The CHAIRMAN. They have come to this point, though, Mr. UnterLayer-and it is quite effective. It is having its weight on Members of Congress and the public generally. They are claiming that this bill is going to check investments, is going to keep capital out of business, is going to disrupt business, is going to destroy the exchanges, and all that sort of thing. That, of course, is a serious thing, but that is the most effective point they have reached with their propaganda. The people do not want to destroy business.

Mr. UNTERMYER. Senator Fletcher, you remember what happened when the Federal Reserve Act was under consideration?

The CHAIRMAN. Yes.

Mr. UNTERMYER. You remember that every great banker, almost, in the United States went upon the witness stand and testified that its enactment would destroy the country.

The CHAIRMAN. Yes.

Mr. UNTERMYER. You remember that within a year or two after it was passed those same gentlemen said it was the salvation of the country-every one of them.

Senator MCADOO. Some of them even claimed credit for its enactment.

Mr. UNTERMYER. Yes, sir.

The CHAIRMAN. I remember that perfectly well.

Mr. UNTERMYER. I do not believe the public is going to take these gentlemen quite so seriously.

The CHAIRMAN. That is what I wanted to bring out. Can you see any such effect as destroying the exchanges, crippling business, and interfering with investments adversely?

Mr. UNTERMYER. I can see that the bill will restrict speculation. That is its purpose.

The CHAIRMAN. And that ought to be done.

Mr. UNTERMYER. It ought to be done.

Senator KEAN. Mr. Untermeyer, further than that

The CHAIRMAN. Let me finish, please.

Senator KEAN. I beg your pardon.

Mr. UNTERMYER. No; you go on.

Senator KEAN. We had Mr. Potter, of the Guaranty, down here. He figured out these margins, and said that for his institution alone it would mean the liquidation of some $400,000,000 of market loans. Mr. PECORA. Mr. Potter was addressing himself then to the original draft, Senator Kean.

Senator KEAN. Yes.

Mr. PECORA. I think much of his criticism would disappear if directed to the revised draft.

Mr. UNTERMYER. Frankly, I think that these specific, rigid marginal requirements are a great mistake, and that is the reason I have suggested the increase of the Federal Reserve Board and the allotting of three men to the execution of this law, and not endeavoring to deal with a delicate subject, such as this is, by hard and fast rules.

Senator KEAN. If anything like Mr. Potter's statement would be true, for his institution alone, that would mean the liquidation of over 1 billion dollars on the stock exchange.

Mr. UNTERMYER. He must have had in mind all the frozen loans he has there for syndicates and pools.

Mr. PECORA. And which would have had to be liquidated by October 1.

Mr. UNTERMYER. The answer to Mr. Potter might be to let the underwriters take up those loans.

Senator KEAN. It might be. I do not know what he had in mind. I could not read his mind.

Mr. PECORA. Senator Kean, his objection was to the original draft, which has been considerably relaxed in respect of the provisions which bear upon the banks.

The CHAIRMAN. Giving those people who have the present margins time in which to carry their securities.

Senator MCADOO. I just want to ask Mr. Untermyer one question. I agree with what I understand to be your position, that it is unwise to fix a statutory requirement, or fix any statutory margin requirement for loans when all these things vary so materially in point of security and other conditions that no general formula can be made to apply with advantage or with safety, perhaps, to the general interest.

Mr. UNTERMYER. That is my position.

Senator McADOO. That can be accomplished, however, through regulations by the authority which is empowered to deal with those questions.

Mr. UNTERMYER. Yes.

Senator McADOO. And the fixing of these margin requirements should be relegated to regulation, and not be committed to a statute. Mr. UNTERMYER. I would not put the rigid marginal requirements in the statute.

Senator McADOO. That is what I mean. Leave it to regulation. Mr. UNTERMYER. I would leave it to regulation.

Senator MCADoo. By the competent authority which is going to administer the act.

Mr. UNTERMYER. That is my idea; but I would be very careful not to leave it to the regulation of people who are under the domination or control of high finance in New York.

Senator McADOO. Certainly not. It will be regulated by the Federal Reserve Board, or the Federal Trade Commission, or whatever authority is established by the Congress to deal with it.

Mr. UNTERMYER. I would rather see a new deal in the Federal Reserve Board.

Mr. PECORA. Through the appointment of three new members? Mr. UNTERMYER. Yes. Is there anything else, gentlemen? The CHAIRMAN. Any other questions to be asked? I do not know whether you need to bring that up, it is not very important, but as long as you are here and your opinion is so valuable to us, we have gotten as far as section 2 of this bill, and the question is as to the importance of section 2, which simply outlines the purpose.

