alone. The number of corporations of all types-industrial, rails, public utilities, etc.-whose stocks are listed on the New York Stock Exchange has been stated to be 788. Here we have the fundamental and vital difficulty with this bill, from our point of view.

Based, as the bill appears to be, on a desire to regulate the large exchanges of the country, and drafted with an eye to their peculiar problems, it has wholly overlooked the infinite diversity of the overthe-counter business and of the problems of that business. After devoting section after section to regulation of the stock exchanges and of the corporations whose securities are listed on the stock exchanges, it finally lumps the over-the-counter business in one comprehensive catch-all section (sec. 14), and leaves its entire regulation to the unfettered discretion of the same commission which is to regulate the stock exchanges and which will necessarily be principally occupied with their problems.

As the very name of this act implies, it is designed primarily for the regulation of national securities exchanges. Whether or not its provisions are well- or ill-adapted to meet these purposes, and whether or not the Federal Trade Commission is well-adapted or ill-adapted for this function, has been and is likely to be the subject of much testimony and thoughtful consideration here. We do not come to speak on that subject, except insofar as the over-the-counter business is affected thereby.

We come for what may be termed the "forgotten man" of the securities business, not the man whose large-scale dealings in the securities of a few great corporations fill the popular imagination, but the man who day in and day out provides a market for the infinitely larger number of smaller corporations which make up the backbone of the business of this country.

It is true that our New York Security Dealers Association represents only a small fraction of the business of this character in the United States. We do not presume to speak for all the dealers in that business. They are scattered through all the samller cities of the land. Wherever there is a group of small companies in a community whose securities are dealt in locally, there will be a local dealer or dealers who will strive to supply a market for that purpose.

We speak only because we have been invited to do so, and in confidence that our business is typical and representative of that of the many other cities of the United States. Nor does our association, of course, represent all or nearly all of the dealers in New York.

There are necessarily some people engaged in the business who are unfitted by character and experience to assume the very real responsibilities of this business. This group will attempt to avoid regulatory supervision, just as the bootleggers did under prohibition, and particularly where the supervision comes from so remote a source as Washington. There may well be prosecutions of a few offenders, but a few prosecutions and convictions will not stamp out the evil, particularly where the prosecution will be as slow and cumbersome as must inevitably be the case where it emanates from a single huge Government bureau in a distant central point. The real hope lies in constant vigilance and self-regulation in the locality.

I rather expect that the stringent regulations proposed in this bill in regard to lending on securities will result in the creation of a great bootleg lending market. If a man can no longer borrow from a

respectable dealer or broker more than $400 on a $1,000 bond, the pawnshops will soon provide him with an opportunity to pledge the same bond together with 1 stickpin, and to borrow $800 on the 2 of them, marking $400 against the bond and $400 against the stickpin. If the prohibition law has any lesson for us, I venture the suggestion that that lesson is that the Federal Government will not, as a practical matter, be able to reach this kind of business.

The respectable and honest dealers, and I confidently state that they are in the great majority, are as much opposed to the dishonest dealer as are the members of this committee. We suffer daily from his competition. What we really fear, is that this bill will encourage and promote his business and not discourage him. By constant local vigilance we have in the last decade gone far in the elimination of what might be called the "underworld" of traders in securities. That has been the prime cause for the creation of our association. At this moment, our members have been advised to subscribe to the proposed draft of Code of Fair Competition for Investment Bankers, which upon its adoption will provide stringent regulations on the same subject matter.

These regulations will, of course, like those under all codes, be enforced in the first instance by others engaged in the same business in the respective localities, and only the appropriate power of supervision and review will be required from the Federal Government itself. This seems to us to be a constructive step forward. But a proposed :statute simply throwing this whole great subject under the general jurisdiction of the Federal Trade Commission seems to us a step backward which can only lead to the encouragement, and not the discouragement, of dishonest and bootleg practices throughout the country.

I come now to particular provisions of the act.

