sound. However, there are several gaps in both segments of the present regulatory structure that need to be closed.

Persons lacking adequate training, experience, competence, or financial resources have on occasion been able to enter the securities business. Outside of the major exchanges, sufficient authority to set up proper standards in these areas has been lacking. The result has been that in certain instances "boilershop" operators and financially irresponsible people have been able to deal with the investing public. The bill under consideration would empower the National Association of Securities Dealers to establish minimum capital requirements and appropriate standards with respect to training and experience and such other qualifications as it may find necessary or desirable. The bill would also require all broker-dealers to be registered with the SEC and be subject to the self-regulatory authority of an appropriate securities association. The exchange has long advocated such measures. In the area of our own jurisdiction it has been seen how helpful the exercise of its self-regulatory authority can be to investors and indeed to the industry itself.

Since the earliest days, the exchange has passed on the character of those admitted to membership. From the turn of the century the program has included new partners in member organizations. In the early 1920's the screening was further extended to registered representatives-that is, those employees of member firms who deal directly with the public. For more than 30 years we have required that registered representatives meet standards of experience. In 1936 the exchange instituted a requirement that these representatives demonstrate their knowledge of the securities business by passing an examination given by the exchange. At that time a minimum training period of 3 months was established, and in 1945 it was extended to 6 months. In the last 5 years the exchange has toughened its examinations, instituted special examinations for those charged with supervisory responsbilities and assisted member firms in strengthening their training programs.

Such produceures do not always succeed in screening out every "bad apple" or in assuring perfect performance, but the exchange is convinced that they have been of great benefit to the investing public.

The outstanding solvency record of its member firms can be largely attributed to the exchange's capital requirements. These have long provided that member organizations shall not permit their aggregate indebtedness to exceed a prescribed ratio to their liquid net capital. In addition, the exchange has a $50,000 minimum liquid capital requirements for firms carrying customer accounts and a $25,000 requirement for firms introducing customer accounts to another firm. These requirements and the exchange's mandatory fidelity bond coverage have been designed to maintain the financial integrity of our member firms for the protection of their public customers and others who do business with them.

The enactment of S. 1642 would benefit the investing public by enabling the NASD also to establish appropriate standards of competence and financial responsibility for those who deal with the public in the over-the-counter market.

SEC DISCIPLINARY CONTROLS

In the enforcement of the securities laws, the Securities and Exchange Commission has operated under a dual handicap, that is, the lack of intermediate sanctions short of broker-dealer revocation and the inability to proceed directly against the individual violator except through action against his firm. Hence, the SEC has had to choose between permitting less serious violations to go unpunished or invoking overly harsh penalties that affect the innocent as well as the guilty.

Senate bill 1642 would permit the Commission to proceed directly against an individual who has violated the securities laws and to impose the intermediate sanctions of censure or suspension.

Over the years, the exchange has found these intermediate disciplinary measures to be effective in dealing with its member organizations, members, allied members, and registered representatives who violate its rules. This approach permits, in addition to explusion, the disciplining by censure or suspension of the people directly responsible for violations without putting an entire firm out of business. We supoprt the proposal to add this flexibility to the Commission's disciplinary powers.

To sum up, S. 1642 would provide for closing major gaps in disclosure and self-regulations, and in the SEC's disciplinary authority, all of which should be beneficial to the economy and to the public. The exchange urges that the bill be enacted.

Senator WILLIAMS. We are very grateful both to you and to the New York Stock Exchange for that statement, Mr. Funston.

The first question that comes to my mind arises from your comments on self-regulation insofar as the exchange is concerned. Is it too early for you to express any attitude on how the Supreme Court decision in the Silver case is going to affect your operations as a selfregulator?

Mr. FUNSTON. Well, Mr. Senator, there is no doubt that this decision is a far-reaching one and a rather uncertain one. It is written and couched in very broad, general language, so broad that it does pose very significant problems for us, and so last week we filed a petition for rehearing. I really do not know that it would be particularly appropriate for me to discuss the matter further, as long as we have this petition pending in the Supreme Court.

