Mr. PECORA. Don't you realize that one little slip would not be a criminal act; that it would have to be a willful violation; and that it is just exactly what this bill states?

Mr. BUTCHER. Mr. Pecora, I took that point up with you the last time I was here, and we came to the same conclusion. This bill is so drawn that any act is a willful act. For instance, if the corporation continues to exist it continues to exist willfully.

Mr. PECORA. I beg pardon. Look at the penalty section of the bill and see for yourself.

The CHAIRMAN. If the officer of a corporation tells the truth and sets forth the facts, do you mean he is a criminal?

Mr. BUTCHER. Under this bill he could very readily be declared a criminal.

Mr. PECORA. Section 25 of the bill is the one providing the penalties, and it starts off with the sentence:

Any person who willfully violates any provision of this act—

Mr. BUTCHER. Well if a person signs a report, and that report-
Mr. PECORA (interposing). It says:

or any person who willfully and knowingly

is responsible for any statement in any application which is false or misleading. But it has got to be willfully false, and a mere slip would not be a willful violation.

Mr. BUTCHER. I am sorry but I cannot agree with you. And the language of your bill does not protect one from an innocent mistake. Mr. PECORA. Then you are closing your eyes to the language of the bill which says:

Any person who willfully violates any provision of this act.

Mr. BUTCHER. Yes; I say that word "willful ", and I understand what willful means, I think-and I might say that I have by my wife been accused of being willful, but

Mr. PECORA (interposing). With all due respect to Mrs. Butcher, I might say that she probably hasn't a judicial mind.

Mr. BUTCHER. Well, judicial to the extent of being the last word in that matter. [Laughter.]

Senator ADAMS. Perhaps your wife may be carrying the burden there.

Mr. BUTCHER. Well, she is always right. I know that. And, Mr. Pecora, the "willful " part here is all right, perhaps and now please don't think I am trying to be personal in saying this, but this is simply what I call a "technicality ", and I just don't like techni

calities.

Mr. PECORA. Oh, no. It is not a technicality at all. It is a very substantial provision, and is intended to mean just what it says. There is a great difference between a willful violation of a penal statute and an innocent violation of it. Yes; there is all the difference in the world between the two.

Mr. BUTCHER. Well, Mr. Pecora, I am not an engineer and I am not an expert accountant, although I have spent some time on accountancy matters. But suppose somebody who goes over some property makes an engineering report and makes a mistake in his figures of, say, 100,000 pounds in relation to the weight of a certain. piece of machinery, a perfectly honest mistake on his part. Then he

sends in his engineering report, and it goes on down the line, and the president and treasurer of the corporation sign it. If the president signs that report that is a willful act.

Senator ADAMS. Oh, no.

Mr. PECORA. Do you mean if he signs it with knowledge of its falsity?

Mr. BUTCHER. Oh, no.

Mr. PECORA. Do you think that would be a willful violation of the act?

Mr. BUTCHER. I do not see how it would be considered in any other way.

Mr. PECORA. It depends on whether he willfully does the thing. Senator ADAMS. Mr. Butcher, your construction of "a willful act " would seem to refer to the fact that he had the will to do it but without any intention to do a wrong.

Mr. BUTCHER. It is my idea that this bill is written with that idea in view.

Senator ADAMS. And in this section there is another limiting statement:

Which statement is, in the light of the circumstances under which it was made, false or misleading in any matter sufficiently important to influence the judgment of an average investor.

In other words, the trifling errors you speak of would not come within that provision.

Mr. BUTCHER. Have you ever seen the average investor?
Senator ADAMS. Well, I think I have been one.

Mr. BUTCHER. Well, I think you are above the average.

Senator ADAMS. I appreciate the compliment and wish it were true. Senator KEAN. In regard to these margins, I have a letter from Edward B. Smith & Co.-and they are large brokers in your city, aren't they?

Mr. BUTCHER. Yes, sir; and in good standing.

Senator KEAN. They say that under the figuring in this bill if one were to buy 100 shares of General Motors at $36 per share, and borrowed on it, they would then have to put up 333 percent. Under the present custom of the exchange you would put up $1,200 as a margin, but under this bill they would have to put up $900 more. Is that the way you figure it?

Mr. BUTCHER. I haven't figured it.