Under paragraph 3 exchanges are defined to include any board or market place, whether organized or unorganized, however managed or conducted, and whether incorporated or unincorporated, where or by means of any facility of which, contracts or offers for the purchase or sale of securities or other transactions in such securities are made.

It appears to me as a layman that these words may well be broad enough to cover every place of business of an over-the-counter dealer. Purchases and sales are certainly made there, and by the use of its facilities. In a broad sense, it is itself a board or market place.

Yet we feel certain that the Congress cannot intend the absurd result that every little over-the-counter dealer's place of business is itself to be an "exchange" for all purposes of the act.

To insure that the intent will be clear, we suggest that the definition of exchanges be confined to regularly organized exchanges (as is done in the draft of Investment Bankers' Code).

We now come to paragraph 6. The problem here is whether the average over-the-counter dealer is "a person who transacts a business in securities through the medium of a member" of an exchange.

Here dealers divide into many classes. Most of them also act as brokers in varying degrees. Why is this? The reason is simple, that the customers demand it. The average investor regards brokers and dealers as really the same. He uses the broad term "broker" to apply to both classes, and to him his broker is the man through whom he can sell the security he doesn't want to hold any longer, and can buy the one he wants.

The average investor has no necessity to catalog in his own mind the house with which he does business definitely as broker or dealer, because of the general nature of the activities of the house; his requirements are that he know on every particular transaction what the relationship of the house is to him, whether it is as broker or agent on a commission basis or whether the house is a dealer acting on a net basis.

Now, in my firm, for example, if a man wants us to sell for him 100 shares of a listed stock, we pass the business on to a stock-exchange firm and take no additional commission above that charged us by the stock-exchange firm. This is the customary practice among over-thecounter dealers in New York. We cannot understand the economic benefit in upsetting the habit of our customer (which may be of years' standing and based on mutual trust) of going to a single broker or dealer for his financial advice and his financial transactions. In effect, you would be requiring us to tell him: "No, we will handle your Home Owners Loan Corporation and your municipal bonds or your publicutility preferred and insurance stocks for you, but we won't handle your A. T. & T. or your General Electric or your General Motors." The customer is baffled. To him they are securities, they are all one; and he wants us to handle them for him.

In my judgment, the principal effect of this will be to deprive the customer of the benefit of the knowledge of the dealer which is the result of years of experience and accumulation of records. The knowledge acquired by the sum total of the dealers throughout the country of all classes of securities-including those in which they do not themselves personally deal-is a real asset to the investors of the country. This bill proposes to kill that asset at one blow.

Many Members of the Congress are lawyers. They understand well the difference between office lawyers and court lawyers, for example: Yet the layman speaks only of "his lawyer." Most likely, his lawyer does not go into court; yet the layman goes to him with his court case, if he has one, and trusts to his lawyer to pass it on to the proper specialist if the need one-whether it be a divorce lawyer, a patent lawyer, a corporation lawyer or one specially qualified in bankruptcy law, railroad law, radio law, criminal law, or any other of the innumerable classes in which lawyers are specializing today.

So in the securities business there is an infinite variety of specialists. The lay investor cannot know them all. He comes to me and I take care of him, calling in the proper specialist where he has a security of the type I do not personally handle. But under the proposed bill I must turn him away whenver he comes with a type of security which is not what I myself directly handle; and I must do this under penalty of never being able to make a loan to him or arrange a loan for him on the very type of security which I do handle the over-the-counter security not listed on any stock or securities exchange.

We submit that this sort of division into rigid classes or castes of the different types of dealers or brokers is arbitrary, unnecessary, and fundamentally un-American.

