The specialist of today is the custodian or trustee of thousands of orders originating in this and many foreign countries. With a market order in his possession a specialist is barred from trading for his own account until that order is filled. He cannot give his personal interest precedence over that of his customer. No business is more carefully supervised, and there are no penalties in any other line of business endeavor more drastic than those meted out to a specialist if he violates the law of the exchange or if, as stated in the constitution of the New York Stock Exchange, he indulges in any practice “inconsistent with just and equitable principles of trade.”

There seems to be a common belief that, because of the possibility of his acting either as a broker or dealer, the specialist has an opportunity to act contrary to the interests of the regular brokers and their customers and that he actually does

Nothing could be further from the truth. The greatest criticism directed against the specialist is that he works in a dual capacity, either as a broker for his customers or as a dealer for his own interests. As a matter of fact, he can never serve these two interests simultane. ously. Were he to do so he would be expelled from the exchange. Further, the minute a specialist steps into the capacity of a dealer, any trades which he may effect for his own account are, by the rules of the New York Stock Exchange, not binding except with the consent and approval of a representative of the firm with whom he trades. In other words, a specialist in trading for his own account buys from or sells to a broker who represents the seller or purchaser, as the case may be. It is the duty and interest of this other broker to see to it that his customer makes the best possible trade. If at any time such a trade is seen to be "inconsistent with just and equitable principles of trade" that trade is canceled.

The new bill as now formulated provides two types of specialists: that of the dealer-specialist (one who trades for his own account and cannot accept commission orders) and broker-specialist (who executes orders for others and cannot trade for his own account). This means a division of the functions now performed by specialists. If this dual capacity is broken up so that there are two categories, viz: dealer-specialists and broker-specialists, a situation will arise which will have a broker-specialist working for the interest of his customers and a dealer-specialist who has no responsibility except to himself.

The present specialist lives because of the fact that if he does not at all times make a just and ample market, the commission houses will speedily introduce a competing specialist in his field and his business will be cut down. He, therefore, does everything in his power to make such a market. Let us assume for the moment that the broker-specialist operating as provided in the bill cannot trade for his own account and a dealer-specialist may. The dealer-specialist has no customers, is responsible to no one save himself, and it is inconceivable that he would have the same interest as the present specialist in the maintenance of a continuous fair market for securities.

The specialist's success depends upon the efficiency and intelligence with which he serves his clientele; without that efficiency and intelligence he would shortly find himself without orders.

The fact that the business of the specialist has been developed over a period of time and requires a high degree of alertness and specialized knowledge for its efficient functioning, and the fact that it involves the livelihood of several thousand people, including the necessary staffs, cannot, of course, be a primary concern of your committee. But your committee is rightly concerned with the maintenance of a liquid or immediately accessible market to the investor, which in turn means an opportunity for the Nation's industry to finance its development. We believe that the specialist performs an essential function in that branch of national economy.

If the liquidity of the market is at any time impaired it will unquestionably mean that collateral would necessarily be more difficult of disposal. Banks would accordingly be reluctant to accept stocks as collateral for loans which might be needed for productive enterprise. The effect, in truth, would be to impair a capital market on all exchanges in the United States where securities may now be either obtained or sold, with the inevitable consequence that other world markets would be utilized.

The end and aim of commercial banks is, at all times, to have such a degree of liquidity that they may accomodate the short-term needs of business. Destroy the liquidity of the market and the ability of the banks so to function would be proportionately curtailed. There are many examples today of the inability to liquidate in other lines of business.

We believe the intricate and complex functions of the specialist should not be disturbed as they now exist, and we respectfully submit the suggestion that the members of your committee visit the exchange to observe these functions in actual operation.

The corporate structure of American business has resulted in the issuance of hundreds of millions of shares of stock held, it is said, by over 20,000,000 people. These are the people who, in the last analysis, “make the market.” If the prospective legislation is followed to its logical conclusion, the functions now performed by the New York Stock Exchange would seriously be curtailed. This would not only impair the savings of millions of people but also throw many thousands into unemployment.

Therefore, it is respectfully petitioned that section 10 of the bill be amended in accordance with the recommendation of Richard Whitney, Esq., President of the New York Stock Exchange, made to your honorable body at a public hearing on Thursday, the 22d of March, 1934.

