Most note brokers have regular customers among the banks and trust companies to whom they offer the commercial paper. They issue weekly sheets containing the names of the makers of the notes, indorsers, if any, the character of their business, the amount of the notes, the interest rates, and the dates of maturity. Much of this paper runs for four to six months, and the amounts are seldom for less than $5,000. When the broker offers a note to a banker he usually sends with it a financial statement of the maker's affairs. The banker may take a batch of notes on a week's "option,' that is, with the privilege of returning any or all of them if he is not satisfied with the report or the general standing of the makers. The usual note broker's commission is one-fourth of 1 per cent, but, as already stated, brokers are now disposed to buy the paper outright, and their profit arises from the difference between what they pay the makers and what they get from the bankers to whom they sell the paper.
The practice of buying commercial paper through reputable dealers is attended by little risk, and the losses have been comparatively small. Some firms, however, have put out excessive amounts of paper and the banks have suffered losses through buying on unverified and misleading statements. The failure in 1914 of one of the largest dry goods jobbing houses in the country with numerous affiliated retail stores having over $30,000,000 of paper outstanding drew renewed attention to the need for properly safeguarding commercial paper. The revelations following this failure showed that in some instances the treasurers of the retail companies who signed the notes were employed in the office of the parent concern; that in some cases the notes were issued without the knowledge of the other officers or directors of the concern; and that commonly they were paid at maturity by the sale of new notes.
To safeguard commercial paper offered for sale in the general market there has been some demand for its registration in much the same way that stocks and bonds are registered before being listed on the stock exchanges. When a borrowing company's outstanding paper is thus registered with a banking house, and accompanied with statements of its general affairs, purchasers of such paper are in a better position to determine whether the company's borrowings are warranted by its capital and business. Since commercial paper is to furnish the basis of an elastic currency under the Federal reserve system, it has been proposed that the Federal reserve banks should provide the machinery for registration. The control of the Federal Reserve Board over the rediscount market would enable it to make the registration of commercial paper sold in the open market practically compulsory. The Reserve Board could also act as a clearing house for the exchange of information among the several reserve banks regarding the amount of a borrower's paper outstanding.
The popularity of one-name commercial paper as an investment for bank funds will be materially affected by the decision of the Federal Reserve Board as to what constitutes commercial paper eligible for rediscount at the Federal reserve banks. The Act of 1913 provides that Federal reserve banks may discount for member banks, notes, drafts and bills of exchange arising out of actual commercial transactions and having at the time of discount a maturity of not more than ninety days. The Act specifically excludes from the rediscount privilege paper issued for the purpose of carrying or trading in stocks, bonds, or investment securities, except government securities. The Reserve Board has the right to define the character of the paper thus eligible for discount. If the Board decides to admit single-name paper to the privileges of rediscount, that method of borrowing may continue to grow as in the past; but if single-name paper be excluded from rediscount, there will probably be a partial return to the earlier practice of using double-name promissory notes.