matter that the New York Curb Exchange altered its policy of keeping disciplinary actions more or less secret and decided thereafter to make public announcement of them in accordance with our previous suggestion. In general, our study of the disciplinary machinery of the exchanges has led us to feel that it could be improved in other respects, particularly, the rights of public customers in arbitration proceedings which we think should be better safeguarded.

If these additions to section 19 (b) are approved and adopted, the Commission agrees with the proposal of the industry to repeal section 19 (c).

STAY OF EFFECTIVENESS OF NEW EXCHANGE RULES

The Commission has further proposed that a new paragraph be added to section 19 (b) to give it power to stay temporarily the effectiveness of new exchange rules pending final action by the Commission. As presently written, the Commission does not have the power to prevent an exchange from immediately putting new rules into effect or adopting new interpretations and applications of old rules. Thus, in the case of the New York Stock Exchange's so-called multiple trading rule, of which I spoke before, the Commission would have been powerless to prevent the irreparable injury which would have resulted from the immediate application of this interpretation had not the exchange as a matter of grace granted various exemptions to members directly affected. If the exchange had proceeded to enforce its ruling pending the hearings, the Commission's eventual decision on the subject would probably have been ineffective for all practical purposes. The representatives of the New York Stock and Curb Exchanges and other representatives of the securities business have agreed to the desirability of this proposed amendment.

The CHAIRMAN. Thank you.

Mr. PURCELL. Thank you.

STATEMENT OF CLARE MORSE TORREY, NEW YORK, N. Y.

The CHAIRMAN. Mr. Torrey.

Mr. TORREY. Mr. Chairman and gentlemen of the committee, my name is Clare Torrey. I am a general partner of Cohu & Torrey, members of the New York Stock Exchange, with offices at 1 Wall Street, New York. In making this statement I wish to put on record the fact that I do so as an individual allied member of the New York Stock Exchange, and represent no one but myself. However, I was instrumental in organizing last year a partners' discussion group of the New York Stock Exchange members, who met on several occasions to consider and finally to propose to the governors of the New York Stock Exchange a series of changes in New York Stock Exchange procedure. I expressed a desire to appear before this committee in order to present certain arguments which in my opinion would justify your committee in recommending to Congress the amendment of section 19 (b) of the Securities Exchange Act of 1934 in the sense desired by the Securities and Exchange Commission.

The volume of transactions on the New York Stock Exchange, as has been pointed out to your committee, has steadily shrunk year by year as follows:

Seats on the New York Stock Exchange which sold as high as $625,000 in 1929, now sell at $22,000. This shrinkage in volume of transactions on the exchange has brought with it an erosion of the industry until today normal brokerage operations run at a loss. These facts have been presented to your committee by others.

We all agree, I am sure, that the New York Stock Exchange can fulfill a vital place in the financial economy of the Nation. However, as the crushing of its business continues through lack of volume, its vitality as a living organism is reduced to a point where it is doubtful that it can serve its proper role in the creation and distribution of securities to the American public.

A saying has grown up among investment dealers that to list a stock is to destroy its market. There is a great deal of significance in this opinion. Speculative trading, as we all realize, has shrunk to a mere shadow of its former robust self. Now it is an accepted maxim of the stock exchange business that most margin accounts are "bull" accounts; that is, speculating for the rise. The shrinkage of debit balances of customers of from approximately $9,000,000,000 in 1929 to a mere $625,000,000 as of November 30, 1941, shows how great the liquidation has been, and also shows that there has been comparatively little margin buying. The function of speculation for the rise as a cushion for liqudation and distribution of securities has become practically nonexistent. This in my opinion is one compelling reason why the exchange is normally heavy, and why there is such a contrast between the comparative bullishness of the London Stock Exchange and the leaden dullness of our own exchange in New York.

