providing another one which will meet all the requirements of business without the abuses heretofore existing. Whether or not that object is accomplished by this bill it is difficult for the layman to say. I think, however, the suggestion which I have seen made by some of those who claim judgment is not without merit. The suggestion is to have the entire problem reviewed by a committee composed of the following, who may add their advice and counsel to that of the committees of the Upper and Lower Houses of our Congress and amplify the already existing information and the conclusions arrived at: an industrialist, an investment banker, a corporation lawyer, a member of the F.T.C. an economist, a professor of law, a legislative drafting expert, an accountant, one of the draftsmen of the present act. There is a provision stating that remuneration to others than officers and directors in excess of $20,000 per annum is prohibited. Does this include all salesmen who may make more than $20,000 in commissions or local branch managers or heads of departments, or those having profit-sharing arrangements in special divisions of the company's activities, such as sharing amounts earned in excess of minimum limit, or factory managers having bonuses for achievements in excess of minimum, etc.? Does the word "director" imply anyone who has a direction of a part of the organization or does it mean only a member of the board of directors? Is an officer" only one who has a title, such as President, Vice-President, Secretary or Treasurer, or is he any executive acting under the general management, in charge of given responsi bilities? 66 The difficulty of estimating the far-reaching influences of the proposed legisiation and the disconcerting feature connected therewith, is the impossibility defining its intention. The "twilight zone within which there must always be the decision as to what constitutes honest information and what might be construed as an intent to use for selfish interest the expression of a viewpoin! or the answering of a question must be sharply defined by the Commission so as to avoid unintended hardship. Every salesman will emphasize excellences and advantages of his offering, without necessarily laying bare such risks as must be at all times apparent to one engaged in the transaction as a purchaser, either regularly or haphazardly. The presentation of any case is bound to be influenced by the bias of the person making such presentation because of personal preferences or for the purpose of creating an acceptance of a hitherto unrecognized merit or for the stimulation of a lagging interest for a particular feature. All of these efforts can be construed as containing a measure of exaggeration and the manifestation of a zeal, leaving out of the picture many facts that could possibly be conjured into the same as essential for a fuli determination of all the equities involved. To arrive at a correct estimate of all the items necessary to a complete understanding on the part of buyer and seller, there is required the establishment of an ethical concept so elaborate and difficult of enforcement that a penalty for the slightest infraction thereof seems difficult of imposition. The F.T.C. will have to become a most gigantic institution for the formulation of all trade practices now left with the Code Authorities for clarification, and the permission of any officer or director to give publicly an honest opinion as to outlook from his point of view will be hampered by the sense of risk involved in a manner far beyond that which will be beneficial to those who would be reasonably entitled to be fully informed in answer to a question Frequently such questions demand an answer in terms, though somewhat vague, sufficiently informative to give the enquirer the frank viewpoint of the informant from a purely subjective point of view. The information may be given from the vantage point of a very wide outlook upon all business relations, or from the narrower one of a particular interest or field of action within which the informant has an opportunity to form a more exclusive judg ment. The burden of responsibility seems to be much more on the questioner than it should be on the informant, and the right of questioning should b limited, under such circumstances, unless a complete denial of information is permitted to the informant when he is questioned vaguely and with t knowing all of the purposes for which the question is asked. The risk to which a director on the board of a corporation is exposed should not be made so great as to cause him to refuse to sit on the board unless he receives a very large compensation or has a tremendous interest to tempt him to contribute his knowledge and experience and time. The fees paid to directors are generally speaking inadequate and the chief advantage directors might derive to compensate them is in the knowledge arising out of association with business in which they may have an active or collateral interest, or in representing financial interests for which automatically they have become the custodians, as is the case of bankers who have marketed securities for the corporation, and who feel responsibility for maintaining contact with the institution. If the legislature will recognize that from the honest director's point of view there is nothing to balance the risks to which this bill exposes him, then it will be realized how unfortunate it will be for industry to lose the advantage of