is the further difficulty, however, of determining what "substantial control" of floating supply is. Section 8 (a) (9): This section prohibits all transactions involving puts, calls, straddles, or other options. This is too sweeping a prohibition. Under certain circumstances options perform a legitimate function. Furthermore, there are outstanding today in the hands of the public options and warrants, many of which are traded in now on the organized exchanges. Section 9 (a): This section prohibits short selling except in accordance with such rules and regulations as the Commission may prescribe * In the absence of knowledge as to what rules and regulations the Commission will prescribe, it is difficult to pass judgment on this section. I should like, however, to read our general conclusions on short selling reached after careful consideration of a mass of factual data. [Reading:] Our study of short selling has led us to the conclusion that while this practice fails in large measure to perform the useful function which its proponents claim for it, it also does not in the aggregate cause the havoc to the general price structure with which its opponents charge it. In any discussion of short selling it should always be borne in mind that it is the speculative excesses on the long side which create a condition of the market where short selling can become a disturbing factor. Long buying and short selling are complementary aspects of the same problem-speculation— and to attempt to solve this problem by an attack on only one of its dual aspects does not promise fruitful results. Yet while it is common to extol those whose activities result in driving prices upward, it is almost universal to condemn their speculative counterparts who strive to produce the opposite effect. As we see it no moral question is involved either in long buying or short selling, but only one of utility. To the extent that speculation on either the long or short side aids the security markets in the performance of their functions, to that extent only should speculation be countenanced. In view of the fact that short selling is relatively unimportant we do not believe that, as a general technique, it requires further regulation than now exercised by the New York Stock Exchange. We believe, however, that there is need of more rigorous control in respect to short selling of individual issues at particular points of time, especially where engaged in suddenly and in large amounts. Under such circumstances short selling has a pronounced and depressing influence upon prices. Section 10: This section covers the general subject of the segregation and limitation of the functions of broker, specialist, and dealer. It contains several provisions which I should like to discuss. One of these is that no member of a national security exchange may act as a dealer in, or underwriter of, securities. I interpret this to mean that no member may buy or sell securities for his own account or for the account of his firm. While the fund staff endorses the principle of the separation of the broker from the dealer function, I believe that, following the general London practice, an exchange member should be permitted to function either as broker or dealer. I do not see any valid reason for prohibiting a nonbroker exchange member from buying and selling securities for his own account, that is to say, from trading and speculation, as long as trading and speculating may be indulged in freely by nonmembers. In permitting margin trading, the bill, ipso facto, puts its stamp of approval on speculation in securities, for margin trading is the essence of stock speculation. Sure the committee does not believe that the nonmember is better qualified as a speculator than the member. Furthermore, if exchange members may not deal in stocks, the odd-lot business, as at present conducted, can no longer be carried on. The committee should consider whether it wishes to bring about this result. It is unlawful under section 10, furthermore, for— any person who as a broker transacts a business in securities through the medium of any such member to act as a dealer in or underwriter of securities, whether or not registered on any national securities exchange. The question arises whether the principle of segregation should be extended as it is here to such persons as banks which, while not actually in the brokerage business, do execute orders for the purchase and sale of securities for their depositors through the medium of national security exchange members. In a small community, in particular, the bank may be the only institution through which a resident can conveniently consummate a transaction in a security; yet, in accordance with section 10, the bank that performs this function may not act as a dealer in, or underwriter of, securities, or, under a strict interpretation, may not even be allowed to purchase and sell securities for its own account. Another specific provision of section 10 is that a specialist may execute only fixed-price orders; that is to say, may not execute market orders. In view of the fact that according to the bill a specialist will be permitted to function only as a broker and will not be permitted to act as a dealer, there seems to be no purpose to this prohibition. It should, therefore, be eliminated since its presence would tend to interfere with the efficient execution of orders. This section further makes it unlawful for a specialist to disclose to any other person information in regard to orders placed with him which is not available to all members of the exchange. The fund staff concluded that it is impossible to enforce a prohibition against disclosing orders, and it therefore prefers a requirement to the effect that orders on the books of a specialist should be available to every member of an exchange. Section 11: In our opinion the purposes of section 11 could be better effectuated by a Federal incorporation act in respect to corporations in interstate commerce than by this indirect and uncertain method. Section 11 (c) (I): The