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Mr. VICTORY. We are asking for the same amount, Mr. Chairman. Mr. LEWIS. We are asking for the same amount, although the number of reports being prepared by our laboratory is increasing each year, which has made it necessary for us to release more of them in what we call temporary form. This is the type of permanent report we issue [indicating printed reports] and, during the past year, we have released peports in this form (indicating mimeographed pamphlets], confidential. So that I would say at the present time 60 percent of our output is in the form of confidential reports. That is one of the reasons the American aircraft industry is leading the world. Much of our new knowledge is withheld from publication until it finds application in new American designs. For example this information on the engine location was used in confidence by the Army, Navy, and American manufacturers for a year and a half before it was given general release. In addition to our confidential pamphlets, we mimeograph technical notes containing new knowledge not of as lasting importance as our printed technical reports covered in our printing and binding estimates.

Mr. WOODRUM. Gentlemen, if there are no further questions, I think that will conclude on this item.

FRIDAY, DECEMBER 7, 1934.

SECURITIES AND EXCHANGE COMMISSION

STATEMENTS OF JOSEPH P. KENNEDY, CHAIRMAN; BALDWIN B. BANE, EXECUTIVE ADMINISTRATOR; DAVID SAPERSTEIN, DIRECTOR OF THE TRADING AND EXCHANGE DIVISION; FRANCIS P. BRASSOR, SECRETARY, AND WILLIAM F. MURPHY, CHIEF OF THE BUDGET AND ACCOUNTING SECTION

Mr. WOODRUM. We will take up this afternoon the items for the Securities and Exchange Commission.

Mr. Kennedy, I notice you have a justification for the 1936 estimate. Mr. KENNEDY. Yes, Mr. Chairman. We present this statement in justification of our estimate for 1936, as follows:

JUSTIFICATION OF THE 1936 ESTIMATES

The Securities and Exchange Commission was created pursuant to section 4 of the Securities Exchange Act of 1934; (Public, 291, 73d Cong., June 6, 1934). This Commission is charged with the responsibility of carrying out the provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933 (Public, 22, 73d Cong., May 27, 1933).

The functions of the Commission very briefly stated are (1) To provide for the regulation of securities exchanges and of over-the-counter markets which use means or instruments of interstate or foreign commerce or the mails; (2) to prevent inequitable and unfair practices on such exchanges and markets; (3) to provide fair disclosure of the character of securities sold in interstate or foreign commerce or through the mails, and to prevent frauds in the sales thereof; (4) to prescribe rules and regulations which will regulate national security exchanges, security issues, brokers, dealers, and others; (5) to make investigations of the operations and practices on registered exchanges, and the conduct of members and member firms; (6) to investigate suspected manipulative operations in connection with any security either on a registered exchange or in over-the-counter markets; (7) to audit the books and records of brokerage houses suspected of

insolvency, to determine whether customers' accounts are protected; (8) to examine and act upon applications for registration and for exemption by organized security exchanges; (9) to supervise the distribution of securities not registered on any registered exchange; i. e., in over-the-counter markets; (10) to examine and act upon security registration statements and accompanying reports, documents, prospectuses, etc.; (11) to assemble and maintain economic, industrial, and other statistics of a miscellaneous nature for use in the regulation of markets for securities of the different industries and for the development of trends, and indices relating to the capital market and the stock exchanges; (12) to regulate and supervise the solicitation of proxies; (13) to prescribe the form for and examine the statements of holdings of officers, directors, and large stockholders of issuers of securities; (14) to provide for the legal enforcement of the Securities Exchange Act of 1934 and the Securities Act of 1933 and to inititate and cooperate with the Department of Justice in the conduct of all prosecutions thereunder; and (15) to perform related functions as prescribed by existing legislation or by rules and regulations of the Commission.

The functions or activities of the Securities and Exchange Commission for administrative reasons have been distributed among an executive staff and seven divisions, the functions, total personnel, and justifications of each of which are indicated below.