Senator KEAN. This would mean a 150 percent margin. Is that the way you figure it? Or you can take the letter and read it. After you have read the letter, I should like to propound that question to you.

(While Mr. Butcher was reading the letter, the following occurred :) The CHAIRMAN. What do you want Mr. Butcher to do, Senator Kean-confirm the statement made by Edward B. Smith & Co. ? Senator KEAN. Yes. And I want to put the letter in the record. Senator BULKLEY. There would be no purpose in the witness confirming it unless the letter is put in the record.

The CHAIRMAN. Let the letter go in and it will speak for itself. Mr. BUTCHER (after reading the letter). Do you want me to say anything, or do you just want me to present the letter?

Senator KEAN. I will ask you about the letter.

Mr. BUTCHER. I have read the letter hastily and believe it to be

correct.

The CHAIRMAN. The letter may go in the record.

Mr. BUTCHER. The 150-percent margin referred to is on the debit balance, not on the market price of the stock.

Senator KEAN. Let the record be completed by inserting the letter. (The letter is as follows:)

EDWARD B. SMITH & Co., 15 Broad Street, New York, March 22, 1934.

Senator HAMILTON F. KEAN,
Senate Office Building, Washington, D.C.

DEAR SENATOR: In reference to our conversation over the telephone this morning and in connection with the hearings which I understand are to be reopened upon the "National Securities Exchange Act of 1934", I wish to point out a question which we discussed in reference to section 6 of the bill, which I believe is causing some confusion not only in Congress but in the minds of exchange members. Section 6 of the bill allows the member of an exchange to loan 40 percent of the market price of a security which is qualified as collateral within the meaning of the act. It is the universal practice among brokers to speak of the margin requirement in terms of the percentage of the debt balance, or in other words, the amount which the borrower owes when he purchases the security that he intends to use as collateral for his loan with the broker. For example, take the case of a customer who wishes to buy 100 shares of General Motors at the present price of $36 per sharethe total purchase price of this stock would be $3,600. The broker would, under the present requirement with the customer, i.e., that the equity be 33% percent of the debit, require upon such purchase that the customer deposit one third of $3,600, or $1,200. This would mean that the customer has an equity in the account of $1,200 and owes to the broker $2,400. This would leave the account just adequately margined.

Upon the margin as required in the bill that the broker may loan 40 percent of the market price it would be necessary that the customer deposit 60 percent of $3,600, or $2,160, which would be the customer's equity in the account, and the account as previously adequately margined would need additional margin to the extent of the difference between $2,160 and $1,200, or $960, which the customer must deposit or render it necessary to sell a part of his stock in order to comply with the law.

This uncertainty in speaking of margin in one instance in the terms of the loan the act allows upon the stock, and in the other instance in terms of the amount that the customer owes the broker, is a question that is causing a great deal of confusion. Under the bill as it is now drawn when a broker may only loan 40 percent of the market value of the stock, the customer has an actual margin, according to our method of computation, of 150 percent, since the customer's equity of 60 percent is 150 percent of the debit balance of 40 percent which remains unpaid.

I believe it would be extremely helpful if some expression of opinion could be obtained from the Treasury Department or the Federal Reserve Board and possibly written into the bill which would clarify the question.

Please allow me to thank you for the opportunity of bringing this matter to your attention.

With kindest personal regards.

Yours sincerely,

(Signed) JOHN W. CUTTER.

The CHAIRMAN. Is that all, Mr. Butcher?

Mr. BUTCHER. Yes, Mr. Chairman; and I wish to thank you very much.

The CHAIRMAN. Are there any further questions by members of the committee?

Senator GORE. Mr. Butcher, you were discussing a minute ago the functions of specialists. I was talking to an old friend the other

night who. is a mere layman and yet he has given a good deal of thought to the pending bill. He used this illustration of what might result if too much limitation were placed upon specialists, dealers, and brokers. He said American Telephone & Telegraph might close some afternoon at 115, we will say, and the ordinary citizen buying it occasionally might take it for granted that it would open around that figure the next day, and yet under this bill he thought it might drop something like 15 or 20 points. Could that happen; and if so, why? And did you say the other day, Mr. Pecora, that that section had been amended?

Senator KEAN. Mr. Pecora did not hear your question, Senator Gore.

Mr. PECORA. What was that, Senator Gore?

Senator GORE. You said the other day that the point I mentioned had been amended, but never mind. Mr. Butcher, will you answer the question?

