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NATIONAL SECURITIES EXCHANGES-H.R. 7852
THURSDAY, MARCH 1, 1934
HOUSE OF REPRESENTATIVES,
Washington, D.C. The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding:
The CHAIRMAN. The committee will come to order. We will hear Mr. Witter.
STATEMENT OF DEAN WITTER, SAN FRANCISCO, CALIF., APPEAR
ING ON BEHALF OF 204 DEALERS ON THE PACIFIC COAST
Mr. WITTER. My name is Dean Witter, of San Francisco. I am authorized to speak for 204 dealers on the Pacific coast. All of these dealers also operate as brokers.
I have prepared a statement here, and I do not intend to go through it in any detail, if I may omit it, because the statement
The CHAIRMAN. You may put the whole statement in the record and refer to any part you desire.
Mr. Witter. I would like, however, to read one of the wires that is typical of several that I have received from the coast in connection with the proposed bill, and I will skip through that, too, if I may, and put that in the record.
This wire is from the Washington State Securities Dealers Association, a voluntary association of all dealers in the State of Washington, and makes particular objection to section 6, which would prohibit banks from extending credit on unlisted securities in the regular course of business, and which would deprive them of the credit they now receive on bank drafts, as well as on inventory.
It makes particular objection to section 10, which prohibits the dealer from acting as both dealer and broker, stating that all dealers in the State of Washington must operate as both brokers and dealers in order to render a complete investment service.
It makes objection to section 14, which purports to control overthe-counter transactions in unlisted securities, and states, among other things:
"The stock of only one corporation and the bonds of only one corporation incorporated under the laws of the State of Washington are listed on a recognized national exchange”, which means that all remaining securities which are not listed would be without market under this bill. It says that taking away the collateral value of these unlisted securities "would be detrimental not only to the security dealers, but to the entire community."
I will not read the rest of it, except that it makes further objections to the reports and listing requirements, as applied to small corporations, and says in part that this group of dealers feel that it would be exceedingly dangerous to the interests of the public, and, moreover, the penalty clause provided thereunder bears no relation to any losses incurred and places a premium upon the activities of "litigous chiselers." I do not know what a "lítigous chiseler” is, but I imagine that this man does.
I also have wires which are somewhat similar, which I shall not read, which come from the Portland Bond Club; from the San Francisco dealers, which include 52 dealers, and from the security dealers of Los Angeles, which include 71. I think that there are more than those whom are included in some of the other associations, whom I am also authorized to speak for.
I have been allowed only 15 minutes, and I would like to skip on this statement, and I would like to begin by saying—and I think that I speak for these two-hundred-odd dealers, that I am in favor of Federal supervision and control of stock exchanges; that I am in favor of complete and accurate reports to stockholders; that I am in favor of punishing misrepresentation, fraud, and other acts by either brokers or dealers which are detrimental to the public interest, and I am opposed to pools, corners, and the manipulation of markets.
I have certain general objections to the regulation of stock exchanges by rigid and fixed statutes.
The CHAIRMAN. Mr. Witter, would you prohibit pools?
Mr. WITTER. That is such a broad subject, sir, that if I began to discuss it, I would not be able to conclude in 15 minutes.
The CHAIRMAN. You remarked on that in your statement.
Mr. WITTER. The definition of "pool" has never been made, clearly made, to me.
The CHAIRMAN. I thought that I understood you to say that you were opposed to pools.
Mr. WITTER. I am opposed to the accepted sense of pools which are combinations made for the purpose of manipulation of markets. There are some types of pools which I think are quite necessary to the conduct of investment businesses, but that is a rather difficult and rather long story, and I am afraid I would not have time to tell it.
I have certain general objections to the regulation of stock exchanges by rigid and fixed statutes. I do not think that a fixed statute endeavoring to deal with all the complex and intricate problems of the brokerage business can be so drawn as to eliminate the possibility of abuses, without at the same time destroying the functions of exchanges and free and open markets for securities to the great detriment of the public.
