$100,000 capital, and it is supposed to have over $1,000,000 in deposits if it has $100,000 capital, and therefore it is a much larger concern, and therefore it is much easier to examine than an industrial company with, say, $50,000 capital and inventories all over the place that have to be checked. It would be a much easier thing to check the bank than it would be to check an industrial company. The cost of checking an industrial company would be much greater than the cost of checking a bank.

Mr. COMSTOCK. Its percentage of the general overhead would be much greater, without doubt.

Mr. PECORA. Are we not assuming a lot?

Senator KEAN. No; I do not think we are assuming very much, Mr. Pecora.

Mr. PECORA. We are assuming that an abuse of power is possible, and hence the power itself should not be granted. As I said before, by that test you could condemn any piece of legislation which gave power to any public officer or board.

Senator KEAN. Yes; but by having too many requirements for examination you could kill any business.

Mr. PECORA. Any and all power, whether vested in a public officer or exercised by a private individual, is capable of abuse. You are going to destroy the entire fabric of civilization if, for that reason, you are going to deprive all persons of the exercise of all power. You have to lodge it somewhere. We must assume that the power will be exercised with sense and discretion, or, as the United States Supreme Court said in a famous case many years ago, the rule of reason would prevail. I think that is a fair assumption.

Mr. COMSTOCK. Of course, there is quite a decided difference between examinations by public authority of banks and examinations by public authority of a private business. Banks are fiduciary establishments. A private business is not.

Mr. PECORA. Where the business or the corporation, through offering its shares to the public, invites the public to become part owners of the business or partners in the business enterprise, do you not think the public is entitled to have some detailed and authentic knowledge concerning the busiess in which it is invited to participate as a partner? Would you, for instance, think of entertaining a proposition made to you in your individual capacity to become a part owner of a private business, unless you were given some information or permitted to have access to records which would enable you to reach a judgment as to whether or not you wanted to invest! Mr. COMSTOCK. I could get that kind of information from which to make a judgment myself, probably better than the Government

could.

Mr. PECORA. In the case of corporations which invite the public generally, through the offer of their securities to the public, do you not think the general public should have the information?

Senator KEAN. Mr. Comstock, are we not talking about Mr. PECORA. Do you think a corporation would prefer to have every investor flock to its offices and make a lot of inquiries con cerning its business, rather than to file statements at regular intervals with a public body?

Mr. COMSTOCK. The objection to this provision applies more to the small corporations than it does to the big corporations.

Senator KEAN. We are talking about unlisted securities.
Mr. COMSTOCK. Absolutely.

Senator KEAN. We are talking about the little $25,000 or $50,000 corporations in the little towns.

Mr. PECORA. But, Senator, this provision here does not apply only to corporations whose securities are unlisted.

Senator KEAN. But the majority of corporations in the United States are little corporations which are locally owned, and they are not offering their securities to the public. They are owned by a few people that know each other, that have access to the books. They do not care to have outsiders buy them, as a rule.

Mr. COMSTOCK. And the expense of a governmental supervi

sion

Mr. PECORA. Conceivably, then, no situation would arise where the Federal Trade Commission would make unreasonable requests for examination of the records of such a corporation. The Federal Trade Commission, I imagine, would act only in cases where there was evidence of an active public interest.

Mr. COMSTOCK. Still, the way is open here in this bill for them to do it.

Mr. PECORA. As I said before, we ought to assume that powers vested in a public body are going to be exercised with sense and discretion.

We apply that rule in our business affairs. Even in an unincorporated business we put persons in charge of departments and leave it to the discretion and judgment of those subordinates with regard to the actual daily operation. That power can be abused, but you would not for one moment think that the ideal form of operating a business is for the owner to attend to every detail himself and make every decision in the routine operation. It is unreasonable. It is contrary to every-day experience.

Mr. COMSTOCK. The point we desire to make here is that there is provided in this bill an inquisitorial power over the small corporation that is not balanced by any good that could come from it.

Mr. PECORA. You are assuming that the inquisitorial power is going to be harshly and unreasonably exercised, and at an undue expense to the corporation.

Mr. COMSTOCK. May we not be justified in that assumption?

