testified before the House Appropriations Committee that the recent action in newly offered over-the-counter securities raised questions as to whether there are forms of manipulation. The National Association of Securities Dealers has written to all members indicating concern over the very large total of outstanding undelivered transactions (fails). This letter warned that there were $1,400 million of outstanding over-the-counter contracts upon which delivery had not been made. The country's largest brokerage firm has run a dozen newspaper ads in the past 2 months urging investor caution. Other brokerage houses have alerted employees to the danger of uninformed public speculation. Here is a quotation from a bulletin which one brokerage firm sent to its managers and registered representatives:

To any of you who were in the securities business in 1930 the above-listed items would be sufficient to alert you and tell you that there could be very rough times ahead for the securities business. To those of you who have recently entered this profession, I will tell you flatly that the warning flags are flying, and it behooves every one of you to recognize this signal and to conduct yourself accordingly.

The congressional investigations of 1930-31 were bitter ones as far as our industry is concerned. Out of these investigations came the Securities Act of 1933, the Securities Exchange Act of 1934, and the SEC, but something far worse than that came from the investigations. Our entire industry was cast in an unfortunate role insofar as the public was concerned and we became the most popular "whipping boys" available. Our entire industry suffered under the last for many long years. It is only recently that the public has again come back into the market in strength and has made it possible for many of you to earn handsome salaries and live as successful businessmen.

I for one do not care to go through the early 1930's again. There are several things that all of us can do right now.

1. The rules and regulations of the SEC, NASD, and the New York Stock Exchange are clearly written and are available for study by each one of you. It is the policy of this firm to abide by all of these rules. During the recent active markets-which of course have caused the events described in the first paragraph-many registered representatives have been critical of some of the rules under which we operate and work, and newly acquired customers have agreed with the criticisms. We do not write these rules but we do propose to abide by them and we can tell you that it is to your own advantage if you also accept and abide by the rules. At this stage of the market and for the reasons outlined above, acceptance of the rules can be your major contribution toward your profession.

2. Our network with busy wardroom offices provides a perfect workshop for manipulation of the securities market. Manipulation and "rigging" of markets is as old as our business. At the present time it is against the law. Let each one of us make absolutely certain that we are not being used by irresponsible persons for the purpose of manipulating or affecting the price of any security. Be extremely cautious about entering orders for any group of speculators. must carefully guard against being "used" by irresponsible and avaricious groups or individuals of any kind.

We

Our subcommittee cannot but be aware of these various pronouncements concerning the current situation in the securities markets nor can it be unmindful of the responsibilities which it has to the Congress and to the public as to the adequacy of the protection afforded to investors and to the public by the various securities acts which are now on the books.

The Securities Act of 1933, relating to the truthful disclosure of information about new security offerings, the Securities Exchange Act of 1934, relating to disclosure of information about listed securities and regulating practices in exchange and over-the-counter operations, and succeeding legislation which is administered by the Securities and Exchange Commission, represent legislation of which the

House Committee on Interstate and Foreign Commerce and Congress are justly proud. These statutes have gone a long way in the mitigation and elimination of undesirable practices in the securities field, in the restoration of confidence in the securities markets, and in the protection of the investing public.

Experience in the administration of these acts, however, naturally has given rise over the years to various suggestions as to their improvement and their workability, which obviously could not all be anticipated at the time of their original enactment. A program for revision in the light of such experience was interrupted by the war. At the instance of the House Committee on Interstate and Foreign Commerce, the Commission renewed discussions with industry relating to a revision program, and from time to time since has presented the result of such discussions to the committee for consideration.

In addition to the responsibilities and duties with which the SEC is charged relating to disclosure of information about listed securities and regulating practices in exchange and over-the-counter operations, the Securities Exchange Act of 1934, as amended, imposed certain duties and responsibilities upon national securities exchanges and upon national securities associations. That act requires that both the exchange and the over-the-counter markets should be governed by certain rules for the protection of the public in the conduct of their operations. That legislation when enacted not only provided for certain items which should be contained in their rules but also directed the Commission to make a study of the rules and report to the Congress the results of its investigation together with its recommendations.

