STATEMENT OF W. G. PAUL, LOS ANGELES, CALIF., SECRETARY OF THE LOS ANGELES STOCK EXCHANGE

The CHAIRMAN. Mr. Paul, state your name and place of residence, and occupation, please.

Mr. PAUL. My name is W. G. Paul. I am from Los Angeles, Calif. I appear before your committee in two capacities: First, as secretary of the Los Angeles Stock Exchange, to present to you gentlemen or answer questions which you may have concerning that particular market.

And second, I wish to appear before you in all humility as representing a little fellow in our business, and as such I would like to present for your consideration serious consequences which this bill imposes upon the smaller man in our business, particularly in section 7 and section 10. I, of course, have certain opinions and ideas on the general sections of the bill, but they have been so ably presented by others, and you still have to listen to others present those arguments, that I prefer to confine myself to those two sections.

Senator MCADOO. My attention was distracted for the moment, Mr. Paul. What were those sections?

Mr. PAUL. Sections 7 and 10. Section 7 deals largely with the capital requirements for a stock broker, limiting the amount of business he may do with the capital he has, and as Mr. Corcoran very definitely stated, implying that that capital should be absolutely cash. I do not want to be glib in my expressions, but in all sincerity I believe that section 7 could conceivably put out of business a vast majority of the smaller units in our business who, after all, to an extent are the backbone of our business. I can conceive where the sections would concentrate the business, and by putting a pure premium on capital as such, possibly further centralize power through sheer money control.

I think the best answer or the best presentation of our objection to section 7 is in our own records as brokers. I think it is conceded, certainly records will demonstrate, that the mortality financially among brokers as such during the very trying period we have just gone through is on the whole an excellent one. Certainly, our own record in Los Angeles I am prepared to stand upon and defend. We have had some failures, but aside from the first failure, which was a direct result of the terrific crash in October, no failure has affected the public to any serious extent, and only two failures have even affected the public.

In other words, we in our business have always made a strenuous effort to see that those brokers who are members of our stock exchange shall conduct their affairs at all times in such a fashion that their financial condition shall protect the public with whom they are dealing. And I submit that the record, the actual record of failures on our exchange, and I believe the majority of exchanges is such as to justify some consideration to the tempering of the iron-clad capital requirements of section 7.

It is well known that many of us are financed through friends or relatives who come into our business in the relationship of special partners and who, instead of presenting to us actual cash, give us perfectly sound, liquid securities which are used as capital.

In our exchange audits and in our exchange questionnaires, through which we control the capital structure of our members, we are particularly and very keenly critical of any form of capital I which is not purely liquid. Many of our brokers do margin business only to a limited extent, and to require them to keep capital in absolute cash position would seem to me to be an undue penalty, and I submit that those stringent provisions of section 7, in the light of past experience, can and should be very seriously considered before they are made a matter of basic law.

I do not care to take a great deal of your time on section 10, because it has been so ably argued, and yet again I want to present our position in that respect. In other words, I want to submit the records of brokers in the conduct of their business. And furthermore, I want to submit that in my humble opinion a member of a recognized stock exchange, such as a national securities exchange would be, under any form of legislation is, with all respect to the very high caliber of the majority of men who are not members of those exchanges and who conduct their businesses in unlisted or over-the-counter markets-it is my humble opinion that to permit the members of national securities exchanges to conduct also the dealer or unlisted business is in a way a safer medium to the public than in the other because, through the method of control which you have over such members, certainly any phase of their business will be subject to that control.

I want to further submit that we as exchanges have always exercised that control. We not only control the relation of our members to their clients as respects securities which are listed, but we say to any member of our exchange: We reserve the privilege of examining any transaction which you may have in any security with the public; and the net result is that in California, at least, I know that the listed brokers in the conduct of their dual capacities have certainly always exhibited a very high standard of conduct. Senator GORE. How many listed brokers have you?

Mr. PAUL. There are 67 members of my exchange. They represent approximately 56 organizations, firms, or individuals doing business. My own experience in different committees in my exchange over the past few years would bear out the fact that we closely scrutinize such conduct.