From all this it follows logically that the effect of liquidation of securities, springing as it does from thousands of sources, estates, tax sales, need of cash, and a general shifting of investment portfolios, has been intensified in its bearish effect on the market. What proposals have been put forward by those responsible for the administration of the New York Stock Exchange to correct this obvious unbalance? Since the character of transactions on our exchange has changed so radically since 1929, it would seem that some constructive program might in the interim have been formulated. Such unfortunately has not been the case. There has been little or no comprehension by the management of the exchange of the place of that in

stitution in the American investment world. This lack of understanding has been directly responsible for the legislation which we are now discussing. It is in my opinion directly responsible for the condition of anemia which afflicts exchange transactions today. In the meantime the constitution of the New York Stock Exchange is such, despite recent changes, that it is an impossibility for those who do not hold seats on the exchange to alter or remedy the causes of the present situation..

What then is the actual composition of the government of the New York Stock Exchange? Under the constitution adopted September 30, 1941, there are to be 32 governors of the exchange for the year 1941-42. The classification of these governors is as follows: Sixteen members or seat holders of the exchange; 6 members or seat holders or allied members, that is to say, they can be officers, and partners residing outside of the metropolitan area who shall be general or limited partners in member firms having their principal places of business outside of such metropolitan area and engaged in business involving direct contact with the public. Let us stop here for a moment. This means that 16 of the 32 governors must be members of the exchange, and that 6 non-New York members of the governing board may be members of the exchange. That makes 22. Of the remaining 10 governors, 1 is the president, 6 are allied members within the metropolitan area, and 3 are representatives of the public. For the fiscal year 1942-43, a greater preponderance of seat-holding members of the governing board is to be observed. For this year. the total number of governors is cut down to 29, of whom in the initial clause 14 must be members of the exchange, 7 may be members of the exchange, and of these 7 one must be a member of the exchange. The provision reads as follows:

Seven members or allied members or nonmembers of the exchange residing and having their principal places of business outside of such metropolitan area who shall be general or limited partners in member firms engaged in a business involving direct contact with the public, of whom not less than one shall be a member of the exchange.

This makes 15 of the governing board who must be members of the exchange, with 6 others who may be seat holders, or a total of 21. The remaining 8 members are made up of 5 allied members within the metropolitan area, 2 representatives of the public, and the president of the exchange.

For the year 1943-44, the constitution provides that there shall be 27 governors. Of these 12 must be members of the exchange; 7 may be members or allied members, but of these 7, 2 must be seat holders. We have therefore 14 of the 27 who must be seat holders, with a possibility of 5 additional being seat holders, or 19. The remaining 8 governors are the president, 2 representatives of the public, and 5 allied members.

For 1944 and thereafter it is stipulated that there shall be 25 members of the governing committee, of whom 11 must be members of the exchange, and 7 may be members or allied members, but of these 7, 2 must be members. This makes a compulsory number of seat holders of 13 out of 25, with a possibility of 5 additional being members, or a total of 18. The remaining 7 seats go to the president, 4 allied members, and 2 representatives of the public.

It will be seen from the above that the floor members at all times control the government of the exchange. This control by the floor has been exercised throughout the exchange history.

Valuing the 1,375 stock exchange seats at $22,000 each, we arive at a total valuation of the seat-holding privilege of roughly $30,000,000. However, the aggregate capital of firms which are members of the New York Stock Exchange was reported on June 30 last as being $320,000,000, or more than 10 times the value of the seats, yet rules for running this vast business are made by those who have less than one-tenth of the total stake in the business.

An outsider may however, think that the floor member performs a unique economic function. Such is far from being the case. The ordinary floor member simply executes orders which originate in the thousands of stock exchange member offices throughout the country. Moreover, in many cases the owner of a stock exchange seat has, with the permission of the exchange, delegated a junior associate or an office assistant to act on the floor in his place. Many seat holders have little or no beneficial interest in their seats, in which cases the matter of ownership is almost nominal.

