partly due to such restrictions. Because new issues by investment bankers are thus checked, unsound proposals are made to have the Government go into the investment banking business. Might it not be simpler to try to remove the restrictions that prevent the existing private investment machinery from operating smoothly and freely? A stagnant market causes social losses.

STATEMENT SUBMITTED THURSDAY, JANUARY 22, 1942, CONCERNING AGENDA ITEM No. 6 OF HEARINGS ON SECURITIES EXCHANGE ACT OF 1934

By Elisha M. Friedman of New York, consulting economist

6. INFORMATION WITH RESPECT TO LISTED SECURITIES (SEC. 12 (b) AND 13 (a)) Equalize requirements for listed and unlisted securities. Now they are more strict for listed securities and therefore deter listing. Such equalization would bring more securities to the exchanges and would serve the public better.

Equalize regulation.—Regulation should be equalized for the stock exchanges and the over-the-counter markets and it should be the same on both listed and unlisted securities. The stock exchange operates on small commissions on the assumption that volume would be adequate. The counter market operates on large commissions and small volume. If the stock exchange's small commissions are attended by artificially restricted volume, the Securities and Exchange Commission law may bankrupt the financial machinery necessary for a country dependent on private enterprise.

STATEMENT SUBMITTED THURSDAY, JANUARY 22, 1942, CONCERNING AGENDA ITEM No. 7 OF HEARINGS ON SECURITIES EXCHANGE ACT OF 1934

By Elisha M. Friedman of New York, consulting economist

7. SIMPLIFICATION OF REGISTRATION (SEC. 12 (g))

Eliminate duplicate registration of both the security under the 1933 act and the issuing corporation under the 1934 act.

FRIDAY, JANUARY 23, 1942

STATEMENT OF SIDNEY L. SCHWARTZ, PRESIDENT OF THE SAN FRANCISCO STOCK EXCHANGE, SAN FRANCISCO, CALIF.

The CHAIRMAN. Mr. Schwartz.

Mr. SCHWARTZ. My name is Sidney L. Schwartz. I am president of the San Francisco Stock Exchange and a partner of Sutro & Co., members of the San Francisco, Los Angeles, and New York Stock Exchanges.

Under date of September 26, 1941, representatives of 12 regional exchanges, with the concurrence of a 13th exchange, addressed a letter to this committee, expressing their views on the reports to Congress submitted by the securities industry and the Securities and Exchange Commission, dated, respectively, July 30 and August 7, 1941. The conclusion of the regional exchanges as expressed in their letter was that the proposals did not help the regional exchange markets or that part of the public served by them; that in the absence of material and constructive changes in the Securities Exchange Act of 1934 the regional exchanges face ultimate elimination from the financial markets of the Nation. The group urged that the study, which the regional exchanges had advocated to the Commission some 10 months previously and which the Commission had agreed to undertake, be completed and used as a factual basis for the possible ultimate solu

tion through statutory and administrative changes of the regional market problem.

The San Francisco Stock Exchange participated with the other regional exchanges and joined in the letter to the committee. Its position still remains as expressed in that letter last September. It was, however, always agreed by the members of the regional group that each exchange should be free to state its own views before Congress if called upon or given an opportunity so to do. Without in any way detracting from the expressions in the letter of September 26, 1941, we suggest to this committee consideration of the following matters:

Consideration of the amendments: The proposals of the securities industry and of the Commission in connection with changes in the 1934 act cannot conceivably be viewed as materially assisting the problems of the regional markets, as is obvious from the following analysis:

(1) The only proposals in the area of agreement between the industry and the Commission which, in the opinion of the San Francisco Stock Exchange, would be helpful generally to the securities exchange business, as well as to the regional exchanges, are:

Approval of amendment to section 11 (d): Proposal to amend section 11 (d), to allow a broker or dealer to extend credit on a security in which he has participated in the distribution four days after he has completed his portion of the distribution and terminated his participation in the selling syndicate. This compares with a previous 6 months' waiting period. The amendment is desirable.

Approval of amendments to sections 12 (d) and 12 (g): Proposal to amend section 12 (d), to admit to exchange registration securities that are in process of reorganization, recapitalization, and so forth, has the approval of our exchange.