Senator WILLIAMS. I did not know that the petition had been filed. Mr. FUNSTON. I think this is the first time that it has come out that we have. I have a copy of our petition for rehearing that I would be very happy to make a part of the record if you wish, or we could discuss it now.

Senator WILLIAMS. Well, could we have that for our files? We will be interested in the information.

Mr. FUNSTON. We will make it available for whatever use you wish to put it.

Senator WILLIAMS. I am rather interested in your impressions of what the effect of this bill would be on the New York Stock Exchange insofar as additional listings are concerned, since over-the-counter securities of the largest firms would have reporting requirements similar to those of listed securities. Could you give me your impression of what the effect here will be?

Mr. FUNSTON. Yes, sir. At the present time, because of this dual system, if you are listed certain information has to be provided under the law and if you are not listed you do not have to give the information; this in certain instances has been an additional cause for companies in the over-the-counter market not wishing to seek a listing.

I think I can best summarize the specific impact of this on the exchange this way. We have a total prospect list of members of about 175 firms that meet all of our qualifications, which are rather high, in terms of earnings, number of stockholders, established position, and so on, and the bill would apply to about 160 companies that meet our qualifications. Most all of these 160 companies are already on our prospect list.

The main reason why these companies do not list is not disclosurealthough in certain instances it plays a part-but our rules go far beyond that, and there are other reasons.

There are about 40 banks and insurance companies, however, in addition to the 160, that this would give some encouragement to them to list, we believe. In other words, out of the 3,900 companies that would be affected by the SEC's estimate of companies that have 500 stockholders and over and capital assets of a million dollars, about 200 of them potentially might be listings for the exchange, and 160 of these are presently on our prospect list anyway. But this would have a very healthy effect, I believe, on the other regional exchanges and perhaps the American Exchange.

Senator WILLIAMS. Senator Javits, you need no introduction to one of your most distinguished constituents, I am sure.

Senator JAVITS. I attended this morning especially to welcome Mr. Funston, who is president of the New York Stock Exchange, and Mr. Etherington, president of the American Stock Exchange, as important witnesses before this committee. Is the witness through, Mr. Chairman?

Senator WILLIAMS. Yes, with his prepared statement.

Senator JAVITS. I have no questions of the witness at the moment, although I understand from having run through his statement earlier that the exchange backs the bill which the SEC has sent up to us. Is that correct, Mr. Funston?

Mr. FUNSTON. Yes, sir; very enthusiastically.

Senator JAVITS. Is that true of the American Stock Exchange as well?

Mr. FUNSTON. He is going to appear next, sir.

Senator JAVITS. I also gather that you think we might even go a little bit further with the matter of reporting by banks and call for reporting by those who have an even smaller number of stockholders than the bill calls for.

Mr. FUNSTON. No, sir, we do not. We would accept the bill just as it is in relation to that and in relation to banks also.

Senator JAVITS. Do you feel that the number of stockholders and the amount of capital which is referred to in the bill is just about a fair breaking point in respect to the reporting requirements?

Mr. FUNSTON. Yes sir; I think so. There figures are not magic. figures that one can say this particular set of figures is the only one. It is a question of judgment, and I think that the SEC has done an excellent job in evaluating and balancing things. I think their recom

mendations are really very practical and would be beneficial to the public.

Senator JAVITS. So you back the bill without change?

Mr. FUNSTON. Yes, sir.

Senator JAVITS. That is a very interesting development from the stock exchange.

Mr. FUNSTON. It is a very happy position to be in, sir.

Senator JAVITS. After all the advertising as to how the investigation might rock the securities market, you end up by backing the bill 100 percent. I think that is very good. I am glad to see it, and I hope that it is a happy precursor for the attitude of business generally toward Government. I think that we can stand a period of mutual confidence in an area which has often been characterized, heretofore, by so much mutual suspicion, and I think that Government and business will more and more have to go into business together. The Communications Satellite Corp. is but the first of many efforts to enlist private enterprise in the solution of our problems. As you know, I have always worked very had for such mutual effort, and I think this is a very auspicious indication that this can be done. The public can be served, the problems can be aired, and reforms can be made through cooperation between business and the Government.

