1. BROADER REPRESENTATION ON BOARDS OF GOVERNORS OF LEADING

EXCHANGES

Since self-regulation as presently practiced has obviously failed, and this has seriously affected the SEC's ability to regulate after the damage has been done, I propose joint regulation of the Nation's stock exchanges.

This would be accomplished by having on the boards of governors, in addition to member firm representation, corporate and institutional investor representation, individual investor representation, and ex officio governmental representation by such bodies as the SEC and SIPC.

I believe that when all interested parties are directly involved and aware of what is transpiring at the various exchanges in the industry, emerging problems can then be more readily understood and, hopefully, more speedily resolved.

By public representatives, I mean shareholder and consumer spokesmen.

Thus, self-regulation is not entirely taken away from the industry, but is merely reinforced by the ongoing presence of other vitally interested parties. It seems to me that the best way to combat the tendency to circumvent rules and regulations is to have the shareholders of América at the center of the decisionmaking.

2. CONGRESS SHOULD SPECIFICALLY SUBJECT THE NYSE AND THE ENTIRE SECURITIES INDUSTRY TO THE ANTITRUST LAWS OF THE UNITED STATES

The time has come for Congress to speak out loud and clear and let the NYSE know in unmistakable terms that by accepting the responsibility of self-discipline through self-regulation it was not given the right to violate this Nation's antitrust laws.

3. BANK TRUST DEPARTMENTS HAVE BEEN OVERLOOKED

Since the banking industry falls under the jurisdiction of the House Banking and Currency Committee, bank trust departments have been able to escape securities oversight. Bank trust departments manage vastly greater amounts of money than mutual funds, and thus a jurisdictional loophole has exempted them from closer scrutiny.

Serious consideration should be given to having the House Subcommittee on Commerce and Finance and the SEC protect the public interest insofar as bank trust departments are concerned, if necessary with the House Banking and Currency Committee jointly.

4. NEW ISSUES SHOULD BE RATED

"New issues" should be rated the way bonds are. Throughout the past decade, both the SEC and the securities industry failed to protect the public from a rash of extremely speculative new issues. When a new issue rises in value 50 to 100 percent on the first day, it is evident that the company was not valued fairly to begin with, and/or a gullible public was persuaded by overzealous salesmen to pay much more than the stock was worth.

The SEC should not have permitted the registration of many of them, nor should the industry have even thought of bringing them to

the market. The "new issue" craze of the 1960's is another example where self-regulation failed.

5. BROKERS SHOULD BE ASSESSED MORE BY THE SECURITIES INVESTOR PROTECTION CORPORATION WHEN NUMEROUS INVESTORS COMPLAIN

Since Congress created SIPC to insure the public against brokerage house failures, that agency is also charged with the responsibility of checking on the financial condition of the firms it is insuring. Thus, in order to aid in its surveillance of the brokers, investor complaints should also be monitored by SIPC, and those brokers where a significant and/or persistent number of complaints are lodged by the public should be assessed a higher contribution to the insurance fund.

This higher assessment would only be reduced when outstanding customer complaints are resolved and the number of incoming complaints reduced. Thus, brokers will be induced to provide better customer service.

Also, since SIPC has to analyze the financial condition of all brokerage firms, it is in an excellent position to develop a "uniform accounting system," since the NYSE has been unable and unwilling to come up with one.

In conclusion, Mr. Chairman, I wish to express to you and the committee my warmest thanks for your kind invitation to testify before you today. I sincerely hope that I was able to make some contribution to your deliberations.

Your abiding interest in the Nation's small investors is deeply appreciated, as is your constant concern for the development of a full public record, for it is through the public discussion of major problems that we might ultimately arrive at constructive solutions that will be good for all and not just a special interest group.

I am especially pleased to have had the opportunity to appear with two such distinguished men as Chairman Emanuel Celler and Mr. Schapiro, of Schapiro & Co. And I might also add Mr. Loeffler, of IDS.

Thank you very much.

Mr. Moss. Thank you very much, Mr. Reinisch.

At this time we will place in the record the clipping from the New York Times of Tuesday, July 14, 1970, and the letter addressed by you to the Honorable C. Jackson Grayson, Jr., Chairman of the Price Board here in Washington, D.C.

They will be placed in the record immediately following your

statement.

(The documents referred to follow :)

PREPARED STATEMENT OF HANS RANDOLPH REINISCH, PRESIDENT, NATIONAL SHAREHOLDERS ASSOCIATION, NOVEMBER 10, 1971, BEFORE THE SECURITIES AND EXCHANGE COMMISSION

THE SURVIVAL OF THE SMALL INVESTOR IN A RESTRUCTURED SECURITIES INDUSTRY I. Introduction

During the past four weeks numerous witnesses have testified at these hearings in behalf of the special interests they happen to represent. As these hearings draw to a close I am particularly pleased to have the opportunity to present the viewpoint of the least-heard group, the public investor.

