sponsibility of the Board of Governors of the Federal Reserve System. It is the duty of this Commission to enforce these regulations. Generally, members of exchanges and broker-dealers who do business through members are prohibited from extending credit on over-the-counter securities and may lend only in the amount provided by regulation T, presently 30 percent, on securities traded on an exchange. Regulation U, applicable to banks, provides that no bank shall make a loan secured directly or indirectly by stock for the purpose of purchasing or carrying stock registered on an exchange in an amount exceeding the maximum loan value of the collateral, presently 30 percent. Extension of credit by persons other than banks and broker-dealers is not regulated. Thus there are gaps and inconsistencies in the present pattern of securities credit regulation. It would be appropriate to inquire whether credit restrictions should be imposed on banks with respect to over-the-counter securities, and further whether persons other than banks and broker-dealers should be subject to the margin requirements.

IX. DISTRIBUTION ON EXCHANGES

Finally, mention should be made of distributions of securities through the facilities of the stock exchanges. While the Commission's rules permit distributions to be effected on exchanges under plans designed to prevent manipulative or deceptive practices, there is evidence that substantial distributions not controlled by these plans have occurred through the trading facilities of the exchanges. It is not clear that all such transactions have been made under circumstances providing adequate protection to the public. The extent of this practice, the problems arising under it and the possible need for the establishment of special controls require study.

X. CONCLUSION

Since the market collapse which led to the enactment of the Federal securities laws, there has been a rebuilding of public confidence in the securities markets. This restoration of confidence is the result of both efforts at self-regulation by industry and the enactment of the Federal securities laws and their administration by this Commission. A thorough investigation of the character contemplated by the resolution is both necessary and appropriate in the light of changing conditions in the securities markets.

XI. MODIFICATIONS PROPOSED

Finally, I would like to suggest two modifications which we believe should be made in House Joint Resolution 438. First, the resolution should be amended to provide that the Commission may report from time to time the results of its study to the Congress, but that the final report should be made on or before January 3, 1963. If the results of our study indicate that any particular area requires prompt legislative action, the Commission should be free to report and make recommendations to the Congress on that matter without waiting until the study is completed. Second, the resolution should be amended to provide that personnel required by the Commission for the conduct of the study and investigation may be employed without regard to existing civil service requirements. The resolution as written would appear to subject the recruiting of all personnel except attorneys to the rules and limitations of the civil service system. It would facilitate the employment of qualified personnel on a temporary basis if we were not required to conform to civil service requirements. We suggest, therefore, that the resolution be amended to permit us to (a) appoint and fix the compensation of a director and such assistant directors as may be required without regard to the provisions of the laws applicable to the employment and compensation of officers and employees of the United States, provided that individual compensation will not exceed $18,500 per annum; (b) appoint professional and technical employees for carrying out th study and investigation without regard to the civil service laws, rules, and regulations; and (c) secure the temporary or intermittent services of experts or consultatants at rates for individuals not to exceed $100 per diem.

Mr. CARY. As you have already stated, we are here to testify on House Joint Resolution 438. I want to say first of all that we welcome and heartily support this resolution and consider it a very timely proposal. In effect, as I see it, this resolution would, first of all,

authorize and direct the SEC to study and investigate the adequacy for the protection of investors of the rules of the national securities exchanges, and the national securities associations; further, that we should report to Congress on or before January 3, 1963, the result of our investigation plus recommendations; and, finally, the joint resolution provides for an appropriation of $750,000.

With respect of that $750,000 appropriation, I would like to make a special comment. I think it is most needed. Our present budget, as I see it, and our manpower, will not support a thorough study of the exchanges and over-the-counter markets at this time. As I have said in the prepared statement, the constant danger in our Commission is that with market activities and flotations at an all time high, we become so overwhelmed with immediate problems, just the administration of the acts, that we are virtually forced to concentrate all our funds and manpower upon them and cannot do any long-range planning.

I think that is what this appropriation and this study would offer

to us.

I have inserted along with the statement, an appendix, Mr. Chairman, dealing with precedents for our study, preceding studies made pursuant to authorization by Congress. I would like also to insert that as a part of the record, if I may.

Mr. MACK. Without objection, it will be included in the record. (Appendix referred to above follows:)

APPENDIX TO SEC STATEMENT ON HOUSE JOINT RESOLUTION 438

STUDIES CONDUCTED BY THE SEC

The Securities Exchange Act of 1934 directed this Commission to make several studies. Thus:

(a) Section 11(e) called for a study which the Commission made on the feasibility and advisability of completely segregating the functions of a dealer from those of a broker. A report was made thereon to Congress on on June 20, 1936, recommending against such segregation.

