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UNLISTED SECURITIES

WEDNESDAY, MAY 6, 1936

HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C. The committee met at 10 a. m., Hon. Sam Rayburn (chairman) presiding

The CHAIRMAN. The committee will be in order.

We have before us this morning S. 4023. The chairman of this committee introduced a similar bill about the time that this bill was introduced in the Senate. As this bill has passed the Senate, we will consider the Senate bill.

A copy of the bill will be made a part of the record at this point. (S. 4023 is as follows:)

[S. 4023, 74th Cong., 2d sess.]

AN ACT To provide for the continuation of trading in unlisted securities upon national

securities exchanges, for the registration of over-the-counter brokers and dealers, for the filing of current information and periodic reports by issuers, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subsection (f) of section 12 of the Securities Exchange Act of 1934 is amended to read as follows:

"(f) Notwithstanding the foregoing provisions of this section, any national securities exchange, upon application to and approval of such application by the Commission and subject to the terms and conditions hereinafter set forth, (1) may continue unlisted trading privileges to which a security had been admitted on such exchange prior to March 1, 1934; or (2) may extend unlisted trading privileges to any security duly listed and registered on any other national securities exchange, but such unlisted trading privileges shall continue in effect only so long as such security shall remain listed and registered on any other national securities exchange; or (3) may extend unlisted trading privileges to any security in respect of which there is available from a registration statement and periodic reports or other data filed pursuant to rules or regulations prescribed by the Commission under this title or the Securities Act of 1933, as amended, information substantially equivalent to that available pursuant to rules or regulations of the Commission in respect of a security duly listed and registered on a national securities exchange, but such unlisted trading privileges shall continue in effect only so long as such a registration statement remains effective and such periodic reports or other data continue to be so filed.

“No application pursuant to this subsection shall be approved unless the Commission finds that the continuation or extension of unlisted trading privileges pursuant to such application is necessary or appropriate in the public interest as for the protection of investors. No arplication to extend unlisted trading privileges to any security pursuant to clause (2) or (3) of this subsection shall be approved except after appropriate notice and opportunity for hearing. No application to extend unlisted trading privileges to any security pursuant to clause (2) or (3) of this subsection shall be approved unless the applicant exchange shall establish to the satisfaction of the Commission that there exists in the vicinity of such exchange sufficiently widespread public distribution of such security and sufficient public trading activity therein to

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STASZINT OF IACS I LATTIS. IN THIS AND

EXCHANGE COMISSOS Vr. LANDIS. W:. Chairman, he 34 F IV İs styypeite an be prentei is jy prank DT auf Pf. The distinction between isiei #6 -112 n

prirties which are not listei un ***un 3 113 1 +Iwalioude being aimitiei o aile i mnist i Tos

Many exchanges do not ailow any *TI? De
Formatuanya rinies a listing statement silei jy te 21
other ani, other exchanges have uimitei 0 -2 123
Xhann ecurities irrespettive of the iiins ji S2
inent by the corporation which issues those TT **
fretem against the objection of that corporiti.
they have made an exchange market in mose Xirdies 121
Jart to whether or not the corporition is in 1
Kohanga market maile or whether the corporation is
pozorom any agreement to furnish any information D me-

That itnation was before this committee and Jette -
Srire in 1934 when the Exchange det was up or NOCI
Ixotangn Act, in one of its very fundamenti esas
boy ing that it is important for Congress to jums
perintement of the various exchanges, and therefore
10' -tallert lisiteri securities it insisted that i pastic
sortit should be filed by the corporation which issiei de
wortling forth in quite some detail the history of the just

nily and otherwise: in other words, furnishing the one can
ination that is essential for intelligent investment ananas:
(۲۶ :۱۱۱۷

When the Congress came to this question of the unisti press it felt, as I gather, that that was an anomalous Intl laimedaid that the best way in which to deal with that ut ment will to permit this anomalous trading in uniiski # in rentenne, in the meanwhile giving the commission 2 arentest the duty of studying the problem and seeing i'w moi mirbt be solved in the final analysis.

The commission thereupon went about the works i thout problem and turned in a report to Congress on tark"

link it is best to sense first the magnitude of the one ihni vinvolved here. These unlisted securities amme! 1 x M): 300 000 shares of stock and about $6.500.000,00 7

M. Mwin 'That is throughout the whole Uniteri Sales

Mi BAAD Throughout the whole United States : *** infiber under securities are to be found on the Vaw

But many of the smaller exchanges aisu late
Ho lenyomboles son sunt of business in unlisted securities.

prosi bene snosus, thote unlisted securities are of two times
puse iloise adres poration has never chosen to list its tri
W!uingos send therefore you have a true unlisted szerint

The true, for example, of the majority of the

on the row York ('urb Exchange. But if our fins Wassepoles, the undsledd department of the Philadeipunk. Mi...

