Commission has concluded was the original intent of Congress. We suggest in the alternative the amendment to section 3 (a) (3) as follows. And, reading this article, section 3 (a) (3), we would add the words "holds any form of membership in the exchange or" and two lines further down strike out the word "an" and insert the word “the,” and in lines 16, 17, and 18, eliminate all of the language and in line 19 eliminate all but the last two words, so that it would read as follows: 3 (a) (3) The term "member" when used with respect to an exchange means any person, firm, organization, or corporation which holds any form of membership in the exchange or is permitted either to effect transactions on the exchange without the services of another person acting as broker, or to make use of the facilities of the exchange for transactions thereon without payment of a commission or fee, and any partner, officer, or director of any such firm, organization, or corporation, and any person who transacts business as a broker or dealer and is controlled by any such member, and includes any partner, officer, or director of any such person. Or (b), at the end of the subdivision (3) of section 3 (a) (3), as set forth in the committee print (p. 72) add a new sentence reading substantially as follows: The acceptance by any member of another exchange or of any association formed pursuant to section 15 hereof of the privilege of making use of the facilities of an exchange with the payment of a fee which is less than that charged the general public shall not thereby make the person, firm, organization, or corporation so accepting such privilege a member of the exchange extending it. We favor the first amendment as the more logical of the two proposals, but if this committee feels it goes too far, we believe the alternative proposal will, from a practical point of view, accomplish the result desired. Inherent in these proposals is our belief that Congress intended in 1934, and would intend today, to define a member as one, who, directly or through his firm, is in association with others in a stock exchange, and not a person who has no relationship to the exchange save only a preferential commission. However, so as to change the present statute as little as possible, we have not eliminated that part of the definition which includes a person permitted to make use of the facilities of an exchange without the payment of any fee or commission. Proposal for amendment of section 2, H. R. 4344: The San Francisco Stock Exchange is of the opinion that a part, at least, of the drying up of the exchange business may be attributed to the administrative attitude of the Commission itself. In making this statement this exchange is not intending to charge the Commission with any deliberate effort to hurt the security business, either of the exchanges or of the dealers or of the over-the-counter brokers. Rather the explanation would seem to lie in the conception of the Commission that its mandate under the 1934 act is to regulate and control rather than to assist the exchange industry in its effort to maintain. a soundly but not overly regulated primary market for securities. It may not be unreasonable to find in the 1934 act this mandate of control and punishment, because the act was passed at a time when Congress felt there had been great abuses in the industry which demanded statutory change and Commission control. Unquestionably, however, the picture has changed since 1934 and the abuses of a former day are as close to being nonexistent as is possible in any branch of business which still possesses a profit motive. Likewise, the attitude of the industry has changed in the 7 years since 1934, and today it asks the help of the Commission as its regulatory body, and urges that it be a cooperative partner rather than a policeman. In the belief that the Commission's attitude emanates, in part, from the statement of purpose in section 2 of the 1934 act, the San Francisco Stock Exchange suggests that this statement be changed by Congress, in the light of present conditions, and respectfully offers for the careful consideration of this committee section 201 of H. R. 4344, which deletes from the statute present present section 2 and substitutes therefor, under the heading "Necessary for Regulation as Provided in This Title," conclusions more in keeping with present conditions. The provisions of this proposed amendment are, we believe, more constructive than anything in the present statute itself or in any proposed amendment in the committee print; its adoption would give to the Commission from Congress an affirmative declaration of purpose which would permit of a more liberal and constructive attitude by the Commission in the administration of the entire statute. We, therefore, suggest to this committee for its careful consideration the amendment to section 2 of the Securities Exchange Act of 1934 by substituting therefor section 201 of H. R. 4344. I realize that much of what I have said is quite general in its nature. This is necessarily so because we of the smaller exchanges know only for certain that we have a serious problem to survive, without knowing how to assure that survival. We look to the Commission for its factual study and later probably we will seek help from Congress. We know that regulation alone has not caused our markets to dry up, but we believe some part of that regulation has aided the drying-up