In addition to that, the State of California, as I imagine most States, has in its statutory laws very definite provisions governing the relation of principal and agent. In other words, the statutes of my own State require me doing business in that State to observe the penalties and the written law governing my relationship to anyone if I should step out of the capacity of agent and act as an undisclosed principal. The securities act of the State of California, which is administered by the corporation commissioner, who is comparable to securities commissioner in other States, in that act itself are stipulated the laws of principal and agent. In our own exchange rulings we have it.

And I want to submit, if not the original, I will secure it if you wish-when I arrived in Washington and this discussion on section 10 was brought up, naturally I had thought about it all the way across the continent, and it occurred to me that in the light of my own experience in California, in the light of the relationship which

I have enjoyed with the authorities in California, particularly the corporation commissioner's office, our records demonstrated that the conduct of that dual business by members of the exchange in California had always been on a very high plane.

I was rather reluctant, and frankly questioned whether the commissioner of corporations of California would be willing to interject his opinion or statement, which naturally would be used as he knew I would want to use it. And yet I did, I wired to California and asked if they would approach Mr. Daugherty, who is our corporation commissioner, and ask him if, in view of the experience of his office, he could and would express an opinion as to the experience of his office-and his office licenses and controls all securities dealers in California-if he would give me an opinion or expression which I might use.. The approach was made through counsel for the exchange. This letter is a copy of the letter which he wrote. [Reading:]

STATE OF CALIFORNIA,

DEPARTMENT OF INVESTMENT, DIVISION OF CORPORATIONS,
San Francisco, California, February 23, 1934.

Mr. EARL C. ADAMS,
Attorney at Law,

c/o Loeb, Walker & Loeb,

Pacific Mutual Building,

Los Angeles, California.

DEAR SIR: Replying to your wire of even date, I beg to advise you that I have discussed with some of the members of the Division of Corporations who have handled complaints against brokers licensed with this Division as a matter of daily routine.

The substance of opinion is that there are practically no complaints against brokers who are members of the New York Stock Exchange. Compared with individuals and firms licensed in this State as brokers, there are very few complaints registered with us against members of the Los Angeles Stock Exchange or the San Francisco Stock Exchange.

There are a vast number of complaints lodged in proportion against individuals and firms holding or having held brokers' certificates from us who are not members of any exchange.

To obtain the actual number of complaints registered against individuals or firms in any given period would necessitate the work of a fair sized force for several weeks.

Yours very truly,

EDWIN M. DAUGHERTY, Commissioner of Corporations.

Senator GORE. Could you say how many of those certificates are outstanding in Los Angeles in connection with your exchange as compared with the licensed brokers?

Mr. PAUL. I am sorry, Senator, I could not, but I am confident that it is vast. It seems to me that almost everybody in California is either a real-estate broker or a securities broker. I can get the exact numbers and will be very glad to do that for you, the number of licensed brokers in California.

Senator GORE. That would not be so important. But what funetion do these certified brokers or near brokers perform as compared with listed or licensed brokers?

Mr. PAUL. If you secure a securities license to be a broker in California, that means that you may conduct any phase of the securities business. In other words, you may act as a broker of securities which are unlisted or even listed without being a member of an exchange necessarily; that you may trade in the obligations.

of the State or any bond, or that you may represent a corporation in the sale of its securities to the public if those securities have been sanctioned by the corporation department. In other words, to be a member of an exchange you must also hold a license with the State. Mr. PECORA. Mr. Paul, do those statutes which require the issuance of licenses to dealers and brokers in your State confer any supervisory power upon a State officer?

Mr. PAUL. Oh, yes; our corporation commissioner, of course, has complete power.

Mr. PECORA. Yes, to do what? Has he a power of examination and visitation?

Mr. PAUL. Yes, sir.

Mr. PECORA. I want to say that, to be exact, in 1923 I helped draft a bill which was introduced in the New York State Legislature seeking to enact that very principle. The bill failed of enactment principally because of the opposition of the New York Stock Exchange to its enactment. I was then in the district attorney's office, and we were in the midst of this bucket-shop campaign, and we sought to have legislation of that sort enacted in the State of New York. The principal opponents of the bill, which passed the State senate and failed in the assembly, was the New York Stock Exchange.

