Mr. SMITH. We like to say that the exchange takes credit for that. Of course our exchange itself is composed of individuals who have done a conscientious job in just using these yardsticks not only as measurements for preventing insolvency, but for a time yardstick to study, move in, and carefully scrutinize the conduct of the member's affairs.

Mr. BOREN. How many presidents have the New York or Chicago Stock Exchanges had?

Mr. SMITH. Prior to 1938 the office was elective. That was prior to the so-called paid president at the Chicago Stock Exchange. The president of the exchange changed, I would say, on an average of every 2 years; but the permanent staff of the exchange, which has had a great deal to do with the enforcement of the rules of the exchange has changed very little in the last 10 years.

Mr. BOREN. What about the New York Stock Exchange?

Mr. SMITH. Well, I suppose I should refer that to the representative of the New York Stock Exchange, Mr. Boren. I do not recall

from memory.

Mr. BOREN. The point I am thinking on, of course, is your comment about the S. E. C. I do feel that as a generalization that too frequent changes in administration cause a lack of experience to enter into the operation of joint business, but I presume at least that while there has been considerable change in the personnel of the Commission itself, there has been very little change in the staff during the 8 years of its existence.

Mr. SMITH. I do not know that that is true.

Mr. BOREN. I do not, either. It is a presumption on my part. Mr. SMITH. I think that would be a question for the Commission's representative to answer. I am aware of a rather large turn-over even in the staff of the Commission.

Mr. BOREN. The trend of the thought that I wanted to bring out is a recognition of the value of the comment you made earlier about the inadvisability of frequent changes, but at the same time I think it could very easily be overdrawn as an element of importance.

There are some branches of the Government as well as private business which I feel could not help but be improved if they changed immediately and possibly pretty often. I will not go into the details on that; but there are two sides to that picture and I thought that you rather heavily emphasized one side a while ago, probably out of proportion to its importance.

Mr. SMITH. As I say, if a corporation came to us and wanted to list securities that had had six presidents in around 8 years, we would be a little doubtful of the management of that corporation. That on the average is just a fraction over 1 year for each president.

Mr. BOREN. I happen to know that the New York Stock Exchange has had a number of presidents in a reasonably short time, and using the same yardstick as a measure, it might appear that every one should be extremely cautious of trading on the New York Stock Exchange.

Mr. SMITH. Well, counsel brings up this point, that the New York Stock Exchange presidency has changed in the last 2 years because the Army took one president. The war is one thing that you cannot provide for, in connection with the presidency; but let me get this picture to you.

Mr. BOREN. I do not know that this is important to the issue here. I just felt that you had overemphasized that and I wanted to bring out the thought, that perhaps you had.

Mr. SMITH. Let me get this picture to you, Mr. Boren—

Mr. BOREN. Let us go back to this question of the president of the New York Stock Exchange. My recollection is that they changed once because one went to the penitentiary within the last few years. Mr. SMITH. I think that is true.

Mr. BOREN. And changed once, because the president decided to go into the Army, and there are other reasons probably for other changes. I do not care to debate the point. I think it is really unimportant either way, but I wanted to bring an opinion of my own in here, and that is that I do not feel that this committee should lay any great stress on the possibility of any change in personnel. After all, the administration

Mr. SMITH. Within the Commission?

Mr. BOREN. Within the Commission, or any place in the Government. The administration is temporary. The Government is permanent. The law should be written in such a way that it would not make much difference who administers it so long as those individuals are competent.

Mr. SMITH. Let me give you this picture of what we tried to do in Chicago. That will keep me out of the New York Stock Exchange. I will stick to our exchange. It used to be that the presidency was an elective office, by the membership of the exchange. It is now elective by the board of governors, and is assumed to be a permanent job.

The staff under the president is a permanent staff. In other words, all of the policies that have been established throughout the years are presumably carried forward by the permanent staff, so that the change in presidents, when the president was elected by the membership, had no effect on the permanent policies of the exchange, such as financial condition of members and things of that kind. It had already been carefully outlined and administered by the paid staff itself. The shift of the elected presidents made no difference. The staff carried on in the same way it did before. I think that is true of the New York Stock Exchange.

