Two brokers argued against a bill introduced by Rep. Birmingham to restrict brokers from rehypothecating securities during a March 10 hearing of the Legislative Banks and Banking Committee (Boston Globe, March 10, 1931, p. 29).
The Birmingham bill provided that “no person, who as broker has bought or holds securities for another, shall rehypothecate or pledge any such security without in each instance stating in writing to his principal or customer the purpose, the name of the proposed pledgee, purchaser or borrower, together with a statement in detail of all profit, interest or commission of the broker and then obtaining the express written consent of his principal or customer to such rehypothectation,” according to the newspaper.
Rehypothecation “is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees,” explained Investopedia.com.
“In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades,” it added.
Charles T. Cronan of Hornblower & Weeks and Ralph Burrell of Pain Webber & Co. testified before the committee in opposition to Birmingham's bill.
Cronan argued that if the bill passed, brokerage houses would have "to render service of impossible details." The clearinghouse system would be upset, and the investment banking business would be driven from the state, he argued.
Burrell said that it would be impossible to comply with the requirements of the bill. Birmingham was not present during the hearing to argue in favor of his bill.