And there are some nearly 9,000 in the State of New York subdivisions

to have their securities listed on any exchange at the present time. A banker doing service for these municipalities is ready and willing to support the market for the securities that he has sold to his customers. I can see no gain from listing these securities and this is demonstrated by the active trading in New York City bonds in over-the-counter market as compared to the exchange where they are listed. Several banks took their securities off the New York Stock Exchange because of the possibility of manipulation and the consequent effect on credit of banks. I believe this same rule might be a serious menace to the holders of municipal securities if listed on the exchange. Therefore I strongly recommend as far as the State of New York is concerned that they neither be listed nor come under the supervision of the Federal Trade Commission. It is the business of New York State to manage its own municipalities and their finances. Respectfully submitted.

MORRIS S. TREMAINE,
State Comptroller.

Senator GORE. One thing I want to ask. He says that 15,000,000 of bonds of cities of New York are listed on the New York Stock Exchange, and he says he does not think any ought to be; is that the point?

Mr. GIBBONS. That is the point. No good object is achieved by having them listed, and there are particularly no sales there. But if they all had to be listed, of course, the sales would be there.

The CHAIRMAN. What is the reason now that they did that?

Mr. GIBBONS. I really don't know, Senator, why they did it. There are bonds listed in Baltimore and in San Francisco and Cleveland. They are listed on all exchanges, certain issues are. Just why, I don't know.

Senator GORE. Is the real reason stated there why bank stocks are taken off the exchange?

Mr. GIBBONS. That I could not guarantee, sir. I don't know.

It is our belief that the bonds of States-reading again from my own memorandum-and the political subdivisions and agencies thereof should be eliminated from the National Securities Act of 1934. This bill is aimed to correct speculative abuses which do not exist in the sales and distribution of municipal bonds. State and municipal securities have no rightful place in the bill and no useful purpose is served by including them in the bill. The inclusion of State and municipal bonds in the bill does not confer any benefit on the holders of municipal bonds nor on the municipalities issuing them. On the contrary, it imposes a very distinct hardship on both the municipalities and the purchasers of their bonds and will seriously affect their value as an investment. The exemption of a municipal bond would not add to its present value, and refusing exemption would seriously impair its value.

If being exempted from this bill is helpful to United States Government bonds, certainly States and municipalities need that help also. If not being exempted would be harmful to Government bonds, certainly States and municipalities should not suffer that harm. They all belong to the same family, and the parent Government, having the strongest credit of all of them, needs the advantage of exemption from the bill less than any single one of the 200,000 or more municipal subdivisions in the country.

If I may go over the bill by paragraphs, this is a very short matter, section 3, subdivision (a) (7), seems to us to be slightly ambiguous, and the only reason we care about that is that it might affect the ability of banks to lend the money on municipals.

And it should be made perfectly clear that the term "dealer" and the term "broker " does not include a bank. We have an amendment for that which probably clarifies it somewhat. It now reads: The term "broker" or "dealer" shall not include a bank or any personAnd so on.

We would change it this way:

The term

66 broker " or dealer" shall not include a bank-comma-nor shall it include any person insofar as he buys or sells a security or securities for his own account and not as a part of a regular business.

In other words, many banks act as dealers for themselves and banks for you, because they lend you money on your municipal bonds, and if they acted as dealers they might come under a provision of the dealer part of the act and not be able to lend you the money, and it should be clarified.

Section (a) (13): State bonds and the bonds of their political subdivisions and agencies are not exempted by the provisions of this act, and they are under the power of the Federal Trade Commission. That gives them, if they so care to use it, a very dangerous power over the financial affairs of all the States, cities, counties, and political subdivisions and agencies in them, and it might be exercised to their great disadvantage.

The credit of a State, or a municipality or agency within it, and its ability to finance its many needs for roads, schools, preservation of health, and so on, would be seriously crippled by the refusal of the Federal Trade Commission to exempt its bonds or by the imposing of unreasonable conditions for granting such exemption, and cause irreparable damage and loss to both the State or municipality and to the holders of their outstanding bonds by the withdrawal of exemption in cases where it had once been granted.