Mr. PECORA. I do not know why. What basis have you for the assumption? What greater basis have you for such an assumption than you have for the assumption that the power would be reasonably and wisely exercised?

Mr. COMSTOCK. That is a question of opinion, I think.

Mr. PECORA. I am asking you for experience that you might cite to support your view.

Mr. COMSTOCK. Of course, we have no experience as yet on the application of this law.

Mr. PECORA. But I mean in the past, with regard to the unreasonable exercise of corresponding powers.

Mr. COMSTOCK. I think I could cite some cases there-not at the noment, but I am perfectly certain that they are available.

Mr. PECORA. I think you would have to search your mind pretty arefully.

Mr. COMSTOCK. I do not know. I do not think so.

The CHAIRMAN. Proceed, Mr. Comstock.

Mr. COMSTOCK. This association further objects to the exemption of the employees of the Federal Trade Commission from the requirements of the Federal civil service law as provided in section 30. Past experience with newly created Federal agencies has proven that such an exemption provides a large amount of political patronage and that the efficiency of any agency staffed in this manner is greatly reduced. We respectfully submit that any regulatory body set up with broad powers over security exchanges and general business must be as free from political influence and the inevitable inefficiency which goes with political patronage as possible. We therefore strongly urge that this section be amended to require that all of the employees of the regulatory body, with the possible exception of a few technically qualified chief subordinates, be recruited under the restrictions of the Federal civil service law.

In conclusion the association believes that unless this bill is substantially modified in the directions outlined above, its enactment would do more harm than good both to the business community and the investing public by causing deflation of sound loans, by unduly restricting the investment market for long-term capital, by unwarranted restrictions upon credit facilities for the securities of small companies and small investments, and in the laudable endeavor to protect the investing public against fraud, will so cramp that same public with bureaucratic methods and control as to destroy or reduce the value of sound securities far more than the sum which may be saved by reducing fraud.

We most earnestly urge that the importance of the question involved is such as to warrant the most careful consideration for every proposed phase of this subject and the enactment of legislation after mature deliberation. Above all whatever statute is enacted should not be punitive in spirit nor intended to substitute Government supervision and control for the initiative and detailed knowledge which can only come from long and intimate acquaintance with the manifold forms of business organization and needs.

Mr. PECORA. Might I ask a question or two? In the second paragraph of your statement you say that your association is disturbed primarily by the extent to which the terms of this bill would subject all business and industry, both large and small, in this country to arbitrary, bureaucratic control. What is the arbitrary bureaucratic control that you refer to there?

Mr. COMSTOCK. I think it has been rather more or less explained all the way through the paper. It is that control which places under constant examination, at the will of the Federal Trade Commission, the accounting, and the ways of doing business of thousands of small corporations.

Mr. PECORA. What is there here which gives power to the Federal! Trade Commission to determine the ways by which a corporation would have to do its business?

Mr. COMSTOCK. Well, the whole bill does that.

Mr. PECORA. I think that is a very broad statement. Can you point to a single instance of any provision of this bill which would operate to give the Federal Trade Commission control and the

power to determine the way in which any corporation must do its business-conduct its actual, corporate business?

Mr. COMSTOCK. I do not think the use of the word "control" here is used in the sense you have just used it.

Mr. PECORA. You say that this bill would subject all business and industry, both large and small, in this country to arbitrary bureaucratic control. That is a very broad statement and I wondered if you really meant it to be as broad as its terms imply.

Mr. COMSTOCK. It may be broader than we meant to have it, but at that, the control there is pretty broad, even so.

Mr. PECORA. Does not the control, so-called, given by the bill to the Federal Trade Commission relate almost entirely, if not entirely, to the requiring of corporations to make reports?

Mr. COMSTOCK. Yes. That is what this word "control" means here.

Mr. PECORA. And also to prescribe the form and content of those reports.

Mr. COMSTOCK. Yes, sir. That is what we mean by control.

Mr. PECORA. That is not control of the business.

Mr. COMSTOCK. No. I do not think it is so intended here. That is not the meaning of that phrase.

