Mr. HOPE. Yes, sir. The CHAIRMAN. Go ahead. Mr. HOPE. Section 9, on page 20 of the bill, is entitled "Regulations of the Use of Manipulative Devices." This section gives the Federal Trade Commission blanket control over short selling, stop-loss orders, and the right to establish rules for the use of " any device or contrivance" in connection with the purchase or sale of any security. The danger of putting in the hands of any body not in intimate and immediate contact with minute-tominute developments the power to change rules affecting matters having such direct effect on the entire stock-market situation as short selling is extremely dangerous and may lead to results entirely different from what is contemplated. The elimination of stop-loss orders is undoubtedly against the public interest. The last subdivision of this section giving them control over devices and contrivances might be construed to mean almost anything. Section 10, page 21, of the bill: The detrimental effect of the abolition of the odd-lot house has already been fully and ably explained to this committee. The segregation of the investment banking business of the issuance, underwriting, and original distribution of securities and the brokerage business and the control of "over-thecounter" securities have already been and, so I am informed, will be further discussed. All have been treated in our brief. I will not burden you, therefore, with a discussion of these questions, except to emphasize the devastating effect they have upon all brokers. There is also the possibility that this section prevents a stock-exchange member from investing in any securities for his personal account. In other words, a stock-exchange member could only buy and sell shares on commission for others. This may not be intended but is a possible interpretation of the restriction of members acting as sealers in securities. In view of the serious liabilities imposed for violation of the bill, it is doubtful if an exchange member would be willing to take a chance on his possible right to invest in securities for his account and thus to the extent that the commission business does not provide adequate income may force stock-exchange members to withdraw from the brokerage business in order to be able to invest their personal capital in income-producing securities. Section 11, page 22, of the bill, is entitled "Registration Requirements for Securities": There is nothing to indicate whether these requirements apply only to securities to be registered in the future or whether a relisting of all presently listed securities is required. The possible effect of this must be fully considered. The enormous expense entailed in relisting all these securities and collecting and furnishing data would be tremendous. In fact, one corporation recently, in order to qualify a single bond issue for $15,000,000 under the Securities Act of 1933 before the Federal Trade Commission, reports that it was required to spend approximately $250,000 therfor. Mr. WOLVERTON. Mr. Chairman, may I ask the name of that particular corporation? Mr. HOPE. I am told that it is the American Water Works. Mr. HOPE. Yes, sir. The CHAIRMAN. I know a little something about that, and that has been used as a horrible example as an argument against Federal control of anything. The trouble about the American Water Works was this: It had never brought its property up to the point where they knew what their physical property was, and it had to go out and have the whole thing appraised, did it not? They just were not up to date with their business, and did not know what they had, and of course it cost them $250,000 to have property valued on which they could issue $15,000,000 worth of bonds. Do you think that would be an unreasonable figure in valuing property of that type which would justify $15,000,000 bond issue; $250,000? Mr. HOPE. I am not competent to answer. The CHAIRMAN. Well, using that as a horrible example as to what bills might do to business and industry, if these people had had their accounts up; had had their engineering reports up to date; and had their property valued, and their property values in hand, it would not have cost them all of this $250,000. Do you think that there is anything amiss in that this company, and the stockholders of such a company should know something about the property value and otherwise, of the American Water Works Co.? Mr. HOPE. Certainly not. The CHAIRMAN. They must not have known much about it or it would not have cost $250,000 to have prepared a statement that they were willing to stand on before the Federal Trade Commission. Mr. HOPE. That is the only example we had any knowledge of. The CHAIRMAN. I will say to the gentlemen this, from $40 to $60 is the average cost of registration with the Federal Trade Commission, if the company knows about its business, as the officers and directors ought to know about it, before they start to register. All right, you may proceed. Mr. HOPE. It is not inconceivable that the Federal Trade Commission would require somewhat similar data for registration on exchanges, and one should consider the expense of these requirements if every outstanding security presently listed on an exchange must go through somewhat similar procedure. Furthermore, some of the issues may be denied registration under the new requirements and under the provisions of the bill practically at the discretion of the Commission. This might have serious effect on the credit situation of the country, the credit of corporations whose securities are