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posed programs. As an illustration, the Commission has approved the basic plans of the NASD to establish and operate a nationwide clearing network to cover the over-the-counter markets. The regulatory need for such a project was (are fully considered by the NASD, and the Commission after considering all factors previously described concluded that such a project was in the public interest. The Commission has proposed to adopt Rule 15A (j)-3 which would govern certain procedures to be followed in establishing and operating the system. A copy of the proposal is enclosed.
2. The Commission has oversight authority regarding any clearing, depositors, locked-in trade, or certificateless system the NASD might develop. As previously noted, Section 15A (j) requires new rules and rule changes of the NASD to be filed with the Commission for its review and nondisapproval. Section 15A(K)11) gives the Commission authority to abrogate, after notice and opportunity for hear. ing, any NASD rules already in force if it is in the interest of public investors to do so. Section 15A (k) (2) gives the Commission power to require the NASD to adopt specified alterations or supplements to its rules, but this power does not appear to extend to the types of matters suggested in your letter. Section 154/1) (1) gives the Commission authority, after notice and opportunity for hearing. to revoke or suspend the registration of the NASD if it fails to comply with any provision of the Act, including Section 15A (b) (8). These powers suggest the existence of broad Commission regulatory oversight that could, if circumstances warranted, include the establishment or modification of operational systems discussed above.
On the basis of past experience, we have no reason to believe that the NASD would not be responsive to requests by the Commission for changes or modifirations that would improve securities operations.
3. Parallel to its oversight authority with regard to the NASD, the Commis. sion has authority with regard to operational facilities established by exchanges. Section 19(b) of the Act provides in pertinent part:
"The Commission is further authorized ... to alter or supplement the rules of such exchange (insofar as necessary or appropriate to effect such changes in respect of such maters as (1) safeguards in respect of the financial responsibility of members; (3) the listing or striking from listing of any security :
(5) the manner, method, and place of soliciting business; . (7) the time and method of making settlements, payments, and deliveries and of closing accounts; ... and (13) similar matters."
This authority, as well as that contained in Section 15A of the Act, gives the Commission ample basis for overseeing the facilities of the VASI) and the exchanges which are presently operating, as well as any such facilities these organizations may separately or jointly create and operate.
4. Although the self-regulatory organizations only have direct powers over their members and others participating in their markets, in their efforts to estil lish improvell operational systems, they have been able to secure the participation of non-members, including banks. We believe that as viable and effective systems are established, lecause of their operational and economie advantages, non-members will find it desirable to join or arrange for participation in such systems. The ('ommission has the power to require participation is non-XASI broker-dealers pursuant to Sections 15(b) (8) and (10) of the Act. The Commissiel's authoriti to establish itself operational systems of the type you discuss would have to be based upon the authority granted by Section 15(C)(3) of the Aet to promulgate rules and regulations designed to provide “safeguards with respect to the financial responsibility and related practices of brokers and deal
..” More importantly, you appreciate that the operation of any such systems by the Commission, assuming it was deemed appropriate by the Congress, would require sulistantial manpower and funding not now available to the ('ommission.
Additionally, Section 15(e) (3) gives the Commission authority to govern a great many aspects of the entire brokerage community's participation in any srs. tem which may be established by the self-regulatory organizations or others.
Finally, the present primary operational responsibilities for any such systems are in the self-regulatory organizations, subject to ('ommission oversight. We looking lieve that this is in accord with the statutory purposes of the Exchange Act. Sincerely yours,
Associate Director. Enclosure.