EXECUTIVE STAFF

The executive staff includes the commissioners and employees assigned to their offices, the office of the executive administrator, and the trial examiners.

EXAMINATION DIVISION

The functions of the Examination Division are to examine registration and listing statements and accompanying reports, documents, prospectuses, etc.; to conduct field investigations of the books, records, and property of the registrant; to conduct hearings wherein registrant is afforded an opportunity to present facts and arguments to show cause why a stop order suspending the effectiveness of a registration statement should not be issued, in all cases wherein the registrant has not complied with provisions of law, rules or regulations; to prepare reports and letters of deficiencies.

To cooperate with other divisions in preparing new forms, in modifying present forms, and in drafting rules and regulations and amendments thereto.

To conduct correspondence relative to the above.

Under the provisions of the Securities Act of 1933, the functions of the Examination Division consisted primarily of the examination of registration statements and listing statements and various reports filed with the Commission pursuant to the requirements of the Securities Act of 1933, and rules and regulations promulgated thereunder.

In addition to this work, additional functions have been added to the Examination Division as a result of sections 12, 13, 14, 15, and 16 of the Securities Exchange Act of 1934.

In addition to the security registration statements, prospectuses, financial statements, etc., as well as annual, quarterly, and other reports are now required to be filed with the Commission; regulations regarding proxies must be drafted and reports examined; over-the-counter markets are inspected and transactions thereon investigated; and various and sundry statements required regarding stockholdings of directors, officers, and principal stockholders of the many corporations throughout the United States which issue securities annually are examined.

It is impossible to estimate the number of security registrations which may be filed during any one ficsal year. However, it may be stated that the Securities Act of 1933 has been in effect slightly more than a year, and during that period 827 registration statements were received, examined, and finally acted upon. The amount of the offerings represented involved $1,209,157,841.34. The fees collected as a result of these filings amount to $125,769.42. These statements and all supporting documents, prospectuses, financial reports, mining and engineering reports, valuation reports, etc., were examined. In connection with the stop orders, hearings had to be conducted, and frequently it was necessary to conduct special field investigations for the purpose of examining the books and records, as well as inspecting and evaluating the property of the registrant.

TRADING AND EXCHANGE DIVISION

Due to the variety of functions assigned to the Trading and Exchange Division, it would be impracticable to submit herein a detailed textual statement covering all activities of the Division. Accordingly, the following outline of functions is presented.

Organized markets

1. Registrtaion of exchanges as "National Securities Exchanges" after consideration of:

A. Application for registration or exemption.

B. Constitution of exchange.

C. Rules and regulations of exchange.

D. Agreement to comply with the act and subsequent amendments.

2. Regulation of:

A. Exchange members who trade for their own account.

B. Odd-lot dealers.

C. Specialists.

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C. Series of transactions in which the price of a security is raised or depressed, or in which the appearance of active trading is created for the purpose of inducing purchases and sales by others.

D. Circulation by a broker, dealer, seller, or buyer, or by a person who receives a consideration from a broker, dealer, seller, or buyer, of information concerning market operations conducted for a rise or a decline even if the information is true.

E. Material false and misleading statements by brokers, dealers, sellers, and buyers.

F. Pegging, fixing, or stabilizing prices.

G. Puts, calls, straddles, and other options, transactions in securities by or for holders of such options and guaranties of such options. H. Short sales.

I. Stop-loss orders.

4. Supervision and policing of customers' margin accounts.

5. Investigation of the total borrowings of brokers.

6. Supervision of hypothecation of customers' securities.

7. Detailed study of entire exchange structure for the purpose of recommending further legislation to Congress.

Over-the-counter markets

1. To supervise all over-the-counter markets with reference to prevailing buying and selling practices, methods used in soliciting buying and selling orders, manipulation of markets in given securities, the making of fictitious markets by dishonest bid and asked quotations and the spreads between buy and sell orders; to asssemble data in the principal over-the-counter markets in the country bearing on the volume of trade which exists in securities not registered on any national exchange or traded in on the unlisted trading divisions of any such exchanges, all for the purpose of providing protection to the investor comparable to that provided in the case of national securities exchanges.

