(Thereupon, at 3:50 p.m., the committee adjourned.)



WashinGTON, D.C.,

Saturday, March 24, 1934. The Honorable Committee on Interstate and Foreign Commerce

of the House of Representatives, Washington, D.C. GENTLEMEN: The undersigned members of the New York Stock Exchange, representing some 60 members engaged in trading exclusively for their own arcount on the floor of the exchange, respectfully invite the attention of the committee to a provision in section 10 of the pending national securities exchange bill, the effect of which would, in our opinion, be the virtual paralysis of the activities of floor traders and substantial injury to the interests of the entire investing public of the United States.

The provision to which we refer is, in substance, that it shall be unlawful for any member of a stock exchange (except "odd-lot dealers” and “specialist dealers") to effect any transaction whatever for his own account while on the trading premises of the exchange. (Subsection (c).)

The exclusion of the floor trader from the privilege of trading on the premises would seem to indicate either that the language employed does not express the intention of the committee or that the functions of the floor trader are imperfectly understood.

The floor trader is a member of the exchange who acts exclusively as principal and, as a rule, only with his own capital. He has no customers and accepts no commission orders. He buys and sells securities for his own account, assuming the entire risk of profit or loss. He is not restricted to a fixed post nor to a limited number of securities. In the course of the day's trading the floor trader is to be found at various parts of the floor in competition with specialists and other traders, contributing in this manner to the maintenance of a fair market in all stocks. If he has, on the one hand, as compared with the investor off the floor of the exchange, the advantage of instant information concerning the technical position of the market, he is subject, on the other hand, to the disadvantage (in view of the exclusion of news tickers from the trading premises) of not being imme diately apprised of developments in the outside world of industry, finance, and politics.

The floor trader performs indispensable services in the public interest by his contribution to the maintenance of a continuous and liquid market in which securities may be bought and sold at equitable prices.

It is obviously in the interest of the investor that the securities which he holds, and which he may desire to use as collateral for the financing of productive enterprises, shall have a continuous fair market value. On an exchange which was limited to the execution of commission house orders, there would inevitably be many occasions on which the divergence between the price bid and the price asked would be so extreme as to result in wide fluctuations. In the filling of the gap between bids and offers and the prevention of sudden and unreasonable fluctuations the interposition of the floor trader plays an outstanding part. Without the constant personal presence of the floor trader, ready to buy or sell instantly for his own account and on his own responsibility for small profits, the market would be characterized by excessively sharp rises and declines.

The initiative of the floor trader and his competition with specialists and other traders are at all times factors of the highest importance in the maintenance of fair market prices.

His services in this respect are particularly conspicuous on occasions of stress, when there is a great preponderance of either buying or selling orders from all parts of this country or from abroad. On such occasions the floor trader is preeminent in taking the initiative, in buying or selling as the situation may require. So highly are his services in this respect valued on the exchange that floor traders are frequently informed of an abnormal market situation by a governor of the exchange, acting in the public interest, with a view to assuring the execution of buying or selling orders at a fair price.

In view of the indispensable services performed by the floor trader, as ahore indicated, we earnestly trust that it is not the intention of the committee to eliminate the floor trader as such. We respectfully submit that the floor trader should be allowed to continue his operations substantially in accordance with the present practice. In this connection, we wish to signify our hearty endorsement of the suggestion made to the committee by Mr. Richard Whitney, president of the New York Stock Exchange, with reference to the revision of section 10 of the bill. Respectfully,

ARTHUR K. HARRIS, New York City.


Re section 8, paragraph 9 of the revised National Securities Act of 1934

This memorandum is submitted with no intention to suggest to the committee to change the intent of the provisions of section 8, paragraph 9. We aim solely to suggest to the committee that for the sake of the clarification of these paragraphs, some slight changes should be made.

We herewith take the liberty to suggest the classification of section 8, paragraph 9, which section is captioned: “Prohibition Against Manipulation of Security Prices."

