Thus, during the month of July 1935, taking account of all exchanges, securities traded on an unlisted basis amounted to 4,284,630 shares and $100,922,000 face value of bonds; listed securities traded amounted to 35,459,364 shares and $237,310,300 face value of bonds. If the figures for the New York Stock Exchange are omitted, the totals for unlisted trading are unaffected, but the volume of listed trading is reduced to 6,031,644 shares and $1,635,300 face value of bonds. During the month of November 1935 securities traded on an unlisted basis amounted to 10,555,485 shares and $92,388,000 face value of bonds; listed securities traded amounted to 73,597,306 shares and $307,880,117 face value of bonds. If the figures for the New York Stock Exchange are omitted, the totals for unlisted trading are unaffected, but the volume of listed trading is reduced to 16,137,531 shares and $5,903,117 face value of bonds."

SIGNIFICANCE FOR THE SMALLER EXCHANGES

The smaller exchanges constitute a peculiar problem in the administration of the Securities Exchange Act of 1934 in several ways, to a consideration of which this report will return below. At this point it is pertinent to indicate the particular importance of unlisted trading for these exchanges. If figures for the two great exchanges-the New York Stock Exchange and the New York Curb Exchange--are omitted, the total of securities currently admitted to unlisted trading on exchanges amounts to 617 issues of stock, involving 1,275,276,404 shares, and 42 issues of bonds in a total face amount of $560,552,800 as against a total for listed securities amounting to 1,138 issues of stock, involving 676,035,535 shares, and 237 issues of bonds in a total face amount of $873,913,462. The comparative extent of unlisted trading on each of the 16 smaller exchanges which permits unlisted trading, taken by itself, is equally impressive.10

SIGNIFICANCE FOR THE NEW YORK CURB EXCHANGE

The New York Curb Exchange is the primary market for unlisted trading. Of the total of unlisted securities 753 issues of stock, involving 600,015,527 shares, and 522 issues of bonds in a total face amount of $6,381,843,636 appear on this exchange; " 691 issues of stock, involving 400,204,695 shares, and 499 issues of bonds in a total face

7 See appendix III.

• Infra, p. 15.

• Figures obtained by (a) subtracting from unduplicated total for listed securities figures representing listed securities traded on New York Stock Exchange or New York Curb Exchange and (b) subtracting from unduplicated total for unlisted securities a figure representing securities admitted to unlisted trading on the New York Curb Exchange. The resulting figures thus represent listed and unlisted securities which are not traded in on either of the great New York exchanges.

10 See Appendix III.

11 Figure represents securities admitted to unlisted trading on the New York Curb, not corrected for duplication.

amount of $5,976,488,335, are admitted to unlisted trading exclusively on this exchange.12

RELATION TO THE PROBLEM OF OVER-THE-COUNTER TRADING

The problem of unlisted trading can be canvassed intelligently only in connection with some consideration of the vast over-the-counter markets. At present, securities traded exclusively over the counter are not registered under the Securities Exchange Act of 1934, and trading therein is not subject to any organized mechanism of control other than that provided by the Commission itself or by the securities commissions of the several States.13 Securities admitted to unlisted trading privileges on exchanges, like over-the-counter securities, are not registered under the Exchange Act," but trading therein is subject to a highly developed mechanism of control in addition to that provided by the Commission-the exchange itself. For years there has been controversy concerning the relative desirability of the unlisted-exchange market and the over-the-counter market for particular securities or classes of securities, and concerning the extent to which and the manner in which the exchange mechanism of control has been actually administered. The question whether securities now admitted to unlisted trading privileges would, upon termination of such privileges, move on to a listed basis on exchanges or into the over-the-counter markets has likewise been a subject of active dispute. Various phases of these problems will be considered more fully in course of the analysis which follows.

13 I. e., these securities enjoy unlisted trading privileges on no other exchange.

18 Pursuant to sec. 15 of the Exchange Act, the Commission has promulgated rules requiring registration of over-the-counter dealers and brokers and prescribing certain standards of fair practice in the conduct of their business. A number of hearings to determine whether registration should be granted in particular cases have been held. The effective date of the registrations and of the standards of fair practice was Jan. 1, 1936.

14 That is, no registration statement is filed in respect of these securities, although under subsec. (f) of sec. 12, as has already been stated (supra, p. 2), they are deemed "securities registered on a national securities exchange" for most purposes of the act.

PART III

ANALYSIS

BRIEF STATEMENT OF CASE OF OPPOSITION TO CONTINUANCE OF

UNLISTED TRADING

According to a substantial body of opinion, unlisted trading is highly objectionable, and therefore, the 2-year period of continuance which has been permitted should be regarded merely as a period for gradual liquidation, and all privileges of unlisted trading should be allowed to lapse at midnight of May 31, 1936. The particular objections expressed vary somewhat from group to group and from individual to individual, but they may be briefly summed up thus:

1. Full and accurate information concerning the issuer is vital to the proper functioning of a free and open market. A properly functioning exchange market is therefore impossible for unlisted securities.

2. The exchange should not have power to determine the market in which the security is to be bought and sold without the consent of the issuer.