This question of financial condition is certainly one field in which exchange performance has been above criticism. The exchanges do not perform so well when second-guessed by the Commission. The Commission will apply a statutory ratio arbitrarily as a matter of law. A member's insolvency will be determined mathematically. While he will pay the penalty, this will bring no recovery to his

customers.

The exchanges, on the other hand, operate in this sphere by the ounce-of-prevention method. To illustrate, let us assume a member firm, after deducting reserves on firm commitments and other exchanges prescribed requirements, shows a capital deficiency according to the strict exchange formula of a dollar, or a thousand dollars. The exchange moves in. The firm is compelled under threat of suspension to reduce its commitments, sell nonliquid assets, or add capital. No statute is violated because exchange devaluation of assets of member firms has been and is stricter than the S. E. C. can generally apply or the present statute requires.

If the S. E. C. takes over in this field the ultimate responsibility will be with it. Divided responsibility has not worked too well in other fields. The exchanges are likely to relax to some extent the high degree of vigilance they have been exercising. The statute no doubt will be enforced by the S. E. C. More people will probably go to jail but the investor who has lost his money will not be better off.

On item 4 of the committee's agenda, the question of segregation, I would like to comment.

While there has been an able discussion of both sides of this difficult subject, the history of what has already occurred, or not occurred, is the best testimony as to its complications and also rebuttal to the Commission's assertion it wants no more power.

In 1934 Congress did not know how the problem should be handled so it told the S. E. C. to look into it and come back in a year and a half and report. The S. E. C. made a sort of a report to Congress 6 months later and presumably continued to study the subject. That was 6 years ago. Rome was not built in a day but you can build a pretty good battleship or a whole Nation can be mobilized in much less than 6 years.

Section 21 (a) of the 1934 act now authorizes the Commission

* to investigate any facts, conditions, practices, or matters which it may deem necessary or proper to aid in the enforcement of the provisions of this title, in the prescribing of rules and regulations thereunder, or in securing information to serve as a basis for recommending further legislation concerning the matters to which this title relates.

The Commission's statement to this committeee that it does not need any authority under section 11 (e) was certainly accurate. Possibly the authorization contained in section 11 (e) is a lapsed grant anyway. Yet in the next breath the Commission asks the committee not to repeal the section because there may be something there it might want to use sometime.

The matter is not in itself of much importance except as it demonstrates the reluctance of a governmental bureau to give up even an unnecessary and lapsed power.

I do not intend to burden the committee by commenting on every item in the agenda and I will hurry on to items 8 and 9.

Before these hearings close somebody ought to call these socalled equalization provisions by their right name. I refer to the proxy and report sections. The proposals are just an "extension of jurisdiction and restrictions." If companies whose securities are not now listed are subjected to proxy regulation and to the reports and penalties provided by section 16 it will mean more grist for the Securities and Exchange Commission mill and pressure on such companies to list on the exchanges, or at least open the possibility of those companies becoming eligible for unlisting trading applications. Neither the New York Curb Exchange or anybody else can successfully sugar-coat that pill with the argument that the stockholder will get a lot of information he does not now get. That is begging the question. The real argument is that fewer corporations will delist because they will be subject to sections 14 and 16 anyway and also that other corporations will say to themeslves, "Well, we are subject to sections 14 and 16 anyway

so we might as well list or become subject to an application for unlisted trading."

From 1921 to 1941, the Chicago Stock Exchange had no unlisted trading department. Last year we applied to the Securities and Exchange Commission for such privilege in 20 stock issues fully listed on the New York Stock Exchange and well distributed in the Middle West. Many of these companies grew up on our exchange before listing in New York. We had to go into unlisted trading to keep our members alive. We had the cooperation of the companies whose securities were involved and enjoyed every courtesy at the hands of the Securities and Exchange Commission.

Probably no sections of the 1934 act give corporations more "saddle sores" than those two sections. When the sores get too bad the corporation applies for withdrawal of their stock from listing and registration. In the delisting application the reasons cited are lack of active trading, desire to economize, and so forth. In private conversation the officials of these companies will tell you that what they really want is to get away from what they characterize as Securities and Exchange Commission red tape. In a few instances the record of the hearings before the Commission's trial examiner will show this admission.