the services of the most desirable counsel and advice of experienced business men, who because of their contact with other industries have a vision into the wider fields of activity which might be denied to those giving attention solely to the interests of the corporation in question, either as officers or the representatives of special stockholders. Surely industry will have to pay dearly for the loss of many valuable directors because of the burden of this new risk which is thus imposed without reasonble or adequate compensation. NATIONAL SECURITIES EXCHANGE ACT OF 1934 STATEMENT OF SAMUEL KNIGHTON, PRESIDENT OF THE NEW YORK PRODUCE EXCHANGE, IN RESPECT TO EXCHANGES WHICH MAINTAIN A MARKET FOR TRADING IN UNLISTED SECURITIES AS AFFECTED BY S. 2693 AND H.R. 7852 MR. CHAIRMAN AND GENTLEMEN OF THE COMMITTEE: The New York Produce Exchange has a vital interest in the proposed National Securities Exchange Act because it maintains a securities market which though recent in origin has come to be the fourth largest in volume of shares in the United States. The Securities Market of the Exchange was organized in 1928, following the recognition by the Board of Managers of this Exchange that there was a need for a third Security Market in New York City. This opinion of the need of such a market was concurred in by the office of the Attorney General of the State of New York and the following is an excerpt of a letter received from Mr. Timothy J. Shea, Assistant Attorney General: STATE OF NEW YORK. 74 Trinity Place, New York City, N.Y., December 7, 1928. Mr. WILLIAM BEATTY, 2 Broadway, New York City. DEAR SIR: This office desires to again state its published opinion that an open public market where buyers and sellers of securities can be represented is so far preferable to a private market in its abilities to reflect values, to secure honesty of execution, and to abolish as far as possible, unfair practices, as to he incomparable in its results. This office feels that any market which affords facilities for openly bringing buyer and seller together benefits the public permitting as it does an open reflection of values. And for these and other reasons beretofore stated, we feel securities not now openly dealt in should be so dealt. Yours very truly, TIMOTHY J. SHEA, Assistant Attorney General. The function of every properly conducted exchange is to afford a market in which buyers and sellers will obtain as nearly the true monetary value of a security as is practical. There is a vast difference between public or regulated markets and private markets. An exchange market in which representatives of buyers and sellers meet on single floor, more closely reflects the public demand for securities and their true value than any system of private buying and selling such as commonly exists in outside trading. In an outside market, the buyer and seller have no means of knowing whether the price paid and obtained reflects actual conditions, as regards supply and demand for any particular security, or for securities in general; whereas a properly conducted market, in which a number of buyers and sellers meet, and in which every actual or even potential buyer or seller is afforded public quotations of what other actual or potential buyers and sellers pay or are willing to pay or accept gives assurance that values are more truly reflected. In order to afford such a market for securities which were not afforded & similar market place the Securities Market of the New York Produce Exchange was established. The Exchange itself, has a long and honorable history. It was formally organized in 1861 as a commercial exchange and has provided rules governing its members in more than eighteen trades in which they were interested. 0: its floor has been handled a substantial portion of all of the export grain trade of the country. It maintains at the present time an inspection department for grain which functions throughout the East, and a Bureau of Chemistry for chemical analyses. Its securities market organized in 1928 has come to be an important element in its organization. It has seventy-eight members who are qualified under its Rules to deal in securities and execute orders, as well as some 220 members who are in the securities business. It maintains facilities for publicly disseminating its securities quotations and transactions, and it has a substantia. organization to investigate and pass upon applications for the admission of securities to trading privileges. The New York Produce Exchange subscribes to and urges the various considerations advanced by the New York Stock Exchange and New York Curb Exchange in objection to the National Securities Exchange Act of 1934. These have been ably presented and fully discussed and it is unnecessary to repeat them. The nature and functions of the securities market of the New York Produce Exchange, however, are different in many fundamental respects from the type of stock exchange that appears to be the object of regulation under the proposed law. The New York Produce Exchange feels it necessary there fore to bring to the attention of the committee certain aspects of its market for stocks and bonds. The New York Stock Exchange and some exchanges in other cities throughout the country provide facilities for trading principally in what are known as listed securities. Such securities are admitted to trading upon application of the corporation which issues them. The requirements of the various markets in