Section 10, as thus amended, would read as follows:

Section 10. (a) It shall be unlawful for a member of a national securities exchange while on the trading premises of such exchange to act as a dealer and broker in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

"(b) Subject to such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to insure compliance with the provisions of this subsection, the rules of a national securities exchange may provide for the registration of members with the privilege of acting as dealers, and any member so registered shall have the privilege of acting as a dealer and as a broker within the limitations of this subsection. It shall be unlawful for a member with the privilege of acting as a dealer who also acts as a broker to effect any transaction in a security by use of any facility of a national securities exchange or otherwise, (1) if in connection with any such transaction he directly or indirectly extends or maintains or arranges for the extension or maintenance of credit for a customer on any security (other than an exempted security) which was a part of a new issue offered to the public by him as a dealer or distributor within 6 months prior to such transaction, or (2) unless, if the transaction is with a customer, he discloses to such customer in writing any interest he may have in connection with the security which is the subject-matter of the transaction and offers the customer a reasonable time not exceeding 10 days to refuse the transaction after the disclosure if the disclosure is not made at the time of the taking of the order and confirmed in writing substantially simultaneously therewith." Respectfully, BLAIR S. WILLIAMS.

HENRY Picol.




BENJAMIN H. BRINSON. The specialists of the New York Stock Exchange are assisted in their labors by 1,290 employees who support 2,481 dependents. The annual salaries of the employees total $2,166,708. The specialists pay in real estate rentals or in lieu of rent $1,846,999 per annum.


March 24, 1934. Hon. Sam RAYBURN,

House of Representatives, Washington, D.C. DEAR SIR: On March 2, 1934, we submitted to the committee of the House of Representatives a brief in regard to the National Securities Exchange Act of 1934.

The committee of “put-and-call” brokers at that time pointed out and tried to make plain the economic inportance of “puts and calls” and endeavored to show the difference between the so-called manipulative options and those dealt in openly by the “put-and-call” brokers and dealers in this country.

We were then, and are now, of the opinion that section 8, paragraph 9, as it appears in the proposed law, as well as in is revised form, only applies to such options which are acquired in conjunction with the actual purchase or sale of stock, Such puts, calls, and straddles are clearly manipulative options.

It seems to us that for the sake of clarity and sharper distinction that this paragraph should be drawn so as to leave no doubt as to the intention of allowing dealings in and the guarantee of legitimate puts, calls, straddles, etc., eliminating puts, calls, straddles, etc., used for manipulative purposes.

We also call your attention to the last part of section 8, paragraph 9, third subdivision, reading as follows: Or if a member, directly or indirectly, to indorse or guarantee the performance of any put, call, straddle, option, or privilege in relation to any security registered on a national securities exchange. The terms put, call, straddle, option, or privilege as used in this paragraph shall not include any registered warrant, right or convertible security.

We submit that this wording should be clarified so that there can be no doubt that the foregoing subdivision was meant to refer to manipulative options only.

We further recommend that the National Securities Exchange Act of 1934 shall provide that the Federal Commission will have the power to require, after an appropriate hearing, that all "put-and-call” dealers and brokers conform with rules and regulations adopted by the Commission, and that the effective date of section 8, paragraph 9, be changed from August 1, 1934, to some later date. We therefore respectfully request that such change be made. Very truly yours,


GEORGE A. LAMBELL. Chairman, The CHAIRMAN. We will recess until 2 o'clock.

(Thereupon, at 12:05 p.m., a recess was taken until 2 p.m., of the same day.)


The committee reassembled, pursuant to the taking of the recess, at 2 p.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.



The CHAIRMAN. Mr. Landis, I think that the committee would like to have your reaction to the bill H.R. 8720, in general, and specifically.

Commissioner Landis. Mr. Chairman, I have had an opportunity to examine this bill. I had the opportunity, to start with, to associate with a number of experts on this subject, who, at the suggestion of Senator Fletcher, started in on the work of drafting a stock-exchange bill. Those experts and myself have watched the hearings on this bill with a great deal of interest and have tried to give them a great deal of consideration and study. The result of that has been, in large measure, this bill.

Mr. BULWINKLE. Would you mind, Mr. Landis, inserting in the record—I do not care to have it done now—but put in the record who the experts were, and what their qualifications are.

Commissioner LANDIS. Yes; I shall be glad to do that. Would you want me to insert that later?

Mr. BULWINKLE. Yes. I want the qualifications of the experts.
Mr. MAPES. With the emphasis on the qualifications.
Mr. BULWINKLE. Yes; with the emphasis on their qualifications.
Commissioner LANDIS. I will do that.

As I was saying, this bill is the result of that work. I do not want to take the time of the committee in going through the bill with a great deal of particularity, the committee having already had an opportunity to do that. I simply want to point out that I think this bill more gen

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erally and as well as it can be done, meets the suggestions that I made to this committee some days ago that the desirable kind of a bill to write about the stock exchanges is a bill which will get the proper degree of flexible administration together with a formal enunciation by Congress of what its principles are. I think that is a very important thing, because it is important to any administrative agency to know very clearly what the congressional policy is. It is also important to an administrative agency to be able to look at that policy and mark it out without fear of pressure, without the fear of being wrong.

