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.

The Securities and Exchange Commission started from scratch in 1934 to regulate a business which by present-day comparison was then fairly active. Today the Commission has a staff of 1,400 or 1,500 employees-I may be a few hundred wrong one way or the other on that-with numerous branches, to regulate a diminishing industry. True the Public Utility Holding Company Act, the Trust Indenture Act, and the Investment Company Act have been added to the Commission's responsibilities. Possibly simplification of the administrative process would meet the situation.

Protesting against departmentalization of the Commission Mr. Purcell last Tuesday, at page 1995 of the typewritten transcript, gave this committee an illustration of the numerous interlocking problems the Commission faced in a sale of some light and power properties to the Black Hills Power & Light Co. by the General Public Utilities, Inc. May I quote Mr. Purcell verbatim from the record? And I am sorry to have to take up the time of this committee to quote that which has gone before, but I think it gives you an example. I quote from Mr. Purcell:

A utility holding company named General Public Utilities, Inc., had light and power properties in South Dakota, some of which were being operated by a subsidiary called the Dakota Power Co. and some of which were owned directly by the holding company. The parent company decided to dispose of these properties and, to this end, formed a new corporation named the Black Hills Power & Light Co. All the South Dakota properties were to be transferred to the new Black Hills Power & Light Co. in exchange for its preferred and common stock which was to be offered to the public by the holding company.

I am still quoting from Mr. Purcell

Now, the public offering of the Black Hills Power & Light Co. preferred and common stocks was, of course, subject to the registration requirements of the Securities Act of 1933. Furthermore, the proposed transfer of the utility assets to the new company and the issuance by the new company of its securities were subject to various sections of the Public Utility Holding Company Act, primarily to sections 6, 7, 9, and 12 relating to the issuance of securities, the transfer of utility assets and transactions between affiliates—

I am still quoting from Mr. Purcell.

The Commission was faced with numerous interlocking problems under two of its statutes since similar accounting questions were involved under both the Securities Act and the Holding Company Act.

Continuing to quote:

Accordingly, the Registration Division, concerned primarily with the Securities Act phases of the situation, and the Public Utilities Division collaborated in a scrutiny of the proposed transaction and in the hearings which were held as required by the Public Utility Holding Company Act on the issuance of the securities and the sale of the properties.

As a matter of fact, in this case the Holding Company Act and the Securities Act were only two of the several statutes brought into play by this one transaction.

Continuing to quote Mr. Purcell

the same character of interlationship existed not only between the Securities Act and the Trust Indenture Act, but also between the Holding Company Act and the Trust Indenture Act with regard to the provisions of the Indenture securing the first-mortgage bonds of Black Hills Power & Light Co. The Securities Exchange Act of 1934 also had an important bearing on this financing since the market price of the common stock of the new company was stabilized by the underwriters to facilitate its distribution to the public.

All these phases, the Securities Act registration statement, the declarations

filed under the Holding Company Act, the indenture securing the new mortgage bonds and the proposed methods of selling the securities to the public, were considered together by the Commission.

From Mr. Purcell's description, I count five or maybe six-it is hard to tell from the record-administrative hoops through which the General Public Utilities and the Black Hills companies had to jump in order to complete this one transaction. And Mr. Purcell says this is "* a recent illustration of the type of situation with which the Commission has to deal every day."

* *

Such numerous interlocking problems in any administrative process ought to be simplified.

Mr. WOLVERTON. Is that a quotation from Mr. Purcell?

Mr. SMITH. That is not a quotation from Mr. Purcell. I had ended his quotation earlier.

Mention was made earlier in these hearings of the frequent changes in personnel of this Commission. How can Congress satisfy a man's ambition or his country's need for his services by amending this statute! Our bench needs good judges and it is complimentary to the Securities Exchange Commission to serve as a preparatory school for our judiciary. But it certainly raises ned with the securities business. The stock of a corporation which had had six presidents in less than 8 years would not command much of a price on any exchange. Most list committees would hesitate to list it for that reason alone. Correction must be by deglamorizing the job, not by statutory amendment as proposed by the industry.

In item 2 of the agenda of this committee the margin requirements are brought into play.

We have no questions here except to point out to the committee the general satisfaction with which the Federal Reserve Board administration of the intricate provisions of the act under its jurisdiction has been received. This is an excellent example of what flexible and reasonable administration can do. Every rule change the Board has made in its regulations has been in the direction of liberalization. Nevertheless the Board knows and the industry knows that the Board's control of credit will be istantly tightened should there be any danger of excess use of credit.

Item 3 of this committee's agenda, the financial responsibility of members, etc.

There has been much discussion of this item but it has failed to bring out the simple fact that the stock exchanges apply their requirements as to member's capital as a brake or governor on his operations and not as a definition of insolvency. That is why the exchanges have been able to point with justifiable pride to almost a complete absence of failures among member firms. As the executive vice president of the New York Stock Exchange, Mr. Davis, pointed out on page 2112 of the typewritten record of these hearings, only one member of the New York Stock Exchange has failed in the last 6 years. This experience is general among the exchanges. There have been no failures of member firms on the Chicago Stock Exchange for over 10 years, and beyond that I do not recall when the last failure involved the public.

Mr. WOLVERTON. Does the stock exchange take credit for that, or does the S. E. C. take credit for it?