Mr. BUTCHER. You are asking me a question which will take a moment or two to answer.

Senator GORE. My friend seemed to think that a specialist in that sort of case would make a market to protect the purchaser against such a drop as I have suggested, which he referred to as just a sinking spell. How about that?

Mr. BUTCHER. A specialist under the New York Stock Exchange regulations has the right to buy for his own account after the stock has first been offered to the group around him. In other words, after he has announced the offering he may take it himself if nobody else wants it. Or that is the way I understand it. But he always is at a disadvantage as compared with the group around him to the extent of one eighth or to the extent of no offering or no bid. He can only take a stock when it is not wanted by anybody else. That tends to bring the spread in the stock closer together. If American Tel. & Tel. closed at 119 and the next morning there is no bid, or a bid of only 114, and the stock is offered at the market, he could technically take it at 114%. But very likely under those circumstances he would take it a point away from the close of the night before, knowing that sooner or later somebody would come forward and there would be more activity. The specialist, instead of being one who abuses the public, is the man who helps the public. I do not believe it would be possible for the New York Stock Exchange to handle 2,000,000 shares a day without specialists, and if the New York Stock Exchange cannot handle the business and handle it right as it has done in the past, there is very serious injury being done to the general public.

Senator GORE. That is, the specialist is a sort of stopgap.

Mr. BUTCHER. Yes; and sometimes they win and sometimes they lose. But the specialist is there, and makes the market very often when nobody is prepared to do it. He hopes, of course, to win, but he takes his chances.

Senator GORE. As the market is operating now he would be in that situation a protecting influence against a tendency to drop 10 or 15 points if nobody was there to buy the stock.

Mr. BUTCHER. I do not quite understand your question.

Senator GORE. As the market is operated now the specialist would be there and would be in a position to get the stock on the way down and thus prevent its dropping 10 or 15 points.

Mr. BUTCHER. Yes, sir. He also prevents too great a rise. He acts as a sort of shock absorber either way. And he is functioning now better than ever before in the history of American business. Senator GORE. Do you think this pending bill lays too severe limits upon his functions?

Mr. BUTCHER. Undoubtedly so, in my opinion. I might say that I am one of those who is ordinarily supposed to be hostile to specialists, for specialists are constantly executing my orders.

The CHAIRMAN. Are there any other questions?

Senator KEAN. Yes, one more: Mr. Butcher, if you wanted to buy 100 shares of stock for yourself under this bill, and you telegraphed to your broker in New York to buy such stock, and you were prevented from giving an order to anybody on the New York Stock Exchange under this bill, how could you do it?

Mr. BUTCHER. Well, there wouldn't be any market except through some bootleg source, and I would have to keep the money and could not buy the stock. That is what I spoke about, that it would freeze up tight like real estate, and it will be a tremendous blow to Florida if you pass this bill. And, Mr. Chairman, I enjoyed being down there in January.

Now, Mr. Pecora, you told me the last time I was here that I would not have to close up shop. I am going to hold you to that. Mr. PECORA. I hope you are not looking to interest me as a partner.

Mr. BUTCHER. Partners are not so willing to take the risks these days.

The CHAIRMAN. All right, if that is all. Mr. Butcher, you spoke about Florida, and I have a telegram from a man saying that perhaps under the bill the State of Florida next winter will very much resemble the State of Nevada. I do not know what he means. you?

Mr. BUTCHER. I can tell you later, after your hearing.

Do

Mr. PECORA. Perhaps he means that the wives of brokers will seek divorces. [Laughter.]

The CHAIRMAN. I think Nevada is doing very well.

Mr. BUTCHER. Well, I think I know what he has reference to, but I would rather tell you after the hearing closes today. (Mr. Butcher left the committee table.)

The CHAIRMAN. Mr. Smith was supposed to come before us first this afternoon, but Mr. Butcher wanted to go back home in Philadelphia, and promised that he would not take very long, and in order to give an opportunity for more members of the committee to be in attendance we delayed hearing Mr. Smith. Now, Mr. Smith, if you will take a seat at the committee table opposite the microphone, and will state your name, residence, and occupation.

Mr. SMITH. My name is Tom K. Smith. I am president of the Boatman's National Bank, St. Louis, Mo., temporarily acting as Assistant to the Secretary of the Treasury.