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privileges for securities shall require that quotations of transactions upon any national securities exchange shall clearly indicate the difference between fully listed securities and securities admitted to unlisted trading privileges only.
The difficulty in a nutshell is simply this: You have three grades of securities. The first is those which are fully listed--the New York Stock Exchange will not trade in securities that are not fully listed. The second is those not listed but admitted to trading privileges. The New York Curb Exchange is a big exchange on which there is a great deal of trading in such unlisted securities. You understand, sir, what the difference is. In the case of fully listed securities the corporation issuing the securities itself applies for the listing, and as part of the listing application agrees to furnish information and afford certain protection to stockholders. In the case of securities only admitted to unlisted trading privileges, the security is never formally listed on the exchange, nor does the issuing company itself ever come within the jurisdiction of the exchange. But if a broker who wishes to trade in the security will vouch for it himself and furnish certain information about the security (and in the case of the New York Curb Exchange, if the issuing corporation consents, although it never comes within the jurisdiction of the exchange) trading is allowed to go on in the securities on the floor of the exchange in the same manner as with fully listed securities. To mark the difference between the added protection given the investor, where the corporation itself lists securities, as distinguished from the situation where somebody else merely applies for trading privileges, the New York Curb clearly marks with an asterisk in the trading quotations those securities which are fully listed and those which are not.
You have therefore three grades of securities. First, those fully listed, in which you have maximum protection for the public. Second, those which have unlisted trading privileges. For these the stockholders of the corporation have, so far as the market is concerned, although not as far as the information is concerned, approximately the same benefit he would have if the corporation had fully listed the security. Third, securities traded in an over-the-counter market, securities not listed anywhere at all.
The New York Curb makes this argument, if you will not recognize unlisted securities on exchanges, securities admitted to unlisted trading which should be preferred to over-the-counter securities will go to the over-the-counter market, where they will be even more difficult to regulate. But the danger is that if you encourage unlisted trading privileges in securities, which in the market sense alone will be substantially satisfactory for the stockholders, you will make it easier for a management that wants to duck the provisions of the bill about information to de-list fully listed securities and arrange through a broker for their admission to unlisted trading privileges.
There is no resolution of that argument possible right away. Different requirements for unlisted securities admitted to trading privileges are maintained by different grades of exchanges. Some exchanges may be brought to surround securities admitted to unlisted trading privileges with quite adequate protection although they cannot be as completely adequate as those protecting securities fully listed on the New York Stock Exchange.
At the other end of the scale are exchanges where the unlisted trading privilege is just a dodge to create a quotation.
The only intelligent resolution of the difficulty you can make at the present time is to give the Commission power to determine between the conditions on which unlisted securities are admitted to trading privileges; let the Commission pick out those exchanges on which the safeguards for unlisted trading privileges are now half decent, and let those exchanges continue for 1 year in those trading privileges the securities so privileged just before the act goes into effect for a year. In the meantime have the Commission study the problem and report to Congress by the opening of the next Congress. Congress will then have disinterested advice how to handle this problem of the unlisted trading privilege, and the exchanges will have had an intervening time in which possibly to work out the problem for themselves.
Mr. LEA. Well, now, as to the status of those unlisted securities that have the trading privilege after next January, assuming that Congress takes no further action than passing this bill as it is, what would be their status?
Mr. CORCORAN. This bill gives them sufferance until next March. That would give 3 months in which Congress can do something. If Congress does not act, they could no longer be traded under the privilege, and must simply have to list or go to the over-the-counter market.
Mr. LEA. They would then be denied the privilege of trading on the markets?
Mr. CORCORAN. And in that time, you are considering
Mr. CORCORAN. You will find that is covered in the first full sentence on page 35 of the bill. You consider them as if they were listed securities. The problem is a very difficult one, sir, because you have all gradations of requirements by exchanges for this curious animal called an “unlisted security” admitted to trading privileges.
Mr. LEA. So if a stock is listed on the exchange in New York, could it be sold on the Chicago exchange without listing in Chicago, under this bill?
Mr. CORCORAN. This bill, sir, says that if at the present time it is sold without listing in Chicago, say, on the Chicago Curb, it may continue so to be sold. That is, the bill preserves the status quo for a year while the problem is being worked out.