2. To promulgate rules and regulations and conduct necessary investigations and inspections for the following purposes:

A. Regulation of over-the-counter transactions.

B. Registration of dealers and brokers.

C. Supervision of dealers and brokers.

As to the scope of the work of the Trading and Exchange Division, it might be stated that on the New York Exchange alone it is estimated that there are 1,157 issuers (United States corporations); 2,362 isues (stocks and bonds) involving a market value as of September 1, 1934, of $65,094,084,920.

It is estimated that there are 500,000 corporations in the United States. Therefore only 1,157 companies out of the 500,000 in existence are listed on the largest exchange in the United States. This clearly indicates the large volume of work of the Trading and Exchange Division in the regulation and inspection of over-the-counter markets and securities handled thereon.

It is estimated that 50,000 issues are traded in on the over-the-counter market. These issues represent approximately 80 percent of American business wealth, or a total of $165,000,000,000. It is estimated that there are between 10,000 and 16,000 over-the-counter dealers and/or brokers.

The number of stockholders in the United States in 1928 was estimated at 18,000,000.

The above statistics give some idea of the vast sums, the large number of corporations, and the great number of persons affected by rules and regulations. The functions of the Trading and Exchange Division are varied in nature, and practically every activity is technical and of great importance to the exchanges, dealers, brokers, and investors, for example-

Under subsection (a) of section 23 the Commission is authorized to classify issuers, securities, exchanges, and other persons or matters. Under subsection (12) of section 3, the Commission may exempt any security either unconditionally or upon terms from all or any of the provisions of the act. Under subsection (11) of the same section, the Commission has power to designate as equity securities those which do not come within the statutory definition. Under section 5 the Commission is authorized either to exempt exchanges entirely from registration or, under subsection (c) of section 11, to exempt exchanges from particular provisions of the act or rules and regulations issued thereunder. Under section 6, the Commission is authorized to prescribe the form of the application, and the information which must be included, and is authorized to determine whether the exchange has complied with the requirements and to preecribe terms in connection with registration and withdrawal of registration. Under sections 9 and 10 the Commission is authorized by rule and regulation to restrict or prevent certain specified practices, and by rule or regulation to restrict any practices which the Commission deems manipulative or deceptive. Under section 11, the Commission is authorized to restrict the trading of members of national security exchanges both on and off the floor of the exchange. Under section 15, the Commission is authorized by rule and regulation to govern over-the-counter markets, including the power to require the registration of dealers and brokers and registration of unlisted securities.

Under section 17 (a) the Commission is empowered to prescribe the accounts and records which shall be kept by exchanges and their members and by brokers and dealers.

Under subsection (b) of section 19 the Commission is authorized to prescribe rules and regulations governing the exchanges themselves.

Under section 21 the Commission is authorized to investigate not only exchanges, members, brokers, and dealers, but any person who "has violated or is about to violate" any provision of the act or rule or regulation.

OFFICE OF THE GENERAL COUNSEL

The general counsel is in responsible charge of all legal matters arising under the Securities Act of 1933 as amended, and the Securities Exchange Act of 1934. This includes

1. Review for legal sufficiency of all stop orders, and refusal orders, in connection with registration statements.

2. Cooperating as to legal sufficiency and form with other divisions of the Commission in connection with the drafting of forms, rules, and regulations promulgated and adopted by the Commission pursuant to authority given under the securities act and the securities exchange act.

3. Drafting interpretative opinions.

4. Examinations and investigations in connection with alleged violations of the acts, and preparation of the findings and opinions of the commission.

5. Preparation of pleadings, briefs, affidavits and other legal papers and documents in connection with stop-order proceedings, injunctions or restraining orders, and trials before the Federal courts.

