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The Stock Exchange Reorganization

( Originally Published 1939 )

SINCE concluding the preceeding chapter on the Security Exchange Commission, a number of things have happened which promises a greater efficiency for the Exchange and the investing public, and which in part can be attributable to the Security Exchange Commission. It seems paradoxical therefore that any memtion should have been made of some occurences in the previous chapter, in the light of subsequent events, nevertheless, I want the reader to have a clear, mental and chronological picture.

On December 10, 1937, some three months before the Whitney scandal broke, Charles R. Gay, then the president of the Exchange, appointed Carle C. Conway, as the head of a committee to consider all aspects of a further development of the organization and administration of the Exchange. The present president of the Exchange, William G. Martin, was also appointed a member of this Committee and acted as its Secretary.

The Committee submitted its report on January 27, 1938, after weeks of study, which included recommendations for a complete revision of the Constitution of the Exchange. The recommendations were promply adopted by the Governing Committee and were approved by the members of the Exchange on March 17, 1938, by a record vote.

Part of the Conway Committees' recommendation was; that the Exchange have outside members on its Board of Governors and that the said board should consist of 32 members as follows:

One paid President.

The Chairman of the Board. Fifteen members of the Exchange.

Six non-members of the Exchange residing in the Metropolitan area of New York City, who are general or limited partners in firms registered on the Exchange, engaged in a business involving direct contact with the public.

Six members or non-members of the Exchange residing outside of the Metropolitan area, who are general or limited partners in firms registered on the Exchange having their principal places of business outside of that area and engaged in a business involving direct contact with the public.

This brought the board membership up to twenty nine and the final and complete step for the Exchange reorganization was made on September 28, 1938, when William G. Martin, President, offered for nomination, which was unanimously approved, Carle C. Conway, Chairman of the Board of the Continental Can Company, Robert M. Hutchins, President of the University of Chicago, and General Robert E. Wood, President of Sears, Roe-buck and Company. All will serve until the next annual election and each of the three are distinct representatives of the public, thus bringing the board membership to thirty two.

That this action has met with the approval of the Security Exchange Commission can be seen in the following telegram sent the Exchange President by William O. Douglas, Chairman of the Security and Exchange Commission. The telegram said;

"You are to be congratulated upon your success in persuading such outstanding men to serve as the public representatives on your board. This is another clear indication of your determination to pursue the objectives we have frequently discussed."

On October 26, 1938, a new Stock Exchange program was adopted which embodied the following rules and regulations;

1—Effective January 1, 1939, no member will be permitted to owe more than fifteen times its net capital, excluding underwriting capital. The present limit, although figured on a different basis, amounts to twenty times.

2—No official of the Exchange shall make or receive a loan from any member or member firm without permission of the Exchange's Committee on member firms, unless the loan is fully secured or is made by or to the Exchange Official by a firm of which he is also a member.

3—No Exchange Official shall participate in any investigation in which he is financially interested.

4—More extensive financial statements will be required of members.

5—Firms doing business with the public must have their books audited at least once a year by independent public accountants.

6—The Exchange will make more frequent and intensive check ups on the books of its members.

7—Members must report to the Exchange any loan in excess of $2,500 unless it is fully secured, or in certain other circumstances.

8—Effective April 1, 1939, no member firm or its general partners, (does not apply to special partners or employees) which carries margin accounts for the public may buy or sell securities on margin for their own accounts.

9—No member firm may carry an account for a general partner of another firm unless a second general partner of the other firm gives written consent.

10—No member doing business as an individual (distinguished from a partnership) may carry security accounts for customers.

11—More intensive control will be imposed on customers men and other employees of members.

12—The Exchange will supervise business practices of members more closely and impose heavier penalties for violations.

13—Each member firm must report to the Exchange weekly its obligations in underwriting transactions.

14—The Exchange proposes to set up a central securities depository in which all securities belonging to the public, but left in the hands of exchange members, may be segregated and protected.

With the adoption of all of the aforegoing it would seem that the Stock Exchange is certainly making a bid for the public's favor, and are placing severe restrictions against their own membership. Paragraphs 8, 9, and 10 above are highly restrictive.

Exchange members and professional traders have often, very often, by their own trading prevented markets from becoming too thin, and kept the spread between the bid and asked price from becoming almost impossible. For example: If you bought 100 shares of Compass-Motor at 100, the bid being 99 and the asked price being 100, naturally you had to pay the asked price when buying. Suppose, however, that you wished to sell. In absence of public buying the only supporters of the 99 bid price would possibly be members trading for their own account or professional traders. Abolish them and your bid price might conceivably drop to 80 instead of 99, thus making an impossible spread. While the offering price would correspondingly drop, nevertheless, remember you paid 99.

- No one will deny that the Security Exchange Commission under Mr. Douglas has been really doing things, and we must admit equally as quick that the Stock Exchange has been more than willing to meet the S.E.C. half way.

It is said that Mr. Douglas visualizes an ideal situation to be expected in the future by the creation of special banks in various financial centers and the turning over to these banks of all the banking and depository functions now performed by brokers.

Such an Utopian scheme may be created and it may possibly work, but personally I am of the opinion that too much distruction of individualism in the Street will retard, certainly not propell progress.

I have talked to many brokers in the financial district who feel and have felt that some of the requirements of the S.E.C. are too severe. One broker- pointed out that there was an economic law which acted upon a "Supply and Demand" of stocks and bonds as well as a "Supply and Demand" for money. Undue interference with this law would and will eventually result in chaos.

Government planning, it has been conclusively demonstrated, carried to extremes, ultimately means that no individual can plan anything. It is necessary, as I stated elsewhere, that a free flow of credit and money is essential to our economic and financial independence. This we cannot have with too much governmental planning or restrictions.

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