Now, the New York Stock Exchange makes corporations which list with it agree not to permit, so far as the corporation can, unlisted trading in the corporation's securities on other exchanges. The theory of the New York Curb is that if a security is listed on any exchange, any other exchange ought to be free to trade in it without the necessity of requiring the security to be listed on the second exchange.
Mr. LEA. Well, looking at it from the long-time viewpoint, say, take the situation 4 years from now, if this bill becomes a law, a stock is listed on the New York Stock Exchange, and somebody wants to list it for trading purposes on the Chicago exchange. Will that be permitted?
Mr. CORCORAN. The bill has nothing it in, sir, to prevent the security being so listed upon the Chicago exchange. Even if Congress should not act before next March 1, there is no prohibition against the stock being listed on the Chicago exchange if the issuer will list it as he listed it on the New York exchange, and if the issuer is permitted, by the rules of the New York Stock Exchange, to list on the Chicago exchange. They are cutting across this matter both the rules of the exchanges and the law.
The New York Stock Exchange does its level best to prevent the listing of any stock listed with it upon a second exchange, so that the market is concentrated on the New York big board.
The other exchanges, of course, fight the New York Stock Exchange on that point.
Mr. LEA. Well, if this bill becomes a law, will it permit the memers of the San Francisco Stock Exchange, for instance, to place on the San Francisco Stock Exchange, for trading purposes, a stock listed on the New York Stock Exchange?
Mr. CORCORAN. Unless the security had been admitted to unlisted trading privileges on the San Francisco Exchange on March 1 of this year; no. The present situation is kept in status quo. There could be no new unlisted stock traded in upon the San Francisco Exchange until the Commission's report and Congress' consequent decision. The problem is a very difficult one. The exchange does not have control over the issuing corporation when the security is not fully listed as it has when the security is fully listed. Someone from the outside, usually a broker, comes in and gives what the exchange considers adequate information. The exchange can check some of that information in Poor's and Moody's, but there is never a listing agreement between the corporation and the exchange, by which the exchange has a contract with that corporation, as there is in the case of listings on the New York Stock Exchange.
Mr. LEA. From the standpoint of the public, when a stock is shown as qualified by being registered on any listed exchange, in accordance with the regulations of the Federal Government, why should not the stock be sold on any listed exchange?
Mr. CORCORAN. We are talking now, sir, of a case where a stock is listed, say, on the New York Stock Exchange, fully listed, and the problem is whether it can be traded in on any other exchange.
Mr. LEA. Yes; in other words, if a stock establishes its right to be presented to the public for purchase, when it once obtains a listing under the rules of the Federal Government which provides for that?
Mr. CORCORAN. That, sir, depends upon a consideration of whether the first exchange, the only one upon which the stock is fully listed, can really maintain control of the issuing corporation if the stock is traded in on a half a dozen other exchanges, too. The theory of the New York Stock Exchange is that it cannot keep adequate control of the situation if it does not have all of the trading in the stock concentrated through itself.
The claim of the other exchanges is that there is no reason why Detroit should not be able to trade in New York Stock Exchange stocks if Detroit wants to. There are so many intricacies involved in the relationship between the exchanges themselves and between the exchanges and the listed companies, that no adequate answer can be made to the problem in a limited time.
So the bill freezes the situation for a year, tells the Commission to study the problem and to put the problem up to the next Congress. The certain cut-off of March 1935 is provided to make certain that the Congress will consider the problem.
Mr. WOLVERTON. Mr. Chairman-
Mr. WOLVERTON. Does this bill by its terms fix any requirement for the trading of a stock on the exchange other than the requirements that are now in force by the rules and regulations of the stock exchange?
Mr. CORCORAN. Which stock exchange; the New York Stock Exchange?
Mr. WOLVERTON. Yes; the New York Stock Exchange. We will take that exchange for the purpose of the first question.
Mr. CORCORAN. Yes; it does.
Mr. CORCORAN. It requires a more full reporting policy than is at present required by the exchanges. It puts the Commission in a position where it can require a fuller reporting policy on the part of the listed corporation than the New York Stock Exchange at the present time is in a position to require.