Proposal to amend section 12 (g) to avoid duplication in registration requirements, so that, if a security is registered under the 1933 act, only minor additional requirements are imposed for registration on an exchange, as compared with the present full registration. This is an advantageous change.

(2) A certain few of the proposals made by the industry, such as the suggested elimination of subdivision (b) of section 16, are desirable to this exchange, but the Commission has announced its opposition to these proposals.

I pause for a moment to comment upon the effect of section 16 on the San Francisco Stock Exchange market.

It is our opinion that this section has done as much to destroy markets in local securities as any other statutory provision or regulation. Our listings are based not only on sound and well managed companies but also on our personal knowledge of the character of their owners and managers. Section 16 of the act suggests what we know to be untrue, namely, that buying or selling of a company's securities by its officers or owners is done for the purpose of manipulation and dishonest gain by use of private information concerning present or future financial prospect of the company.

The reports required by section 16 (a) are published many weeks after the information has been filed and from the standpoint of the stockholder or the public provide no guide as to the purpose of the sale or purchase of securities, by the reporting officer or

stockholder. Since these reporting requirements became effective, the number of bona fide stockholders who have called at the exchange to inspect such reports has been negligible.

A large number of the companies having securities listed on this exchange started business as family or closed corporations. Before listing, public distribution of the company's securities took place but a substantial percentage of the shares almost universally remained in the hands of the former owners. In such cases, to set up limitations upon the purchase and sale of securities of these companies which may deprive the market of support in times of stress, or eliminate the supply of stock, is an act which can be harmful to the interests of the public and specifically to the interests of the company's stockholders. Obviously, the limitation of action such as is implicit in section 16 (b), on the part of officers, directors, and principal stockholders of small local companies is much more harmful to the public interest than it is in the case of companies with Nation-wide security distribution. The San Francisco Stock Exchange supports the proposal to repeal section 16 (b).

3. The balance of the changes, proposed or accepted by the Commission, amount in effect to an extension of the power and jurisdiction of the Commission (a) over the exchange markets, and (b) in part at least over the security business done elsewhere than on the exchanges.

Disapproval of amendments to sections 19 (a) and 19 (b): Further extension of jurisdiction by the Commission will discourage self-government by the exchanges and is not warranted by the experience of the past 7 years since enactment of the 1934 act. Such extension of jurisdiction ultimately will make the exchanges mere arms of administration for the Commission. Persons of responsibility or position in the community will not consent to serve in such purely administrative capacity and the exchange personnel, particularly in the elective boards and executive offices, is bound to disintegrate in character.

Commissioner Purcell, early in his presentation before this committee, advocated responsible self-government by the exchanges. At page 65 of the printed report of these hearings he said, in part:

the officials of the Commission, that is, the staff members, and the Commissioners themselves, have endeavored to follow what apparently is the intent of the statute to encourage self-regulation on the part of exchanges.

However, the Commission's proposed amendments to sections 19 (a) and 19 (b) are seemingly designed to the opposite end, through the extension to the Commission of further regulatory and punitive powers over the exchanges and their membership. By the proposed changes to section 19 (a) the Commission is empowered to suspend or withdraw the registration of an exchange for failure by the exchange to enforce compliance with its own rules and may even suspend or expel any member or officer of an exchange for violating the rules of that exchange.

The suggested amendments to section 19 (b), in addition to extending the Commission's reviewing powers over exchanges rules to a number of new subjects (committee print, p. 111, lines 9-13) actually give the Commission, through the power to suspend any rule adopted by an exchange, original jurisdiction over the rule-making and governing powers of the exchanges. The San Francisco Stock

Exchange opposes the proposed amendments to sections 19 (a) and 19 (b).

Disapproval of amendments to sections 8, 14, and 16 (a): There is inherent in several of the proposals a doctrine which on its face offers selfish benefits to the exchanges through the extension of Commission jurisdiction to unlisted securities and over-the-counter brokers and dealers. We refer in this respect to the proposals to amend sections 8, 14, and 16 (a) of the act. This extension of jurisdiction is supposed to eliminate distinctions which now favor, through absence of regulation, the over-the-counter broker and dealer and the unlisted security. It is the position of the San Francisco Stock Exchange that this approach to the problem is unqualifiedly wrong. If regulation has stifled exchange markets to a very considerable degree, as it seemingly has, the proper answer is not the extension of such regulation to other competitive markets, but a careful review of the regulations with the objective of the ultimate elimination of those which are not necessary in the public interest and which tend to destroy the fairest and best market, historically that of the organized exchange.

