Page images
PDF
EPUB

securities under the laws of that State. A large number' have been doing business from 20 to 60 years, while the others are conducted for the most part by men who received their earlier training with the older firms. A few of us hold memberships in the New York Stock Exchange and other exchanges, but the large majority are not members of any national exchange. These nonmembers, however, handle a substantial volume of business in listed securities through the medium of member firms.

As we read this bill, including its title and preamble, it is apparent to us that it was intended to prevent by legislation certain abuses which have crept into the securities business. In this respect the bill has our complete and whole-hearted support. However, we believe that in many of its provisions the bill goes considerably beyond its stated purpose, and unless these provisions are very much modified, or completely omitted, an incalculable amount of harm will be done to a multitude of investors, particularly those who do not reside in the three or four large financial centers.

The sections which give us the greatest concern and to which we most seriously object, are sections 10 and 7, sections 14 and 18, and section 6.

I should first like to comment on secton 10.

The first sentence of this section makes it impossible for investment firms to accept orders from their customers for listed securities if they also act as a dealer in unlisted and local securities. By enacting this provision, you will do two things which I feel certain are not intended.

First, you will injure the investor by destroying the relationship which he has with his investment firm and you will also make impossible the attainment by him of what no one will deny is the most desirable relationship possible between the customer and his investment advisor. May I illustrate this point: If you are an investor and have been a resident of a city of medium size for a number of years, you should be able to go with complete confidence to at least one house for advice and assistance with regard to any or all of your investment problems. These include the selection of new investments, the review and analysis of those already held, as well as the execution of orders and the physical handling of the securities. Besides having a high degree of confidence in the integrity of those who conduct the business, you as an investor want to be satisfied that they have had a broad experience with and are well informed regarding all types of securities. It goes without saying then that they should have facilities for executing any orders you may decide to give them, whether in listed or unlisted securities. And of course, you do not want them to be prohibited from handling your business.

Secondly, a law which segregates the business of a broker in listed securities from that of a dealer in unlisted securities will eliminate from the field the local house and so it will tend to drive into the hands of a comparatively small group of large national organizations practically the entire securities business. The local house, obliged to choose between one or the other line of business, could not do a sufficient volume in either one to permit it to continue in business. On the other hand, the large national organizations could, of course, maintain only small branch offices in cities of moderate size and so would not be as likely to become identified with the communities served, or to develop a sense of continuing responsibility which local houses must demonstrate if they are to survive.

claiming such misrepresentation. In view of the normal tendencies of juries to be liberal in support of the contentions of individuals against brokerage firms, corporations, etc. the present rule as to the burden of proof should be continued as it is more than ample protection for the injured party. Shifting of the burden to the party charged with the misrepresentation is contrary to the principle of American jurisprudence that guilt is never to be presumed and is encouragement for groundless and concocted litigation.

Section 11 (c) should be amended by striking out all of paragraph (II) commencing on page 23, line 17 and ending on page 24, line 23 and inserting in lieu thereof:

(II). Such information as to the issuer and affiliates as in the opinion of the Commission is necessary for the proper protection of the public and of investors in the securities of the issuer."

The advisability of this amendment lies in permitting the Commission to prescribe its requirements as to the information to be submitted instead of providing positively in the statute as to the information, much of which will, in certain corporations, be both unnecessary and burdensome. The amendment provides for greater flexibility and still gives to the investing public, through the Commission's regulations, the protection which the act intends.

Section 12 (a), subdivision (2), should be amended by striking on page 25 line 21, the words “and quarterly", and further amended by striking out entirely subdivision (3) lines 24 and 25, thereafter changing the numbering of subdivision (4) line 1, page 26, to subdivision (3). These changes are intended to eliminate certain of the most burdensome and unnecessary requirements placed upon corporations with registered securities.

Section 15 (b) subdivision (3) should be amended on page 30 by changing the word “unless" in line 5 to “if” and striking the word "no" in line 6. This again relates to the burden of proof the argument with respect to which has been set forth in connection with the amendment to section 8 (a) (5).

Amend section 16 by ending the sentence with the word “appropriate", line 11, page 31, and striking out the balance of the sentence commencing with and the cost”, in line 11, and ending with “person examined", line 14, page 31. Placing of the burden for expensive and cumbersome, and possibly unnecessary, investigation upon the party investigated is contrary to the principles of democratic government and of Anglo-American jurisprudence. The burden of payment for investigation, etc. should only rest upon the party investigated if found guilty of violations of the provisions of the statute. The heavy penalties elsewhere imposed in the statute would appear sufficient to take care of this liability.

