Bond Houses And Investment Companies

A large part of the business of investment banking in the United

States is conducted by corporations and firms organized for the

purpose of buying and selling investment securities, especially bonds

and mortgages. Rarely, if ever, do these concerns conduct savings

accounts. Ordinarily they confine their attention exclusively to the

investment end of the business and act in the capacity of jobbers, or

brokers, or both.<
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Within the investment field some of them specialize closely and others

deal in a wide range of securities. The specialties most frequently

followed are government, state, and municipal bonds, railroad bonds,

public service securities, timber bonds, irrigation bonds, and real

estate mortgages. Specialization involves the development of expert

knowledge of the class of securities dealt in and thus of special

serviceableness to both investors and the promoters of the enterprises

or the public bodies which issue the securities. These specialists

sometimes serve as middlemen between the issuers of securities and

other investment banks, as well as between them and the real owners of

the capital invested, their expert knowledge being of service to the

former as well as the latter.

Until recently there have been few attempts to regulate the operation

of these institutions by law, but the fraudulent practices of some of

them, and the ignorance and weakness of perhaps the majority of

investors, have recently created in some quarters a strong public

sentiment in favor of such regulation. In several states legislation

has resulted, of which the most noteworthy is the so-called "blue sky

laws" of Kansas and some other states.

In details these laws differ widely from one another, but they are

alike in that they impose upon some branch of the state government the

obligation of supervising both companies which issue securities and

those which offer securities for sale. The Kansas law, the first of

this kind passed in the United States, has been considered too drastic

by most of the companies that have attempted to operate under it, but

the Wisconsin law, which went into effect October 1, 1913, is looked

upon with more favor.

In formulating these and other laws for the proper regulation of these

concerns, it has been found difficult to provide adequate protection

to the investing public without unduly hampering the issue and

negotiation of securities, but this difficulty should, and in time

doubtless will, be overcome. A free and open market for bonds, stocks,

and other evidences of indebtedness is essential to freedom of

enterprise and mobility of capital, which are in turn essential to the

economic prosperity of any country. On the other hand, investors

undoubtedly need and deserve the protection of the state against

misrepresentation and fraud. It is practically impossible for them in

many, perhaps in most, cases to obtain the information necessary for

self-protection. The matters and conditions to be dealt with in such

legislation are so complex and subject to such frequent change that

laws are apt to be imperfect, inefficient, or obstructive. It seems

probable that those which do not attempt to be specific and detailed,

but give wide powers and discretion to administrative boards or

commissions, are most likely to be successful.