I should suppose that these considerations are even more important to investors outside of New York than to investors in New York. The New York investor can perhaps educate himself as to the different types of available brokers and dealers. But the man in the smaller city or town will only have a few brokers or dealers available. Far

more than the New Yorker, even, he wants to deal with the broker whom he has confidence in, whom he knows. Indeed, in many places he has hardly any choice. Yet if that broker does any business through the medium of any member of any exchange, he will be debarred from taking any orders for his customer in baby bonds, guaranteed railroad stock, real-estate bonds, municipal bonds, and all the other types of securities not dealt in on an exchange. He will be debarred even from loaning or arranging for a loan on any of the stocks or bonds in local companies owned by his customer.

We therefore believe it to be extremely important that the same loan privileges be granted to unlisted securities as are finally granted to listed securities.

Indeed, the effect of requiring brokers and those dealing with brokers to get rid of the unlisted collateral in their accounts will in my opinion result in a great amount of dumping, the effect of which will be definitely deflationary.

This is more important outside of New York, as we in New York do our over-the-counter business almost entirely on a cash basis, whereas in other cities customers' securities are very frequently carried by the dealers, who are in many cases members of at least one exchange.

We further believe that the phrase "any person who transacts a business in securities through the medium of any such member" should be replaced by a phrase which would be limited to persons habitually and primarily engaged in a brokerage business on an exchange.

The same considerations apply to the term in section 10:

Any person who as a broker transacts a business in securities through the medium of any such member.

We come finally to section 14. Placing all "over-the-counter" trading and dealing under the jurisdiction of a commission is not objectionable per se. No honest security dealer is afraid to be under supervision, any more than anyone else conducting an honest business. There is a belief among us, however, that a national commission, if not fully acquainted with the nature of the over-the-counter business, might attempt to regulate it along lines which follow strictly the regulation of exchanges. The "over-the-counter" business differs in so many ways from exchange business that it plainly needs rules of its own which, though similar in general scope and purpose to those applying to the listed business, must of necessity differ from them in details, many of which are essential to the survival of the business. Trading in securities "over-the-counter" is the oldest form of dealing in securities. It antedates all exchanges and is essentially one of barter or negotiation.

There can be no argument against the pure theory of an exchange, a central meeting place where the orders of buyers and sellers of active securities meet at a central place and are executed at one price at a fixed rate of commission. The trouble comes when it is attempted to stretch the theory to cover securities and situations to which it cannot apply.

Our recommendation is that, inasmuch as the investment bankers' code when approved by the President will itself become a law regulating the activities of dealers in securities, and inasmuch as that

code contains stringent and enforceable regulations, there is no necessity, at least at this time, for the enactment of section 14 of the proposed National Securities Exchange Act.

Before closing, may I express my thanks to the chairman and members of this committee for giving me this patient hearing. This concludes my formal statement. I would like to submit for the record a brief statement with regard to the practice of dealing in unlisted securities on exchanges-with particular reference to the document submitted by the New York Curb Exchange on this same matter, and I would be happy to answer any questions which any member of the committee may wish to ask.

ACTIVE MEMBERS OF THE NEW YORK SECURITY DEALERS ASSOCIATION

Allen & Co., Charles Allen, Jr., New York, N.Y.; Bristol & Willett, Meyer Willett, 115 Broadway, New York, N.Y.; Frank Charcot, Jr., 25 Broad Street, New York, N.Y.; Clokey & Miller, Gerald Clokey, 50 Broadway, New York, N.Y.; T. C. Corwin & Co., T. C. Corwin, 25 Broad Street, New York, N.Y.; Doty, Fay & Co., A. C. Doty, 15 William Street, New York, N.Y.; Dillon, Throckmorton & Shantz, Howard D. Shantz, 115 Broadway, New York, N.Y.

Chas. E. Doyle & Co., Frank Y. Cannon, 20 Pine Street, New York, N.Y.; Joseph Egbert, 2 Rector Street, New York, N.Y.; Elliot & Wolfe, George A. Elliot, 115 Broadway, New York, N.Y.; Englander, Birnbaum & Co., Gustave L. Birnbaum, 30 Broad Street, New York, N.Y.; Clinton Gilbert & Co., Clinton Gilbert, 120 Broadway, New York, N.Y.; Greene & Co., Irving A. Greene, 37 Wall Street, New York, N.Y.; Greene & Perkins, Herbert L. Perkins, 39 Broadway, New York, N.Y.; George W. Hall & Co., George W. Hall, 61 Broadway, New York, N.Y.; Hanson & Hanson, A. R. Hanson, 25 Broadway, New York, N.Y.