Thank you, Mr. Funston.

Senator WILLIAMS. Thank you, Senator Javits. We are grateful to you, Mr. Funston.

We are privileged now to have Mr. Edwin D. Etherington, president of the American Stock Exchange as a witness.

STATEMENT OF EDWIN D. ETHERINGTON, PRESIDENT, AMERICAN STOCK EXCHANGE; ACCOMPANIED BY MARTIN J. KEENA, VICE PRESIDENT, SECURITIES DIVISION, AND PETER G. SCHMIDT, AMERICAN STOCK EXCHANGE

Mr. ETHERINGTON. Senator Williams, I have with me today Mr. Martin J. Keena, vice president of the exchange in charge of our securities division, on my right, and Mr. Peter G. Schmidt, who is on our staff.

I am going to follow carefully the statement that I have written. in advance, perhaps departing from it here and there.

Senator JAVITS. Mr. Chairman, I have no idea how long the witness will take, and if I have to leave before he is through, I would like the privilege of welcoming him here as another distinguished citizen of New York and an important leader in its affairs and the affairs of the Nation.

Am I right in assuming, Mr. Etherington, that, generally speaking you concur with the views expressed by Mr. Funston?

Mr. ETHERINGTON. Senator Javits, you are exactly correct. My statement is part of the happy precursor you mentioned a moment ago, because we feel that the bill does present a series of well-balanced remedies for problems that have been clearly identified.

Senator JAVITS. Thank you very much. Thank you, Mr. Chairman, for allowing me to go ahead.

Mr. ETHERINGTON. Mr. Chairman, this bill may lack the glamour of a dramatic new policy proposal and it may repeat-it does repeat

with certain thoughtful modifications, proposals that have been considered by the Congress in the past, but we feel it should not be misjudged as a series of minor suggestions of no great importance to the public. The SEC has pointed in the chapters it has already issued to important abuses that cannot be stopped without legislation. Moreover, there is substantial support for this bill throughout the securities industry, in what may be an unprecedented merger of opinion within our industry.

You have already had the bill described to you in great detail by other witnesses. I will not do that. I also have submitted a statement for the record in some detail, describing the bill in certain technical aspects and our reasons for supporting it.

Senator WILLIAMS. We will include your appendix material. (See p. 154.)

Mr. ETHERINGTON. Thank you, sir. I would like in summary to view the proposals against the background of policies that are reflected in the existing securities laws and the experience in the 30 years since the laws were enacted.

I think it is natural, at the conclusion of a special study of the securities markets, to think of this bill as the product of recent thought or the expression of recent experience. There is no question that the documentation in the SEC's recent study does point up the current need for this legislation, but even more compelling is the consideration that 30 years of experience has revealed gaps in the securities laws so wide that the national policy is undermined and the efforts of people in and out of government to assure responsible behavior are sometimes frustrated.

The central philosophy of the securities laws as already enacted might be distilled in three sentences: A person who buys securities is entitled to the facts; a person who owns securities is entitled to know when the facts change; and broker-dealers should be honest, competent, and financially responsible people. Under this philosophy, the twin touchstones of national policy related to our industry might be characterized as self-protection and self-control.

The opportunity for self-protection was afforded investors in new issues of publicly held securities issued for the first time, as well as to owners of securities listed on stock exchanges, through the disclosure provisions in the laws enacted in 1933 and 1934. The doctrine of self-control was recognized in the 1934 act, which confirmed the primary obligation of stock exchanges to regulate their own operations and the conduct of their members.

Experience has confirmed the wisdom of these policies, but it has also revealed how unevenly they apply. Most publicly held companies have no obligation to disclose pertinent facts to their owners, except in the case of new issues, unless they list. Broker-dealers can skirt the industry's self-control mechanisms if they are not NASD or stock exchange members. The NASD itself lacks some of the authority it needs to block out the admission of unscrupulous or unqualified people, and the disciplinary powers of the SEC often leave it with a choice of being over- or under-extreme because of the difficulty of focusing on an individual directly responsible for a violation.

These deficiencies are understandable in historical context. The basic securities laws were born during a depression whose start in