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The Martin report is, indeed, a "great leap backward," and has nothing whatever to do with protecting the public interest.
A periodical says:
Traditionally the New York Stock Exchange has regulated itself under the benign and occasionally drooping eye of the SEC. The Exchange wants to continue the system with one addition-blanker antitrust immunity. Once again, the brokerage establishment prefers to retain and strengthen its basic monopoly.
And the new Chairman of the SEC and Mr. Martin appear to desire continuation of Wall Street as a private club, with elimination of all competition within the industry.
Mr. Martin carried a big boulder, but unfortunately I believe it dropped on his toes. If the near collapse of 1968–70, when over 100 member firms failed, or got into difficulties, demonstrates anything, it tells us that Wall Street needs the invigorating effects of real competition, not more protective regulation.
This subcommittee has the opportunity to provide the stimulation and the leadership toward that new vigor in the securities industry.
I am concluding by appending to my remarks a copy of a letter dealing with these matters that I have sent to Assistant Attorney General Richard W. McLaren. I ask permission to include this in the record.
Mr. Moss. Without objection, the permission is granted, and the letter will be included in the record at this point. (The letter referred to follows:)
U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON THE JUDICIARY,
Washington, D.C., November 12, 1971, Mr. RICHARD W. McLAREN, Assistant Attorney General, Antitrust Division, Department of Justice, Washington, D.O.
DEAR MR. McLAREN : For many years I have been concerned with the antitrust implications of many activitives of the national securities exchanges, and with those of the New York Stock Exchange in particular.
The courts have consistently told us that anti-competitive rules of the Exchange, promulgated in the name of self-regulation, are not immune from antitrust liability unless clearly “necessary" to the workings of the Exchange Act. It is my belief that the Exchange is today engaged in a number of anti-competitive practices that cannot meet the courts' standard. The Department of Justice has a responsibility to investigate these matters, and take appropriate action.
In particular the Department should seriously consider antitrust action aimed at the following Exchange practices : rate fixing, limited membership, ban on institutional membership, proposed rules permitting member firms to sell life insurance, prohibitions on members engaging in off-board trading, and agreements to prevent interest payments on customer free credit balances.
The issue of commission rates, currently fixed by the Exchange, rather than determined by principles of free market competition, presents perhaps the most glaring antitrust violation. If the legitimate goals of the Exchange Act are fair dealing on exchanges and the protection of investors it hardly follows that price fixing is necessary to their achievement. And, if it is not “necessary", it is subject to the Sherman Act, just as any other agreement in restraint of trade.
There is no compelling reason, other than the economic self-interest of the insiders, for the practice of rate fixing to continue. Commission rates should be fully competitive, not fixed. As you have pointed out on numerous occasions, competition would substantially benefit investors without damaging the industry.
Secondly, membership on the Exchange is now set at 1,366 seats. Restriction on the number of memberships establishes the Exchange as a private club, contrary to the principles of the antitrust laws, and preserves the value of seats on the basis of their scarcity. Since the principal benefit enjoyed by Exchange members is access to the membership Exchange rate, the value of a seat, in a very real sense, represents the capitalized value of access to a price fixing scheme. I know of no trade associations other than securities exchanges which sell memberships. I have always thought it clear that the antitrust laws required trade associations to accept into their numbers all who meet objective qualifications applied in a nondiscrimatory manner.
Membership restrictions, moreover, by limiting access to the inside rate structure, operate to prevent brokers' customers from obtaining the favorable rate, and thus freeze them as captive customers of the Exchange members. Those most directly boycotted by these restrictions are banks, trust companies, insurance companies, mutual funds and other institutions, which are currently barred from membership by Exchange Rule 318.
The issue of institutional membership was recently complicated even further by reports that proposed Exchange rules now being considered by the Board of Governors would permit member firms to sell life insurance. Serious antitrust issues are raised by any attempt of the Exchange to compete directly with insurance companies, while not permitting them to compete with the Exchange members in the securities market. Secondly, it is essential that the Department forefend the growth of conglomerate type operations by Exchange members. Should Wall Street get into the insurance business, it cannot help but inhibit competition in that industry, contrary to the principles of the Celler-Kefauver Act.
There also appear to be significant restrictions on the freedom of Exchange members to pay interest to customers on their free credit balances. The result is that if a member firm wishes to compete by offering to pay interest on cash left by a customer with his firm, he may be restricted from doing so upon risk of being expelled as a member of the Exchange. It is perfectly clear that if banks agreed that they would not pay interests on deposits it would be a per se violation of antitrust laws.