We appreciate fully that paragraph 9 as it appears in the revised draft refers only to puts and calls for manipulative purposes, in which we have no interest. We deal only in puts, calls, and straddles, wh ch are openly offered and have a regular day to day market at standard prices and which are regularly quoted. Their main function is to insure against unlimited losses.

We submit that legitimate puts, calls, and straddles shall continue to be endorsed or guaranteed by stock-exchange houses in order to assure the purchaser that all conditions of the contract will be carried out. This guaranty is of great importance to the purchasers thereof because an insurance policy where there is even the slightest doubt regarding the compliance with its terms, is worse than valueless.

The members of the New York Stock Exchange are permitted to guarantee puts and calls only if adequate security is maintained by the writer. This, together with the guaranty or endorsement of a stock-exchange house, provides a complete safeguard to the investor.

We submit that the last six lines of section 8, paragraph 9, should be amended as follows:

“Or if a member, directly or indirectly, to endorse or guarantee in contravention of any such rules or regulations, the performance of such put, call, straddle, option, or privilege in relation to any security registered on any national securities exchange. The terms put, call, straddle, option or privilege, as used in this paragraph shall not include any options which are openly offered and competitively sold, and also shall not include any registered warrant, right or convertible security.

We are firmly convinced that your committee while wishing to prevent excessive speculation and to regulate unfair practices in security transactions, desires that dealings which are economically sound and which are to a large extent used for the protection of the investor, should not be legislated against. Therefore, we have made the above suggestions and stand ready at any time to furnish all the technical and expert advice at our command to assist in drafting the amendments herein suggested or any other regulations pertaining to puts and calls. Respectfully submitted.

Geo. A. LAMBELL, Chairman,

Committee of Put and Call Brokers and Dealers in the City of New York.


OF 1934

To the Committee on Banking and Currency of the United States Senale.
To the Committee on Interstate and Foreign Commerce of the House of Representatires.

The National Automobile Chamber of Commerce (referred to hereafter as the "chamber') respectfully submits the following objections to certain provisions of the proposed act to regulate stock exchanges which directly affect business corporations whose securities are listed on national exchanges. The sections of the proposed act as they appear in the revised draft of the bill introduced in the House on March 19, 1934, to which the Chamber is particularly opposed are sections 11, 12, 13, 15, and 25.

The automobile industry believes that the proposed bill, through the provisions of the above sections, goes far beyond the legitimate purposes of stock exchange regulation and under the guise of that purpose extends to industry in general an unjustified governmental supervision over certain phases of its internal management. Aside from the question of the constitutional power of Congress to so extend governmental supervision to business in general, the chamber believes that there is no justification for governmental interference with the normal functions of private management. If long recognized principles are to be discarded and all business is to be supervised by a governmental agency then, in effect, all business is being put into the category of the railroads. To such a general theory that all industry should come under governmental bureaucracies, this chamber is unalterably opposed. If control of certain features of corporate management is to be given now to a Federal agency, it is likely to be but the beginning of the usurpation of other functions of management.

In addition to its general objection to the regulation of phases of general business management by a Federal agency, the chamber submits that the sections referred to impose undue hardship on business without compensating advantages to the public.

Sections 11 and 12 of the proposed bill would require corporations whose stock is to be traded in on an exchange to register with the exchange and the Federal Trade Commission and to file certain information, reports and data, together with such additional information as the Commission shall deem necessary or appropriate in the public interest or for the protection of investors.

In connection with the registration of its stock, a corporation is required to agree in advance to comply with such rules and regulations as the Federal Trade Commission may make. This provision in effect makes an unfair demand of corporations and places an undue responsibility on directors. Considerable doubt exists as to the right of corporate directors to delegate their powers of management by agreeing in advance to matters which may affect the interests of the corporation when the determination of such matters is left entirely to outside parties over which the corporation will have no control. The fear that has arisen in connection with this section may well cause many corporations to refuse to register their stock with consequent loss of a free market for such stock and with the adverse economic effect which such a result would entail to the public in general.

