Mr. NEWBOLD. I haven't bought any Federal land-bank bonds for some time and will have to ask. [After asking someone sitting behind him.] I am informed it is about a quarter of 1 percent in that case, and it is because there is nothing like the activity in Federal land-bank bonds or in home loan bank bonds that there is in Government bonds. That is, a sale of 20 million dollars of United States Government bonds is not at all unheard of, and therefore the commission is very low. And in the case of the more limited market, the more risk a man takes who takes a position in the market, the larger the commission is. But a quarter of 1 percent as suggested to me I think would prove to be high. I think the investor would not have to pay that much.

The CHAIRMAN. Are there any questions that any member of the committee wishes to ask?

Senator TOWNSEND. I do not wish to ask any.

Senator BARKLEY. I have no questions.

The CHAIRMAN We are very much obliged to you, Mr. Newbold. Mr. NEWBOLD. And I thank you both for myself and in the name of all our firms for your courtesy in hearing me.

(And Mr. Newbold left the committee table.)

The CHAIRMAN. We will now hear Dean Witter who has come on here from San Francisco. I understand that some gentlemen from California have been here all week, and they want to get away. I think we should accommodate them for about half an hour. I believe that is the time you requested?

Mr. WITTER. I think I will not take as much as that of your time.

STATEMENT OF DEAN WITTER, SAN FRANCISCO, OF DEAN WITTER & CO.

The CHAIRMAN. Please state your name, place of residence, and Occupation.

Mr. WITTER. My name is Dean Witter. My residence is San Francisco, and I am both a broker and an investment banker.

The CHAIRMAN. Mr. Witter, the committee will be very glad to hear your views on this bill, S. 2693.

Mr. WITTER. I am authorized to speak for 204 dealers on the Pacific coast, about 30 of whom have seats on some exchange and who do both a brokerage and dealer business, and the remainder of whom have no stock exchange seats. All of these dealers also operate as brokers. Attached to this statement are copies of wires providing this authority. I should like to read them into the record. I particularly represent small dealers rather far removed from the financial centers.

I am allowed only 15 minutes of your time and will try not to repeat testimony already given. May I complete my statement. which is brief, and then I shall be glad to answer questions.

I am in favor of Federal supervision and control of stock exchanges. I am in favor of complete and accurate reports to stockholders; I am in favor of punishing misrepresentation, fraud, and other acts by either brokers or dealers which are detrimental to the public interest. I am opposed to pools, corners, and the manipulation of markets.

I have certain general objections to the regulation of stock exchanges by rigid and fixed statute. I do not think that a fixed statute endeavoring to deal with all the complex and intricate problems of the brokerage business can be so drawn as to eliminate the possibility of abuses without at the same time destroying the functions of exchanges and the free and open market for securities to the great detriment of the public.

Time does not permit me to cover the entire subject matter of the bill and I will therefore confine my statement to the effect of the first sentence of section 10 and section 19 (b) insofar as this section relates to this sentence and section 7(c), which separate dealers and underwriters from brokers.

The presumed purpose of these sections which provide for the divorce of broker and dealer is, (1) to insure that the customer knows whether he is dealing with a firm as a broker or a dealer, and, (2) to prevent the use of the same capital for the conduct of two businesses. I do not presume that the bill was intended to enforce a hardship upon the conduct of legitimate business nor to further reduce the already decimated ranks of the dealers although these sections would do both. I shall later suggest how the purposes of these sections can be fulfilled without damage to public interest.

As drawn these sections would destroy the business of many small firms in smaller communities as these firms depend for their livelihood and their usefulness upon providing both brokerage and investment service to their customers. This would injure the investor. There may be no legitimate firms left in many smaller towns. If this is the case, it would make investment difficult and precarious. If there are any left, they would be wholly separate firms, which would have difficulty earning a livelihood. The investor could not buy municipal bonds and listed common stocks from the same firm. Neither the broker nor the dealer could take a comprehensive and disinterested view of the investors' requirements. Pressure will be exerted on the dealer to recommend only unlisted securities to his clients in order to handle all of their business. A broker is likely to be prejudiced in favor of listed common stocks only. I do not see how the public will be benefited by the proposed separation.

I believe the country as a whole will be injured. First, if I am correct in the assumption that many small dealers will be forced out of business or would become brokers only, then it will become even more difficult than it is at present for deserving local enterprises to be financed. Secondly, municipalities are largely financed by small dealers, who are also brokers and who purchase municipal obligations and redistribute them to the individual investor. Experience has shown that this type of financing cannot be handled on a brokerage basis. If an arbitrary separation is imposed, it would greatly curtail the market for municipal bonds and small local issues. I shall not go further into this phase of the matter because of limitations of time.