Lastly, I wish to focus attention on Rule 394 of the Exchange which prohibits Exchange members from engaging in off-board trading in listed securities, except under the extremely complicated and very difficult requirements of Rule 394 (b).
A recent SEC Staff Study on Rule 394, not yet made public, sheds much light on the bluntly anti-competitive nature of the Rule. The summary and conclusions of the Study, which have been made available to the New York Stock Exchange, lead one to believe that Rule 394 is designed to preserve the power of Exchange members to impose double commissions on trade effected through the Exchange. The interest of investors in getting best executions on the Exchange seems to be of distinctly secondary importance.
The Staff Study concludes that the Rule thwarts rather than furthers the purposes of the Exchange Act, and finds it antithetical to a healthy market operated in the public interest. These findings should surely prompt Department action Finally, I ask the Department to examine with a wary eye the recent William
Chesney Martin Report, urging a single nationwide exchange, armed with antitrust immunity, restricting entry and exclusively trading every listed stock. The Martin Report has been labeled by one scholar “a classical prescription for monopoly", and has nothing whatever to do with protecting the public interest.
I urge the Antitrust Division of the Department of Justice to give these matters immediate consideration, and to advise the House Committee on the Judiciary of its action. Sincerely yours,
EMANUEL CELLER, Chairman. Mr. CELLER. It is my belief that the grave antitrust considerations I have raised this morning merit attention by the Department of Justice.
One more word.
We hear much about self-regulation. In light of the recent debacle on Wall Street, I think it is foolhardy to say that self-regulation by the exchange has been successful.
Strategies and abuses employed were undetected or disregarded. Tht kind of so-called self-regulation is unwarranted. Proper surveillance and supervision should have detected the untoward conduct.
Because of its past derelictions, does the exchange come with clean hands when it seeks more protective self-regulation? Is the granting of a monopoly, with immunity for all members and immunity from all kinds of practices that might conceivably include wheeling and dealing, the answer!
Remember, due to self-regulation, all of these firms failed or collapsed or were forced to merge.
When left to their own preserves, unmolested, see what happened to the free credit balances of customers left with the broker. Did the broker keep the customers' money segregated from his own? No. If a lawyer or an accountant did that, he would be brought to book.
In 1970, something like $3 billion of customers' free balances were not kept separate, but were subject to withdrawal and used by the broker, oftentimes to maintain his position and to increase his capital structure, or to maintain his positions in securities, or to finance margin purchases of other customers.
The reason given to justify this commingling is that it has been done for years in Wall Street. Well, to my mind, no evil can be justified because of its duration.
Just a commingling of funds is barred by command of Congress in the Commodity Exchange Act.
The SEC only a day or so ago promulgated, rather belatedly and only after much prodding, tentative rules and regulations forbidding some sort of commingling of funds.
I urge you, however, to place in your bill a requirement for desegregation of accounts and stock, and not rely upon rules and regulations in the discretion of the SEC. There should be no discretion.
It must be mandatory that these accounts and stocks be kept separate, and the language of the Commodity Exchange Act might be used as an example.
The continuing bad faith of the New York Stock Exchange with respect to proposals which are intended to pay only lipservice to the concept of the protection of investors was again demonstrated just last fall.
The exchange proposed a formula rule for the segregation of customers' funds-the exchange did this—which was intended to meet the mandate of the Securities Investor Protection Act, the act which we passed a year or so ago.
If this formula were to be applied to several dozen of the largest member firms, only two of the lesser known of these firms would have to escrow as much as a penny of their customers' moneys.
Now, this sort of sham demonstrates that the interests of the New York Stock Exchange lie not in the protection of the public, but rather in the protection of the members' unlimited freedom to use and abuse customers' assets, and oftentimes the SEC, as in the case of moneys that are offered to dealers for purpose of investment, not as partners but as subordinated lenders, those subordinated lenders must sign an agreement that they cannot hold the New York Stock Exchange liable for any misfeasance or malfeasance.
They cannot hold the New York Stock Exchange liable for any misconduct-just think of that—as an exculpation.
Now, what happened? The Securities and Exchange Commission frowned on that practice and said it was contrary to public interest. What did the New York Stock Exchange do? It just thumbed its nose at the SEC, and apparently there is nothing in the Securities Exchange Act which says that the SEC can compel the New York Stock Exchange to eliminate that kind of obnoxious practice.