presently listed, and the value of such securities in the hands of the public. This section also requires that the registration information must be filed with the Federal Trade Commission in addition to being filed with the stock exchange. Furthermore, the information must be filed at least 30 days before the registration becomes effective. If the bill goes into effect on October 1, 1934, the mass of information required from all the corporations having presently listed securities must be filed by September 1, 1934. It would be difficult, if not impossible, to compile adequate information even if the rules as to what would be required were immediately issued. How any single commission could digest aii that information in 30 days and decide what securities were to be registered and what not, is a practical problem to be considered in the drafting of the legislation. A restriction in this section affecting the corporations themselves is that they must file an undertaking to abide by all future rules and regulations of the Federal Trade Commission and agree not to lend funds in any money market or to any person who transacts a business in securities except in accordance with the regulations of the Federal Trade Commission. By this and some of the following pro-visions this bill ceases to be a regulation of stock exchanges and becomes in effect a bill completely subjugating every business to the absolute discretion of the Federal Trade Commission over most of, if not all, the important phases of its operation. Furthermore, when a corporation has once qualified for registration and agreed to abide by the rules of the Commission it is bound to do so forever and cannot withdraw from registration except "upon. such terms as the Commission may fix." Section 15, pages 28 of the bill, is entitled "Transactions by directors, officers, and principal stockholders." This section may have a place in a national corporation act, but it has no place in a bill purporting to regulate security exchanges. It restricts transactions by officers, directors, and also any stockholders who hold more than 5 percent of the class of stock of which they are stockholders; and request all such persons to file monthly reports of changes in their holdings of the stock of the corporation, whether such holdings be of record or be beneficial. This would bring under the restriction of this section a broker in whose name there was registered more than 5 percent of a corporation's stock who might not own or have a beneficial interest in a single share. It also makes it unlawful for any such person to purchase any registered security of his corporation with the intention or expectation of selling the security within 6 months; and any profit which he makes, if he should sell the security within that period, must be paid over to the corporation. It also prevents any such person from selling short any securities of the corporation. It also makes it unlawful for any such person to disclose any confidential information affecting a registered security of the corporation, and not necessary to be disclosed as a part of his corporate duties. Any profit madewithin 6 months in respect to such security by any person to whom such information shall have been disclosed shall be paid by such person to the corporation. The effect of these restrictions cannot be fully visualized but they have definite possibility of seriously limiting the registering of securities by corporations. The credit value of the holdings of many stockholders may be seriously diminished through the restrictions on unregistered securities, because of these and other burdens thrown on the corporations and the officers and directors. If the burdens are as great as seem possible many corporations may not register their securities, for the benefit which the corporation receives from such listing may be small compared to the burden placed upon the corporation to maintain such registration. Section 17, page 31 of the bill, is entitled "Liability for Misleading Statement. The broad liability imposed by the bill makes this section particularly burdensome and puts tremendous advantages in the hands of a speculator to cover himself from bad speculation through endeavoring to force recovery from his broker for alleged misstatements. The nature of this right has been discussed herein before. Particular attention should be called to the part of subdivision (c), page 33 of the bill, which gives the Commission power to prescribe the time and method of making settlements, payments and deliveries and the time of calculating margin requirements and the time and method of closing out undermargined accounts. The control of these matters by a commission which is entirely outside the control of the persons conducting the matters regulated is likely to cause extreme damage to the business. The possibility of the Commission preventing closing out of margin accounts for a certain length of time which might be alleged to be in the interest of the investors, has been hereinbefore discussed. The great danger of such requirements and the prevention of freedom of contract in respect to them cannot be overestimated. It should also be pointed out that under this same subdivision the Commission is given the right to fix interest rates and charges and may summarily suspend trading in any registered security or even close the exchange itself. The dangers from these blanket delegations of authority also cannot be overemphasized. Section 28, page 47 of the bill, is entitled "Foreign Exchanges and gives