Mr. UNTERMEYER. I don't see any harm in it. It is a stump speech.

Senator KEAN. That is the objection to it?

Mr. UNTERMEYER. No; I don't see that that is any objection to it. I think it may guide the courts in determining what Congress had in mind when it was passing this legislation as affecting interstate

commerce.

Senator CoSTIGAN. That was the case in the Grain Futures case.

Mr. PECORA. Board of Trade against Olsen.

Mr. UNTERMYER. Yes.

Mr. PECORA. This section was somewhat based on that Grain Futures Act, which contained a recital of purposes, which also might be called a "stump speech ", but was a statement of conclusions of fact.

Mr. UNTERMYER. Yes.

Mr. PECORA. And which was of guidance and value to the court in construing the act and upholding its constitutionality.

Mr. UNTERMYER. Yes; stump speeches are sometimes very interesting when not delivered from the stump.

Senator KEAN. The motion, Mr. Untermyer, was to leave in everything, I think, that was constructive and to cut out the speech part of it.

Mr. UNTERMYER. Well, then there would not be anything left. [Laughter.]

Senator KEAN. I think that the finding of facts was all left in. Mr. UNTERMYER. I read it two or three times, and I think pretty well of it myself.

Senator ADAMS. So do the authors.

Mr. UNTERMYER. Oh, yes; I am sure they do. I think it is pretty well constructed as that sort of a thing, and it may be a guide to the court. It cannot hurt. There is nothing about it that I have seen. I went through it to see if there is anything that might harm, if it contained any admissions against interest, and I could not find anything.

The CHAIRMAN. Any other questions you wish to ask Mr. Untermyer?

Mr. UNTERMYER. Gentlemen, I am obliged to you for your patience.

The CHAIRMAN. We are very much obliged to you for coming down.

Mr. PECORA. Might I make again the statement that the communication addressed to us by Mr. Untermyer and which contained many suggestions, most of which he has referred to in detail today, was very, very carefully and favorably considered, and I think it should be stated to Mr. Untermyer that many of them have been adopted. Mr. UNTERMYER. I am very intensely interested in this thing. The passage of this legislation I would regard as the culmination of one of my ambitions of a quarter of a century.

The CHAIRMAN. I am glad to hear you say that. I think it is very important, and I think now is the time to accomplish it if we are ever going to accomplish it.

Mr. UNTERMEYER. Yes; I think so, too.

The CHAIRMAN. The country needs it. We are very much obliged

to you.

Is there anything else now? If not, we will meet again at 10:30 tomorrow morning.

(Accordingly, at 3:27 p.m., the committee adjourned until 10:30 on the following morning.)

WASHINGTON, D.C., Saturday, March 24, 1934.

PETITION ON BEHALF OF THE SPECIALISTS OF THE NEW YORK STOCK EXCHANGE The Honorable Committee on Banking and Currency of the United States Senate, Washington, D.C.

GENTLEMEN: The undersigned members of the New York Stock Exchange respectfully invite your attention to the far-reaching effect which we believe certain provisions of the pending Stock Exchange Regulation Bill would have on the fortunes of twenty million investors in the United States.

We refer to the provisions in Section 10 of the Bill for the practical elimination of the present market "specialist", who, as he now operates, is an indispensable factor in assuring the liquidity of investments and, in turn, the liquidity of commercial banks and other financial institutions throughout the country.

The specialist, as the members of the Committee are doubtless well aware. is a member of the Exchange who deals exclusively in one or more stocks and is thus able to execute with the utmost diligence all orders entrusted to him for the purchase or sale of such stocks. Any member of the Exchange may become a specialist if he so desires.

Because of the active and varied operations on the floor of the Exchange, it is physically impossible for the broker who directly represents the commission house to execute all transactions committed to him. In line with the intensive specialization which has taken place in every field of modern activity, the vocation of the specialist has been developed over a period of years to fill the obvious need of a man of expert knowledge and financial and moral responsibility who can give instant execution to orders entrusted to him for the purchase or sale of specified stocks. The specialist is primarily a broker's broker.

The specialist, however, under the present practice, is more than a broker's broker. He is also a dealer, and his activity as a dealer is indispensable to his effective functioning as a broker. It is our understanding that your Committee, while recognizing the useful services performed by the specialist, seeks to impose certain limitations upon his activities in accordance with the Committee's general purpose of regulating the Exchange on behalf of the public interest.

The members of the Exchange, as already reported to your Committee, are heartily desirous of co-operating in any measure that would make the Exchange a more effective market for public securities. We feel, however, that the present draft of the bill before your Committee would essentially alter the character of the specialist as he actually exists and, in so doing, greatly diminish the facilities of the Exchange in its service to the public.