The proposals I am making today are designed to assure the survival of the small investor so that he can continue to help finance the responsible growth of corporate America and thus the American economy. As you well know the responsible and enlightened growth of the American economy depends upon public confidence and its full participation in the market place so that there will be adequate liquidity, even in times of uncertainty.

II. A dual market

The individual investor's market share has been declining steadily in recent years and in order to assure his survival I propose the creation of a dual market which would serve in one instance only institutional (wholesale) investors and in the other only individual (retail) investors. Each market would consist of various regional exchanges with competing specialists. The exchanges in each of the dual markets would be linked by a national automated tape that would record all transactions. Brokerage firms could be members of various exchanges and of both the institutional and individual investor markets.

Each regional exchange would be governed by its own Board of Governors which would include public and corporate representatives. Governing each of the dual markets would be a Market Board of Governors consisting of tripartite representation including member firms, the public and corporations with ad hoc governmental representation to include the SEC and SIPC.

Corporations are to make available two kinds of stock, one for the institutional (wholesale) market and one for the individual investor (retail) market. They will be completely distinct kinds of stock that are not interchangeable to prevent arbitrage. Since numerous corporations have had less than happy experiences with institutional trading of their stock I anticipate considerable corporate support for this concept and in fact suspect that they may wish to authorize a majority of their outstanding shares to be traded on the retail or individual investor market. The dual market concept might make it more difficult to engage in corporate take-over raids abetted by institutions. Competitive rates would be required in both markets. In the institutional market negotiated rates would be arrived at between the institution and the broker while on the individual investor market competitive commissions charged by the various brokers would be posted on a monthly or quarterly basis.

If the concept of a national tape or communications network is to become a reality trading hours should be shifted to compensate for time differences, thereby accommodating millions of investors in the far west.

The creation of a dual market has in a way already occurred in that institutions are trading whenever it suits them in the "third market" which is not open to small investors. Also, trading on a "net" basis should be prohibited since this distorts the true price of a stock.

III. Competitive commission rates1

The Justice Department has at great length tried to impress upon the SEC the desirability of instituting competitive commission rates for the securities industry. It spelled out in detail how the entire industry and economy would benefit from competition and there seems little point in my restating their well documented position at this time other than to remind this Commission that it is the opinion of the Justice Department that the securities industry was neither given express nor implied immunity from this nation's antitrust laws by any act of Congress. It is therefore to be hoped that jurisdictional jealousies between two governmental agencies-the SEC and the Justice Dept.-will not delay any further the putting into effect of competitive commission rates for all transactions. I am delighted to note that various brokerage firm officials who recently testified at these hearings are now also taking the position that the fixed commission system is not justifiable or necessary.

IV. "Unbundling” will improve investment research

A major advantage resulting from competitive rates would be the "unbundling" of customer "services" so that their true worth to the investor would finally be revealed. I was therefore dismayed in recent weeks to read that Chairman Casey, without awaiting the end of these hearings and the views of the small investor, publicly dismissed the need to "unbundle" investment research costs. It seems that Chairman Casey is now trying to minimize the need for negotiated rates by

1 See my previous SEC testimony July 15, 1971.

setting up a straw man argument-namely, that investment research costs are so inconsequential a part of the commission dollar that it does not pay to separate or unbundle costs and hence the need to negotiate commissions is less urgent. One of Wall Street's favorite theories is the "odd-lot" theory which states that odd-lotters or small investors are always wrong. If small investors are always wrong then what good has Wall Street's investment advice done during the past thirty years? The answer is none. Rather than spend commission dollars on investment research it is spent on promotional material disguised as research. Last week Chairman Casey and Mr. Haack both admitted that the portion of the commission dollar spent on research is so small that it isn't worthwhile to unbundle the costs. Interestingly enough, however, to justify the surcharge last year and higher fixed commissions this year, we were told that the numerous "services", including investment research, that the small investor receives from his broker, justifies a higher commission rate.

It should be remembered that the only regulated portion of the brokerage business is security commission business. Therefore NYSE member firms have been loading as many costs as possible onto the regulated portion of the brokerage business in order to subsequently demand commission rate increases. Thus we are now hearing all of a sudden that there should be no unbundling of such costs as investment research, which is a very clever way of assuring higher commission related costs without really producing anything worthwhile for the small investor!

I firmly maintain that if the quality of investment research is to be improved it must stand by itself rather than remain intertwined with other costs and services and especially promotional activities as at present.

Extensive experience over the past decade with hundreds of brokerage, banking and mutual fund research departments in the United States and Europe lead me to the conclusion that present research activities are of very little value even to the experienced investor. In this connection I wish to draw your attention to a 1969 survey of 2,500 security analysts, 500 of whom responded. Approximately 60% of those 500 replying felt that the communications between security analysts and registered representatives was not adequate! Some 63.3% felt that service to all investors was not adequate while 72% of the analysts felt that small investors do not benefit adequately from investment research advice. (See attachment, p. 1699.)