SECURITIES AND EXCHANGE COMMISSION
PROPOSAL TO ADOPT RULE 15Aj-3_UNDER THE SECURITIES EXCHANGE ACT OF 1934
Notice is hereby given that the Securities and Exchange Commission has under consideration a proposal to adopt Rule Aj-3 under the Securities Exchange Act of 1934 (the Act). Propsed Rule 15Aj-3 prescribes certain requirements applicable to a national association of securities dealers which establishes and operates facilities for clearing and settling securities transactions, including the requirement that the applicable rules of the Association incorporate as gnides to interpretation and application certain public interest standards set forth in the Act and also that such rules of the Association provide fair procedures for consideration of requests for or refusals of access to such system by customers, issuers, brokers and dealers. The proposed rule would also provide for Commission review of adverse action by the Association with respect to such requests for or refusals of access. Background-(The Vational Clearing Corporation)
While the proposed rule is applicable to action that may be taken by any secu. rities association registered under Section 15A of the Act, it has been formulated in light of the National Association of Securities Dealers, Inc.'s (NASD) establishment of the National Clearing Corporation (NCC) as a wholly-owned subsidiary to provide a nationwide system to clear and settle over-the-counter transactions in securities and the NC'C''s and NASD's proposals to adopt rules governing the operation of and access to such a system.
The VASD has submitted to the Commission amendments to its by-laws and a proposed new schedule thereunder which, among other things, would provide complaint and hearing procedures for aggrieved persons who may be adversely affected by NoC action. The VASD has also submitted to the ('ommission proposed rules which, among other things, provide standards regarding who may obtain access to the system and the applicable rates to be charged those who clear through the system ; standards for the inclusion or exclusion of securities from the system ; standards for suspending or deleting securities from the list of cleared securities (i.e., those securities qualified for clearance through the system), and for suspension or exclusion of those who clear through the system for failure to comply with applicable regulatory standards. The Proposed Rule and its Statutory Basis
Rule 15Aj-3 would be adopted pursuant to various provisions of the Act, including the power conferred by Section 23(a) to adopt “such rules and regulations as may be necessary for the execution of the functions vested" in the Commission by the Act. The rule relates specifically to the Commission's function to make sure that rules of a national securities association, among other things, "are designed to . remove impediments to and perfect the mechanism of a free and open market; and are not designed to permit unfair discrimination between customers or issuers, or brokers or dealers".
Discharge of this function in the context of reviewing rules of an association for its subsidiary) governing the operation of and access to a system of clearing and settling securities transactions is a novel problem in the administration of Section 15A. The Commission, however, dealt with a similar problem when the Association proposed to establish the NASDAQ system, its system for providing automated quotations to members and the investing public. See Securities and Exchange Act Release No. 8170 of December 16, 1968, announcing the adoption of Rule 15Aj-2. As the Commission indicated at that time, existing rules of the WISD (other than those of an organizational or procedural character) relate primarily to standa rds of business conduct or to conditions of membership. Apart from the possibility that the Commission may disapprove rules of this type which are on their face unlawful and/or in violation of the standards of the Act, the statute spells out a procedure whereby persons aggrieved as a result of the application of rules of conduct or rules limiting membership may have appropriate consideration of their grievance within the association and on review by the Commission. Rule 15Aj-3 would provide a similar procedure where application of a rule of a national securities association or its subsidiary denies access to a
1 Other pertinent provisions are in Section 15A.
facility for clearing and settling transactions which is maintained by the collective action of the association. The requirement of a fair and orderly procedure for consideration of specific access requests and grievances appears to the Comi mission essential to assure that such rules conformi, in their actual operation, tai the statutory requirements.
The text of proposed Rule 15Aj-3 is as follows: Rule 15A3-3: Rule for a National Securities Association Relating to a Facility
for Clearing and/or Settling Securities Transactions (a) Any national securities association which directly or indirectly adopts, or proposes to adopt, any rules providing for or regulating a system for the clearance and/or settlement of securities transactions shall incorporate in such rules a provision to the effect that insofar as such rules prescribe the conditions of access to such system, such rules shall be applied and interpreted in accordance with the standards of paragraph (b) (8) and paragraph (h) (2) of Section 15A of the Act, including the requirement that rules of such an association shall be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and not to permit unfair discrimination between customers or issuers, or brokers or dealers; and to assure that any disciplinary action pursuant to such rules shall not be excessive or oppressive, having due regard to the public interest.