Mr. PECORA. The language is capable of that interpretation.
Mr. COMSTOCK. That is possible; yes.

Mr. PECORA. Do you favor the adoption of a uniform system of accounting for corporations?

If

Mr. COMSTOCK. It depends on what you mean by a uniform system. you mean the same system that the United States Steel Corporation employs and the A.B.C. Grocery Stores employ, then I am not in favor of uniform accounting, because you cannot make the systems apply.

Mr. PECORA. But there are certain uniform principles of accounting that might be made general to the accounting of all corporations. At the same time there are perhaps certain kinds of corporations with details or features that would not be common to all. But insofar as it would be possible to establish certain fundamental principles of uniformity, would you favor that?

Mr. COMSTOCK. Yes; I would. But I would make this qualification. I would favor it within competitive circles. Where businesses are competitive with each other, then I think the uniform accountEng is a fine thing, a splendid thing.

Senator KEAN. I would like to ask you, after reading this bill and studying it, with regard to these smaller corporations, whether this, in your opinion, is not an attempt on the part of the Government of the United States to seize the rights of the States in the control of corporations which do not do an interstate business. The Consticution applies to corporations doing an interstate business; that is, the Constitution applies to companies engaged in interstate commerce. This is attempting to regulate corporations that do not do an interstate business, is it not?

Mr. COMSTOCK. Yes, sir.

Senator KEAN. That is one of your objections to it?

Mr. COMSTOCK. Yes.

Mr. PECORA. Have you made a study of the bill for the purpose of arriving at an opinion as to whether or not the bill is constitutional?

Mr. COMSTOCK. No, sir; I have not.

Mr. PECORA. Then, how can you answer Senator Kean's question in the absence of such a study?

Mr. COMSTOCK. I think it is perfectly easy to do that.

Mr. PECORA, You can do something more than most individuals. ¡ Mr. COMSTOCK. I do not know of anybody who can pass upon the constitutionality of this bill, or any bill, except the United States Supreme Court.

Mr. PECORA. That has the power of making the final decision. ! Mr. COMSTOCK. Yes.

Mr. PECORA. But it is open for anyone who is qualified by educa tion, training, and experience, and who makes a study or research on the question of constitutionality, to reach an opinion.

Mr. COMSTOCK. That is an academic opinion, is it not?

Mr. PECORA. You say you have not made such a study of this bill Mr. COMSTOCK. That is an academic opinion.

Mr. PECORA. You have not made such a study of this bill?

Mr. COMSTOCK. Not from that point of view.

Mr. PECORA. Then how could you say whether or not the bill i constitutional?

Mr. COMSTOCK. I do not think I made that statement. I did not say the bill was unconstitutional.

Mr. PECORA. Your answer to Senator Kean's question was such that it could only, intelligently, be based upon an opinion as to its constitutionality.

Mr. COMSTOCK. He asked a certain question, which did not refe particularly to the Constitution, and I answered it in a perfectly proper way, from my point of view.

The CHAIRMAN. Have you anything further to say, Mr. Comstock
Mr. COMSTOCK. No, sir. That is all. Thank you.

The CHAIRMAN. We are very much obliged to you.
Mr. COMSTOCK. Thank you very much, Mr. Chairman.

STATEMENT OF HERBERT FILER, NEW YORK CITY, DEALER IN PUTS AND CALLS, 39 BROADWAY, NEW YORK CITY

Mr. FILER. Mr. Chairman and gentlemen of the committee, my name is Herbert Filer. I am a broker and dealer in puts and call and I represent the put-and-call brokers and dealers of New York City.

The CHAIRMAN. We will be glad to have your views about this bill.

Mr. FILER. I should like to present a statement in reference to se tion 8, subsection 9 of the proposed bill, which abolishes all put and calls.

On behalf of the committee of put-and-call brokers and dealers, may I present to you this brief, the intention of which is to show that puts and calls, which are to be prohibited under the present proposed legislation, should be divided into two classes-those which are handled by the legitimate put-and-call brokers and dealers, who we represent, and those which are granted by corporations or con panies for manipulative purposes.

I wish to prove that the put-and-call contracts which we handle have great economic value and submit that in the proposed legisla