3. Exchanges frequently admit securities to unlisted trading when no real market for the securities exists on the exchange. In such cases it is frequently contended that the exchange quotation reflects only a kind of arbitrage against the over-thecounter market.

4. Manipulative practices have been rife in connection with unlisted trading upon exchanges.

5. The continuance of unlisted trading will involve an unfair discrimination against the issuers of listed securities and will, because of such discrimination, tend to discourage listing and encourage delisting.

6. As a practical matter, it is extremely difficult to bring home to the investing public the distinction between a fully listed security and one admitted to unlisted trading privileges.

ANALYSIS OF CASE OF OPPOSITION TO CONTINUANCE OF UNLISTED

TRADING

The objections to unlisted trading set forth above will be analyzed not only in terms of their validity or invalidity but also in terms of the practically available courses of action. The Commission is convinced

that the practical possibilities for corrective action are of primary importance in any analysis of the problem. In the consideration of each objection, therefore, particular attention will be directed to the question of what can be done to correct such evils as may be demonstrated or assumed to exist.

Objection because of lack of information.-The importance of this objection is beyond question. In the operation of the securities market information concerning the securities and issuers thereof is of the essence. In this aspect, therefore, unlisted trading is most unsatisfactory. But, in the judgment of the Commission, this deficiency will not be corrected by the termination of unlisted trading.

If the privilege of unlisted trading were terminated, some of the issuers of securities which had been admitted to unlisted trading might seek to regain an exchange market by registering pursuant to section 12 of the Exchange Act. The evidence suggests, however, that a large number of the securities would go over the counter. Since issuers who had listed prior to the passage of the act would presumably have less objection to registration than issuers who have always been unwilling to list, the tendency of the latter to go over the counter rather than to register would presumably be far greater than in the case of the former. Yet even in the case of the former there has been some delisting. Thus, since September 30, 1934, 1,368 issues of securities, previously listed on exchanges, have disappeared from exchange trading. It should be noted, however, that many of these delistings are insignificant in that the issues in question were almost wholly inactive. Moreover, a number of these delistings appear to have represented the retirement or redemption of securities. Nevertheless, they give some indication of the probable course of issues at present admitted to unlisted trading privileges if the privilege were terminated. Thus, until some effective means is devised to bring about registration by issuers whose securities are traded over the counter, the problem of obtaining information concerning securities admitted to unlisted trading will not be solved by the termination of the privilege.

A consideration of the problem of registration of securities traded over the counter is plainly relevant to the present inquiry. This problem will be canvassed more fully below.2

A limited basis of information may be provided for unlisted trading. It is entirely feasible, for example, for an exchange to require any member on whose application a security is admitted to unlisted trading to become a stockholder of the issuer and to file with the exchange all information available to him as a stockholder. It should likewise be feasible to permit unlisted trading in a security only if the issuer thereof furnishes to stockholders periodical reports (at least once a

1 See appendix IV.

Infra, pp. 17-21.

year) containing balance sheets and profit-and-loss statements, certified by independent accountants; and to require that the member must file an official copy of each annual report of the issuer in the form issued to stockholders. Indeed, requirements to this effect were adopted by the New York Curb Exchange on July 5, 1933.3 Unfortunately, these rules have been inapplicable to the great bulk of unlisted securities traded on the exchange since these were admitted prior to July 5, 1933. But if Congress should repeal the expiration date for unlisted trading now set forth in section 12 (f) of the Exchange Act, the Commission would have power to put requirements of this kind into effect for all securities admitted to unlisted trading on any exchange, regardless of when the securities may have been admitted to the privilege. Under section 12 (f) of the Exchange Act, the Commission is empowered to continue unlisted trading, subject to limitations therein set forth, on such terms and conditions as may be deemed necessary for the protection of investors. Under section 19 (b), the Commission has power to require changes in the rules of exchanges "in respect of such matters as listing or striking from listing of any security similar matters." Under section 6 (a), each registered exchange must agree "to comply, and to enforce so far as is within its powers compliance by its members, with the provisions of this title, and any amendment thereto and any rule or regulation made or to be made thereunder."

(3) the and (13)

Objection on the ground that the exchange should not have power to determine the market without consent of the issuer. The contention has frequently been made that the determination of the market place for securities of an issuer is properly the responsibility of the management of the issuer. It is alleged that the course of trading in the securities of an issuer affects the general problems of management, and that management, in the exercise of its fiduciary duty to all security holders, should decide where trading in the securities should be centered.

In furtherance of this point of view, it is argued that management is after all nothing but the reflection of the wishes of that class of security holders which controls management and that therefore the decision as to whether trading in the securities of the issuer should be on an exchange or on the over-the-counter market is but the decision of the controlling security holders of the corporation. The content of this assumption need not here be examined.

In the judgment of the Commission it is unnecessary to decide whether management or an exchange has the better claim to the determination

'See appendix V. The rules of July 5, 1933, were adopted by the Curb after the investigation by the attorney general of the State of New York. They represented a marked improvement in standards over previous conditions on that exchange.