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PROPOSALS FOR AMENDMENTS TO SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934

MORNING SESSION

TUESDAY, JANUARY 27, 1942

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C.

The committee met, pursuant to adjournment, at 10 a. m. in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will please come to order. Mr. Smith, you may proceed.

STATEMENT OF KENNETH L. SMITH, PRESIDENT, CHICAGO STOCK EXCHANGE, CHICAGO, ILL.

Mr. SMITH. Mr. Chairman and members of the committee, my name is Kenneth Smith. I am president of the Chicago Stock Exchange. From 1924 to 1929 I was in the office of the Secretary of State of the State of Illinois, where I assisted in the administration of the Illinois securities law. In 1929 I went to the Chicago Stock Exchange as an examiner of listing applications. Prior to my election as president of the exchange in 1938 my duties at the exchange covered at different times the business conduct of members, including the actual examination of books as to financial condition and rule violations. This work led to conferences with the Securities Exchange Commission and the Federal Reserve Board in the formulation and enforcement of their rules and regulations. I have never been a member of the exchange and have not engaged in the securities business as either a dealer or a broker. I have been on both sides of the table in connection with regulation.

It is a real privilege to appear before this committee as its hearings are drawing to a close. As I listened to the testimony of the many witnesses heard last week I could not help but feel how difficult it would be if I were a member of the committee, to sift and organize the evidence so that out of it would come the result best for the country as a whole.

Many times as I sat in the back of this room I have wished that I could have asked the witness a question or two. Often a member of the committee has been at the point of bringing out the real facts but has fallen short of so doing because it requires familiarity with the business and with the workings of the Securities and Exchange

Commission to get to the bottom of things. Therefore, if I may, I am going to ask myself some of these questions and answer them to the best of my ability. Let the chips fall where they may. Only by the most candid approach, whether it may step on the toes of my associates in the business or on the toes of the Commission, do I feel that I can discharge my obligation to this committee. You are the people's representatives, it is our duty to help you in any way we can. The first question-who wants legislation? Mr. Purcell's answer to that question is given in his opening statement to this committee. At page 3 of the transcript of these hearings he says—

Right at the outset I would like to make quite clear that the impetus for amendment of these statutes comes from groups in the securities industry and not from the Commission. I should not wish our appearance at the beginning of the hearings to indicate in any way that the Commission initiated any program for enlarging its authority.

That is clear enough. But listen to this.

From the first paragraph of the report on the proposals for these amendments which the Commission made to this committee under date of August 7, 1941, I quote as follows:

The few proposals which would extend in material respects the area in which the acts apply have emanated from sources other than the Commission

and I am still quoting

although the Commission does recommend the adoption of several amendments which it believes essential to give it authority to fill loopholes in the general area now covered by the acts.

That is what the Commission has so often called a "yes-but” answer when used by someone other than itself.

Presumably then we must look to the so-called industry report made to this committee by the representatives of the Investment Bankers Association of America, the National Association of Secur ities Dealers, Inc., the New York Curb Exchange, and the New York Stock Exchange. Much labor went into the preparation of this report. Its early pages enumerate the many conferences given over to the task. In some of these conferences, when the work was well advanced, we participated. But we were made to feel like a stepchild in a family council. Early in these hearings, page 7 of the record. Congressman Holmes drew attention to the lack of stenographic reports of these S. E. C.-industry conferences. The little fellows made suggestions but there is no evidence anywhere that these suggestions received any consideration.

Mr. WADSWORTH. Would you care to enlarge upon that?

Mr. SMITH. Well, I could, if the Congressman would like to have me do so, and I will try to give you a verbal picture of just how that conference lined up. I will have to draw on my recollection. I think that the Commission has a more accurate record of it. I do not have an accurate record of the circumstances of the conferences.

The regional exchanges as a group held several meetings.
Mr. WADSWORTH. About when?

Mr. SMITH. That was some time in the fall of 1940, or in January of 1941, I would say. At the request of the regional exchanges act ing through a so-called steering committee, we came down to Washington and had a conference with the Commission, which was rather hard to get. Our group assembled down here in Washington. It

was only after many telephone conversations that we were able to get an audience with the Commission. The idea was that we were to sit with the staff, which we did not like.

So we pressed our point for an audience with the Commission, and it was finally granted. At first we sat with the Commissioners, and just preceding that, I think it was a Sunday preceding a Monday, we were given an agenda of what the industry and the Commission had worked out in the way of proposals for amendments to this act. It did not give us much time to study the proposals.

Mr. WADSWORTH. That must have been about October of last year. Mr. SMITH. I am not entirely clear on my dates. I attended every one of them, and I have been down here so much that I am quite confused on what the purpose of any particular visit to Washington was for. I think it is clearly set out in that report of the industry and the Commission.

We were given this agenda to study, and obviously with a group as large as the regional exchanges-and I think there were some 16 exchanges in attendance at that meeting in Washington-we could not crystallize a program of constructive or destructive criticism on the proposals that had then been rather well crystallized between the so-called industry and the Commission; but we went into that conference with the Commission and a subsequent conference with the staff, with those proposals before us.

We put our proposals, or we put our criticism of those proposals in the form of pencil notes. That was about all we had time to do. Mr. PADDOCK. As I understand, Mr. Smith, that was not the same agenda as we have been working over in these hearings.

Mr. SMITH. That is correct. No; it was not a complete agenda. It was simply a list of the subjects for amendments to the act. It did not state, as I recall, the first time what the proposals were to be.

Subsequently, however, they gave us a complete agenda; a complete program with the proposals of the Commission and the so-called industry. That was under similar circumstances and was about a month later, as I recall.

