Then we ran into a third case of a peculiar type, and that is this. Here we will say is the security of a corporation which is listed in New York and traded in New York. There is outstanding another security of that corporation which is not listed anywhere. Since the corporation has listed one security, adequate information about that corporation is present, and therefore there can be no objection on the score of inadequate information, to admitting the second security to trading on an exchange. It is already there as a consequence of registering the first security.

The objection to the admittance of that security to an exchange arises from the fact that an exchange market may not be desirable for that security, not from the fact that information with reference to that security is missing.

Therefore, again we suggested with reference to that class of securities, which is not a large class of securities by any means, that an exchange ought to be permitted to put a security of that type on, to make it available for trading on that exchange, provided that it could show and prove to the commission that an exchange market was desirable in that particular security and, of course, that the information was available.

Mr. MERRITT. If you are not going to state it hereafter, will you kindly say now what conditions make trading undesirable? I do not see how it can hurt anybody.

Mr. LANDIS. You mean trading on an exchange?

Mr. MERRITT. Yes.

Mr. LANDIS. I think there are conditions that make an exchange market undesirable. Namely, take this condition. Here is a security which may not be fully distributed. It may be in the process of distribution. One of the great methods of distributing that security-and sometimes a very unfair method-is to distribute the security off the exchange as against exchange quotations. Consequently a little maneuvering of those exchange quotations enables you to establish the price at which your salesmen will sell it off the exchange. There is a great tendency to manipulate those prices on the exchange in order to carry on this sales campaign off the exchange.

Mr. MERRITT. Well, I do not want to argue this with you, but the information about the company is with the exchange.

Mr. LANDIS. That is true.

Mr. MERRITT. And anybody who would take the trouble could find out?

Mr. LANDIS. That is true. But there is a tendency there not to have a free and open exchange market because of the vast amount of securities that are still in the process of distribution off the exchange. Most of the exchanges recognize that and refuse to admit to trading a stock that is in the process of distribution. Some of the smaller exchanges have at present rules which are not perhaps conducive to the best interests, and which we have been taking up with them, and they will permit the listing of a security at times when only 25 percent or 30 percent of the security is distributed. The purpose of listing there is not to create a ready market, because the ready market is available. There is so much of this stuff pushing for a market. But it is simply to establish a price against which the over-the-counter transactions can be made.

Again, one obvious instance where an exchange market may not be desirable is where there is a very small outstanding supply. Now, under those circumstances there is not enough in the way of offers to buy and sell being made at a central point, and consequently the process of regulation has to be entered into in order to establish fair and not too fluctuating prices with reference to securities.

Then again, there are certain types of securities for which their issuers insist that an exchange market is not a desirable medium. The banks, for example, are in that class. The banks have generally taken the position that the listing of their securities on an exchange is undesirable. Without wanting to quarrel with that, I simply instance that as an indication of where an exchange market is believed by persons not to be the most désirable type of market for buying and selling of securities.

That, in substance, comprises this portion of the bill, sections 1 and 2, with reference to the problem of unlisted trading. The Commission, however, saw that this problem of unlisted trading was very closely related to over-the-counter trading as a whole. And when I say it saw that, it simply recognized what Congress had seen very clearly in 1934 when it passed section 15 of the Exchange Act, giving the Commission power to prescribe rules and regulations governing trading in the over-the-counter markets; that is, entirely off the exchanges.

Section 15 authorizes the Commission to prescribe a system for the registration of the brokers and dealers, a system for the registration of securities not listed on exchanges; that is, traded completely in the over-the-counter market.

The commission this year brought into existence a scheme for the registration of brokers and dealers in the over-the-counter market. There are about 6,000 brokers and dealers registered with us at the present time.

We have developed, under the authority of section 15, a schematic device for the registration of these brokers and dealers which, as far as I know, is not criticized by the industry as such.

That regulatory scheme we thought it was about time actually to put into legislation rather than making it rest simply upon the regulations of the commission.