As I said before, I do not intend to cover all of the provisions of this bill, and I would like to confine my statements to the effect of those particular sections which are referred to in this wire which I have read, and particularly to section 10, and not to all of section 10, because I am not competent to speak on all of it, but the first subsection of section 10, which relates to the separation of dealers and underwriters from brokers.
I have never heard of any argument that I thought had the slightest weight that would favor the segregation or separation which is proposed in this bill, and it is therefore difficult for me to present any argument as to why that proposed segregation should not be undertaken.
The presumed purpose of these sections which provide for the divorce of broker and dealer is, first, to insure the customer knows whether he is dealing with a firm as a broker or a dealer; and, second, to prevent the use of the same capital for the conduct of two businesses,
I do not presume that the bill was intended to enforce a hardship upon the conduct of legitimate business nor to further reduce the already decimated ranks of the dealers, although these sections, sections 10, 7, and 19, would do both. I shall later suggest how the purposes of these sections can be fulfilled without damage to the public interest.
It would not be constructive to object to the divorcement of the brokerage and the dealer business without suggesting some means which would insure the public against confusion of functions. This can be done by the segregation of the two businesses under one ownership, and by having all letterheads printed either “bond department” or “brokerage department." All statements showing transactions with customers should be clearly phrased to indicate, without possibility of misunderstanding, whether the firm is acting as a broker or as a principal in that particular transaction.
And, I may say, by the way, that that has been very comprehensively covered in the investment bankers' code, which has just been drafted, and I think is now finally approved. It makes it obligatory upon all firms to indicate clearly whether they are dealing as a broker or a dealer.
In the conduct of my firm and many others, we have scrupulously separated our brokerage department premises, books, accounts, organization, capital, personnel, and functions. In general, our brokerage departments and bond departments are as separate as though they were two different firms, except for mutuality of name, ownership, and general policy. I think that no harm and some advantage has come to the customers of each department through the dual functions of the firm. No brokerage department customer's man is allowed to sell our own participations or underwritings to his custom
The reason is practical as well as ethical. And I will not go into detail as to this, if you do not mind.
I do not believe it is practical to provide by statute that the two businesses should be as completely segregated as ours, as small dealers cannot afford the segregation of capital and premises. The large dealers could, by the way, and it might be wise to treat them differently, and I can suggest a means of doing that.
The main purpose of segregating is served by making it clear whether the dealer is a broker or a principal. This should be indicated in verbal statements and in written bills and confirmations.
The dealer and underwriter business has recently been largely confined to the purchase and sale of municipal bonds. These bonds are rarely, if ever, listed, and under the provisions of section 7 (c), a dealer can neither use his capital to carry such security, nor could he borrow money against them.
Section 6 of the proposed bill forbids lending on unlisted securities, which would enforce a great hardship upon the market for unlisted securities, and particularly upon the smaller firms.
Section 14 regulating "over-the-market” market, enforces a particular hardship on outlying territories as there are a multitude of unlisted bonds and preferred stocks trade in which are in most cases obligations of companies so small that their size will preclude compliance with any extensive listing requirements. That pertains to bonds of small municipalities, for which the country markets are the best markets, and I think that many municipalities could not be financed if the provisions of the present bill were retained.
The Dickson report to the Secretary of Commerce recommended control by a "Federal stock exchange authority” and through a flexible mechanism to further study the means of regulating the stock exchanges and advised against placing stock exchanges in a straitjacket. It urged that the law be limited to minimum requirements and that broad discretionary power be given the authorities.
Regarding the segregation of brokerage and dealer businesses, it said:
Any such proposed segregation should not be accomplished before we are in a position to calculate its cost and to foresee its repercussions.
I think that the authority designated to exercise control of stockexchange firms should be authorized to extend the segregation of the two businesses as far as its further study indicates it to be necessary in the interest of the public.
