In the spring of 1939, owing to the losses sustained for many previous years by members of the public through the malpractice of what are called "bucket-shops," parliament passed an act to provide for regulating the business dealing in securities. It is called the Prevention of Fraud (Investments) Act 1939. Sec tion I lays down that no person shall, on or after the appointed day, carry on or purport to carry on the business of dealing in securities except under the authority of a principal's licence ; that is to say, a licence under this act authorizing him to carry on the business of dealing in securities. The servant or agent of any such person is required to hold a representative's licence authoriz ing him to deal in securities as a servant or agent of the holder of a principal's licence. These restrictions do not apply, the Act lays down, to a member of any recognized stock exchange or recognized association of dealers in securities. The Bank of England, certain other bodies and persons, are exempted from the restrictions im posed by this Act. Contravention of its provisions involves lia bility for heavy penalties. Issue of the licences, the Act provides, is in the hands of the Board of Trade and a prescribed fee, to gether with a deposit of isoo, is required for a principal's licence which will be valid for one year. Fraudulently inducing persons to invest money is an offence that carries liability to penal servi tude for a term not exceeding seven years, and restrictions are placed upon the distribution of circulars relating to investments. The restrictions do not apply to prospectuses and other documents permitted by the Board of Trade.
(W. L.) United States. —A stockbroker is an agent who deals in stocks, bonds and other securities either on or off an organized exchange. Legally, the relationship between the broker and cus tomer is not only that of agent and principal but becomes that of creditor and debtor and that of pledgee and pledgor when the customer purchases on margin and the broker furnishes the re quired additional funds secured by collateral. The relationships between brokers and their customers are governed by the various and differing State statutes, custom, business policy and the con stitutions and rules of the organized exchanges. The New York Stock Exchange does not permit a corporation to become a mem ber; consequently brokerage houses with membership on the exchange are partnerships.
The distinction between brokers and jobbers, which obtains in London, does not exist in the United States. On the New York Stock Exchange all brokers are free to trade with one another and with the public as they choose provided they conform with the constitution and rules of the exchange. Brokers on the New York Stock Exchange may be divided, according to the special nature of their business, into five groups: (I) commission brokers, those who act for the public at a commission fixed by the ex change; (2) "two-dollar" brokers, who act as agents for other member brokers on the exchange at a rate of $2.50 per ioo shares (the old name still prevailing although the $2 rate has been super seded) ; (3) floor or room traders, those who buy and sell for themselves and for their own profit; (4) specialists, who specialize in certain securities and may act as commission brokers or floor traders but who ordinarily do not come into contact with the public ; and (5) the odd-lot dealers, who supply or buy from commission brokers a sufficient number of odd lots to equal the full ioo shares, which is the minimum amount that may be pur chased or sold on the exchange. While very few houses deal in odd lots, they usually have several representatives on the exchange and probably one-fourth of all the business done on the exchange originates in odd lots. The odd-lot dealer enables the small in vestor to trade in a few stocks or shares within a small fraction above the price at which large lots are bought and sold.
Brokers who are members of the New York Stock Exchange are controlled rigidly by the constitution, rules and customs of the exchange in an effort to secure fair competition and the proper relationship between the broker and his customer. For example, a broker may not take the side of the market opposite his cus tomer, his charges are regulated, he must report accurately the status of his business to the exchange, he may not advertise securi ties falsely and the advertising by the firm of itself is regulated explicitly by the exchange. American stock exchanges are modelled after the New York Exchange. Brokers are also regu lated by the laws of their respective States and by the Securities and Exchange Commission created by Federal law. (W.E.S. ;X.)