The specific piece of regulatory paperwork mentioned most often in both witnesses' testimony and in the broker-dealer written comments inserted into the record was Form Q, a requirement of the National Association of Securities Dealers. The form was instituted in May, 1970; it was established in part, at least, in response to the conditions of the late sixties, when the accounting systems of a number of brokerage houses collapsed under the strain of unexpected volume, resulting in a substantial number of brokerage failures. Form Q was described as an early warning industry surveillance device, devised to detect an impending critical financial situation of a member firm. As described by Mr. Gordon S. Macklin, president of N.A.S.D., it appears to be simple enough:

This form contains a balance sheet, profit and loss statement, net capital computations and supporting schedules... 19 The opinions of the witnesses indicate that it is anything but simple, an assessment that is borne out by the appearance of the form, included as an exhibitory appendix to Mr. Macklin's statement. Form Q, inserted in the record, has a total of twenty-eight pages, including detailed instructions.20 Comment on this form as recorded in the hearings was almost universally unfavorable:

It is customary in most businesses to maintain financial records on regular calendar quarters ending in March, June, September, and December. But the NASD, in its infinite wisdom, devised Form Q, which requires us to report quarterly, but for a different and unconventional accounting period; namely, January, April, July, and October. Naturally, this greatly increases our costs. How much cheaper, fairer, and more decent it would be if the NASD permitted firms to prepare Form Q from financial records for normal accounting periods.21

Another criticism was that received from Mr. M. Merrill Miller, president of Miller Securities, a small firm operating out of Syracuse, New York:

(Form Q) is designed to force all reporting firms into a uniform pattern regardless of the size or nature of their business. Some of the financial information required is not available directly from ledger accounts normally carried by a small firm without extrapolation and rebalancing. The resulting re-casting of figures is too complex for many small-brokerdealers to handle with in-house talent. Consequently, auditors are usually required to prepare the report. A simplification of the Form Q report so that key statistics could be directly entered from usual accounts would substantially relieve the burden of its preparation.22

IV. THE RESPONSE OF REGULATORY AGENCIES TO THE PROBLEM

The subcommittee hearings revealed that industry regulatory agencies, both Federal and private, are aware of the serious problems

19 FPB Hearings, Op. cit., Part 4, p. 1642. 20 FPB Hearings, Op. cit., Part 4, p. 1897. 21 FPB Hearings, Op. cit., Part 4, p. 1440. 22 FPB Hearings, Op. cit., Part 4, p. 1749.

created by the growing paperwork requirements which have developed in recent years. In a written statement submitted to the subcommittee, Mr. Lee A. Pickard of the S.E.C. said in part:

certain overlapping and duplicative reporting requirements have crept into existence and undoubtedly pose an unnecessary burden upon those broker-dealers subject to them... In the effort to monitor the industry more closely to minimize the public exposure as a result of firm financial difficulties, each of the self-regulatory organizations and the Commission imposed additional reporting requirements and record-keeping procedures. . . the Commission has sought consistently to strike a balance between the often conflicting objectives of a sound regulatory program protective of the public and the important objective of not unduly burdening the broker-dealer community from a regulatory or reporting standpoint with the ultimate consequence of an industry unable to adequately serve its investor constituents.23

The statement of Mr. Gordon S. Macklin, president of N.A.S.D., also reflected this awareness:

Since a large number of the Association's member firms. employ less than ten individuals, the Association has always been particularly cognizant of administrative problems encountered by the smaller broker-dealer when confronted with various record-keeping and reporting rules required by the various industry regulators."