Under the authority of the existing section 15, we thought it was rather desirable to embrace that in the act, and section 3 of this act, paragraphs (a) and (b) do that in substance. They take our regulatory scheme and make of it statutory law.

Paragraph (d) of that section is an attempt to go into the field which Congress told us in 1934 to look into-namely, the field of registration of over-the-counter securities.

The number of securities not listed on exchanges and dealt in over-the-counter markets is enormous. Anybody can indulge in a guess as to what that is and the guesses vary from about 75,000 to 200,000. No one actually knows. But if the principle of bringing out information about nationally traded securities is valid with reference to securities that happen to be traded on exchanges, it is equally valid with reference to securities which may not be traded on exchanges. That was recognized by Congress in 1934 in that

section 15 and that suggested to us that we should devise a means for bringing about the registration of these securities.

The means provided in section 15, however, seem to us not to be quite adequate. As section 15 stood, we had the power to deny an interstate market to a security which would not register. The result of doing a thing like that would be or might be very unfortunate. For example, if we said to the X Y Z Corporation, "Your securities cannot be traded in in an interstate market unless you register certain information with us," and the X Y Z Corporation said, "All right, we won't register with you," the investors in those securities might be quite unduly penalized. The brokers and dealers who held positions in those securities might be penalized. Their market to dispose of those securities might be unduly interfered with. And we felt that the way in which the sanction was placed there, not upon the corporation itself, but upon the stockholders of the corporation and upon the brokers and dealers, was not the best means of dealing with that problem.

So what paragraph 4 of this bill suggests is what we think is truly a slow method, but still a fair method, to accomplish that end of bringing about the registration of national issues.

Paragraph (d), in the first place, provides that a security which seeks the capital market in the sense of filing a registration statement under the Securities Act, because it is going to make a public offering, shall not only furnish information at the time when the public offering is made, but if that security is truly a national security, it shall continue to furnish that information so long as a considerable volume of that security is outstanding.

The standards that we put forth there were 2 million dollars. We felt that an issue of the size of 2 million dollars which might involve at least 2,000 bondholders and from the standpoint of stockholders might involve very many more than that, was an issue of a national size which the Federal Government ought to have some concern with. And therefore it was justifiable to say to an issue of that type, “If you are seeking the capital market, not only must you give information while you are doing that, but so long as you are in that capital market and your securities are outstanding, the duty of furnishing periodic reports comparable to those furnished by corporations whose securities are listed on exchanges, should be placed upon you."

That means that the entry of this field of the over-the-counter market, will be a gradual entry. It will be a program that will perhaps take 10 or 15 years of fulfillment before we get to a degree of investment information about over-the-counter securities comparable to that about securities listed on exchanges.

But the problem is such an enormous one and still quite indefinite and still quite vague, that this seemed to be the best method of approach to it, rather than trying to make the drastic approach that section 15 itself contemplated.

Section 15 (c) is a section which was intended to be supplementary to the scheme for the registration of brokers and dealers.

Under the present powers that we have, we have the power to prescribe rules for the conduct of these brokers and dealers in their transactions with investment customers which will prevent fraud, manipulation, concealment, and practices of that type.

Section 15 (c) was intended to supplement the existing power that the commission now possesses and since its passage by the Senate we have received criticims of section 15 (c) that I think it is worth while to bring to the attention of this committee.

The objections to section 15 (c) revolve about two things: One, that the term "any other person" as contained on page 15. line 13namely, that the prohibitions of that, section apply not only to brokers and dealers, but they apply also to every Tom, Dick, and Harry who may be selling or buying securities; and therefore that with reference to those persons, not the brokers and dealers, the Commission has the power to require of them observance of the rules and regulations that it has the power to promulgate in the effort to prevent fraud, concealment, unfair discrimination, and so forth.

The second objection to that arises from the inclusion of municipal bonds within section 15 (c). Section 15 (e) does not exempt municipal securities from its provisions. The reason why it does not do so is because control by the Commission over fraud in dealing in municipal securities is something that is already established under the existing legislation.