(b) The original section 12(f) ordered a study by the Commission of unlisted trading on the stock exchanges. The present section 12(f), enacted in 1936, was the result.

(c) Section 19 directed the Commission to study certain aspects of the rules of the stock exchanges. The results of this study were set forth in a report to Congress on January 25, 1935, which contained recommendations in 11 areas. The recommendations were not, however, for legislative action but rather for action to be taken by the exchanges themselves. The exchanges took such action.

(d) Section 211 of title II of the 1934 act, which was actually an amendment to and became section 28 of the Securities Act of 1933, led to an exhaustive study and an eight-volume report by the Commission which was in turn followed by the enactment of both chapter X of the Bankruptcy Act and the Trust Indenture Act of 1939.

The Public Utility Holding Company Act of 1935 included a direction in section 30 that this Commission study and report to Congress upon numerous aspects of investment trusts. The resulting report led to the enactment of the Investment Company Act of 1940.

The Investment Company Act contains a continuing authorization in section 14(b) for the Commission to study and report to Congress from time to time on the size of investment companies and resulting problems which involve the public interest or protection of public investors. Such a study has been substantially completed through portions of the report are yet to be prepared. It should be noted that although we have been able to carry the cost of this study (a little over $85,000 to date) within our regular operating budget by spreading it over several successive years, the bulk of the manpower required to make

the study and report has been supplied by the securities research unit of the Wharton School of Finance and Commerce of the University of Pennsylvania, which was retained by the Commission for that purpose, and that a minimum of the time of the Commission's own staff has been devoted to the study.

In addition to the foregoing express statutory directions and authorizations by Congress for this Commission to make studies and reports of the type under consideration, which are the truly comparable historical precedents for the resolution now under consideration, other studies and reports or comments by the Commission have resulted from time to time from requests by committees of Congress that this agency submit its comments or give testimony on proposed legislation.

Mr. CARY. Without going into those precedents, I would like to go back to this study as proposed. It seems to me that it is important because we do not have current data on market practices, the last study being something over 20 years ago. There has been a tremendous increase in the size of the securities markets, a growth in trading volume, changes in methods of distribution and trading, and new types of investment media. We have, naturally, some acquaintance with these changes, but we lack any refined data upon them.

The question, therefore, comes up to us now whether our present rules adequately protect investors in the light of these changed market conditions. What new rules are needed? What now unregulated areas of the securities markets need regulations? What rules need change?

The remarks that follow provide only a general indication of the nature of the inquiry. If House Joint Resolution 438 is enacted, I am sure that further preparation and study will suggest pertinent areas of inquiry beyond those that are discussed in this opening statement. Now I would like to move on to sort-of-a-background picture of the economic changes that have taken place. First of all, perhaps the most significant change is the growth in public participation. Public ownership of securities has expanded. A New York Stock Exchange survey shows that during 1952-59, the number of stockholders doubled. What is the importance of this data? The proliferation or increase of stock ownership has injected into the market an increasing number of inexperienced investors. In addition, there has been a substantial growth in trading. Trading on the New York Stock Exchange has increased from 1.9 million in 1950 to over 4 million shares in 1961. On the over-the-counter market, the number of issues in the sheets has increased from 5,200 in 1951, to over 7,500 at present. By the way, there has been an increase of 1,500 in the last 2 years, 1.500 out of 7,500.

There have also been changes in marketing methods. Today, many buyers and sellers in the market are uninformed, except in a vague, general way, about corporate financing and market operations. Thus, it is important to have a personal relationship between the brokers and the customers in which the broker seeks to ascertain whether a security is suitable for a particular customer.

Recent developments in marketing methods may have undermined this relationship, this personal relationship, and it also may have led to questionable merchandising techniques. These recent developments to which I refer include the fact that there has been an enormous increase in customers men. Brokers registered with the New York Stock Exchange have increased from 10,600 in 1950 to 27,800 in 1961. In the National Association of Securities Dealers, the increase has

been from 28,794 in 1950 to 93,300 in 1961. Beside this numbers problem, there are further difficulties flowing from the fact that many salesmen work part time. They have no particular qualifications. And they are not subject to the type of supervision which emphasizes ethical standards.