That study, together with the Commission's hearings into the difficulties of Richard Whitney & Co., led to a program of reforms drafted with the cooperation of the Commission, which was approved by the New York Stock Exchange in October 1938. In view of the more than 20 years which have elapsed since that time and the experience which necessarily grows out of the administration of such programs and of the statutes, and in view of the comments which recently and currently have been made as to today's market conditions, it has seemed to us that it is now highly appropriate again to review these rules governing the activities of the various securities markets to see whether they are adequate to protect investors, to determine just how they are being administered by the exchanges and the over-the-counter associations, and whether changes, modifications, or expansions of the rules or statutes are desirable now in the public interest.

It is our feeling that the SEC properly, as an arm of the Congress, now should bring up to date and enlarge upon the study which it was authorized to make some 26 years ago. For this purpose, I have introduced House Joint Resolution 438, which would authorize to be appropriated the sum of $750,000 for the Commission to make such study and investigation and report to the Congress by January 3, 1963, the results of its study together with its recommendations.

Our first witness this morning is William Cary, Chairman of the Securities and Exchange Commission.

Chairman Cary, I believe this is your first appearance before our subcommittee and I wish to welcome you here as well as to express to you and to your fellow Commissioners the continuing interest which this subcommittee has in the successful and effective administration by you of the various statutes which have been entrusted to you.

STATEMENT OF WILLIAM L. CARY, CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY COMMISSIONER BYRON D. WOODSIDE; COMMISSIONER J. ALLEN FREAR; FRANK J. DONATY, COMPTROLLER; PHILLIP A. LOOMIS, JR., DIRECTOR OF THE DIVISION OF TRADING AND EXCHANGES; MANUEL F. COHEN, DIRECTOR OF THE DIVISION OF CORPORATION FINANCE; WALTER P. NORTH, ASSISTANT GENERAL COUNSEL; ALLAN CONWILL, GENERAL COUNSEL; AND ARTHUR FLEISCHER, JR., LEGAL ASSISTANT TO THE CHAIRMAN

Mr. CARY. Thank you, Mr. Chairman.

Mr. Chairman, I am William L. Cary, Chairman of the Securities and Exchange Commission. I am accompanied today by my colleagues, Commissioner Woodside and Senator Frear on this side, and by certain members of my staff, including Mr. Donaty, our Comtroller, Mr. Loomis, the Director of the Division of Trading and Exchanges, Mr. Cohen, the Director of the Division of Corporation Finance, Walter North, our Assistant General Counsel, Allan Conwill, our General Counsel, and my legal assistant, Arthur Fleischer.

I have a prepared statement, but in pursuance of your general policy I would prefer not to read it, although I may read one or two excerpts directly, but to summarize it as we go along.

Mr. MACK. Mr. Chairman, you may read your entire statement, or we can insert the entire statement into the record at this point.

Mr. CARY. I think you have copies of the statement. I would like to insert that as part of the record, and then to summarize it, if I may. Mr. MACK. Without objection, the entire statement will be inserted at this point.

(Mr. Cary's statement follows:)

STATEMENT OF WILLIAM L. CARY, CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION

Mr. Chairman and members of the committee, I am William L. Cary, Chairman of the Securities and Exchange Commission. I am accompanied today by Commissioner Woodside and Commissioner Frear, and by certain members of the Commission's staff.

I. INTRODUCTION

We are here at your invitation to testify on House Joint Resolution 438. We welcome and heartily support this resolution and consider it a most timely proposal. This resolution would amend the Securities Exchange Act of 1934 by adding a new subsection, to be designated subsection (d), of section 19 of that act. Subsection (d) would authorize and direct this Commission to make a study and investigation of the adequacy, for the protection of investors, of the rules of national securities exchanges and national securities associations, including rules for the expulsion, suspension, or disciplining of members for conduct inconsistent with just and equitable principles of trade. The Commission is also directed to report to the Congress on or before January 3, 1963, the results of its study and securities markets have occurred with respect to the amount and kind of public participation, the size of the markets themselves, the methods of distributing and selling securities, and the trading practices on the exchanges and in the over-the-counter market.

Because of the lack of detailed information about many of the developments in the securities markets, a void which would be cured at least in part by the proposed investigation, I caution that my remarks which follow form at most a general indication of the direction of any inquiry. We have not yet had the opportunity to formulate a detailed plan. If House Joint Resolution 438

is enacted, further preparation and the course of the investigation itself will undoubtedly suggest pertinent and essential areas of inquiry beyond those which I discuss today.

V. CHANGES IN THE SECURITIES MARKETS

As background I should like now to turn to a discussion of certain of the basic changes in the securities markets.

