Thou Shalt Not

Out of two years' rich experience gained in probing the practices of U. S. stock exchanges, the Senate's Banking & Currency Committee last week pumped a bill for regulation and restriction. Brokers had expected the worst and they got it. To the Federal Trade Commission through compulsory registration of both exchanges and their listed securities the bill handed almost unlimited power over each & every phase of the gigantic business of securities trading. The bill bristles with penalties--up to $25,000 fine, ten years in jail, for individuals, $500,000 fine for exchanges-- and provides in numerous cases civil liability for investors' losses. And it also contained a double decalog of prohibited practices which was expected, if enacted, to halve the volume of trading. To brokers the bill meant: Thou shalt not create a false impression of market activity by placing or allowing thy customers to place buying & selling orders simultaneously (wash sale). Thou shalt not, alone or with thy fellows, attempt to raise or depress the price of a listed stock, nor shalt thou allow others to do so (pools). Thou shalt not spread rumors about manipulated stocks for the purpose of inducing buying or selling (tips). Thou shalt not lure the public with false or misleading information about a company or its prospects (inside dope). Thou shalt not hire scriveners to secure favorable publicity in the Press (puffing). Thou shalt not buy a substantial proportion of a stock's floating supply to force up the price (corners, squeezes). Thou shalt not deal in options or privileges which speculators use as insurance against losses and which men of small means buy as a long-shot gamble (puts, calls, straddles). Thou shalt not devise any other cunning devices. Thou shalt not borrow money from anyone except a bank that is a member of the Federal Reserve System. Thou shalt not borrow more than ten times thy capital. Thou shalt not employ thy firm's capital for thine own trading. To corporations whose stocks are listed the bill meant: Thou shalt not fail to furnish both to the exchange and to the Federal Trade Commission all information requested, including detailed data on salaries, bonuses, options, contracts, etc. Thou shalt not fail to publish annual and quarterly balance sheets and earnings statements and also monthly reports on sales or gross income. To officers and directors of a corporation and any person owning more than 5% of its stock the bill meant: Thou shalt not sell thy company's stock short. Thou shalt not buy thy company's stock with the expectation of selling it within six months. Thou shalt not reveal confidential information which might be used for profitable speculation in thy company's securities. Thou shalt not fail to tell both the exchange and the Commission how much of thy company's stock thou possesseth. And if ever thou shalt buy or sell so much as even one share of its stock thou shalt promptly notify these authorities, which will undoubtedly publish it forthwith. Also banned except under the Commission regulations are short selling, price pegging ("stabilization") and stop-loss orders. But the provision which provoked the most ire in Wall Street last week was that on margins. The bill fixes 60% as the minimum requirement. This also applied to banks. At present the New York Stock Exchange requires 33% of the market value in accounts of less than $5,000, lower in larger accounts. If the bill is enacted, it will not only force liquidation of thousands of brokerage accounts but also a vast volume of bank loans.

President Roosevelt let it be known that he had not read this measure before it was introduced last week, that he was neither for it nor against it. Which was taken to mean that the road was clear for modification of at least the harshest features. But just before the bill was introduced, the President did send a special message to Congress, urging some sort of regulation for both commodity and stock exchanges. Excerpts:

"This Congress has performed a useful service in regulating the investment business on the part of financial houses. . . .

"There remains the fact, however, that . . . naked speculation has been made far too . . . easy for those who could and for those who could not afford to gamble.

"The exchanges in many parts of the country . . . conduct, of course, a national business. . . . The managers of these exchanges have, it is true, often taken steps to correct certain obvious abuses. We must be certain that abuses are eliminated, and to this end a broad policy of national regulation is required. ... It is my belief that exchanges for dealing in securities and commodities are necessary and of definite value to our commercial and economic life. Nevertheless, it should be our national policy to restrict, as far as possible, the use of these exchanges for purely speculative purposes."

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