This bill, I think, achieves that kind of a balance. It is a nice degree of balance to achieve and with the degree of flexibility that has been introduced in this revised bill, in my judgment, the criterion that I said was a desirable criterion has been met.

The feature about this bill to which I suppose you would really like me to address myself is the position of the Federal Trade Commission in this bill.

The revised bill, as distinguished from the original bill, divides the administrative authority between the Federal Reserve Board and the Federal Trade Commission. The Federal Reserve Board having dealt for many years with the problem of credit is intrusted with that problem. The Federal Trade Commission, having dealt for some 8 to 9 months now with the problems of the securities administration and having dealt for many years with the problems of investigating corporations, is intrusted with the administration of those features of the bill.

Judge Healy this morning had an opportunity to present aspects of the Commission's control over marketing practices and corporate accounts and spoke from a wide experience in that field. I think he demonstrated the necessity for some such control.

Now, I would like to make one point clear: There has been some talk about the autocratic power of the Commission; about the power this bill gives the Commission to run all industries. The Commission has had considerable administrative experience in connection with the provisions of the Securities Act, and the Commission, in the exercise of those powers, always makes an effort to call in the men directly interested with a problem, in order to give them the fullest opportunity for hearing and presentation of their views before a rule or regulation affecting them is promulgated.

We have had, and I would like to emphasize this, we have had the advantage of a high degree of cooperation from lawyers and bankers who have been affected by our rules and regulations. We have spent days with them working out our rules and regulations, sending them drafts, getting their criticisms back on those drafts, before finally adopting a draft in that revised form. In such a way we have been able to take care of what we conceived to be the real criticisms that have been raised during that process.

In other words, I would like to give this impression, that you can expect sympathetic, informed, and intelligent administration from the Commission.

The other matters on this bill that I would like to say something about are the administrative features. I have worked over some of those features. Some of the men associated with the Commission have been working over them. They have been drawn, in a large measure, from the Securities, Act which in turn was drawn from the

Federal Trade Commission Act, so that the powers that the Commission ought to have in order to adequately to administer the policies of this bill, I think, are here.

Nor do I believe that there are powers here which it is unnecessary to give the Commission in order to effect adequate enforcement of this act.

Then as to the listing requirements, an additional degree of flexibility has been introduced. On the problem of supervising reports, methods of reports, again, there is a degree of flexibility,

Indeed, I do not know where flexibility is missing, where else it is desired.

We must recognize this as a technical and a complicated problem-which is, I think, so obvious, after these days of hearingsthat it must be met in that fashion. I think it has.

And, I do not have any fault to find with this bill.

Mr. MAPES. Will you be good enough to express your judgment, particularly on the provisions relating to the marginal requirements of the bill?

Commissioner LANDIS. Yes, sir. I will be glad to do that. The administration of the margin provisions is handled not by the Federal Trade Commission, but by the Federal Reserve Board. Legislative minimums on margins are set.

Now, let me look at this problem from two standpoints. If you should ask me as to the administrative necessity for flexible requirements and whether I wanted them, I should unhesitatingly say "no.” It is too much of a burden to carry from the standpoint of administration. If you get a runaway market, everything is moving in that direction. At that time to require an administrative board to buck these elements, the force of public opinion, and at the same time to buck whatever pressure may come from any side, is a tremendous task to place on any administrative board.

Mr. Mapes. I appreciate the force of that statement. Still, a fixed provision in the law is a fixed provision, and unchangeable.

Commissioner LANDIS. It is fixed; and on the other hand, the important question is, Where is it fixed?

It may interest you, Mr. Mapes, to know this. Yesterday there was laid before me a list of all of the stocks on the New York Stock Exchange and their margins calculated according to this margin provision. There was laid before me also a substantial list of the stocks on the New York Curb Exchange, and their margins calculated according to this provision. From that list were drawn stocks automatically selected in order to get a representative lot. Preferred stock was excluded. All stock that was selling below 10 was excluded. Then the way in which that margin requirement would work was computed. The result was 66.8 percent of the current market price would be available.

Now, that seemed to me a very desirable solution.

Mr. Mapes. Is it any answer to your statement, with regard to responsibility, and the pressure that is brought to bear upon an administrative agency with broad discretionary power to know that, I understand him, the chairman of the Federal Reserve Board was of the opinion that the marginal requirements might properly be left to the discretion of that board?

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