In response to the rising tide of criticism brought against the regulatory paperwork burden, an Advisory Committee on Broker-Dealer Reports and Registration Requirements, was established by the S.E.C. in September, 1972. The advisory committee was charged with the task of reviewing the regulatory requirements of over sixty government and self-regulatory bodies; its purpose was to determine whether reporting requirements were unnecessarily duplicative, and if this was, in fact, the case, whether the purposes of regulation would be better served by simplified and consolidated reporting forms. The Advisory Committee submitted its report in December, and although the report in its entirety is reprinted in the appendix, conclusions reached and a summary of the committee's recommendations follow:

The Committee concludes that the present regulatory reports submitted by broker-dealers require duplication of efforts by firms and regulators. This is wasteful without necessarily serving the public interest. We believe recommendations aimed at reducing and in some cases eliminating such duplication can be accomplished through the present regulatory structure. The Committee believes that its recommendations are compatible with existing data gathering systems used by regulatory organizations and that the physical and staff resources of the self-regulators should be used as extensively as possible in implementing our proposed improvements. The Committee believes that the majority of its recommendations can and should be implemented

#FPB Hearings, Op. cit., Part 4, pp. 1475-1484.

FPB Hearings, Op. cit., Part 4, p. 1580.

within a very short period of time. A few of our proposals are long-term in nature, but action should be initiated on them now.

Our recommendations can be summarized as follows:

1. In each area subject to regulation, i.e., trading, financial responsibility and operations, a broker-dealer should report to a single regulator.

2. A Report Coordinating Group should be established to coordinate and control reporting in the industry.

3. Uniform registration laws should be adopted by selfregulators and government regulators.

4. The Joint Regulatory Report-with suitable modifications should be adopted as the key regulatory report, replacing, among other reports, the I&E, the X-17A-10 and the X-17A-5.

5. Financial and operations reports should be on a quarterly basis. All financial reports should be filed on a consolidated basis.

6. Standard definitions should be developed for terms used in reports.

7. A standard form should be developed for the assessment and fee reports required by the exchanges, the SEC and the SIPC.25

After some delay, the regulatory agencies began to implement certain elements of the Advisory Committee's report. The first segment to be introduced was the designation of the National Association of Securities Dealers as the sole regulatory agency for hundreds of small broker-dealers. The regulation, which took effect on June 30, 1973, was designed to eliminate as much as possible the expense, burden, and inconvenience resulting from multiple examination of brokers for compliance with reporting and record-keeping requirements and financial responsibility.26 The N.A.S.D. became the sole examining agency for all broker-dealers who are not members of any of the major or regional stock exchanges, i.e., the New York or American Exchanges, or the Philadelphia-Baltimore-Washington, Midwest, Pacific Coast or Boston Exchanges."

After the subcommittee hearings had been completed, in early 1974 the Securities and Exchange Commission announced implementation of additional Advisory Committee recommendations. In press releases dated January 24, 1974, the S.E.C. announced the following steps:

the solicitation of public comments regarding the development of a key regulatory report to replace a number of reports currently filed by broker-dealers with the Commission and the self-regulatory organizations; the establishment of a Report Coordinating Group under the Federal Advisory Committee Act constituted, inter alia, to advise the Commission in regard to reducing unnecessary or duplicative reporting by broker-dealers; 28

25 FPB Hearings, Op. cit., Part 4, p. 1487.

26 FPB Hearings, Op. cit. Part 4, p. 1583.

27 FPB Hearings, Op. cit. Part 4, p. 1584.

25 U.S. Securities and Exchange Commission, Securities Exchange Act of 1934, Release No. 10612/January 24, 1974. Securities Investor Protection Act of 1970, Release No. 9/ January 24, 1974, p. 1.

V. THE RESPONSE OF CONGRESS TO THE PROBLEM

On September 24, 1973, Senator Thomas J. McIntyre introduced Senate Resolution 173, to direct the Securities and Exchange Commission to review its rules and regulations, taking into special consideration whether the regulations placed undue requirements on small broker-dealers, requirements which might endanger the role of the small firm dealing in securities. Further, the resolution directed the S.E.C. to consider and implement recommendations of the Advisory Committee Study. The resolution was adopted by the Senate on February 7, 1974.29