(b) Such rules shall also provide a fair and orderly procedure with respect to the determination of whether ang customer or issuer or broker or dealer mas be excluded or limited in respect of requested access to such system including provisions :
(1) for notice of and opportunity to be heard upon the specific grounds for exclusion or limitation which are under consideration ;
(2) that a record shall be kept ; and
(3) that the determination shall set forth the specific grounds upon which the exclusion or limitation is based.
(c) In the event of any such exclusion or limitation, such action shall be subject to review by the Commission, on its own motion, or upon application by any person aggrieved thereby filed within 30 days after such action has been taken or within such longer period as the Commission may determine. In any proceeding for such review, if the Commission, after appropriate notice and opportunity for hearing, and upon consideration of the record before the association and such other evidence as it may deem relevant, determines that the specific grounds on which such action is based exist in fact and are in accord with the applicable rules of the association (including the provisions thereof required to be included br paragraph (a) of this Rule), the Commission shall by order dismiss the proceeding. Otherwise, the Commission shall bg order set aside the action of the association and require the association to accord the aggrieved person access to such system or to take such other action as may be appropriate, subject to such terms and conditions as the Commission determines to be in accordance with the public interest and consistent with the rules of such association.
All interested persons may submit their views and comments on the above proposal in writing to the Securities and Exchange Commission, Washington, D.C., 20549 on or before December 14, 1971. All such communications will be considered available for public inspection. By the Commission.
ROXALD F. Hunt, Secretary. Mr. PANTER. Moving on
Mr. McCOLLISTER. May I interrupt a few moments to ask if Mr. Howland has any comments to make on this? He has a frown that suggests he may
Mr. HOWLAND. I think we are in an area of conflict, because I think the Stock Clearing Corporation probably dates back to 1920, at which time a set of rules were promulgated. For example, our rules in our Stock Clearing Corporation state that our members must clear all securities, all listed securities, that they trade through our clearing corporation.
I think the same rule applies to the regional exchanges, and I think that there could be a conflict here. This is all I am saying. I think it would be well that the SEC tackle this problem.
Mr. Moss. We would hope that the opinion would be sufficiently comprehensive to give us the answer to all of the fringe questions.
Mr. DELAHUNTY. May I say something?
I might add that this very subject was the subject of debate between the Pacific Stock Exchange and the NASD in February of this
year. It had to do with a problem which arose by reason of the fact, and this is a correction to some of the statements made yesterday, that the Pacific Coast Stock Exchange Clearing Corporation not only settles the clearing of exchange transactions, but also the clearance and settlement of over-the-counter transactions. It does not differentiate between the clearance, settlement, and transfer of an overthe-counter transaction or a listed transaction between its members. They are both processed through the same clearance procedure.
That question was posed to Mr. Peake yesterday, and he said that generally speaking, with respect to exchanges, there is an organized method of clearance and settlement of exchange transactions but no such situation exists in the over-the-counter market with respect to clearing corporations.
Mr. Vioss. Thank you for that clarification.
Mr. PEAKE. I think the rules of most of the exchanges provide in almost all cases that a transaction may be made ex-clearing. That means it may be made on the floor of the exchange but is not settled
Mr. DELAHUNTY. I would like to correct that. Those items are cleared in the normal way through the PCSE stock clearing corporations.
Mr. PEAKE. I did say "most exchanges," Mr. Chairman.
Mr. Moss. Does anyone else desire to comment on this matter at this time?
Mr. SPORKIN. All I can say is that I think it needs a good legal research.
Mr. Moss. I think so, too. We hope you do that kind of job.
Mr. PAINTER. Mr. Chairman, Mr. Howland mentioned a conflict or words to that effect. At this point, I think it may be appropriate to offer to introduce into the record an article in the Wall Street Journal of the 12th of October, 1971. The article is entitled, "Battle for Influence Over Stock Trading Looms on Wall Street." The subtitle is, "NASD, Big Exchanges Clash Over Planned Expansion of Automated Quotations."