process. We see little or no benefits in the proposed Securities Exchange Act changes which appear in the committee print. I have tried to indicate where some are helpful and others harmful. In behalf of one small business, the San Francisco Stock Exchange, I have suggested a few other changes. In concluding, I could do no more than say, if Congress believes, as it has heretofore, that the local, regional markets have a real place in our economic life, and in which opinion I believe the Commission agrees, then something must ultimately be done to aid their survival. But ultimately may be too late, the need is immediate. I have referred in this statement to the letter from the regional exchanges to the chairman, dated September 25, 1941. I request that a copy of this letter be considered as an appendix to my statement; with your leave, I will now file such copy. Likewise in my presentation I have referred to, and briefly argued for the adoption of, section 201 of H. R. 4344 in place of present section 2 of the Securities Exchange Act. For purposes of illustration I have added in the appendix hereto a copy of this proposed new section which discloses fully the changes which its adoption would effect in the language of present section 2. Again, with your consent, I would like to file this document as the second part of the appendix to my statement. I thank you for your patience in listening to me. The CHAIRMAN. The matter referred to may be inserted in the record. (The matters referred to are as follows:) APPENDIX I CHICAGO, ILL., September 26, 1941. COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, House of Representatives, Washington, D. C. GENTLEMEN: The undersigned national securities exchanges have reviewed the reports to the Congress by the "securities industry" and the Securities and Exchange Commission, dated respectively July 30 and August 7, 1941, in the light of the letter dated June 18, 1940, from Chairman Lea of the Committee on Interstate and Foreign Commerce to Jerome N. Frank, then Chairman of the Securities and Exchange Commission, which prompted the conferences out of which these reports came. These reports, despite the time and earnest effort expended by the four signers of the "industry" report and by the Commission, do not sufficiently consider the interests of the small elements in the business or the interests of the public served by them. We believe the limited participation of the regional national securities exchanges in the conferences from which the reports emanated precluded adequate consideration of these matters. The regional exchanges are located in California, the District of Columbia, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Ohio, Pennsylvania, Utah, and Washington. They constitute the small business of the securities industry. They represent that part of the industry which is primarily concerned with local issuers, investors, and brokers and dealers. The problems of the securities business from the point of view of the regional exchanges are essentially different from those presented by the report of the "securities industry." These proposals do not help the regional exchange markets or that part of the public served by them. In the absence of material changes in the Securities Exchange Act of 1934, the regional exchange markets will face a process of disintegration leading to ultimate extinction. In recognition of this fact, 10 months ago the regional exchanges advocated, and the Securities and Exchange Commission undertook, a factual study of the major problems of the regional exchanges. We respectfully urge that this study be completed and used as the basis for the elimination of unnecessary handicaps to the securities business as related to the regional markets. While the regional exchanges have an interest in the Securities Act of 1933, it is our belief that detailed comment on the specific proposals regarding that act properly may be left to those organizations dealing with the underwriting and distributing phases of the business. However, it is our opinion that, generally speaking, many of those proposals would seem to be constructive and merit favorable consideration. We shall be pleased to amplify our views on the 1934 act whenever hearings are held on the pending measures. Respectfully yours, Theodore Gould, president, Baltimore Stock Exchange; P. R. O'Brien, The following exchange although not present at the conference in Chicago, where this letter was prepared and signed, has signified its approval by signature on a counterpart. SAN FRANCISCO MINING EXCHANGE, By GEORGE J. FLACH, President. 74947-42-pt. 5-3 APPENDIX II Section 201 of H. R. 4344 which is offered as a substitute for section 2 of the Securities Exchange Act of 1934 modifies section 2, paragraph 1 of the Securities and Exchange Act, as follows: "SEC. 2. For the reasons hereinafter enumerated, transactions in securities, as commonly conducted upon securities exchanges and over-the-counter markets, are affected with a national public interest which makes it necessary to encourage and foster orderly, active, stable, and liquid markets for securities upon securities exchanges and in the over-the-counter markets and to this end to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and principal security holders, to require appropriate reports, and to impose requirements necessary to make such regulation and control reasonably complete and