6. Cooperating with other divisions of the Commission in connection with the preparation of reports to Congress pursuant to sections 11, 12, 19, and 211 of the securities exchange act.

As indicated above, the functions of the general counsel's office relate to complaints, legal interpretations, prosecutions, and other enforcement activities in connection with, or required by, the Securities Act of 1933, the Securities Exchange Act of 1934, and rules and regulations promulgated thereunder. The old Securities Division of the Federal Trade Commission had assigned thereto 10 attorneys ranging in salaries from $3,200 to $5,600, inclusive. Although these

attorneys were engaged only upon certain phases of complaints and upon interpretations and enforcements in connection with the Securities Act of 1933, due to the small force they were merely able to scratch the surface. This Division was able to call upon the Federal Trade Commission for experienced attorneys in the trial of such cases.

The broad scope of authority granted to the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the great variety of activities to be investigated and regulated by this Commission, will require a very sizeable staff in the office of the general counsel.

Many involved and complicated trials will be held before the Commission and before examiners representing the Commission; also a great many cases will be prosecuted before the Federal courts. The work requires employees who, in addition to being attorneys eperienced in the conduct of the trial of cases, are intimately acquainted with the financial world, with the customs and practices of brokers, dealers, and investment houses, with the rules, regulations, and practices in connection with transactions on the exchanges, and with legal precedents established in the various States in connection with the above. The attorneys who represent this Commission will be opposed by the most skilled and highly paid advocates available.

In addition, the securities exchange act represents an extension of governmental powers, and accordingly there is little doubt but that the validity of the Commission's rules and regulations, as well as its interpretations, will be subject to judicial review. Then, too, the Commission is directed to draft rules and regulations in connection with the many matters which Congress has authorized the Commission to take jurisdiction over, if, in its discretion, conditions warrant.

The trend of correspondence received by this Commission since its establishment clearly indicates that the public have come to expect that this Commission will to a large extent supervise the sale of securities, to the end that fraud may be detected and fraudulent practices enjoined. This phase of the work will require that the Commission establish and maintain effective liaison with all enforcement agencies dealing with the fraudulent sale of securities in the States, including "blue sky" commissions, Attorney Generals' Departments, officers of the district attorneys' offices, and with information agencies such as the better business bureaus and the chambers of commerce.

The above statements present a miniature picture of the scope of the activities of the Office of the General Counsel. As to the volume, it might be stated that during the past 12 months approximately 983 complaint cases have been received, of which number 602 were disposed of by office examination and correspondence; 194 were made the subject of field investigations and reports; and 188 are now in the process of investigation. In addition, the Commission has cooperated with the Department of Justice in the preparation for and aided in the trial of six injunction proceedings before Federal courts; and approximately 49 hearings were held by examiners in connection with stop-order proceedings.

OFFICE OF TECHNICAL ADVISER TO COMMISSION AND OFFICE OF ECONOMIC ADVISER TO COMMISSION

Owing to the broad scope of activities regulated by this Commission under the mandates of the Securities Exchange Act of 1934, and to the broad effect which actions taken by this Commission will have upon the investing public, brokers, dealers, issuers, and exchanges, the Commission has deemed it necessary to employ technical, financial, and economic advisers.

The employees assigned to the Office of the Technical Adviser and the Office of the Economic Adviser will be called upon to assemble industrial statistics; conduct studies of the markets for securities of different industries; assemble and maintain economic, market, and other statistics; examine and extract pertinent information from all general and financial publications; plan and develop indices relating to the capital market and stock exchanges; and cooperate with other divisions of the Commission in the conduct of special studies required under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The functions of the Office of Technical Adviser and the Office of the Economic Adviser as presented above indicate the type, scope, and purpose of the work to be performed in these offices. The Commission is charged by law with the responsibility of supervising the security dealings on exchanges and in over-thecounter markets. Without the statistical analyses and economic studies contemplated in these offices, it would be impossible for the Commission to establish broad and general policies in connection with and determine the type and scope

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