STUDY OF REGIONAL EXCHANGES REQUESTED

It was in no spirit of delaying suggestions to Congress that the regional exchanges in their letter of September 26, 1941, proposed that the study undertaken by the Securities and Exchange Commission on the factual situation confronting the regional exchanges be completed and that thereafter the proper statutory or regulatory action be taken. The fact of the matter is, the regional exchanges constitute but a small part of the total markets of the country; the attention of the Commission has been directed to fields which it may consider more important; its personnel is limited and its work, therefore, necessarily restricted. But, at the same time, Congress recognized when the 1934 act was passed, and we believe the Commission today recognizes, that the regional markets are an essential part of the financial structure of this country, that their existence should be protected and their development encouraged. Unfortunately, separated as they are, with limited financial resources and personnel, the regional exchanges are not in a position to make this study as convincingly and satisfactorily as is the Commission. Moreover, the local exchanges have not the authority to demand of actual or potential issuers information necessary for a complete study. On the other hand, the Commission has the position and authority to obtain this information and has at its command, or available to it, facts with respect to all the security markets; it has a trained staff, and the facilities for reaching sound conclusions. The San Francisco Stock Exchange asks that Congress direct that the Commission make this study of this ailing but essential industry and report to it how the little man in the financial world can be permitted to continue in existence. And I might add that in conversation yesterday with members of the staff of the Commission, I have been advised that the Commission holds to this view, and that they have already completed a study and examination of the Cleveland Stock Exchange and that within the next week or so they contemplate sending examiners to the San Francisco Stock Exchange for the purpose of making an examination of that exchange.

ADDITIONAL AMENDMENTS SUGGESTED

The San Francisco Stock Exchange has in the past made one or more suggestions to the Commission as to changes in the statute. It is particularly concerned by the definition of "member" as set forth in section 3 (a) (3).

Proposal for further amendment of section 3 (a) (3): Our exchange for many years had extended an advantageous commission rate to members of certain other exchanges and selected dealers. The obvious purpose of this was to stimulate interest among such persons in the maintenance and development of the San Francisco Stock Exchange market. The preferential commission rate was extended only under proper safeguards. In discussing this matter with the Commission almost 2 years ago, the San Francisco Stock Exchange was advised that in the opinion of the Commission such firms or persons receiving the commission advantage automatically became members of the San Francisco Stock Exchange (whether they wished it or not) because of the definition of "member" of a national securities exchange in section 3 (a) (3) of the 1934 act. We argued this matter with the Commission at considerable length, citing the opinion of our counsel that it was at least doubtful whether the language of the statute intended to give such an artificial definition to the word "member"; that, on the contrary, in the Senate resolution adopted on April 4, 1933, extending the powers of the Committee on Banking and Currency, the reference to members of an exchange was obviously a reference to persons in association together; likewise, in the Commission's report, through its then chairman, Joseph P. Kennedy, to Congress under date of January 25, 1935, under section 19 (c) of the act, which related to "classification of members," there was every indication that the Commission itself adopted the usual and ordinary definition of "member." However, in our subsequent discussions and correspondence with the Commission, we were definitely advised that it adhered to the technical definition that any person who was permitted to carry on business at a lesser commission rate than that charged the general public was to be construed a member of the exchange.

-We consider the definition unsound and that its application works a hardship. Practically all of the persons to whom commission advantages had been extended were subject to regulation, namely, as members of other exchanges or as over-the-counter brokers or dealers; they object to being made members of the San Francisco Stock Exchange or of any other exchange which they do not voluntarily join, and subject to all the regulation that such membership entails. At the same time, the San Francisco Stock Exchange does not feel qualified to extend its regulatory powers in full to such persons, nor does it see any need for such extension, particularly as their only relationship to the exchange is that because of their position in the industry they receive a preferred or "wholesale" rate of commission. Failing in efforts to persuade the Commission to change its viewpoint upon this matter, we have suggested to it that it give its approval to some statutory change in the definition of "member" so as to more nearly conform to the usual and ordinary definition of that word as distinguished from the artificial definition which the