respect to listing vary considerably; but in every case there is one commen factor, namely, the voluntary application of the corporation for the admission of its securities to trading privileges. So-called "Listed Securities" form a relatively small proportion of the total volume of corporate securities issued in this country. The New York Produce Exchange maintains a market principally for securities which are admitted to trading privileges upon application of someone other than the issuing corporation. The holders of such securities are accordingly afforded an organized market which has the advantage of full publicity and supervision of trading. The securities market of the New York Produce Exchange is truly a market place. The securities dealt in have been admitted to trading upon the applica tion in most instances of a member of the Exchange who is an owner of such security. Members make such application when there has been evident a sufficient interest in the respective securities by persons wishing to buy and those wishing to sell to warrant admission to the Exchange's facilities and the securities have met the standards for admission to trading. Of 796 issues admitted to trading only 39 have been admitted upon the application of the issuing corporation. The others have no corporate application behind them. In other words, it is an exchange which is, and professes to be, nothing else but an organized market place with adequate facilities and conveniences in which orders to buy and sell securities may be executed. The conduct and practices of its members are subject to rules and regulations of the same scope and nature as those of members of exchanges trading in securities listed on corporate application. The exchange does not exercise supervisory powers over issuing corporations and does not hold itself out to do so; but it does enquire into and ascertain that the corporation is a bona fide enterprise and meets various requirements of its listing department. Securities markets of the type of the New York Produce Exchange must have been outside the contemplation of the draftsmen of the bill but they will nevertheless come within its application if it becomes law. The prohibition gainst trading in securities on a national securities exchange other than on corporate application applies directly to such markets as that maintained by The New York Produce Exchange. A great many of the corporations whose securities are admitted to trading n this market are those representing industries and enterprises, which are slowly growing and are not yet in a position, either as to record of performance or distribution of ownership, to meet the requirements of other exchanges n New York. The securities market of the New York Produce Exchange is partly a market of primary distribution of securities. Through such primary listribution long term capital is obtained which cannot be had through ordinary panking channels. The true functions of the primary market is to carry new securities through a sort of seasoning process by which they are both actually carried and subjected to a process of appraisal of value. Such a process is economically useful and essential and its speculative functions legitimate. Somebody must take the risk of new capital ventures. Mature and successful enterprises do not spring into existence. The committee should have in mind that dealing in unlisted securities, raded in on exchanges and elsewhere, represents the trading in over two thirds of all security issues. The proposed law would deprive this enormous volume of unlisted securities of an organized market place. Over ten million shares were traded on the New York Produce Exchange alone last year, which gives it fourth rank in the volume of stock sales on exchanges in the United States. Another factor of importance, which is frequently misunderstood, is that the trading in securities on markets such as the New York Produce Exchange is almost entirely done on a cash basis. Many of the issues range in price from Two Dollars ($2.00) to Ten Dollars ($10.00) per share. Purchasers of such stocks pay for them in cash. The credit dangers which have played such an important part in the consideration of securities market regulation are completely absent in this particular market. Practically all of the securities traded in have been admitted to trading without application by the issuing corporation. Many of such corporations, unlisted until now, will certainly not be in a position to meet the requirements of the proposed law to obtain a listing even should they desire to do so. Many others will fail or refuse to do so for the same reasons that have prompted them to fail to apply for listing up to the present time. If the refusal of corporate directors to make application for listing under the requirements of the proposed Bill is to result in the deprivation to the owners of such securities of the benefits of a public market, then the owners are to be penalized for conditions over which they have practically no control. And all trading in such securities will have to cease on national exchanges. This means that the New York Produce Exchange Securities Market will cease to exist. Where will the trading in these securities on the New York Produce Exchange and on many other exchanges go? Those who hold these securities and those who wish to acquire them will have to take their chances as sellers and buyers in wholly unregulated markets. The speculation of the