3. Machinery of listing.—The Stock Exchange maintains a Committee on Stock Listing, consisting of five members, to which are referred all applications for listing securities. A high-salaried clerk, in re ality an important expert with a staff of assistants and offices of his own, is employed by the Committee to go over the reports in minute detail.
Even after the Committee on Stock Listing has granted its permission to list the stock its action must be reviewed by the Governing Committee. The Stock Listing Committee presents to the Governing Com mittee the full statement of the capital, number of shares, resources, etc., of the corporation making the application. This evidence is reviewed by the Gov erning Committee and if it gives its consent the stock may then be placed upon the list of the Exchange. It will be seen, therefore, that to gain admission any se curity must pass the scrutiny of two committees, one of which is the supreme body in the government of the exchange.
It is further maintained by the Stock Exchange that the function of determining the merit of new security issues is one that does not properly belong to the Stock Exchange, but to the government itself. If laws could be enacted which as in England, Germany and France place the burden of this responsibility upon the shoulders of competent departments of the govern ment, the Committee on Stock Listing of the New York Stock Exchange could go out of business. It would say to applicant companies, "Here is the gov ernment's blank provided for your purpose; fill it out." The public would know at once that no security could be admitted to the Exchange list that had not complied with these requirements. In the absence of such a law, the Committee on Stock Listing goes far ther today than it ever went before to protect the public.
4. No supervision after listing.—The requirements for listing securities are strictly enforced by the com mittee. After the corporation secures admission to the list, however, this supervision virtually ceases. There is little checking up of its affairs and no further statements are made compulsory until further issues are listed. It is this fact that justifies the previous assertion that the mere fact of being listed on the Ex change does not guarantee the merit of the security in question.
The corporation may drift into an unsatisfactory condition without any official objection being raised by the Exchange and its securities may drop from a high value to a practically worthless condition.
5. Safeguards maintained.—It would be inaccurate to say, however, that the Exchange does nothing at all by way of supervision. On the contrary, it recom mends that the listed corporations publish and dis tribute to the stockholders an annual report with full details concerning the income and expenditures of the corporation and a balance sheet showing the true financial condition at the end of the fiscal year. Ob servance of this rule is not compulsory, but the recom mendation has almost the force of law and nearly all the corporations comply with it.
Nor will the Exchange allow any listed company to declare secret dividends by which only "insiders" profit. Due notice must be given of all dividends, new stock issues and other essential details. Any thing in the nature of actual fraud in the issue of stock, forged stock, illegal issue of stock, improperly engraved certificates, overissue of stock and other ac tually fraudulent measures are forbidden by the ex change in a long list of rules and regulations which are rigidly enforced. It compels all companies to maintain in the city of New York two separate offices, one where stock can be transferred and the other where this process is checked up. This rule prevents any possible delay or fraud in having securities trans ferred to a new owner's name.
In other words while practically guaranteeing the physical genuineness of its securities, the Stock Ex change consistently refuses to guarantee their worth. If the Exchange were to attempt such a colossal task it would undertake one of the biggest problems and burdens in the whole of modern industrial life. It is absurd to expect such a thing.
6. Advantages of listing.—The marketability of any security is obviously increased by listing. Yet it must not be supposed that no unlisted securities• have a broad, active market. Many unlisted securities en joy an excellent market. Indeed there are listed bonds whose chief market is not on the Stock Ex change at all, but "over the counter," which means by telephone from broker to broker. But such a market is not dependable. The outside buyer is wholly at the mercy of the dealer. He has few published quota tions to go by. There is nothing open about the deal ings even if the outsider knows to what dealer to go, which is rarely the case.