The industry is on the right track in its recommended repeal of section 16 (b). Reasons have been ably discussed. But, so far as I recall, the testimony nobody has yet pointed out that the glaring example that caused the Congress to adopt section 16 in 1934 occurred in the stock of a national bank, which would not be affected under even the proposed amendment. Also that the manipulation of stocks on inside information is prohibited by other sections of the existing statute.

There is the serious economic question of whether the public interest is not better served by having a buyer or a seller even though he be an insider than to have no buyer or no seller. We believe that on the smaller exchanges, where the situation is sometimes acute, the answer to the question is yes.

You may wonder why we differ with the industry on the extension of these provisions-a position which is seemingly against selfinterest. There are two reasons. One is pride. The Chicago Stock Exchange hopes to succeed or fail in its service to its financial community by its own efforts. The other reason is as selfish as it can be. We are convinced that these provisions as they now stand have been detrimental to the manufacturer, the utility, or whatever the corporation whose securities are affected. Any proposal which is not good for general business and public is not good for the securities business, and is bad for us.

What we regard as an important and necessary change is not even listed in the agenda. This reference is to section 9 (a). One has only to observe the skillful salesmanship presently engaged in by the Government to promote the sale of defense bonds to a patriotic, eager-to-buy public, to realize that securities must be sold. Particularly on the smaller exchanges where orders do not come from all parts of the country and where securities are frequently little known outside of their own locality, market sponsorship is required. The statute has successfully sounded the death knell of pools, I hope

74947-42-pt. 5- -4

and believe for all time, but in so doing it has also sounded the death knell of liquid markets in small issues. Uncle Sam needs liquid markets because taxpayers will have to sell securities to make their March 15 tax payments.

The dismissal of the problems of section 9 (a) (2) by a stipulation between the Securities and Exchange Commission and the industry. which says in effect, we will take care of the problems the section creates, by interpretive opinions issued by the Securities and Exchange Commission is merely a confession of the existence of the problem. Such opinions cannot prove an adequate solution. We are glad that we are not obligated under any agreement not to discuss before this committee any point not specifically mentioned in the industry or the Securities and Exchange Commission reports. Doubtless any interpretative opinions issued by the Commission will be in terms which clearly show the opinions to be the opinions of its general counsel. Perhaps the Commission will adopt some of these opinions as its own. Who will say, however, that succeeding Commissions will accept these opinions as their own or that a judge sitting in a civil action will concur in the Commission's interpretation of this section? Statutes should be clear and definite. They should not be amended by executive interpretation.

This brings me to what I should like to say about items 11 and 12 on your agenda, which is section 19, and particularly 19 (b) and the title of the Act. I do not think that the committee has completed its discussion on that and I do not think it has heard from either all of the representatives of the industry or the Commission on this subject, but I will try to state it my way.

In the polite presentation of the proposals to the committee, the speakers have been naturally reluctant, in many cases, to speak with complete frankness. One who is subject to the regulations of a governmental agency is not disposed to offend it. However, there is an intangible something which for want of a better term, I shall call "the administrative attitude." The Commission has been sincere, honest, usually intelligent, and many times far-sighted, in its administrative policies. I do not think I have ever met a more sincere group of individuals than compose the Commisison and its staff. The statute it administers came into being at a time when there was an outraged public opinion. Section 2 of the 1934 act and the problems with which the Commission had then to grapple gave it a direction in which it has been traveling ever since. Now, it is proposed by the amendments to section 19 to extend the Securities and Exchange Commission's power over national securities exchanges. More than that, the industry suggests that the title of the act be amended to read that the regulation of the securities exchanges and over-the-counter markets take place and I quote from their recommendation: "With the least possible interference with honest business." The Chicago Stock Exchange disclaims any part in any suggestion which contemplates the regulation of honest business on any such premise. Short of a state of war and national calamity, honest business should be allowed to conduct itself without interference

The grant of jurisdiction over the national securities exchanges and the over-the-counter markets, as made to the Securities and Exchange Commission, carries with it the obligation of fostering those