In contrast with government by the floor, the production of business is accomplished through office partners, out-of-town firms, customers' brokers, and representatives of the member firms which constitute the business-getting element of the exchange. These business-getting elements are in touch with the public; the floor is not. In a sense we may imagine the floor of the stock exchange as a sort of a flattened out Chinese wall which effectively separates the floor members from the public. For this reason they cannot be expected to keep closely in touch with modern investment trends. Contact with the public is an all-important qualification it seems to me for the government of any investment body.

We who are on the firing line getting business realize why the New York Stock Exchange has become, so to speak, a graveyard of values. It is because those who are responsible for the administration of the New York Stock Exchange believe that in some magical fashion the era of speculative trading activity will be revived, for it is on this basis that the entire structure of the exchange has been built. Since the margin account, however, no longer exists, or if it does so, in a drastically reduced form, and since the trading account of yesterday is now almost unknown, it would seem to any person with imagination that the thing for the New York Stock Exchange to do is to integrate itself with the modern machinery for the creation and distribution of securities. This as I say is a perfectly logical idea, but what has the exchange done? It has permitted the over-the-counter dealers of the Nation to underwrite, to negotiate the sale, and to a very great extent to retail all of the British securities sold within the past year. It has encouraged the growth of an over-the-counter market through the country which today flourishes in contrast with the New York Stock Exchange which is moribund. In other words, it has not answered for its own membership the problem of the merchandising of securities, and it has permitted the nonmembers of the exchange to perform this vital economic function while it, the exchange, bases its policy entirely on the hope that its former activity of speculation will revive. Speculation is natural in any human enterprise, but cer

tainly not basic, and the basic fact of the securities business today is creation and merchandising of the various forms of capitalization. Numerous members of the exchange community have proposed to the exchange within recent years that it widen its circle of membership by including nonmember dealers in some acceptable fashion, splitting commissions with them and possibly with the banks and bankers of the country; by broadening its list of securities, by attempting in some sensible fashion to unite with the New York Curb Exchange, and in general to increasing volume and revenue of the exchange itself. With these suggestions has usually been associated a plan looking to a radical readjustment of commission rates, which would mean in the end a substantial increase. Such readjustment of commission rates, however, should logically be made part of a comprehensive program. All these efforts, however, have had no visible effect on the management of the exchange.

I firmly believe that the New York Stock Exchange has an unparalleled opportunity for public service before it at this time, and an opportunity for its membership to share fully in the program of industrial expansion for national defense and in the post-war readjustment and reconstruction. This opportunity, however, cannot be grasped if we think of the exchange in terms of the margin account. Every country except this one, for example, has a truly national securities exchange, but as matters stand today the New York Stock Exchange instead of becoming the national exchange bids fair to develop into a regional exchange.

The present constitution of the New York Stock Exchange can only be changed by the vote of its members, and the members are the seat holders, and the seat holders are on the floor, and the floor controls the exchange. Only members of the exchange may vote. Allied members who may be presumed to control roughly nine-tenths of the capital used in exchange transactions have no vote. Such nonmember partners or so-called allied members as may be elected to the board of governors are chosen in the first instance by a nominating committee of five, of whom three must be seat holders. It is significant that these nonmember partners are not selected either by their fellow allied members or by the producing firms of the exchange. They are selected in the last analysis by the seat holders. It is therefore obvious that in the government of the exchange producing firms as such, and office partners as such, have a minor voice, and a voice, moreover, which is to a great extent regulated by the seat-holding membership through their own process of selection. In striking contrast to this state of affairs no one can gainsay the fact that it is the producing firms and office partners who originate the business of the exchange and who are in daily contact with the public. It is only reasonable therefore to reach the conclusion that the government of the New York Stock Exchange as at present constituted is fundamentally not representative of the true membership of the exchange.

It is for these reasons that I believe a change should be made in the Securities Exchange Act of 1934 to permit the Securities and Exchange Commission as desired by them to hold hearings and eventually to make rulings, subject to legal review, on the question of the methods of election of officers and committees to insure a fair