Section 17 of the Securities Act, as it stands, does not exempt from its provisions municipal securities. It makes it a crime under the Federal law to use the mails or instrumentalities of interstate commerce to commit fraud in the sale of municipal securities.

Again, section 10 (b) of the Securities Exchange Act as it now stands gives the Commission power to prevent manipulative practices with reference to any security, whether it is listed on an exchange or not so listed, and whether it is exempt or not exempt.

But the objection, as I understand, that is advanced to this section 15 (c) is that it is an increase of power on the part of the Commission that is granted by that language. In other words, because the power is expressed in these terms, to prevent fraud, concealment, unfair discrimination, and so forth, that not only would the Commission have the power to issue regulations which will penalize fraudulent transactions, but also the Commission would have power to issue regulations which will compel the conduct of business along certain lines, because doing business along other lines may be conducive to fraud.

This morning, and for the last few days, I have been discussing that section with some of the municipal bond dealers; and the intent, certainly of the Commission, so far as that phraseology is concerned, is not to give the Commission a power to deal with other than fraudulent practices, such as concealment, unfair discrimination, and manipulation, with reference to transactions in all securities, whether they are municipal securities, or whether they are ordinary corporate securities.

We have eliminated, of course, short-term securities from this section, and the reason for that is very simply this: That the function the Commission is really concerning itself with is long-term investments and not short-term investments; and the problem of controlling transactions in short-term securities is, in a large measure, a banking problem as distinguished from an investment problem. We saw no reason to inject ourselves into that field of shortterm securities as of the present time.

If I may say this, I think this question of the difference between the municipal-bond people and ourselves is merely a matter of straightening out a few words in there so as to make it clear that the Commission is not seeking the powers that by some construction of the act might be given to them.

I think the thing can be straightened out, so far as the group that I have had conversations with in the past few days is concerned. I may say, also, with reference to that, that there has been concern expressed over that section on the part of certain municipalities. Telegrams have come to us; telegrams have undoubtedly come to you gentlemen; and telegrams have come to the chairman of the Senate Committee on Banking, indicating the worry of certain municipalities to the effect that that section somehow slows up municipal financing or makes it impossible, or subjects municipal bonds to taxation-something that is wholly unwarranted so far as the language of that particular section goes.

I do not know exactly what the source of those rumors is, but I cannot conceive, for example, that the municipal-bond dealers will say, "We ought to have a carte blanche to commit fraud." I do not believe they want to do that. And I have heard no indication to that effect from them. But they take the position that although it may be true that we happen to construe our powers under this language as considerably limited, it might be possible to construe those powers as being in excess of the present construction and therefore, in the future, they might be subjected to a form of regulation which they do not think is justified.

If that be so, for my part, I see no objection to making clear just what the extent of that power is.

The CHAIRMAN. It seems that the municipal-bond people and the American Bankers' Association are asking for the same amendment. Mr. LANDIS. No; the American Bankers' Association is asking for a different amendment, Mr. Chairman. They are, of course, concerned with the fact that municipal bonds are brought within this subsection, inasmuch as the primary part that banks now play in dealing in securities concerns municipal securities. But their concern is over the inclusion of themselves within the term "or any other person", in subsection (c). Now, from our standpoint, our intention is

The CHAIRMAN. I do not think I am incorrect in what I have been told by these people. I have a telegram here from, for instance, Governor Lehman, and another gentleman from Maine. Also I talked to the representative of the American Bankers' Association and I thought he said to me that the same amendment would take care of their situation. I may have misunderstood them.

Mr. LANDIS. In my discussion with them they were, of course, amenable to the excision of those words "or any other person" from section 15 (c), which would, of course, leave the banks entirely out of that section 15 (c). Their position on that point is this, that as banks they are subject to regulation now by the Comptroller of the Currency, in part by the Federal Reserve Board, and in part by the Federal Deposit Insurance Corporation; that even though that grant of regulation to these three agencies is not necessarily as comprehensive as section 15 (c), they feel that any regulation that came with reference to their purchases and sales of securities should

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