Dunne & Co., Frank Dunne, 40 Wall Street, New York, N.Y.; Fred H. Hatch & Co., Inc., Arthur C. Madeau, 63 Wall Street, New York, N.Y.; Hewitt, Ladin & Co., J. F. Hewitt, 74 Trinity Place, New York, N.Y.; Hoit, Rose & Troster, James Currie, Jr., 74 Trinity Place, New York, N.Y.; C. E. Judson & Co., Chas. E. Judson, 19 Rector Street, New York, N.Y.; Katz Brothers, Moe I. Katz, 37 Wall Street, New York, N.Y.; Kearns & Williams, Chas. M. Kearns, 11 Broadway, New York, N.Y.

Hardy & Co., Lee Roth, 11 Broadway, New York, N. Y.; Lawson & Co., S. W. Lawson, 111 Broadway, New York, N.Y.; W. Wallace Lyon & Co., L. B. O'Meara, 40 Wall Street, New York, N. Y.; Morgan, Trow & Co., Ralph C. Morgan, 120 Broadway, New York, N.Y.; Munds, Winslow & Potter, Frank S. Thomas, 40 Wall Street, New York, N. Y.; William Morris & Co., William Morris, 44 Pine Street, New York, N. Y.; George Nelson & Co., George Nelson, 74 Trinity Place, New York, N.Y.

H. D. Knox & Co., Herbert M. May, 11 Broadway, New York, N. Y.; Lasser Bros., Maurice Lasser, 70 Pine Street, New York, N.Y.; R. G. Notine & Co., Robert G. Notine, 74 Trinity place, New York, N.Y.; John J. O'Kane, Jr. & Co., John J. O'Kane, Jr., 42 Broadway, New York, N.Y.; Outwater & Wells, H. Prescott Wells, 15 Exchange Place, Jersey City, N.J.; J. Roy Prosser & Co., J. Roy Prosser, 52 William Street, New York, N. Y.; F. L. Rabe & Co., F. J. Rabe, 120 Broadway, New York, N.Y.

Mark Noble & Co., Mark A. Noble, 30 Broad Street, New York, N.Y.; L. A. Norton & Co., Harry D. McMillan, 35 Nassau Street, New York, N. Y.; Simons, Blauner & Co., Isidore B. Kraut, 25 Broadway, New York, N. Y.; Sirota, Rosen & Co., Nathan Rosen, 42 Broadway, New York, N.Y.; Carroll M. Swezey, 42 Broadway, New York, N.Y.; Hart Smith & Co., H. Hart Smith, 52 William Street, New York, N. Y.; Spielmann, Shea & Co., Henry Spielmann, 111 Broadway, New York, N.Y.

J. K. Rice, Jr., & Co., Richard C. Rice, 120 Broadway, New York, N.Y.; B. H. Roth & Co., B. H. Roth, 25 Broad Street, New York, N.Y.; Wm. J. Ryan & Co., William J. Ryan, 44 Wall Street, New York, N. Y.; Leo G. Siesfeld & Co., Leo G. Siesfeld, 25 Beaver Street, New York, N.Y.; W. C. Simmons & Co., W. C. Simmons, Room 1810, 40 Exchange Place, New York, N.Y.

P. J. Steindler & Co., Percival J. Steindler, 11 Broadway, New York, N.Y.; Tweedy & Co., F. B. Tweedy, 15 William Street, New York, N.Y.; G. M. P. Murphy & Co., Prescott Erskine Wood, 52 Broadway, New York, N. Y.; National