first part of this section provides foran undertaking by the issuer to comply with and so far as is within its power to enforce compliance by its officers, directors, and stockholders with the provisions of this act * * I do not believe that a corporation has any power over its stockholders and therefore consider it meaningless to require an undertaking by an issuer to attempt to enforce compliance with the provisions of the act by stockholders. Section 15: This section as a whole deals with transactions of directors, officers, and principal stockholders. Insofar as its provisions are sound, and insofar as they apply to corporations engaged in interstate commerce, they should, in my opinion, be embodied in a Federal incorporation act. I question whether that part of section 15 which pertains to owners of securities, who are not officers or directors, is practicable and enforceable. Section 15 (b) (1): This section provides that an issuer may sue any of its directors, officers, or certain owners of its securities, for profits derived by them as the result of a purchase and subsequent sale within 6 months of a security of the issuer, the profits being calculated on the basis of the difference between the highest and the lowest price at which the security sold during the 6 months' period. While I deem it highly desirable to stop directors and officersand if possible, large stockholders also from speculating in the stocks of their corporation, I am afraid that the provisions of section 15 (b) (1) will result in wide-spread violations, subterfuges, and Our own recommendations provide merely for prompt publication of all transactions by directors and officers in the securities of their own corporation. I believe that publicity will cure the worst of the evils surrounding the stock-market operations of "insiders ", and I am of the opinion that our recommendation could be effectively enforced through corporations and their transfer agents. Section 15 (b) (3): forbids the stockholder to disclose, directly or indirectly, any confidential information regarding or affecting any such registered security not necessary or proper to be disclosed as a part of his corporate duties. While heartily approving of the purpose of this section, I am of the opinion that it will prove largely meaningless, because it will be virtually impossible to enforce. Section 28: This section in effect makes it unlawful for any broker or dealer to consummate a transaction in an American security in a foreign security exchange except in accordance with rules and regulations of the Commission. While it is proper for the bill to provide safeguards against the flight of the securities business from the United States, it should be borne in mind that section 28 can be evoked to prevent arbitrage transactions between this and foreign countries, a trading technique which, under ordinary circumstances, can scarcely be considered harmful. I have briefly commented upon some of the major provisions of the National Securities Exchange Act of 1934. To repeat what I said at the outset of this statement, I am thoroughly in sympathy with the objects which the act seeks to achieveto bring speculation in securities under control, to reduce its volume, to eliminate manipulation, to prevent fraud, to put an end to the advantages enjoyed by "insiders", to make available to investors information about issuers and issues, and, in general, to standardize, regulate, and control the business conducted on and through security exchanges. My criticism is not directed to the purposes of the act but to some of the methods by which the bill proposes that these purposes are to be achieved. I believe that it confers too much discretionary power upon the Federal Trade Commission and that the grant of such extensive power by the legislature to an administrative agency is not wise. I believe that it imposes liabilities and penalties which, on the whole, are excessive and some of which are likely to result in blackmail and wholesale litigation, and which, in addition, will stimulate evasion and subterfuge. I believe that it errs in leaving certain activities unregulated. I believe that in several respects it is unenforceable and unrealistic. In spite of these criticisms, however, I am convinced that the bill is based on sound principles. Suitably amended, it should prove to be a highly beneficial piece of legislation. Thank you very much. Mr. REDMOND. Mr. Bernheim, just for the sake of the record. have the trustees of the Twentieth Century Fund approved this report? Mr. BERNHEIM. No, sir; they have not taken any action on the report. Mr. REDMOND. I see. Mr. BERNHEIM. As I understand it, the trustees of the fund are in the same relationship toward a research project as are the trus tees of a college. They do not assume personal responsibility, and in this case, due to the great haste of the final preparation of the report, they did not even have a chance, as far as I know, to make a careful study, and in some cases to make any study, of the findings and conclusions. But I do not want to speak for the fund. Mr. Clark, the secretary of the fund, is here, and if you want to ask him that question, he can give you a much better answer than I can. Mr. REDMOND. I just wanted to establish that for the record. Mr. BERNHEIM. But they have not assumed the responsibility. That I am quite sure. Mr. PECORA. The trustees of the fund do, however, assume responsibility for the employment of the research men? Mr. BERNHEIM. They authorize the project, appropriate the money, and from that point on I do not know just exactly what they do. I was engaged through the secretary of the fund. Now, whether it was his discretionary authority to engage me or whether he was empowered to do so by the trustees, I do not know, but he is right there, Mr. Pecora, if you wish to go into that at all. Mr. Clark is here. Mr. PECORA. Mr. Evans Clark, secretary, is here? Mr. BERNHEIM. Yes; he is here, and he can answer those questions much better than I can. Do you want him? The CHAIRMAN. Mr. Clark. |