The fact that such power exists would greatly depress bond prices. for it would be a constant threat, and one can never tell when a municipal bond now exempted might be withdrawn from exemption so everybody would buy a bond in the constant fear that that might happen, and the price would accordingly be lower. It would have a continual depressing effect on bond prices.

Now, municipal securities are held to the extent of billions by insurance companies, fraternal orders, savings banks, Postal Saving funds, pension funds, banks, and other corporations, as well as by individuals, as well as your own governmental agencies, who would loan the money, and by corporations and individuals; so that any thing that affects their value is vital.

Senator GOLDSBOROUGH. Trust estates.

Mr. GIBBONS. Yes; including trust estates, of course.

Now, in section 7, subdivision (a): This subsection affects a deale or broker in municipal securities in cases where he is a member o an exchange. In New York City and throughout the country man dealers in municipal bonds are also members of exchanges and d a combined stock and municipal bond business. In such cases h

must make loans on all listed securities only through a member of the Federal Reserve System or in accordance with regulations of the Federal Reserve Board. It applies to municipal securities that are listed on an exchange, and they would either all have to be listed or exempted, and many municipal securities are now listed on the various exchanges throughout the country, usually their local exchange. It would be necessary to ascertain, when borrowing upon a municipal bond, whether that particular municipal bond was listed on some exchange, and it would be next to impossible to do this. Some exchanges might list thousands of them, and it would cause. a great delay and embarrassment and practically retard the prompt sale and purchase of municipal bonds, which is a desirable thing if the market is to be kept free and open.

The subsection (b) of section 7 prevents a dealer from assuming liabilities exceeding 10 times of his net capital unless such securities are exempted. In other words, it would prevent a dealer even bidding at any one time for bonds in the aggregate of more than 10 times his capital, after deducting such bonds as he is already carrying. As only a small percentage of the bids made by dealers are successful in buying the bonds bid for, this would limit the amount of bonds bid for at a time, and would therefore greatly reduce the amount of competition that now exists in the public sale of State and municipal securities. Many a man will take a chance in bidding for a large lot of bonds more than 10 times his capital. In this way it would be illegal for him to do so.

Senator GORE. Figuring he would get some and not all?

Mr. GIBBONS. Correct, Senator. If he did get them, he could sell them before he would have to carry them or sell part of them. And, of course, a municipality does not care how much capital the dealer has, provided he has enough money and can finance his purchase when the bonds are delivered.

Senator GOLDSBOROUGH. He generally has to put up a certified check when he bids.

Mr. GIBBONS. Exactly; and how much money he has back of that they do not care, because if he does not comply with the terms of the bid he forfeits his check.

Senator GORE. Yes; because he is collecting interest, not paying it. Mr. GIBBONS. And furthermore, if a dealer can buy a million of bonds and borrow $950,000, why shouldn't he? It is a good thing for the municipality, and it helps to keep the price maintained. They do not care how much capital he has, providing he pays for bonds he has bought.

Some dealers join together to bid for an issue of bonds which is too large an amount for any one of them to bid for alone. These accounts are often made on the basis of being undivided as to liability. For instance, if 10 dealers join together to buy 10 millions of bonds and they are successful in making the purchase, each dealer would have an interest of a million dollars. If one of those dealers should fail, the liability of the other nine dealers would each be increased by his share of that failed dealers liability. If a dealer bought two millions of bonds with one other dealer on an undivided liability account and one dealer failed, the remaining dealer would

be liable for the entire $2,000,000, whereas he only anticipated being liable for a million.

In other words, it would be very difficult for a dealer in municipal bonds, if he were limited as to the amount of bonds he could buy in proportion to his capital, to go ahead on one of these accounts and bid for a large block of bonds.

Senator GORE. He would not get the bonds, anyway, unless he paid for them?

Mr. GIBBONS. No. And if he did get them, he might be liable for more than he bought.

As an ordinary business chance he is willing to run that risk, but he is not willing to run the risk of going to jail and paying a $25,000 fine, and the answer is he would not bid on the bonds, and the municipality would not get the competition. Competition means a lot there. There were only two bids for 30 millions Pennsylvania State bonds. Forty-five houses joined on one bid and were successful, and many houses were in the other bid, and they were unsuccessful. Any one dealer on the successful bid might have been liable for that entire amount.