1. Growth of public participation and trading volume

Perhaps the most significant market changes, which are largely responsible for many of the others I shall discuss, are the sheer increase in size of the securities markets and the growth of public participation. As to this latter point, all published data indicate that the base of stock ownership has greatly expanded and that the rate of growth of public participation in the markets has been accelerating. For example, a census of shareholders made by the New York Stock Exchange shows that, during the 7-year period from 1952 to 1959, the number of shareholders doubled, and that during the period from 1956 to 1959 the number of shareholders increased at a rate of nearly 1 million a year. It is highly probably that this diffusion of stock ownership has injected into the market an increasing number of persons having slight acquaintance with the intricacies of corporate finance and stock market operations.

The greater public participation in the securities markets has accompanied a startling growth in the volume of trading in those markets. For example, trading on the New York Stock Exchange has expanded from an average daily volume of 1,980,000 shares in 1950 to an average daily volume of 4,500,000 shares thus far in 1961. In the over-the-counter market, the number of stock issues quoted in the "sheets" has expanded from approximately 5,200 in 1951 to over 7,500 at the present time. Note especially that there has been an increase of approximately 1,500 traded issues in the last 2 years.

2. Changes in methods of distribution and marketing

Accompanying the growth of public participation in the securities markets have been changes in the methods of distributing and selling securities, such as the spread of branch offices, the employment of part-time salesmen, and the usė of novel methods to distribute certain securities. These changes raise questions as to possible assaults upon the integrity of marketing procedures.

The number of customers' men registered with the New York Stock Exchange has increased from 10,608 in 1950 to 27,896 in 1961; the number of customers' men registered with the National Association of Securities Dealers, Inc., has increased from 28,794 in 1950 to 93,351 in 1961. Many securities salesmen work on a part-time basis; many have no particular qualifications to sell securities; and most important, many are not subject to the kind of supervision which insures high ethical standards. The possibility exists that these factors may have led to questionable merchandising techniques. They also have undermined the important personal relationship between broker and customer in which the broker seeks to ascertain whether the security is suitable for a particular customer.

The growth of branch offices is another aspect of the trend to seek a mass market for securities. The number of branch offices maintained by member firms of the New York Stock Exchange has increased from 1,661 in 1950 to 3,166 at the end of 1969. Some member firms during this period have trebled the number of their retail outlets. This development has increased the problems of training and supervision of salesmen, the regulation of whom is so important because of their immediate contact with the public. Moreover, the task of supervision is aggravated by the employment of part-time or inexperienced registered representatives, particularly in the mutual fund area. Furthermore, some registered representatives may solicit from door to door and operate from private residences remote from their supervisors.

The above-described diffusion of responsibility throughout the trading and distribution process presents serious problems. On the purely mechanical level, the heavy trading volume has made it difficult for many broker-dealers to keep current the books and records required by statute and rules of this Commission. As a further illustration, there appear to be a growing number of instances in which broker-dealers have failed to deliver securities or the proceeds of sale of securities. The decentralization of control, coupled with the influx of inexperienced salesmen, suggests the possible development of a lowering of standards in market operations.

VI. THE OVER-THE-COUNTER MARKET

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 the 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 market 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.

VII. EXCHANGE RULES

Although the Exchange Act grants to the Commission broad powers over the exchanges, the Commission has in general left to the exchanges the policing of their own members. This approach reflects the view that the exchanges can and should exercise a substantial measure of self-regulation and self-discipline subject to the statutory standards and the ultimate authority of the Commission.

As this committee knows, the Commission recently announced that it was investigating the rules, policies,a nd procedures of the American Stock Exchange relating to the conduct of specialists and other members. I do not know what the results of the investigation will show, and I believe that it would be improper and unfair to make any comment on it before the staff has completed its study and reported to the Commission. I would anticipate that, if House Joint Resolution 438 were enacted, we would coordinate our investigation of the American Stock Exchange with a study of the rules and practices of other exchanges to determine whether, and the extent to which, any changes in such rules and practices may be necessary.

VIII. PROBLEMS OF FINANCING

Two aspects of the employment of credit in the securities markets warrant special attention. The first is the extension of credit by banks on over-the-counter securities. This is largely unregulated under existing laws. The second is the apparent growth of nonbank credit, including loans by moneylenders.

Under the existing provisions of the Securities Exchange Act, the promulgation and interpretation of regulations concerning credit extension are the re