A BILL ON TRADING IN UNLISTED SECURITIES UPON FEBRUARY 11, 1936 Printed for the use of the Committee on Banking and Currency The committee met, pursuant to call, at 10:30 a. m., in room 301, Senate Office Building, Senator Robert F. Wagner presiding. Present: Senators Wagner (presiding), Glass, Barkley, Bulkley, Gore, Costigan, McAdoo, Adams, Maloney, Radcliffe, Norbeck, Townsend, Jr., Carey, and Couzens. Senator WAGNER (presiding). The committee will please come to order. The chairman of the committee (Senator Fletcher) was called out of town to attend a funeral, and he asked me to preside at this hearing. Chairman Landis, of the Securities and Exchange Commission, was invited to come up on the Hill and discuss a report made to us by his Commission. Mr. Commissioner, if you will just take a seat at the table opposite the committee reporter, we wish to thank you for coming, and invite you in your own way to give us a résumé of the report that you have made. STATEMENT OF JAMES M. LANDIS, CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C. Mr. LANDIS. Gentlemen of the commitee, it is a pleasure to come up here, and I shall be glad to try to explain this Report on Trading in Unlisted Securities Upon Exchanges submited by the Securities and Exchange Commission under letter of transmittal dated January 3, 1936. In presenting this subject may I start in by attempting to make clear to you certain definitions that will relate to different types of securities covered in our report. Prior to the Securities Exchange Act two types of securities were dealt in on the exchanges of this country. The first type was known as a listed security, listed because the issuer of such security had, at the request of the exchange, agreed to furnish certain information, both at the time of listing and periodically, to the exchange. And I might add at this point that the listing requirements of the various exchanges of the country differ. But that was one type of security. The second type of security was one that was submitted to unlisted trading. That is, a security that was traded in on an exchange 1 but which was admitted without any commitment on the part of the issuer at all. For instance, a broker might bring a security to the attention of the appropriate stock exchange committee and say: Won't you allow trading in this security, and doubtless the security would be admitted to trading on the exchange without any obligation on the part of the issuer to furnish any report or to furnish any information about the security, either at the time or periodically. And so it is that I say, that was the situation prior to the passage of the Stock Exchange Act. Senator GLASS. Why did such a discrimination exist? Mr. LANDIS. The discrimination was due to the fact that the issuer of such a security did not want to furnish the required information, did not want to assume the listing obligations. Senator GLASS. Yes; but why should an exchange permit trading in any security on their exchange without furnishing that information of certain issuers of securities and not require it of others? Mr. LANDIS. Well, that was the policy of some exchanges. May I say, for example, that the New York Curb, which is the large exchange concerned in this report, was one on which the majority of the securities traded in were admitted to unlisted trading. The idea of the exchange was to take a security which it thought deserved an exchange market, and give it that exchange market even though the issuer of the security did not want to assume the type of obligations that the issuer of a listed security was willing to assume. Senator CoUZENS. Was a trader more or less active on the Curb able to discern the difference between a listed and an unlisted security, such as you have described? Mr. LANDIS. That was true with reference to some exchanges, and with reference to other exchanges it was not true. Senator COUZENS. So that a prospective purchaser who went in and read the market report would not know at all whether information had been furnished the exchange or not. Mr. LANDIS. That was true with reference to numerous exchanges. But the New York Curb tried to bring about a starring of the listed securities as distinguished from the unlisted. However, some newspapers would carry that designation while others would not. Senator ADAMS. Were there any unlisted securities dealt in on the New York Stock Exchange? Mr. LANDIS. Not since 1910 have there been any unlisted securities dealt in on the New York Stock Exchange. It is the great listed exchange of the country, while the New York Curb is the great unlisted exchange of the country. For instance, today about 80 percent of volume of the securities traded in on the New York Curb are unlisted. Several of the 23 exchanges throughout the country are in a more or less similar position. Some do not have any unlisted securities. For instance, the Chicago Stock Exchange has no unlisted securities at all. The Chicago Curb, on the other hand, has more unlisted than listed securities. The Cleveland Stock Exchange has no unlisted trading. Senator GLASS. One might understand readily why one class of people would not want to give information while another class might be willing to give the required information; but what puzzles me is to understand why a stock exchange should make such discrimination. Mr. LANDIS. A stock exchange is, quite naturally, dominated very frequently by the desire to get business, and that was very true prior to the passage of the Securities Exchange Act. Admission of many of those securities to unlisted trading privileges was not justified by the fact that an exchange market for such securities was desired as distinguished from an over-the-counter market. Very frequently securities were put on exchanges which should never have been placed there at all. That was the situation faced at the time of the passage of the Securities Exchange Act. The passage of the Securities Exchange Act was upon the theory that information about securities was essential; and, secondly, it superimposed upon the listing requirements of the various exchanges, the requirement for registration. Securities had to be registered when they were initially put on the exchange, and by section 13 of the act, periodical reports were to be furnished by the issuers of securities. Congress had in 1934 this problem of unlisted trading to deal with. Being faced with the question of what to do with the great mass of securities already on the exchanges, it said to the Securities and Exchange Commission: "You may continue unlisted trading privileges in these securities for a period of 2 years. In the meanwhile you will study the situation and report to us, and suggest what we should do." Hence our recommendations. Senator GLASS. That is the question here before this committee now. Mr. LANDIS. That is the reason why we submit this report. Section 12 (f) of the Securities Exchange Act of 1934 in substance put what might be called a death sentence upon unlisted trading, if I might use that terminology here Senator GLASS (interposing). It is very familiar to us. Mr. LANDIS. To become effective in 2 years. Congress suggested in the meantime that the question should be studied and that we should report back to you as to what in our judgment might be desirable to do in reference to the unlisted trading problem. First, our report seeks to give some indication of the magnitude of this problem. It is a very large problem. The amount of the securities admitted to unlisted trading privileges runs into billions of dollars. If tomorrow, for example, unlisted trading should be abolished and the requirement should be made that all securities should be required to register, the result would be that many small exchanges would be forced to close. Very likely the New York Curb Exchange would suffer seriously. How far it could go on is a matter of speculation. With 80 percent of its business subject to that requirement, for 80 percent of its business is unlisted trading, if you should take that privilege entirely away from them, what would happen is really a matter of speculation for them as well as for the Congress. Senator BULKLEY. Does not the New York Curb have a form of listing even for those who do not furnish the listing information? Mr. LANDIS. If I can go into that, I will show how the unlisted trading angle of the Curb was very seriously criticized some years ago. The attorney general of New York made an investigation of the situation, and as a result of the investigation the Curb cleaned up that situation quite a bit. Hundreds of securities were dropped from the Curb, securities for which an exchange market was not a |