May I offer to introduce that article into the record, Mr. Chairman?
SECURITIES STRUGGLE-BATTLE FOR INFLUENCE OVER STOCK TRADING LOOMS ON
VASD, BIG EXCHANGES CLASH OVER PLAN NED EXPANSION OF AUTOMATED
Breaking the Paperirork Jain
(By Richard Rustin and Wayne Green) Though the opposing sides won't publicly admit it, a bitter struggle for infiuence in the securities markets of the future is being waged between the nation's stock exchanges, headed by the New York and American boards, and the
National Association of Securities Dealers, which polices the nation's sprawling over-the-counter market.
The battle is being fought on two apparently interrelated fronts. One involves the NASD's expansion of NASDAQ, its automated service for disseminating quotes on unlisted stocks, to include issues listed on the Big Board and the Amex, a move the exchanges consider a direct competitive threat.
On the other front will be decided the question of who will play the major role in solving the paperwork logjam that, three years after the industry's notorious operations crush, continues to plague the over-the-counter market, where almost all transactions still require physical delivery of stock certificates
The outcome of these clashes apparently will have far-reaching effects on the level and quality of services that will be offered to the investing public and on stockbrokers' costs of doing business. Moreover, in the view of some combatants, should the NASD prevail in expanding its influence at the expense of the wellentrenched exchanges, there could be a marked alteration in the structure of the nation's corporate capital-raising markets. Proving ground
Historically, the over-the-counter market has been a proving ground for un. seasoned companies going to the public for capital for the first time. Eventually, the cream of these corporations is skimmed off by the stock exchanges, who depend on this influx for growth in trading volume and for the added revenue, which comes in the form of a percentage of member firms' brokerage commission income for transactions executed on the exchanges.
But the NASD, which long has acquiesced in this arrangment, apparently now is trying to keep some of the cream for itself. Under the association's battle plan, it's NASDAQ system would be perfected so that transactions in unlisted stocks and certain exchange-listed issues traded over the counter could be executed automatically. And this trading network would be hooked into a computerized clearing network that would vastly reduce the physical handling of stock certificates.
The result would be a streamlined marketplace that presumably would be the technical equal of the exchanges, which have similar far-reaching automation plans of their own.
Asks one highly placed NASD official: “Where do the exchanges get their listings? Suppose the over-the-counter market gets so perfected that its handling of transactions is just as good as that of the exchanges. Corporations, in thinking about getting listed on exchanges, wouldn't be trading a primitive market for an automated market, as they do now, but would have to ask themselves whether it's worthwhile to trade one automated market for another automated market."
THE MARTIN PLAN
The implication, he continues, is that many more companies, as they become seasoned, will make subsequent capital-raisings in the over-the-counter market rather than through an exchange.
Of course, not even the most sanguine NASD partisan will go so far as to say that innovations will enable the unlisted markets to displace the exchanges as the nation's premier marketplace. The best they can hope for, it's said, is some form of parity, an arrangement that looms large in the light of the recent. Big Board-commissioned, much-publicized report on the securities industry by William McChesney Martin Jr., the prestigious former Federal Reserve Board Chairman. Mr. Martin favored the amalgamation of all the nation's exchanges into one central market, but skirted the question of how the over-the-counter market should relate to a central market.
William J. Casey, Securities and Exchange Commission Chairman, says the SEC has "an intense interest” in the current conflict and probably will play a major role in its resolution. But he won't say much beyond that. It's known that Mr. Casey has been pressing both sides to resolve their differences, at least partly because he believes automation is a key way of placing a lid on brokers' securities-processing costs. Thus, he reasons, future brokerage commission hikes could be avoided.
Until recently, there has been no real alternative to the organized exchange market. Because over-the-counter dealers are spread throughout the country. they have had great difficulty in announcing up-to-date bid and asked prices for securities and in executing transactions. NASDAQ, despite a host of start-up problems, has eliminated some of that disadvantage by making over-the-counter stock quotes instantly available.