Mr. WOLVERTON. What section does that come under? Mr. CORCORAN. 11 and 12. Mr. WOLVERTON. What I have particularly in mind, and which I will use as an illustration, is the unfortunate situation that arose through trading in certain alcohol stocks, last summer. If I remember correctly, the investigation made by the Senate committee revealed that the listing of that stock was made possible because of failure on the part of stock exchange authorities to examine balance sheets of the corporation offering the stock for listing. It has been suggested that if the stock exchange authorities had considered such balance sheet they would not have permitted that situation to arise last June.
Now, is there anything in this bill providing additional requirements that would preclude that situation arising again?
Mr. CORCORAN. As I remember that was a case where the stock exchange did not look through the rigging of a subsidiary.
Mr. WOLVERTON. Yes.
Mr. Corcoran. Through which options were washed. The stock exchange listing committee, had before it then, as I understand from Mr. Altoihul's testimony, plenty of information, but just did not see it.
Mr. WOLVERTON. That was the impression I had from the testimony.
Mr. CORCORAN. Under this bill the listing of those additional shares would have had to come through two bodies. It would have been submitted to the stock exchange, and it would also have been submitted to the Commission, down here, so that there would have been two checks.
There was nothing additional required to what the stock exchange had to do the job in connection with that American Alcohol case. The listing committee just slipped.
Mr. WOLVERTON. I am interested from the standpoint of the investing public. What is there in this bill that would have prevented that situation, if this bill had been in effect at that time?
Mr. CORCORAN. A requirement, sir, that the listing applications come down to the Commission as well as to a listing committee on the stock exchange, so that the slip probably would not have occurred in both places.
You are putting me a case where I cannot make much of a showing, for the reason that there was a case where the rules of the stock exchange required, and got the necessary information, but the stock exchange listing committee did not look at the information.
Mr. WOLVERTON. Yes, I understand that there was a slip some place or other.
Mr. CORCORAN. Yes.
Mr. WOLVERTON. It is for that reason that I am inquiring as to what has been provided in this particular bill to prevent any such possibility in the future.
Mr. CORCORAN. It provides a double check, sir.
Mr. WOLVERTON. Well, are you satisfied then that this bill, by its provisions, would have dealt effectively with that situation if it had been in effect at that time?
Mr. CORCORAN. It would certainly have decreased, sir, the risk that the situation could occur, because a second pair of eyes would have been going over the same papers. There is no way in the world, sir, whereby you can assure that men will not slip; but the listing application, the registration, would have had to pass two sets of eyes.
Mr. WOLVERTON. But is there no additional requirement set up before the stock can be listed than previously existed?
Mr. CORCORAN. The listing requirements for the Commission are set out on page 32.
Mr. WOLVERTON. Do they provide anything in addition to what the rules and regulations of the stock exchange require?
Mr. CORCORAN. I am not absolutely sure, sir, because how much the Commission would ask for under any one of these headings on page 32 would depend upon the circumstances of a particular case. The stock exchange is in a position now where, theoretically, it has the power when an application comes to it to ask for just as much information as the Commission could ask for. It is a question of how far the Commission would follow
and demand more information.
Mr. WOLVERTON. But does this bill lay down any fundamental principles for listing of stocks which is not already in effect by the rules and regulations of the stock exchange?
Mr. CORCORAN. No; I do not think so, sir, except that it does require-now, we are talking about the initial listing?
Mr. WOLVERTON. Yes.
Mr. CORCORAN. It does lay down considerably advanced requirement for the reporting policy of the listing corporation after the listing has been made, in that it puts the Commission in a power where it can demand not only annual statements with an audit, but other unaudited statements down to quarterly and monthly reports.
Mr. WOLVERTON. Is there any power given in this bill that will permit the regulating agency, which is the Federal Trade Commission, to fix in the future rules and regulations with regard to listings?
Mr. CORCORAN. Yes. The Commission is put in a position where, if it thinks that the rules and regulations of any stock exchange with respect to listing requirements are too lax, it can call the rules to the stock exchange's attention and ask the exchange to change the rules. If the stock exchange does not change the rules, the Commission can,