The SEC was not only concerned with foreigners trading in the United States. It was equally, if not more, concerned with the ability of foreigners and Americans to trade U.S. securities on overseas exchanges. By the late 1930s, the SEC was especially troubled by the trading of U.S.-issued securities on the London Stock Exchange (LSE) and other European exchanges. The SEC correctly understood that it did not have the power to regulate trading on foreign exchanges and incorrectly understood that such exchanges were entirely unregulated. The SEC viewed such trading as a danger to U.S. markets, as they feared that Americans and foreigners alike would trade on these supposedly unregulated exchanges rather than on U.S. stock exchanges.(14)
By 1938, the SEC was so concerned about U.K. and Continental stock exchanges that it sent a staff member to Europe to study the primary foreign securities markets. As Joseph Kennedy, former SEC Chairman and then Ambassador to the United Kingdom, wrote to SEC Chairman Douglas, "I think it is very important, as I have already advised the State Department, for a man to be here, make his personal observations, and then report personally to the Commission and advise them as to what the actual conditions are here."(15) Although it is unclear why he was chosen, Lunsford "Jack' Yandell, an attorney with the Radio Corporation of America, was seconded to the SEC to undertake this mission.
Yandell was instructed to research "[W]here, how, and to what extent American securities are dealt in and held in England and Europe, both by foreigners and by Americans who use foreign facilities."(16) His work was also to include a general description of European underwriting and arbitrage. Yandell quickly discovered that the LSE was the largest market for American securities outside of the U.S. Without reliable statistics, Yandell surmised that between 20,000 and 500,000 shares traded daily in London, with these figures representing periods of extreme inactivity and activity. In his report, he explained how the LSE functioned and found that the primary reason for investing in American securities was price appreciation rather than income, and that the London market essentially tracked New York Stock Exchange activity.
In determining why traders purchased U.S. securities on European markets rather than in the United States, he concluded that overseas markets had lower margin requirements, greater liquidity, advantageous commission arrangements, more efficient settlement, a less cumbersome bureaucracy and lower taxes. Yandell found few problems with such trading and determined that Americans were not in any substantial numbers buying U.S. securities overseas. Rather, he wrote, "[T]here has been much more talk about them than there have been actual dealings."(17) He further asserted that transactions by Americans were motivated by the LSE's greater liquidity rather than by tax or securities law evasion. Going to the heart of the SEC's purpose, Yandell wrote that only a small number of Americans traded abroad to evade U.S. securities laws and that such transactions were negligible and represented no threat to the U.S. market.
Many at the SEC were horrified by Yandell's report, finding it too sympathetic to the British and anti-regulatory. A memorandum, probably written by Commissioner Jerome Frank for Chairman Douglas, stated, "The report shocks me first, because of its conclusions and second, because those conclusions are based upon what seems to me to be pronounced sycophancy with reference to the English – at a time when certainly most of the American republic is not minded to accept the dogma that America must do whatever is good for the English…. The foreign markets can be used by American traders to do all the things prohibited by our statutes and regulations."(18) It concludes by stating that foreign investment in U.S. securities was not only unnecessary to the U.S. economy but was an actual detriment.
Others at the SEC found Yandell's work incomplete and his methodology flawed. They were especially disturbed with his inability to collect European statistics and his reliance on "impressions," "hearsay," and "opinions."(19) Even though Yandell attempted a number of redrafts, the SEC determined that the report should not be publicized or circulated.
(14) February 17, 1938 Memo from Paul Gourrich to SEC Chairman Douglas on material on foreign transactions in American securities (courtesy of the Library of Congress)
(15) April 28, 1938 Letter from Ambassador Joseph P. Kennedy to SEC Chairman Douglas on Lunsford "Jack" Yandell's work in London (courtesy of the National Archives and Records Administration)
(16) November 22, 1938 Report on Foreign Dealings in American Securities – By Lunsford P. Yandell (courtesy of the Library of Congress)
(17) Id.
(18) October 13, 1938 Memo from SEC Commissioner Frank to SEC Chairman Douglas, with comments on Yandell's report (courtesy of the National Archives and Records Administration)
(19) February 21, 1939 Review by Members of the Staff of the Trading and Exchange Division of "Report on the London Stock Exchange" and "Report on Foreign Dealings in American Securities" (courtesy of the Library of Congress)