A. Conclusions

VI. SUMMARY

The American securities industry, from giants like Reynolds Securities to small firms such as James C. Butterfield, Inc., of Jackson, Michigan, is caught in a period of change and confusion. It appears to be following a trend observable in many areas of private endeavor, a trend embracing such disparate fields as brewing and the automobile industry. A widely fragmented industry, operating in conditions close to perfect competition, with numerous independent corporate units, has, in each case, come to be dominated by a small number of large firms. These larger firms, due to superior financing, management, and economies of scale, create in time an oligopolistic situation, stifling competition and prohibiting the entry of new competitors for all practical purposes. The hearings reveal the small broker-dealers of the United States to be in an analogous situation: they are squeezed by giant firms which possess enormous resources and virtually limitless capital. And yet, the small firms are saddled with an additional burden: the agencies which should be protecting their very real ability to contribute to the Nation's economic growth, have hitherto been demonstrably unsympathetic to the basic concept of the small broker-dealer.

B. Findings

1. Small securities broker-dealers suffer from inadvertent and occasionally intended discrimination by Federal and self-regulatory agencies; this is engendered by their insensitivity to the special nature of the small dealer in securities.

2. The public and private agencies charged with regulation of the securities industry have failed even to go so far as to establish the official definition of a small broker-dealer.

3. The failure of recognition has been manifested by a growing number of regulatory paperwork requirements which are a particular burden to small broker-dealers, who are severely limited in the clerical and accounting resources needed to service this burden.

4. Many of the paperwork requirements imposed on small brokerdealers have little bearing to firms of their size and scope of operation. 5. The disappearance of small dealers would have an adverse effect on the many communities served by firms of this nature, in particular through depriving small businesses of their prime source of financing, and by driving additional small investors from the market. Further, a serious decline in the number of small firms would

U.B. Congress. Congressional Record, Volume 120, Number 13, February 7, 1974, pp. 81388, 89.

substantially reduce the quality of competition in the securities brokerage industry throughout the United States.

6. Federal and private agencies charged with regulation of the securities brokerage industry, encouraged by the actions of the Senate, have made a start toward reducing unnecessary and duplicative reporting requirements and towards rationalizing those remaining ones so as to minimize the inconvenience of servicing them.

VII. COMMITTEE RECOMMENDATIONS

(1) Congress should consider enactment of legislation expressing its sense that the national interest is served by preserving the small broker-dealer, and that it should be possible for him to perform his vital role with minimal unnecessary regulatory interference. This legislation should direct the Securities and Exchange Commission to establish a Joint Committee on Small Broker-Dealers for the purpose of determining a standard classification which will establish a definition of the small broker on an industry-wide basis. The Joint Committee would also develop common policies regarding the role and function of the small broker-dealer in the securities industry. This Joint Committee should be as broadly representative as possible, and should include representatives from both private and public regulatory agencies, major and regional stock exchanges, and substantial representation from small broker-dealers themselves.

(2) While the committee commends the Securities and Exchange Commission for taking an interest in the subject, the progress of the Commission has been painfully slow by any standard. In contemplating this slow progress, one cannot but question the true resolve of the Commission in seeking earnestly to relieve the paperwork burden for the small broker-dealer at the earliest possible time. In September 1972 the first step was taken with the appointment of an SEC Advisory Committee on Broker-Dealer Reports and Registration Requirements. That Commission's report was submitted in December 1972 to an SEC Staff Task Force, which in turn received comments from interested agencies and self-regulatory bodies. The Staff Task Force has, in turn, recommended that a new body be set up, the Report Coordinating Group. The Task Force made other recommendations as well, including the development and implementation of a key regulatory report incorporating uniform definitions and reporting periods, but with a markedly passive attitude, the Group is the only recommendation on which positive action has been taken to date. And even then the Group has been a long time in formation. Although the SEC press release of January 24, 1974, promised that the Group would be named by the Commission "in the near future," the Commission is only now getting around to announcing its choice. The Committee is disturbed at the slow rate of progress being made by the Commission and urges the Commission to set a definite timetable for the completion of its task of developing a uniform reporting system.

(3) In regard to the recent announcement of the Securities and Exchange Commission of its intent to establish a standing Report Coordinating Group in the near future, the committee strongly recommends that this group should include at least one member representative of the small broker-dealer's point of view.