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or the unlisted department of the Boston exchange; one finds a different situation. There the security is traded unlisted from the standpoint of that exchange, but that security, is usually listed. on... some other exchange.

In other words, Boston trades in, we will say, United States Steel. United States Steel is listed on the New York Stock Exchange, but may be traded unlisted either in Philadelphia or in Boston.

Now, in that situation you will see immediately, that the information about the security is available, because it is listed and registered in New York. But from the standpoint of trading in the Boston exchange and in the Philadelphia exchange, it is an unlisted security and falls within that category of unlisted securities which were given over to us to study.

Mr. MAPES. May I interrupt for a question, Mr. Landis?
Mr. LANDIs. Yes; indeed, Mr: Mapes.

Mr. MAPES. Who determines whether a stock is traded on the exchange as an unlisted security or not?

Mr. LANDIs. In the days before the Exchange Act—that is, prior to 1934—that question was determined by the exchange itself. A А broker would apply for unlisted trading privileges in a security because he felt that a market could be made on the exchange in that security. And the exchange would exercise a certain amount of supervision; would make, perhaps, some review of the stock to see whether or not the outstanding stock was sufficient in volume so as to make a fairly good exchange market and might make its inquiries of the issuer, or it might not. It might listen to objections of the issuer, or it might not. But the entire control of that question of the admission of the securities to unlisted trading privileges was in the hands of the exchange itself.

In 1934 that situation was changed by legislation. What Congress said was that you can keep these unlisted securities that you now have on the exchanges, but you have no power to increase that list of unlisted securities.

In other words, it froze the situation in 1934.
Mr. MAPES. So the list is limited to what it was?

Mr. LANDIS. As of March 1, 1934. In dealing with that problem the Commission, I think, recognized from the start that unlisted trading is an anomaly. I think we must recognize that.

The theory of the Exchange Act is that information of an adequate character ought to be available to persons who wish to buy and sell securities and that in many of these instances adequate information might or might not be available, but there could be no assurance without the intervention of the proces of registration that information of this type would be available. But assuming that to be true, the question was, what to do with this anomaly? Was it wise to throw off from the exchange markets this great volume of stocks and bonds? The Commission felt that it was not wise to do that; that the way in which to handle the problem was to allow the freezing process still to take place; in other words, not to admit ad lib further unlisted securities to the exchanges, and that gradually by a process of encouraging the listing of the isuance of new securities, the unlisted trading departments of the various exchanges would go out of existence over a period of years; and that a gradual

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render the extension of unlisted trading privileges on such exchange thereto necessary or appropriate in the public interest or for the protection of investors. No application to extend unlisted trading priviltges to any security pursuant to clause (3) of this subsection shall be approved except upon such terms and conditions as will subject the issuer thereof, the officers and directors of such issuer, and every beneficial owner of more than 10 per centum of such security to duties substantially equivalent to the duties which would arise pursuant to this title if such security were duly listed and registered on a national securities exchange; except that such terms and conditions need not be imposed in any case or class of cases in which it shall appear to the Commission that the public interest and the protection of investors would nevertheless best be served by such extension of unlisted trading privileges. In the publication or making available for publication by any national securities exchange, or by any person directly or indirectly controlled by such exchange, of quotations or transactions in securities made or effected upon such exchange, such exchange or controlled person shall clearly differentiate between quotations or transactions in listed securities, and quotations or transactions in securities for which unlisted trading privileges on such exchange have been continued or extended pursuant to this subsection. In the publication or making available for publication of such quotations or transactions otherwise than by ticker, such exchange or controlled person shall group under separate headings (A) quotations or transactions in listed securities, and (B) quotations or transactions in securities for which unlisted trading privileges on such exchange has been continued or extended pursuant to this subsection.

“The Commission shall by rules and regulations suspend unlisted trading privileges in whole or in part for any or all classes of securities for a period not exceeding twelve months, if it deems such suspension necessary or appropriate in the public interest or for the protection of investors or to prevent evasion of the purposes of this title.