Section 17 should be amended by ending the sentence with the words “such statement", line 18 page 32 and striking commencing with “unless the person", line 8, page 32, to and including “false or misleading", line 11, page 32, and inserting on line 2 page 32, after the word “investor" and before the word "shall" the following: “and which statement is, or in the exercise of reasonable care should be, known to the person making or responsible for it as false or misleading."

This again shifts the burden of proof back to where it belongs under recognized principles of law. The argument for this change has been set forth more at length with respect to the amendment to section 8 (a) (5).

The CHAIRMAN. You have the remainder of the morning, Mr. Secretary, but a gentleman has come down here from Connecticut, representing some of Mr. Maloney's people.

Mr. DICKENSON. I will yield, with pleasure, Mr. Chairman.
The CHAIRMAN. I will ask Mr. McKeon to proceed.

STATEMENT OF JOHN J. McKEON, REPRESENTING THE CON

NECTICUT INVESTMENT BANKERS' ASSOCIATION

Mr. McKEON. My name is John J. McKeon. I am the senior partner of Chas. W. Scranton & Co., of New Haven, Conn. The firm has been in business since 1892 and I have been associated with it continuously since 1895.

Mr. Chairman, I very much appreciate the privilege you have given our Connecticut group to state our views here this morning.

The Connecticut Investment Bankers' Association has 40 members and includes practically all Connecticut firms registered to deal in securities under the laws of that State. A large number have been doing business from 20 to 60 years, while the others are conducted for the most part by men who received their earlier training with the older firms. A few of us hold memberships in the New York Stock Exchange and other exchanges, but the large majority are not members of any national exchange. These nonmembers, however, handle a substantial volume of business in listed securities through the medium of member firms.

As we read this bill, including its title and preamble, it is apparent to us that it was intended to prevent by legislation certain abuses which have crept into the securities business. In this respect the bill has our complete and whole-hearted support. However, we believe that in many of its provisions the bill goes considerably beyond its stated purpose, and unless these provisions are very much modified, or completely omitted, an incalculable amount of harm will be done to a multitude of investors, particularly those who do not reside in the three or four large financial centers.

The sections which give us the greatest concern and to which we most seriously object, are sections 10 and 7, sections 14 and 18, and section 6.

I should first like to comment on secton 10.

The first sentence of this section makes it impossible for investment firms to accept orders from their customers for listed securities if they also act as a dealer in unlisted and local securities. By enacting this provision, you will do two things which I feel certain are not intended.

First, you will injure the investor by destroying the relationship which he has with his investment firm and you will also make impossible the attainment hy him of what no one will deny is the most desirable relationship possible between the customer and his investment advisor. May

May I illustrate this point: If you are an investor and have been a resident of a city of medium size for a number of years, you should be able to go with complete confidence to at least one house for advice and assistance with regard to any or all of your investment problems. These include the selection of new investments, the review and analysis of those already held, as well as the execution of orders and the physical handling of the securities. Besides having a high degree of confidence in the integrity of those who conduct the business, you as an investor want to be satisfied that they have had a broad experience with and are well informed regarding all types of securities. It goes without saying then that they should have facilities for executing any orders you may decide to give them, whether in listed or unlisted securities. And of course, you do not want them to be prohibited from handling your business,

Secondly, a law which segregates the business of a broker in listed securities from that of a dealer in unlisted securities will eliminate from the field the local house and so it will tend to drive into the hands of a comparatively small group of large national organizations practically the entire securities business. The local house, obliged to choose between one or the other line of business, could not do a sufficient volume in either one to permit it to continue in business. On the other hand, the large national organizations could, of course, maintain only small branch offices in cities of moderate size and so would not be as likely to become identified with the communities served, or to develop a sense of continuing responsibility which local houses must demonstrate if they are to survive.

The service given by our local Connecticut houses to their communities as such is no mere figure of speech. May I draw to your attention a single illustration? During the past 2 years several of our Connecticut municipalities were upon occasions in dire financial distress because the market for new issues had practically disappeared. Under the leadership of Connecticut firms, who are also members of the New York Stock Exchange, the necessary financing was accomplished locally so that not one of our cities or towns in need of financing has been left uncared for. I submit that, if prior to that time our Connecticut firms had been obliged to elect as to which type of business they would do, and had elected to do solely a brokerage business, this service to our Connecticut municipalities would not have been performed. While we had implicit confidence in our communities and in their ability to recover, I maintain that it required an attitude of service and a real sense of responsibility to our communities to accomplish what was done.