Now, there ought to be something in the legislation which gives some teeth to the SEC in that regard. Self-regulation cannot do it.
You see what happens when they are left to their own devices, and I hope this committee in its wisdom will take some steps in that regard.
The New York Stock Exchange expects those who criticize it, or expects even the members of the SEC to hold the handkerchief when the members of the exchange merely sneeze. That is exactly what the
In other words, when the New York Stock Exchange members chew, they want everybody else to masticate, and it is time to stop this practice. I hope this wise committee will put some teeth in the statute.
Now, I am sorry I have to take these extreme views on the matter, but it is only when we take these extreme views we get some attention and get some action.
I don't mean to imply this committee does not act unless it gets violent action or violent talk.
I don't mean to be violent. There are a lot of good things in the New York Stock Exchange, and a lot of healthy things in the New York Stock Exchange, but we have to get after those practices which are obnoxious. After having said all of that, I am sorry I took so much time.
I am very, very happy to have been with you, and I want to thank you very much, gentlemen.
Mr. Moss. Mr. Chairman, as I stated at the beginning, we are very happy you are with us.
With reference to page 2 of your statement regarding the jurisdiction of your committee and the attitude of this subcommittee toward that jurisdiction, we concede the jurisdiction to the Committee on the Judiciary, and we have no intention of invading that jurisdiction.
We have every desire here in this subcommittee to build a record representing views and facts from many informed and interested sources, so that when we are ready to write a report, reach conclusions, and make findings, we shall have a record to support everything we do.
We will act in this committee on the rule 394 study, and we hope to espedite making that study available to the public and those who are interested in it.
Mr. Chairman, you mentioned the rule of Silver v. New York Stock Exchange, that the action be necessary to "make the Exchange Act work." Who determines what is necessary to "make the Exchange Act work?
Chairman Casey in his testimony before the Senate Securities Subommittee and Assistant Attorney General McLaren in a letter to me nare indicated that the primary determination should be made by the Securities and Exchange Commission.
Senator Williams questioned this and indicated that, in his view, the primary determination should be made by the appropriate Federal district court.
I wonder if you would give us your views on this matter.
Mr. CELLER. I think the antitrust enforcement in this field must remain in the province of the Department of Justice.
The antitrust laws provide for the enforcement and remedies in the courts. This is where these antitrust problems belong.
Mr. Moss. Thank you.
Mr. BROYHILL. Mr. Chairman, I don't have any questions, but I do want to welcome Chairman Celler before the committee.
It is an excellent statement that you have given here, and I hope it is widely read within the securities industry. Frankly, I think that within the industry itself your statement will be widely applauded, sir. I am talking about people back at home, not necessarily those in New York.
Mr. CELLER. I hope so.
Mr. STUCKEY. Mr. Chairman, I believe it has been about 20 months since Mr. Schapiro has introduced a lawsuit against the SEC to make the report on rule 394 public, but to date I don't think there has been any action taken on this matter. I think it is of extreme importance to this subcommittee that it be made public, so that we can hold indepth hearings on it.
Mr. Moss. The Chair might observe that, as the author of the act, we contemplated quicker handling by the courts. In fact, we specifically provided for expedited handling of these cases involving the availability of information.
We will make some inquiries.
Mr. CARNEY. The distinguished chairman of the Judiciary Committee explained everything to my satisfaction.
Mr. Moss. Mr. Chairman, we thank you, and I am certain that your statement will receive considerable attention. Mr. CELLER. I deeply appreciate your kindness, Mr. Chairman. (The following letter was subsequently added to the record :)
DEPARTMENT OF JUSTICE,
Washington, D.C., November 19, 1971. Hon. EMANUEL CELLER, Chairman, Committee on the Judiciary, House of Representatives, Washington, D.O.
DEAR MR. CHAIRMAN: This is in response to your letter of November 12, 1971, concerning the antitrust implications of certain activities of national securities exchanges, particularly the New York Stock Exchange.
We quite agree that many of these activities raise important questions not only for securities policy but for antitrust policy as well, and we have been giving them careful study for some time.
As you are no doubt aware, in April 1968 we filed a memorandum with the Securities and Exchange Commission suggesting that the SEC hold public hear ings to determine whether fixed commission rates were “necessary to make the Securities Exchange Act work." The SEC ordered such hearings and the Department of Justice participated actively in them. In January 1969, the Department filed a comprehensive brief with the SEC, arguing that the evidence adduced at these hearings did not demonstrate a regulatory need for fixed rates and urging