I can amplify any of those comments, sir, and I would be glad to answer any questions I could. I do not think it would serve a useful purpose to cover it in greater detail.
The CHAIRMAN. We would like to have you recommendations in your extended statement if you can give them. Like practically all of our witnesses, you say you are in favor of regulation.
Mr. WITTER. Yes, sir.
The CHAIRMAN. And we would like to have your suggestions as to what sort of regulation. I mean, in your extended statement. Of course, you would not have time to do it this morning. We would like very much to have that, because it will be helpful to us when we go to write this bill to know what your constructive suggestions are.
Mr. WITTER. My thoughts as to regulation and control sir, are practically embodied in the Dickinson Report, which has given that matter careful study, of which I heartily approve, and which I think provides for flexible control of the stock exchanges, on the one hand, without limitation imposed by a fixed statute, to draft a bill in fixed terms which would regulate the stock exchanges, which would, in my opinion, require several hundred pages in the bill to cover all of the numerous contingencies, and would leave us with certain arbitrary laws to govern matters which at times there must be justifiable exceptions.
I would recommend, and I would be glad
The CHAIRMAN. We would like for you to state in your memorandum what practices that are now indulged in on exchanges you think ought to be prohibited by law.
Mr. WITTER. Yes, sir.
Mr. COOPER. Mr. Witter, most of the testimony we are getting at the present time is merely on the regulation of stock exchanges.
Mr. WITTER. Yes, sir.
Mr. COOPER. There is another part of this bill in which we are very intensely interested. Now, I think probably it is just as important, if not more important, than the regulation of stock exchanges, and that is what effect this measure would have if it became a law on industry, banks, and so forth. Now, I do not know whether you people intend to touch on that or not. It seems as if we are just forgetting, to a great extent, that important part of this measure. Probably you do not want to touch on that.
Mr. WITTER. I will be very glad to.
Mr. WITTER. The bill is not a bill to regulate stock exchanges, as I read it, and I am not an attorney. The bill is to regulate all banks, all credit, all corporations, all officers and directors of all corporations and all stockholders. It gives the so-called authority, of the Federal Trade Commission, or whatever authority may be finally incorporated as the administrative authority of the bill
, power to so hamper and restrict the development, the financing of new industries, and providing of the capital of this country, that it is easily conceivable that it would put an entire estoppel to the capital market for new construction, which I think would be very disastrous, have a very disastrous effect upon the country as a whole.
I may say, if this bill is made effective, only on the New York Stock Exchange, although my firm is a member or upon the brokers of the country, and that if I thought that the bill could be made effective without crippling the country, my objections would be much less strenuous than they are, when I think that the bill provides for such a comprehensive governmental control of industry as to virtually destroy the initiative and independence of American business.
Mr. COOPER. I just wanted to get your views on that. Mr. LEA. Mr. ChairmanThe CHAIRMAN. Mr. Lea. Mr. LEA. Mr. Witter, in looking for the causes that have led to losses to purchasers of stock in recent years, to what extent would you say that the irresponsibility of dealers and underwriters has been responsible for those losses?
Mr. WITTER. Well, that is a very difficult question to answer. I would say that bad judgement has been exercised by all dealers, and by all bankers, and by all business men. To try to analyze the particular effects of it, which could be directly attributed to dealers, would be, in my opinion, an almost impossible problem.
This bill, again, does not really deal with dealers except to the extent that it proposes the complete separation of dealers from brokers, and I can say that very little losses, comparatively, have come to investors as a result of the functioning of some firms in a dual capacity. I know of only 3 or 4 big firms that went broke as a result of that dual capacity There are thousands who remained solvent.
I would get considerably off of my subject, I think, if I spoke on the subject of dealers, which I think has been already covered. Is that what you had reference to, Mr. Lea?
Mr. LEA. Yes. This bill picks out the dual capacity as an evil to be eliminated under the provisions of section 10.