Much of the specific information required by the sections would be of little benefit to the public but would seriously affect the interests of the corporation by the disclosure of facts intimately related to confidential affairs of the corporation to competitors and to prying individuals with no legitimate ends to be served. It is reasonable to assume that the average investor is primarily interested in the true character of the security, and the actual assets and the actual earnings of the corporation. The giving of information which goes beyond these phases of the corporation's affairs exceeds the legitimate requirements of investors and the public interest.

It is submitted that sections 11 and 12 have no proper place in this bill. If, however, the Congress deems the general purpose of these sections essential, it is suggested that fairness requires that the sections be substantially amended. If a provision along such lines is deemed desirable, the following is suggested in lieu of sections 1l'and 12:

“Sec. 11. (a) It shall be unlawful for any person to effect any transaction in any security on a national securities exchange after such a security has been deprived of trading privileges of such exchange.

'(b) If an issuer lend any funds, except upon exempted securities, at the money post of any exchange or to any member thereof or to any broker or dealer who transacts a business in securities through the medium of any such member


except in accordance with such rules and regulations as the Federal Reserve Board may prescribe, provided that the provisions of this paragraph in regard to lending shall not apply to a member bank of the Federal Reserve System, or fails to file such information, documents, or reports as may be required by rules and regulations of the Commission to adequately reflect the terms, position, rights, and privileges of the different classes of securities outstanding and the actual assets and actual earnings of the corporation, including an annual report certified by an independent public accountant, the Commission, in its discretion, after notice and an opportunity for a hearing, may require that the securities of such issuer be deprived of trading privileges on such exchange.

The above section would fully protect the interests of the public in that corporations would be required to give all proper information or have their securities deprived of trading privileges on such exchanges. It would not require corporations to agree in advance to things they know not of and so would avoid a natural fear and hesitation over registration of securities.

It seems clear that if Congress has power to regulate exchanges, it has power to prescribe on what conditions trading in a stock may be permitted on such exchanges.

Section 13 (a) relating to proxies has been substantially modified but it still wilı impose considerable expense and trouble on corporations without any apparent benefit to their stockholders. It is believed that the methods of securing proxies under the corporation laws of the several States are fair, do not prevent the solicitation of proxies by stockholders dissatisfied with the management of a corporation, and that section 13 (a) should be omitted from the proposed act.

Section 15 requires the disclosure of all purchases and sales of stock by every person who is the beneficial owner of more than 5 percent of any class of any equity security or by any officer or director of an issuer whose stock is listed on an exchange, and permits the recovery by the issuer of any profit made by such persons on less than 6 months' transactons in the stock of such issuer. It is believed that this section will have far-reaching adverse consequences not contemplated by the sponsors of the bill. It will discourage the ownership of stock by officers and directors who are the parties directly charged with the management of corporations. That it is in the interest of the stockholders of a corporation to have those charged with the responsibility of management own a substantial interest in the corporation has long been recognized.

Furthermore the disclosure of purchases or sales by officers or directors of a corporation is likely to be misleading to the public. Parties without knowledge of all the circumstances unquestionably would be inclined to place undue importance on such transactions. For instance, suppose the head of a large corporation found it necessary for personal reasons aside from the nature of the investment to sell a substantial amount of stock of that corporation. Public knowledge of the sale might precipitate fear and cause a disastrous selling wave in the stock by the general public. Conversely, the values of stock may be unreasonably inflated upon news of the purchase of stock by such an individual. The section would put into the hands of unscrupulous officers and directors a most dangerous instrument for market manipulation. It is suggested that the public interest would best be served by omitting section 15 from the bill.

The penalties provided by section 25 seem to be too severe in view of the fact that the legislation is of new type and there are no precedents to guide persons who would endeavor honestly to comply with the act. Penalties should not be so severe as to discourage the doing of business under the act. We should profit from the experiences with the penalties imposed by the Securities Act of 1933. Respectfully submitted.