Senator GORE. You mean the combination got the bonds that was successful, or the other?

Mr. GIBBONS. There were two combinations, and one combination, Senator, got them, and they assumed the liability. If they had not had a great many smaller houses in that account, the bonds would have been sold to a few large banks, and they would not have paid the high price that they did pay, that is, a premium for a bond bearing interest at 34 percent, because they would not have had the assistance of the small dealers in selling the bonds for them.

Senator GOLDSBOROUGH. In other words, the limitation of capital put a burden on them and restricted their purchasing power?

Mr. GIBBONS. Absolutely; and it would have eliminated competition at the sale.

Senator GORE. What loss or damage does this provision safeguard the investor against?

Mr. GIBBONS. To have municipals in it?

Senator GORE. Yes.

Mr. GIBBONS. Senator, I cannot see that it does one atom of good to a holder of municipal bonds, or to a municipality or State, not one atom, and it is possible that it may do irreparable harm.

The CHAIRMAN. If municipal bonds are exempted from the bill that cures all those sections you mentioned?

These are some of our

Mr. GIBBONS. Then this would not apply. reasons why, in our opinion, municipal bonds and State bonds, bonds of their agencies, should be exempted absolutely and irrevocably. The CHAIRMAN. Does that include district bonds and other subdivisions?

Mr. GIBBONS. It should, because many States have many districts. For instance, the most important subdivision in New York State is that of the district, outside of the big cities, that is, the school districts.

The CHAIRMAN. Do you think they ought to be exempted?

Mr. GIBBONS. The school districts? They are undoubtedly the safest bonds we have in our State and in many other States.

Senator GORE. Do you know, Mr. Gibbons, how many Government units or subdivisions there are in the United States that have authority to issue bonds?

Mr. GIBBONS. Something between 175,000 and 200,000, Senator. New York State

Senator GORE. There are 6,353 in Oklahoma alone.

Mr. GIBBONS. How many?

Senator GORE. Six thousand is all.

The CHAIRMAN. New York State has how many, you say? Mr. GIBBONS. About 8,000; between eight and ten thousand. Senator GOLDSBOROUGH. It is stated in that telegram, I think. Mr. GIBBONS. No. He said that he had 180 million dollars of bonds: of 600 different municipal subdivisions in New York, but there are nearly a thousand towns in New York State, some 57 cities, 60 counties and over 500 villages. Every town is subdivided into a school district, an average of about 8 to a town. The school districts are formed in their boundaries for the convenience of getting pupils to their schools. Their credit is of the utmost importance to them. Whether they sell a 6-percent bond or a 42-percent bond is a vital matter to them; and for their credit. The cheaper they borrow their money the lower their taxes are.

The CHAIRMAN. Are any of those districts in default?
Mr. GIBBONS. In New York State?

The CHAIRMAN. Yes.

Mr. GIBBONS. Not a one, to the best of my belief.

Senator GORE. Is there any way the public could be safeguarded by amending this bill or otherwise, against the sale or against the purchase of these municipal bonds that are not delinquent now or where delinquency is imminent?

Mr. GIBBONS. Šenator, it is very difficult to tell when you buy a bond what the future will bring for that bond. The present administration sells a bond which under their proposed bill would entitle it to exemption, and that would justify a dealer in paying a high price for that bond. A subsequent administration might bring about a different situation, a worse one.

Senator GOLDSBOROUGH. Isn't it a fact that the delinquency on many of these bonds has occurred through the noncollection of taxes and that when the taxes are collected those bonds will come back? Mr. GIBBONS. That is correct in many places, and in some places of course they sold too many bonds based on exceedingly high appraisal of property. But that is not general by any manner of means. As a matter of fact, in this country it is estimated as closely as may be that 1 percent of all, numerically, of the municipalities, are in default.

Senator GOLDSBOROUGH. That covers the entire country?

In

Mr. GIBBONS. Yes. That would mean in Senator Gore's State, with 6.000 subdivisions, that 60 of them would be in default. New York State there are practically none. I know of none in actual default. Many of them have been late. It is very difficult to tell what a default is. What would a default be? A week's delay in paying interest or a week's delay in paying principal, or 6 months'