Another element of growth has been of branch offices. The number maintained by member firms of the New York Stock Exchange has increased from 1,661 in 1950 to 3,166 at the end of 1960. This has increased the problem of training and supervising employees, which has, in turn, been aggravated by the number of inexperienced salesmen, particularly in the mutual fund field. There has been door-to-door soliciting and operation from private residence away from any supervision.

With this diffusion of responsibility, coupled with the influx of inexperienced salesmen, there is a possibility, at least worthy of examination and study, of the development of a lowering of standards in market operations. To give two examples, there has been evidence of the failure of brokers and dealers to keep required books and records. They simply cannot keep up with the volume. There has also been a failure of broker-dealers to deliver securities and the proceeds of sale to customers. This is sometimes known in the industry as "fails."

The next point I would like to refer to is the over-the-counter market. Here I would like to read from my statement, if I may.

The expanding over-the-counter market, and the issues traded in that market, present problems which clearly are within the scope of the inquiry directed by House Joint Resolution 438. There is a lack of basic information concerning the over-the-counter market. For example, unlike the exchange markets, the volume of trading is not known. Thus, it is difficult to determine which securities are active and which inactive or whether price increases or decreases in a security have been accompanied by slight or heavy trading.

Fundamental information is also absent with respect to issues traded in the over-the-counter market. We note that issuers having securities registered on a national securities exchange are required to file with the Commission monthly, semiannual and annual reports essentially detailing the material events which have occurred during the reporting period, including financial data, mergers, and transactions with insiders.

Similar reports must be filed by other issuers which have registered, under the Securities Act of 1933, securities of a class aggregating more than $2 million. A large but unknown number of issuers, in whose securities there is a substantial public interest, are not subject to these reporting requirements. Thus, the investing public is deprived of financial information with respect to these companies, a void emphasized by the fact that many of them do not even appear in the standard financial reference works. This absence of data is particularly unfortunate in the over-the-counter market area, where a great number of companies are speculative or unseasoned ventures. In summary, we note this gap in the full disclosure requirements of the securities laws and state our view that any investigation should concern itself with this fundamental problem of the over-the-counter market.

Other questions for inquiry with respect to the over-the-counter markets relate to marketing and trading processes, which are conducted by a multitude of brokers and dealers. Adequate information concerning many aspects of these processes is not known. As mentioned above, data concerning volume of trading, both in the aggregate and in particular issues, is not available and disclosure concerning many issuers whose securities are traded in this market is inadequate. Among the problems which have arisen is that presented by securities whose market price rises sharply immediately after an initial public offering. It will be necessary to consider whether these increases result solely from normal forces of supply and demand or whether unwholesome or even manipulative practices have contributed.

The proposed study should provide important information concerning the actual operation of the over-the-counter market and the adequacy of the rules governing trading in that market.

Now, moving away from the prepared statement to a summary of it, I would like to touch brifly upon the question of the exchange rules. The Exchange Act grants to the Commission broad powers over the exchanges. But the Commission has generally left to the exchanges the policing of its own members. The view has been that the exchanges can and should exercise a substantial measure of self-regulation, subject to statutory standards and the ultimate authority of the Commission. At this time, however, and pursuant to that policy, there is pending, as you know, an investigation of the rules, policies, and procedures of the American stock exchange relating to the conduct of specialists and other members. I will not make any comment on that at this time. The investigation itself, is just recently underway. However, I can say that if this House Joint Resolution 438 is enacted, we expect to coordinate this American Stock Exchange study with a general study of the rules and practices of other exchanges.

That brings me to the next problem I want to refer to, the problem of financing. It seems to me that there are at least two major problems or aspects of the employment of credit in respect of securities loans. One, there is the extension of credit by banks on over-the-counter securities, and, two, the apparent growth of nonbank credit, including loans by moneylenders.

In the prepared statement which you have, we have set out a general outline of the margin requirements. Of course, the promulgation and the interpretation of rules with respect to margin responsibility. is vested in the Board of Governors of the Federal Reserve System. The Commission enforces these regulations. If I can speak generally about this field of credit, I would say that there are no prohibitions on banks lending against over-the-counter securities, and there is no present regulation of others than banks and broker dealers. In other words, no present regulation really directly of moneylenders.

The extent, if any, of further control would, of course, be a question for this study. There are gaps and inconsistencies in the present pattern of securities credit regulation. I think we would have to inquire whether we should impose credit restrictions on banks with respect to over-the-counter securities-when I say "we," I mean whether the Federal Reserve Board should set them—and then whether or not we should subject persons other than brokers and dealers and banks to margin requirements.