When I say similar circumstances, we were given what in effect has resulted in this report of the so-called industry and the Commission in great detail; but that, too, we received on a Sunday before a Monday that we were to appear before the Commission. We did not care much about commenting on that in detail, and obviously we could not make any constructive criticism of it. We could tell them what we did not like and what we did like, but we did not make any constructive criticism for other subjects, for amendment of the act because, as you gentlemen know, it takes a great deal of time to crystallize your opinion and particularly to suggest amendments to the

act.

The second time we were down here, which was a month later or more-I do not want to be definite on that, because the record shows what it is the second time that we were down here and had this complete agenda or proposals on which the industry and the Commission had reached certain areas of disagreement and agreement, we tried to give it a little bit more study, but here is the picture.

As we went into a conference, composed of the Commission and the staff, these representatives of so-called industry and ourselveswe went to the Commission's office and were told that we had been

invited to these conferences. Well, we went into the conference room. It was a room something like this, not quite as large; but around one end of the table was the Commission and its staff, lined up behind it were Mr. Davis, Mr. Terman, at the end of the table; around the other available space at the table were the individuals of the so-called industry. You have the signatories to that report. You could probably cross off half of them and have the ones who furnished the real work on that report on behalf of the industry.

In my observation it looked as though it was Mr. McLean Stewart, from Harriman, Ripley & Co., of New York; Mr. Stewart Hawes of Blyth & Co.; Mr. Frum, who was about the only one outside. of New York who participated actively; and, of course, the New York Curb and New York Stock Exchanges, Mr. Howland Davis and Mr. Rosenberry, of the New York Stock Exchange, and Mr. Truslow and Mr. Rea for the Curb.

Now, that was the line-up that we walked into. There were some seats available in the back of the room. As you might have noticed, I have been in the back of this room since these hearings started. I got in the habit of being in the back of the room from those original hearings before the S. E. C.

Mr. BOREN. You do not intend to infer that you had any feeling of being "in the back of the room" in these hearings.

Mr. SMITH. Yes; I certainly do.

Mr. BOREN. What possible reason should you have for it? I mean by that, did you have difficulty in being heard before this committee?

Mr. SMITH. Well, we knew, of course, that we could be heard before this committee.

Mr. BOREN. Were you using the term in the literal sense of sitting in the back of the room here, and if so, why did you sit in the back of the room?

Mr. SMITH. That was rather a facetious remark.

Mr. BOREN. Well, I am not finding fault with your comment; but I am interested, because I for one member of the committee feel that there is no disposition on our part to show any preference to anybody. I do not know one of you fellows from the other. I am interested in the subject matter.

Mr. SMITH. Well, certainly I do not feel that we have been made to feel in the back of the room at these hearings. My comment was to bring out the fact that we have more or less set a precedent down in our mind of being in the back of the room at the hearings on amendments to these laws.

Mr. BOREN. I know nothing about the situation at the Commission.

Mr. SMITH. There were two hearings. At the ones before the Commission we were in the back of the room. Before this committee we realize that we were entitled to hearing and you gentlemen have been very nice, and the chairman has been very nice in allowing us time.

Mr. BOREN. Well, I just wanted the record to show that everybody present entitled to a hearing would get a hearing, and everyone who might have information is welcome. I am sure that what I say for myself is absolutely the position of every member of this committee, and that this committee shows no favors. We are interested in the matters of public policy and we would be just as inter

ested in hearing a tenant farmer from the distant Middle West as we would be in hearing a banker from New York or anywhere else if that tenant farmer could bring in some facts that would help us in making our decisions, and so far as I am concerned, I do not think anyone here present would express any doubt but what most anyone gets a considerate hearing, and they get it when they come up before us.

Mr. SMITH. If you need, or want a concurrence in that, Mr. Boren, I am sure that I can concur in that and that there has been no apparent disposition to shove anybody into the background.

Mr. BOREN. I just did not want any false impression to be left in the record.

Mr. SMITH. In any event, although this hearing at the Commission was conducted as I have described it, it is of no moment how the proposals were created if they are sound and constructive.

To be sound and constructive they must give indication of being for the benefit of the public. Proposals made to serve the self-interest of this group or that group should not be adopted. There are reasons why our securities markets are not functioning. These are not obvious reasons but a little later in my discussion I shall try to give my ideas on this subject. Certainly, however, chiseling a temporary advantage for the exchanges or for the over-the-counter markets or for the investment bankers will effect no permanent cure. The securities business will prosper only to the extent it serves the general economic need.

Fortunately, the Chicago Stock Exchange was never asked to sign the "industry report." From my description it should appear obvious why we were not. We could not have done so with a clear conscience. We could not be and are not a party to the agreement stated at the top of page V of the report from which I quote:

The representatives of the industry and the Commission have advised one another that the proposals contained in the drafts presented in this report are the only proposals for amending these two acts which the Commission or the conferees representing the industry intend to recommend to the Congress, or support in connection with the present program for amending the Securities Acts.

We are not embarrassed by that haunting phrase the committee has heard from both the so-called industry and from the S. E. C. You know the theme, "We do not concur. Neither do we object."

Now, for a brief review of the evidence on some of the more important points of the agenda.

ITEM 1 OF THE COMMITTEE AGENDA, ORGANIZATION OF THE COMMISSION The industry proposes more Commissioners, more salary, longer terms. The Commission coyly declines to comment. To make his point, Mr. Fleek, president of the Investment Bankers Association quotes imposing statistics from the monograph of the Attorney General's Committee on Administrative Procedure as to the work load of the Commission. The world does not judge a commissioner or anybody else by the number of pages he reads in the course of a day. We have all admired the industrious individual who produces an opinion by tedious painstaking effort; we have marveled at the brilliance of the individual who idles until the last moment yet produces a better product.

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