This memorandum is concerned with the basic question whether Congress, by virtue of the commerce clause, has power to regulate security exchanges. Its purpose is to show that a constitutional foundation exists upon which may be built a statutory structure for the regulation of such exchanges. For if this power can be established, as in my opinion it can, then it becomes largely a


question of fact and of administrative judgment whether and how far the regulation shall be extended beyond the exchanges themselves and applied to related and collateral activities.

I Regulation of security exchanges is a national problem.—The national character of the problem of the regulation of security exchanges is shown by the facts. Some of them are subject to judicial notice. Others have been brought out by the congressional investigations or have been gathered as a result of independent studies. A few of the broader aspects may be noted here as bearing on the national interest.

Transactions upon the security exchanges may have a direct effect upon the ability of the instrumentalities of interstate commerce to perform their functions. New security flotation is difficult if, because of manipulation or loss of public confidence, existing securities have shrunk to abnormally low values. With this should be considered the frequent refunding operations made necessary for the American railways by virtue of their heavy funded debt. The other carriers (air and motor transport, pipe lines) have in general a small funded debt but their stock distribution is more limited, making speculative movements more

No reason appears why the burden which may thus be imposed upon the efficient functioning of the interstate transportation system is any less direct or real than that of low intrastate passenger fares, Railroad Commission of Wisconsin v. Chicago, B. & Q. R. Co. (257 U.S. 563).

Interstate commerce in largest part consists of the movement of goods fi. nanced by credit. Without adequate credit facilities the physical instrumentalities of interstate commerce are near to useless. An unrestrained speculative activity absorbing, at times, billions of dollars of credit, at high interest rates, of necessity increases the cost of financing and, to a significant extent, diminishes the volume of credit available for the interstate transaction. An even more serious impediment to the continued functioning of this interstate shipment is found in the vulnerability of the commercial banking system to extreme fluctuations in the quoted values of securities. Through direct investment and through collateral required of the borrower, the commercial banks are so circumstanced that an abrupt decline from a speculative peak must reap a heavy toll in insolvency, with consequent attrition of the interstate movement of commodities. A congressional power which can reach the purchase of stock in competing businesses, Northern Securities Co. v. United States (193 U.S. 197), the charging of discriminatory prices, Van Camp & Sons v. American Can Co. (278 U.S. 235), and the publication of an unfair" list, Loewe v. Lawlor (208 U.S. 274), because of a possible diminution of interstate commerce, hardly can be said to fall short of protecting the essential credit foundation from the dangers presented by an unrestrained speculative market for securities.

Since “commerce among the States is not a technical legal conception, but a practical one, drawn from the course of business", (Swift & Co. v. United Stales, 196 U.S. 375, 399) one must take a practical view of the nature of interstate com

In commercial reality it is, in the largest part, the result of orders placed by businessmen hoping to resell at a profit. If their predictions of their markets fluctuate, so will fluctuate the volume of interstate commerce. The movement of securities on organized exchanges is an important matter in shaping the judgment of business men as to the future. It seems clear that a power to regulate interstate commerce is incomplete if it cannot serve to guard the exchanges from manipulated movements and speculative hysteria. The words of Woolsey, J., are peculiarly appropriate in this regard (United States v. Brown, 5 F. Supp. 81, 85; D.C., S.D.N.Y. 1933):

“When an outsider, a member of the public, reads the price quotations of a stock listed on an exchange, he is justified in supposing that the quoted price is an appraisal of the value of that stock due to a series of actual sales between various persons dealing at arm's length in a free and open market on the exchange, and so represents a true chancering of the market value of that stock thereon under the process of attrition due to supply operating against demand."

None but the brave could say that interstate commerce is more directly burdened by the exclusion of cooperative marketing associations from grain exo changes, Board of Trade v. Olsen (262 U.S. 1), than by speculative upheavals on the securities markets.

The marketing of securities in interstate commerce has recently been subjected to a large measure of congressional control. See The Securities Act of 1933 33 Columbia Law Review 1220). This control is incomplete without control v the securities exchanges. Market support" is an almost invariable corollary of


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