effective, in order to protect interstate commerce, and the national credit, the Federal taxing power, to protect and make more effective the national banking system and Federal Reserve System, and to insure the maintenance of fair and honest markets in such transactions: "(1) Such transactions (a) are carried on in large volume by the public generally and in large part originate outside the States in which the exchanges and over-the-counter markets are located and/or are effected by means of the mails and instrumentalities of interstate commerce; (b) constitute an important part of the current of interstate commerce; (c) involve in large part the securities of issuers engaged in interstate commerce; (d) involve the use of credit, directly affect the financing of trade, industry, and transportation in interstate commerce, and directly affect and influence the volume of interstate commerce; and affect the national credit. "(2) The prices established and offered in such transactions are generally disseminated and quoted throughout the United States and foreign countries and constitute a basis for determining and establishing the prices at which securities are bought and sold, the amount of certain taxes owing to the United States and to the several States by owners, buyers, and sellers of securities, and the value of collateral for bank loans." The italicized words represent proposed additions to the present statute. The balance of section 201 of H. R. 4344 is identical to section to section 2 of the Securities Exchange Act of 1934 except that subdivisions (3) and (4), reading as follows, have been eliminated: "(3) Frequently the prices of securities on such exchanges and markets are susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities which (a) cause alternately unreasonable expansion and unreasonable contraction of the volume of credit available for trade, transportation, and industry in interstate commerce, (b) hinder the proper appraisal of the value of securities and thus prevent a fair calculation of taxes owing to the United States and to the several States by owners, the fair valuation of collateral for bank loans and/or obstruct the effective operation of the national banking system and Federal Reserve System. "(4) National emergencies, which produce widespread unemployment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit." Mr. PADDOCK. Mr. Chairman. Mr. PADDOCK. Do you feel, Mr. Schwartz, that this committee ought to delay acting on this proposed legislation involving the exchanges until the factual studies of the regional exchanges now being made by the Commission are available to it? Mr. SCHWARTZ. I do, sir; and I am very pleased to say that apparently the Commission has moved right in on that and the delay I do not think will be a very great one, because after all, our exchanges are small. They are not large, and the work can be done quickly. The CHAIRMAN. Thank you. Mr. SCHWARTZ. Thank you. FRIDAY, JANUARY 23, 1942 The CHAIRMAN. Mr. Cunningham. STATEMENT OF RUSSELL I. CUNNINGHAM, PRESIDENT OF THE CLEVELAND STOCK EXCHANGE, CLEVELAND, OHIO Mr. CUNNINGHAM. Mr. Chairman and gentlemen, my name is Russell I. Cunningham, partner of Cunningham & Co., Cleveland, Ohio. I have been a member of the Cleveland Stock Exchange since 1922, and president of that exchange since February 1939. I am addressing my remarks to item 6 of the committee agenda relating to "Information with respect to listed securities," and particularly to subsection (H) of section 12 (b) and section 13 (a) of the committee print having to do with "Material contracts made not in the ordinary course of business." If we are to judge by past experience, the inclusion of this proposal will of itself be another serious deterrent to new listings and will encourage delistings. We will discuss our problem of delistings and lack of new listings later and will confine our remarks on this proposal by just urging its rejection. My next remarks are addressed to item 8 of the committee print agenda, having to do with proxy regulations and particularly to certain exemptions as outlined in section 14 (d) of the committee print. The proposal has been advanced by the New York exchanges and endorsed, at least in part, by the Securities and Exchange Commission that exemption to the proxy regulations be applied to overthe-counter corporations with less than $3,000,000 in gross assets and fewer than 300 stockholders. While we endorse these exemption proposals, we are of the opinion that their intended application is too narrow. To limit the exemptions to over-the-counter corporations is to close the door to any possibility of our securing listings from this class of issuer. We believe it to be one of the primary functions of small stock exchanges to serve as the proving ground and market place for the security issues of small corporations. This has been our history. Most of the well-known rubber companies and quite a few of the larger steel, automotive and aircraft equipment companies had their first market on the Cleveland Stock Exchange. As they expanded, it was natural for them to seek broader markets and greater capital by listing on the New York Stock Exchange. We in Cleveland are proud of our contribution to American industry and we want to continue in our role of the past. For this reason and in the public interest, the Cleveland Stock Exchange respectfully requests that exemptions to the proxy regula |