It would not be constructive to object to the divorcement of the brokerage and dealer business without suggesting some means which would insure the public against confusion of functions. This can be done by the segregation of the two businesses under one owner

ship, and by having all letterheads printed either "Bond department" or "Brokerage department." All statements showing transactions with customers should be clearly phrased to indicate without possibility of misunderstanding whether the firm is acting as a broker or a principal in that particular transaction. This has been comprehensively provided for in the Investment Bankers' Code recently adopted.

The CHAIRMAN. But not yet signed or approved by the President, Mr. WITTER. No, sir.

The CHAIRMAN. You may proceed with your statement.

Mr. WITTER. Our bond department has eight separate forms showing purchase and sale of securities and clearly setting forth whether we are acting as a broker or a principal. In the event that we are selling securities in which we have a profit that fact is also stated. I attach hereto copies of the eight forms which we use and in which we say in so many words that "We act as principal ", if that is the case. If we act as principal in the sale of securities in which we have no profit or a loss we obviously omit the phrase "which includes a profit to us ", and unfortunately we have had much use for this particular form.

In the conduct of my firm and many others we have scrupulously segregated our brokerage-department premises, books, accounts, organization, capital, personnel, and functions. In general our brokerage departments and bond departments are as separate as though they were two different firms except for mutuality of name, ownership, and general policy. I think that no harm and some advantage have come to the customers of each department through the dual functions of the firm. No brokerage department customers' man is allowed to sell our own participations or underwritings to his customers. The reason is practical as well as ethical. If we sell our own underwritings to brokerage-department customers, who often carry securities on margin, the securities are not permanently placed, and we have not fulfilled our obligation to the company whose securities we have been paid to sell. If we sell our underwritings to marginal customers, we are using our own capital for the purchase of our own securities. In the event of adverse developments we would be frozen with these loans. In addition brokerage-department customers have reason to resent biased advice, and the recommendation of our own issues would destroy our brokerage business. I do not believe that it is practical to provide by statute that the two businesses should be as completely segregated as ours, as small dealers cannot afford the segregation of capital and premises. The large dealer, of course, could afford to segregate his business as between two departments; and I think, perhaps, it would be proper to insist that the large dealer do so. But I do not think that is a practical suggestion from the viewpoint of the small dealer. The main purpose of segregation is served by making it clear whether the dealer is a broker or a principal. This should be indicated in verbal statements and in written bills and confirmations.

The dealer and underwriter business has recently been largely confined to the purchase and sale of municipal bonds. These bonds are rarely, if ever, listed and under the provisions of Section 7 (c) a dealer can neither use his capital to carry such securities nor could he borrow money against them.

In passing I think I should point out that it is impossible for a brokerage firm to refrain entirely from acting as a principal, as in the case of errors which must be cleared, and that no dealer, whether member of an exchange or not, can refrain from acting as a broker unless it refuses to handle customers' orders to buy securities not owned by the firm. A strict interpretation of this portion of the bill would destroy the investment banking business and, consequently, the capital market which I think is admitted to be prerequisite to normal recovery.

mar

Section 6 of the proposed bill forbids lending on unlisted securities which would enforce a great hardship upon the market for unlisted securities and particularly upon the smaller communities and the smaller firms. Section 14 regulating "over-the-counter kets enforces a particular hardship on outlying territories as there are a multitude of unlisted bonds and preferred stocks traded in which are in most cases obligations of companies so small that their size would preclude compliance with any expensive listing requirements. The Los Angeles group have pointed out that there are over a thousand issues of companies traded in which provide in some cases some sort of collateral, and with which they could not deal if this bill became effective.

The Dickinson report to the Secretary of Commerce recommended control by a "Federal Stock Exchange Authority" and through a flexible mechanism to further study the means of regulating the stock exchanges and advised against placing stock exchanges in a strait-jacket. It urged that the law be limited to minimum requirements and that broad discretionary power be given the authority. Regarding the segregation of brokerage and dealer business it said: Any such proposed segregation should not be accomplished before we are in a position to calculate its cost and to foresee its repercussions.

I think that the authority designated to exercise control of stockexchange firms should be authorized to extend the segregation of the two businesses as far as its further study indicates it to be necessary in the interests of the public.

DEAN WITTER,

[Western Union]

SAN FRANCISCO, CALIF., February 27, 1934.