Senator GORE. Could you tell us how far the laws of California supervising the exchanges of California correspond with the provisions in this bill? What are the points of resemblance and difference?

Mr. PAUL. Well, I should say that the corporate securities act of the State of California in its provisions governing brokers is similar in this respect, that it is general; it confers the powers of supervision upon the corporation commission. Our securities act deals chiefly with the issuance of securities in that State which are to be sold to the public. I should say just from pure memory that the provisions in that act as relate to brokers are to a very limited extent specific. That is, there are no set phrases, such as a broker may or may not do this, he may and may not do that. It merely licenses him as such with our securities commissioner, and the presumption is that the securities commissioner shall take such steps as in his judgment may be necessary to protect the public in the relationship of that broker.

Senator GORE. Does it give the commission power to regulate margin accounts?

Mr. PAUL. No, sir.

Senator McAdoo. He has no inquisitorial power?

Mr. PAUL. Oh, no.

Senator MCADoo. Or power of visitation and examination?

Mr. PAUL. He or his representative may come to your office and examine your records.

Senator McADOO. With respect to the conduct of your business. Mr. PAUL. I would say he possibly has that power, although he rarely exercises it.

Senator McADOO. His chief function is with respect to complaints? Mr. PAUL. That is right.

Senator MCADOO. Due to the fact that the initial issues of the corporation-either stock or bonds-do not comply with the requirements of our statute. Is not that about the extent of his authority?

Mr. PAUL. Yes.

Senator McADOO. But so far as any regulatory power over the conduct of the broker's business or anything of that sort is concerned

Mr. PAUL. I should think he had that if he cared to invoke it, but it is more of a police power in that when occasion arises he may exercise it.

Senator McADOO. Upon complaint; but I mean to say he has not general inquisitorial power of his own volition.

The CHAIRMAN. He can revoke licenses.

Mr. PAUL. Yes; after hearing, and for cause.

Senator KEAN. He has got to have a hearing, and it must be for

cause.

Mr. PAUL. Yes.

Senator GORE. Does it fix or regulate the relationship between the amount of capital and the amount of business transacted by a broker? Mr. PAUL. No, sir. Furthermore, in California, as a prerequisite for a license, we require the filing of a surety bond in the amount of $5,000.

Senator GORE. What are the stipulations of the bond-to do what? Mr. PAUL. To protect any person doing business with that broker in the amount of $5,000 against fraud.

Senator MCADOO. That is not a very heavy bond.

Mr. PAUL. If I may continue for just a minute, I have presented here the implication that because we are carefully surrounded by laws in California the conduct of our business has been on a high standard, as exhibited by my own statement and as confirmed by our corporation commissioner. But frankly I think it goes deeper than that. I have heard certain expressions here in the hearing as it has been conducted to which I would take particular exception if they were intended as their inference might have led you to believe.

I do not believe any man can exist in any business unless his standards of ethics and business conduct are generally on a high level or a high plane. I do not know of any broker who could exist in business if his business were predicated upon taking advantage at every opportunity of his customer. Certainly, that is the basis for the contention which we make on section 10. I certainly could not hope to get the brokerage business of a customer of mine with my right hand if with my left hand I was dealing with him unfairly in the so-called "investment end" of his business. Most of the menof whom I may say, in all humility, I am presenting myself as an example here-deal largely on a personal basis. Our clients to a great extent are friends who, over a given number of years, have learned to trust our judgment, in spite of 1929. They trust our integrity and our honesty, and they come to us more or less as you would go to a physician, with their financial problems. We discuss all phases of investment with that type of person, and certainly no investment account of any character can confine itself to any one class of securities, any more than a well-balanced meal could be all dessert.

Senator GORE. I can see how that might apply to regular cus tomers, the so-called "bulls and bears." How about these "lambs" that just wander into the shambles occasionally and never get out!