“Unlisted trading privileges continued for any security pursuant to clause (1) of this subsection shall be terminated by order, after appropriate notice and opportunity for hearing, if it appears at any time that such security has heretofore been withdrawn or if such security is hereafter withdrawn from listing on any exchange by the issuer thereof, unless it shall be established to the satisfaction of the Commission that such delisting was not designed to evade the purposes of this title or unless it shall appear to the Commission that, notwithstanding any such purpose of evasion, the continuation of such unlisted trading privileges is nevertheless necessary or appropriate in the public interest or for the protection of investors. On the application of the issuer of any security for which unlisted trading privileges on any exchange have been continued or textended pursuant to this subsection, or of any broker or dealer who makes or creates a market for such security, or of any other person having a bona-fide interest in the question of termination or suspension of such unlisted trading privileges, or on its own; motion, the Commission shall by order terminate, or suspend for a period not exceeding twelve months, such unlisted trading privileges for such security if the Commission finds, after appropriate notice and opportunity for hearing, that by reason of inadequate public distribution of such security in the vicinity of said exchange, or by reason of inadequate public trading activity or of the character of trading therein on said exchange, such termination or suspension is necessary or appropriate in the public interest or for the protection of investors.

"In any proceeding under this subsection in which appropriate notice and opportunity for hearing are required, notice of not less than ten days to the applicant in such proceeding, to the issuer of the security involved, to the exchange which is seeking to continue or extend or has continuell or extended unlisted trading privileges for such security, and to the exchange, if any, on which such security is listed and registered, shall be deemed adequate notice, and any broker or dealer who makes or creates a market for such security, and any other person having a bona-fide interest in such proceeding, shall upon application be entitled to be heard.

“Any security for which unlisted trading privileges are continued or extended pursuant to this subsection shall be deemed to be registered on a national securities exchange within the meaning of this title. The powers and duties of the Commission under subsection (b) of section 19 of this title shall be applicable to the rules of an exchange in respect of any such security. The Commisison may, by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors, either

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unconditionally or upon specified terms and conditions, or for stated periods, exempt such securities from the operation of any provision of section 13, 14, or 16 of this title."

SEC. 2. Any application to continue unlisted trading privileges for any security heretofore filed by any exchange and approved by the Commission pursuant to clause (1) of subsection (f) of section 12 of the Securities Exchange Act of 1934 and rules and regulations thereunder shall be deemd to have filed and approved pursuant to said subsection (f) as amended by section 1 of this Act.

Sec. 3. Section 15 of the Securities Exchange Act of 1934 is amended to read as follows:

"SEC. 15. (a) No broker or dealer (other than one whose business is exclusively intrastate) shall make use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) otherwise than on a national securities exchange, unless such broker or dealer is registered in accordance with subsection (b) of this section.

(b) A broker or dealer may be registered for the purposes of this section by filing with the Commission an application for registration, which shall contain such information in such detail as to such broker or dealer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such broker or dealer, as the Commission may by rules and regulations require as neecssary or appropriate in the public interest or for the protection of investors. Except as hereinafter provided, such registration shall become effective thirty days after the receipt of such application by the Commission or within such shorter period of time as the Commission may determine.

"An application for registration of a broker or dealer to be formed or organized may be made by a broker or dealer to which the broker or dealer to be formed or organized is to be the successor. Such application shall contain such information in such detail as to the applicant and as to the successor and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the applicant or the successor, as the Commission may by rules and regulations require as necessary or appropriate in the public interest or for the protection of investors. Except as hereinafter provided, such registration shall become effective thirty days after the receipt of such application by the Commission or within such shorter period of time as the Commission may determine. Such registration shall terminate on the forty-fifth day after the effective date thereof, unless prior thereto the successor shall, in accordance with such rules and regulations as the Commission may prescribe, adopt such application as its own.

"If any amendment to any application for registration pursuant to this subsection is filed prior the effective date thereof, such amendment shall be deemed to have been filed simultaneously with and as part of such application; except that the Commission may, if it appears necessary or appropriate in the public interest or for the protection of investors, defer the effective date of any such registration as thus amended until the thirtieth day after the filing of such amendment.

"The Commission shall, after appropriate notice and opportunity for hearing, by order deny registration to or revoke the registration of any broker or dealer if it finds that such denial or revocation is in the public interest and that (1) such broker or dealer, or (2) any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), or any person directly or indirectly controlling or controlled by such broker or dealer, whether prior or subsequent to becoming such, (A) has willfully made or caused to be made in any application for registration pursuant to this subsection or in any document supplemental thereto or in any proceeding before the Commission with respect to registration pursuant to this subsection any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact; or (B) has been convicted within ten years preceding the filing of any such application or at any time thereafter of any felony or misdemeanor involving the purchase or sale of any security or arising out of the conduct of the business of a broker or dealer; or (C) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from engaging in or continuing any conduct

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