Hotel Carlton, Washington, D.C.: At a joint meeting of Security Dealers Association of San Francisco, local I.B.A. members and nonmembers, totaling 53 firms, a resolution was unanimously adopted authorizing you to represent them before the Senate Banking Committee and the Interstate and Foreign Commerce Committee of the House and to express for them their disapproval of the Fletcher-Rayburn bill as now written. Group wishes specific opposition registered to sections 6, 10, and 14. Dealers object to section 6, which in present form precludes extension by banks of credit on unlisted securities in regular course of business which would stifle public market for majority of Pacific-coast issues and cause deflationary liquidation, thereby impeding further national recovery. Dealers feel Pacific-coast market requires security dealer to act both as investment banker and broker in order to properly handle and diversify clients, investment account which must be given first consideration. Dealers therefor oppose section 10 because it encourages exclusive broker to favor and sponsor only securities on his particular exchange for commission consideration and likewise causes exlusive underwriter or dealer to recommend only those securities in which they personally are interested.

175541-34-PT 15——22

In view of the excellent self-regulatory measures embodied within the fair practice provisions of Investment Bankers Code approved by this group today section 14 of bill is not only burdensome but unnecessary. Furthermore, believe section 14 destructive to unlisted market here because majority of western issues are not listed on any exchange and their marketability would be narrowed to detriment of both corporation and security owners. Partial list houses present follows: Anglo-California National Bank, American Trust Co., Bank of America, N. H. Bennett & Co., Bennett, Richards & Co., Brush Slocumb & Co., Blyth & Co., Cavalier & Co., City Co., Conrad, Bruce & Co., David Skaggs & Co., Denault & Co., Elworthy & Co., Eyre Palmer & Co., Heller Bruce & Co., Hellman Wade & Co., Henderson & Co., Heron & Co., Martin Judge, Jr. & Co., Leppo & Co., Mitchum Tully & Co., R. H. Moulton & Co., R. N. Miller & Co., Collins & Sons, Inc., Schwabacher & Co., Shaw Hooker & Weeden & Co., Dean Witter & Co., Wulff Hansen & Co.

SECURITY DEALERS ASSOCIATION OF SAN FRANCISCO.

[Postal Telegraph]

DEAN WITTER,

Carlton Hotel, Washington, D.C.:

LOS ANGELES, CALIF., February 27, 1934.

Security Dealers Association of Southern California, a voluntary association composed of 71 investment dealers all operating in southern California, 20 members having seats on some exchange operating both as broker and dealer, and 51 members having no stock exchange seats but acting both as broker and dealer, had a meeting today, unanimously authorizing you to represent their association before Senate Banking Committee and Interstate and Foreign Commerce Committee in connection with Fletcher-Rayburn bill. Our group here particularly concerned with section 6A, which we feel in present form would preclude extension of credit by banks on unlisted securities in regular course of business and feel should be definitely clarified. Section 10 we feel affects par ticularly legitimate small investment dealers whose relationship with client makes it necessary for them to act both as agent and principal in giving rounded investment service. Dealer who is intrusted with client's investment account should surely be allowed to act as agent for that client if he feels it necessary. Section 14 presents a particular problem in this territory as there are more than 1,000 issues unlisted bonds and preferred stocks traded in which are in most cases obligations of companies so small that their size would preclude compli ance with any rigid rules that may be set up by Federal Trade Commission. We are wiring directly to committee as an association and some of our members also wiring members of the committee. Please advise in what way we may be of further assistance.

SECURITY DEALERS ASSOCIATION OF SOUTHERN CALIFORNIA, By Edw. MCWILLIAMS, Secretary.

[Western Union]

DEAN WITTER,

PORTLAND, OREG., February 28, 1934.

Carlton Hotel, Washington, D.C. The board of governors of the Investment Bond Club of Portland, having! 33 dealers as members, would like you to represent the organization before Senate and House committees in regard to Fletcher-Rayburn bill. Our organization is disturbed by provisions in the bill which seriously hamper investment houses which are primarily dealers, these same provisions failing in our opinion to afford investing public any protection. Sections 10 and 14 are particularly offensive in this connection. Section 6 A would seriously injure holders of high-grade unlisted bonds. In general we see no occasion for provisions of act which hamper investment dealers who occasionally act as brokers for convenience of customers. After all we have the Securities Act of 1933 and our code besides State regulations.

INVESTMENT BOND CLUB OF PORTLAND.
R. H. MARTIN, President.