uninformed will not be stopped but only rendered more uninformed and exposed to the dangers and price irregularities of unorganized markets. Such trading will be driven to outside or office or telephone markets. These will be, more than ever, in the hands of persons over whom there is no exchange control or supervisory power. The greater part of this business is now conducted by men who are subject to no exchange supervision or regulation. Section 6-A of the proposed bill prohibits members of national exchanges from extending credit on securities not registered on a national securities exchange. As the securities business follows available credit such business will pass entirely out of the hands of members of exchanges and those who do business through members of exchanges. And should the Federal Trade Commission attempt to control such outside markets pursuant to the general and vague provisions of Section 14 of the bill the business will undoubtedly seek secret and underground markets where manipulative practices will be as far out of control as was bootlegging under the Eighteenth Amendment. It will be driven to unregistered, unreported and unregulated channels of the sort that can be carried on without the benefit of the United States mails or the instrumentalities of interstate commerce. It is taken for granted that the committee does not wish to destroy the many industries and enterprises of the nation whose securities have never been "listed" on any Exchange. But such result will follow a successful destruction of their capital markets as represented by organized market places. It will deny to young and local businesses, existing and future, access to buyers and sellers of securities and give to the large corporations a monopoly of the country's capital funds. It will throttle creative and promotional efforts from which have developed most of our industrial accomplishment. It will dictate to buyers and sellers of securities in such unlisted companies that they cannot buy or sell the securities they are interested in except in an unorganized and unregulated market and from and through persons under no supervision of an exchange. The ideal situation visualizes all securities transactions taking place on an organized exchange and subject to regulations thereof. Until such a situation becomes possible, the public is by far better served in permitting so called unlisted securities to be traded on an organized exchange. The New York Produce Exchange has no quarrel with any measures the G ernment wishes to take to control corporate conduct or exact corporate informstion. But it feels that such control should be exercised directly upon the corporations and not through and by the market places as policing agencies of the Government. And the New York Produce Exchange has no quarrel with any measures the United States Government may wish to take to improve the internal practices of the securities markets. It pledges itself to cooperate with and support any efforts reasonably and directly aimed at that purpose. Respectfully submitted. MARCH 8, 1934. Senator DUNCAN U. FLETCHER, SAMUEL KNIGHTON, President of New York Produce Exchange BANKER'S BUILDING, Chicago, Ill., February 24, 1934. Chairman Banking and Currency Committee, Washington, D.C. DEAR SENATOR FLETCHER: In answer to your letter I submit the following brief statement: 1. If there is to be any authority placed over brokers and bankers in financ ing the purchases and sales of securities on margin, that authority should be cne in direct contact with the various elements of the money market and responsible for the guidance and control of the credit policies of the entire banking system. To begin with the loaning of money on securities is obviously a credit func tion. The lender in performing this function is guided largely by the marketability of the security offered as collateral, and by its investment merit. That such loans are highly desirable from a banking standpoint, and furnish a safe avenue for the profitable use of surplus liquid funds is a fact well known to anyone with a practical knowledge of the money market. Following September 1929 wave after wave of liquidation swept the security markets and the giant total of $8,500,000,000 loans to brokers were liquidated down to less than $400,000,000 with comparatively neglible loss to the banks a feat without comparison in the history of modern finance. No other test need be necessary to establish the safety and desirability of broker's loans from a banking standpoint. 2. Experience has shown, however, that additional control by Federal Re serve banks over the volume of money used to finance speculative transactions may prove advisable particularly in times of prosperity when such loans tend to become excessively large. This additional control may be had in the form of authority to raise margin requirements on security loans; or, stating it another way, reduce the loan value of posted collateral. This device woul prove far more effective in checking the volume of funds seeking employment in the security markets than raising the rediscount rate, and would also prove an effective brake on speculation itself. Also, this authority to raise margins, if made available to the central banking authorities, could be used and would prove very effective at a time wher it might be desirable or even necessary to reduce the volume of money em ployed in the securities markets without affecting the money markets. |