The specialist of today is the custodian or trustee of thousands of orders originating in this and many foreign countries. With a market order in his possession a specialist is barred from trading for his own account until that order is filled. He cannot give his personal interest precedence over that of his customer. No business is more carefully supervised, and there are no penalties in any other line of business endeavor more drastic than those meted out to a specialist if he violates the law of the Exchange or if, as stated in the Constitution of the New York Stock Exchange, he indulges in any practice "inconsistent with just and equitable principles of trade ".

There seems to be a common belief that, because of the possibility of his acting either as a broker or dealer, the specialist has an opportunity to act contrary to the interests of the regular brokers and their customers and that he actually does so. Nothing could be further from the truth.

The greatest criticism directed against the specialist is that he works in a dual capacity, either as a broker for his customers or as a dealer for his own interests. As a matter of fact, he can never serve these two interests simultaneously. Were he to do so he would be expelled from the Exchange. Further, the minute a specialist steps into the capacity of a dealer, any trades which he may effect for his own account are, by the rules of the New York Stock Exchange, not binding except with the consent and approval of a representative of the firm with whom he trades. In other words, a specialist in trading for his own account buys from or sells to a broker who represents the seller or purchaser, as the case may be. It is the duty and interest of this other broker to see to it that his customer makes the best possible trade. If at any time such a trade is seen to be "inconsistent with just and equitable principles of trade" that trade is cancelled.

The new Bill as now formulated provides two types of specialists: that of the dealer-specialist (one who trades for his own account and cannot accept commission orders) and broker-specialist (who executes orders for others and cannot trade for his own account). This means a division of the functions now performed by specialists. If this dual capacity is broken up so that there are two categories, viz: dealer-specialists and broker-specialists, a situation will arise which will have a broker-specialist working for the interest of his customers and a dealer-specialist who has no responsibility except to himself. The present specialist lives because of the fact that if he does not at all times make a just and ample market, the commission houses will speedily introduce a competing specialist in his field and his business will be cut down. He, therefore, does everything in his power to make such a market. Let us assume for the moment that the broker-specialist operating as provided in the Bill cannot trade for his own account and a dealer-specialist may. The dealerspecialist has no customers, is responsible to no one save himself, and it is inconceivable that he would have the same interest as the present specialist in the maintenance of a continuous fair market for securities.

The specialist's success depends upon the efficiency and intelligence with which he serves his clientele; without that efficiency and intelligence he would shortly find himself without orders.

The fact that the business of the specialist has been developed over a period of time and requires a high degree of alertness and specialized knowledge for its efficient functioning, and the fact that it involves the livelihood of several thousand people, including the necessary staffs, cannot, of course, be a primary concern of your Committee. But your Committee is rightly concerned with the maintenance of a liquid, or immediately accessible, market to the investor, which in turn means an opportunity for the nation's industry to finance its development. We believe that the specialist performs an essential function

in that branch of national economy.

If the liquidity of he market is at any time impaired it will unquestionably mean that collateral would necessarily be more difficult of disposal. Banks would accordingly be reluctant to accept stocks as collateral for loans which might be needed for productive enterprise. The effect, in truth, would be to impair a capital market on all exchanges in the United States where securities may now be either obtained or sold, with the inevitable consequence that other world markets would be ultilized.

The end and aim of commercial banks is, at all times, to have such a degree of liquidity that they may accommodate the short term needs of business. Destroy the liquidity of the market and the ability of the banks so to function would be proportionately curtailed. There are many examples today of the inability to liquidate in other lines of business.

We believe the intricate and complex functions of the specialist should not be disturbed as they now exist, and we respectfully submit the suggestion that the members of your Committee visit the Exchange to observe these functions in actual operation.

The corporate structure of American business has resulted in the issuance of hundreds of millions of shares of stock held, it is said, by over twenty million people. These are the people who, in the last analysis, "make the market". If the prospective legislation is followed to its logical conclusion, the functions now performed by the New York Stock Exchange would be seriously curtailed. This would not only impair the savings of millions of people but also throw many thousands into unemployment.

Therefore, it is respectfully petitioned that Section 10 of the Bill be amended in accordance with the recommendation of Richard Whitney, Esq., President of the New York Stock Exchange, made to the Committee on Interstate and Foreign Commerce of the House of Representatives at a public hearing on Thursday, the 22nd of March, 1934.

Section 10, as thus amended, would read as follows:

"Section 10. (a) It shall be unlawful for a member of a national securities exchange while on the trading premises of such exchange to act as a dealer and broker in contravention of such rules and regulations as the commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

(b) Subject to such rules and regulations as the commission may prescribe as necessary or appropriate in the public interest or for the protection of