the Commission power to restrict transactions on exchanges out of the United States. The effect of this section on American securities which have already been listed on the leading European and other exchanges should be carefully considered, for although the purpose of the section may be to prevent evasion of the bill by merely conducting the security transactions outside the exchange, the effect may be much greater. Furthermore, this section applies only to brokers and dealers and, therefore, all individuals who are not brokers and do not come within the classification of dealers may conduct any of the prohibited transactions on foreign exchanges. CONCLUSION From the foregoing, the bills may be seen to have three fundamental characteristics of almost equal importance: (1) To regulate certain stock exchange practices; (2) to restrict and control the granting of credit and investment; and (3) to control many of the practices of the corporations themselves, their officers, directors, and stockholders. All these important subjects are by these bills placed under the supervision and control of the Federal Trade Commission, whose functions were confined (as its name would indicate) to the administration and enforcement of the Sherman Anti-Trust Act, the Clayton Act, the Federal Trade Commission Act and related laws, all which concern trade and commercial practices. Its personnel has been chosen for these special purposes. To so suddenly invest this body, however efficient it may have been in its own field, with the broad and absolute control over the delicate financial mechanism of the banks, corporations, stock exchanges, and the general markets for securities, to say the least requires the most cautious consideration. It should be further remembered that the Federal Trade Commission, in addition to its original duties, was, by the Securities Act of 1933, given control of the issuance of new securities. It thus has recently been given drastic control of new financing by the corporations of the country; but these bills now propose in addition to give it jurisdiction over the market for and trading in outstanding securities and also give it jurisdiction over many of the related credit transac tions of the entire banking system of the country and of many corporate practices. The bill, however, exceeds its express purposes of exchange regulation and investor protection and in fact becomes by its far-reaching provisions a vehicle for the regimentation of credit and corporate practices through the medium of stock exchange regulation. To illustrate, it vests in the Federal Trade Commission the power to control collateral loans and interest rates; to prescribe the forms of reports, balance sheets and earning statements and methods of accounting in the appraisal or valuation. of assets and liabilities, and in determining depreciation, and so forth, to be employed by corporations whose securities are registered on any exchange; it dictates the conduct of officers, directors, and stockholders of corporations; it requires annual and quarterly reports, balance sheets and profit-andloss statements (certified by independent public accountants) as well as monthly reports and statements of sales or gross income of all corporations whose securities are registered on any exchange; and gives absolute regulatory power over all securities, registered or unregistered. The Federal Trade Commission is given an indirect but potentially effective directional control over the investment of all capital. If this proposal is carried out, the Federal Trade Commission can, through its control of so many of the varied phases of the financial and economic life of the country, restrict the operation of and even destroy corporations that incur its displeasure. The Federal Trade Commission does not have to convict a corporation of any particular illegal transaction, but can regulate it out of existence by control of credit, restrictions on new financing, removal of its securities from exchanges, and so forth, without in any way justifying its motives or the soundness of its judgment. Although the bill provides for judicial review by appeal to the courts from the decisions and orders of the Federal Trade Commission, it must be appreciated that many such orders and decisions of far-reaching and fundamental effect would be primarily administrative orders involving the discretion of the Commission and might thus not be subject to review by the Courts in a manner sufficient to present the full controversy for judicial review. Furthermore, immediate action, absolutely required by the very nature of the subjects involved, is impossible and delay will prove a denial of justice. Furthermore, granting to the Federal Trade Commission the proposed broad control over financial matters further causes confusion and conflict in that it separates from the normal financial branches of the Government control over some of the most important phases of the financial and credit structure of the country. To so separate control of different parts of the financial system of the country in several independent branches with no coordination established between them, presents much possibility of confusion, conflict and disorder. The CHAIRMAN. I believe I understood you to say you endorsed Mr. Whitney's suggestions in this paper that he filed here. Mr. HOPE. Yes, sir. The CHAIRMAN. And, your main objection to the bill is that it is conferring too much power on the board or commission? Mr. HOPE. That is one of them; I think that is the main one. |