The above merely illustrates one service performed during a short period of time. Many others might be related. Therefore, with all the seriousness and with all the force that I am able to command, I wish to state that our group believes that some way must be found to permit the broker, dealer, and underwriter relationship to continue to exist, if any but the very largest cities of the country are to be served in their municipal and industrial financing, and if a complete investment service is to be afforded to our Connecticut investors.

Section 7, subdivision (c): My comments in reference to section 10 apply also to subdivision (c), of section 7, which prohibits brokers in listed securities from placing any of their firms' capital in securities to be held for their own account. Obviously, if section 10 should be modified to permit investment firms to function both as brokers in listed securities, and also as dealers in unlisted securities, this part of section 7 will have to be modified to conform with any change made in section 10.

Section 14 and section 18: These sections provide for regulation by the Federal Trade Commission of the business of dealing in unlisted securities both with respect to the terms on which dealers may market them and also with respect to the information required to be filed with the Commission by the corporations who have in the past issued these securities. In other words, the effect of the two sections combined is to make it possible for the Commission to apply to local and other over-the-counter securities now outstanding the same requirements which the corporations involved would have to meet if such corporations were now to issue new securities in accordance with the terms of the Federal Securities Act of 1933. Should the Commission exercise to the fullest extent the power so given, the market for a large part of these securities might be entirely destroyed by reason of the fact that the corporations might fail to furnish the complete financial statements required by the Commission and consequently all transactions in securities of such companies would be placed under a

Furthermore, even if difficulty did not arise in this form, restrictions on the making of a market for these securities might be so burdensome as to make dealers reluctant to handle any transactions in issues in which the volume of trading is not large enough to justify the expense involved by compliance with the regulations imposed.

At this point I wish to say that our group does not believe that the Commission will use their power arbitrarily or unjustly, but we do wish to point out that these sections impose on the Commission duties, the wise administration of which will be very difficult, indeed, if not impossible.

Section 6, subdivision (a): This provision prevents a member of an exchange or anyone transacting business through such member from extending credit on unlisted securities. This means that a client who has a margin account with a member of an exchange may not use as collateral to protect his account any unlisted securities no matter how high grade or how highly liquid they may be. This restriction would exclude as collateral certain obligations of the United States Government as well as municipal and State bonds, railroad equipment bonds and other over-the-counter securities which, in the past, it has not been customary or feasible to list on a national exchange. This seems to us to work an unnecessary hardship on the marg!n trader in listed securities and at times of an emergency, it might imperil his position and also that of his broker. This could occur in spite of the fact that a client possessed adequate and satisfactory resources, for, in times of emergency, circumstances might well make it impossible to arrange promptly with banking institutions for separate credits on his unlisted collateral.

In Connecticut, where investors have a substantial portion of their resources invested in our own manufacturing, utility, and insurance stocks, this restriction could be especially burdensome and dangerous. Here again, we have an illustration of the inadvisability of completely segregating business in listed securities from all other security transactions.

We believe that the views which I have tried to make clear to you are entitled to your serious consideration, because in presenting them we have tried to show how the bill will have harmful effects on investors in Connecticut and also in other States. It seems to us that some way must be found to provide safeguards necessary to prevent abuses without depriving investors of the advantages they now possess. I refer to the markets which make liquid their over-the-counter securities and the services provided by responsible local houses equipped and permitted to conduct a general investment business. Unless this is done, the bill will fail to confer on investors the benefits for which it has been designed and which we all hope will be accomplished.

We are keenly aware of how difficult it is to reconcile all of these matters and we are continuing to give the subject intensive study. It may be that some concrete proposals will be developed. In this event, and provided your committee will be interested in receiving them, we shall be glad to forward them to you.

The CHAIRMAN. We are very much obliged to you, Mr. McKeon.
Mr. MERRITT. Mr. Chairman-
The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. Mr. McKeon, it is true, is it not, that in Connecticut, and throughout New England generally, there are great numbers of small corporations, manufacturing and otherwise, which have been going on for generations with their operations well known in their communities, and to the banks in general.

Mr. McKeon. Yes, sir.

« PreviousContinue »