practices on the New York Stock Exchange, we presume the regulations suggested are for the purpose of eliminating such practices and respectfully suggest that the regulations be confined thereto and not extended to affect other functions of broker-dealer business to the detriment of the general public

With that in mind we suggest changes in several sections under the heading "Definitions.", Section 3, subdivision 4, to read, “The term 'broker' means any person engaged in a business of effecting transactions in securities for the account of others, for which service a commission is charged." The definition as given in the bill could be interpreted to include banks and trust companies who buy securities for the account of others.

Section 3, subdivision 5 to read, “The term 'dealer' means any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise, the chief purpose of which is to give investors a service that will enable them to buy or sell securities, whether listed or not, which cannot be purchased or sold to better advantage on a national securities exchange. A dealer also may be an underwriter and distributor of securities."

We urge the elimination of section 6 for reasons given previously.

We urge the elimination under, "Restrictions of members borrowing" section 7 (a).

To prohibit a member of a national securities exchange from borrowing from any person other than a member bank of the Federal Reserve System would work an extreme hardship on broker-dealers located outside of the principal financial centers. In the ordinary conduct of business broker-dealers find it necessary to carry open accounts with their correspondents in the financial centers where the larger stock exchanges are located. If broker-dealers are denied the privileges of carrying such accounts with their broker correspondents, they could only use a member bank of the Federal Reserve System to clear their transactions. Even if practical, this would naturally incur another charge to be passed on to the public.

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