If negotiated rates are applied to all transactions the question of institutional membership becomes almost academic. Therefore I would support the exclusion of institutions from membership providing that brokerage firms give up their own asset management functions. 2 VI. Stricter listing requirements—corporate responsibility 2 As an investor and concerned citizen I do not find it difficult to accept the concept of corporate responsibility. It should be clear to all that sooner or later in one form or another society and its investors will have to pay for the excesses of American industry. Economic growth without a measure of quality should be a legitimate concern of the securities industry since it will in the long-term be uneconomical to continue to finance polluters of our air and waters, to finance those who engage in deceptive advertising or discriminate against the nation's minorities. I therefore urge that strict new listing requirements be imposed which would "delist" or "suspend" from trading any stock whose corporation violates federal pollution, advertising, hiring or other standards. Such requirements would induce institutional as well as individual investors to become more concerned about corporate responsibility since they would not wish to to see their stock holdings "suspended" or "delisted." Before such requirements become operative I feel a plan should be devised which makes it possible for mutual fund shareholders and pension fund participants to instruct their managements on how to vote at annual corporate meetings in which the funds have an interest. A nation which is belatedly recognizing the need to evaluate economic growth not only in terms of dollars and cents but also in terms of quality of life must embark on bold and imaginative ways to make up for years of neglect in responsibly financing its industrial and technological progress. VII. Public representation Since public confidence is an essential ingredient to the continued functioning of the securities industry, I urged at SEC hearings last year that "genuine public representation" be instituted on the Board of Governors of the NYSE and other exchanges. At present the so-called "public representatives" are all corporate executives whose viewpoints clearly do not represent the small investor. For example, in order to help the NYSE these corporate executives would rather impose a surcharge on small investors than increase corporate listing fees, as was the case in 1970. Mr. McChesney Martin and others who now favor the concept of public representation should spell out whether they only consider corp. and inst. execs. as public representatives. For example, I would like to see people like Ralph Nader, Lewis Gilbert, Phil Moore (Campaign GM), Alice Tepper Council on Economic Priorities) and other consumer and shareholder advocates designated as the "public representatives." TIII. Penalties and disciplinary actions for securities violations Present penalties for violations of the securities laws are much too light. Heavier fines and prison sentences should be imposed rather than arriving at ere temporary suspensions and consent agreements. Individuals charged with violations who subsequently are found to have vioated the securities laws should be broadly publicized. Also, it is imperative that the firms with whom such individuals are associated be identified since the inEviduals act as agents for these firms. If firms are purposely not identified as a matter of SEC policy they have less incentive to adequately supervise their ployees. Firms should be required to include in their annual reports any penalles or disciplinary actions imposed against them during the course of the year. About a week ago the SEC suspended the license of a brokerage firm that is already in the process of liquidation and does not engage any more in a public siness. This ex post facto suspension penalty is meaningless and does little instill public confidence in the SEC's enforcement procedures. II Special investor complaint department should be established at SIPC Since the newly created Securities Investor Protection Corp. insures brokerage fs, it needs to know the financial condition of these brokers so that their stomers can indeed be adequately protected. Therefore it seems a logical deopment that customer-broker problems be brought to the attention of SIPC See my testimony, House Appropriations Subcommittee, May 13, 1971. so that they might be speedily resolved. A special investor complaint department should be established at SIPC since the SEC has unfortunately demonstrated in recent years that it is unwilling and unable to handle investor complaints. Also, all brokerage firms should make customer agreements available in large print in which they precisely spell out procedures for arbitrating any differences that may arise. SIPC would be charged with developing these arbitration procedures. Underwritings and in particular new issues should be rated according to quality the way corporate bonds are rated. Consideration should be given to earnings and dividend history so that prospective investors can tell at a glance whether a new issue is of sound or highly speculative quality. Sound issues would be rated "A" and speculative issues would be rated "D". Underwriters should not be compensated by receiving stock of the company they underwrite in order to prevent a conflict of interest. A formula should be devised which would price new issues more fairly. When new issue prices go to a substantial premium on the first day one can safely assume that the issuing corporation did not get a fair price for its stock and/or a gullible public was persuaded to immediately pay much more than the stock was worth. One leading Wall Street brokerage firm recently stated in one of its publications: "The work of the Syndicate Department is a very lucrative part of the securities business; the average commission on 100 shares of a public offering is 3x to 4x the equivalent NYSE commission." XI. Bank trust departments Much attention has been paid in recent years to the role and power of mutual funds and relatively little SEC concern has been given to bank trust departments. I believe that there should be strict SEC enforcement of the complete separation of trust department services from other banking services such as credit operations. Also measures should be undertaken preventing trust departments from buying stock for individual accounts that is simultaneously being sold by foundation funds it is managing. It may be worthwhile if exploratory meetings were held in regard to these matters between SEC staff members and Congressman Patman's House Banking & Currency Committee staff. XII. The stock certificate should be retained Securities industry spokesmen, Congressional leaders and the SEC have urged the elimination of the stock certificate but unfortunately have ignored the view of the investing public. I believe that the stock certificate should be retained. More than half of the nation's shareholders trade less than once a year. Most stock market activity is accounted for by institutions and professional traders. Why then should mil lions of investors give up their stock certificates? The stock certificate is no the problem. The problem is the abuse of the system. The 1963 SEC Specia Study pointed out how accounting firms were advising brokers to purposely delay delivery so that they could use the undelivered stock certificates as col lateral for their other activities. Banks also aggrevated the problem by refusing to accept partial deliveries. No, investors should not be penalized by having thei stock certificates computerized which would severely limit their freedom to us their stock holdings as negotiable instruments. Those investors who wish to hav their certificates immobilized by placing them in a regional certificate syster should feel free to do so. Rather than one national depository I propose a re gional approach as is the case with the Federal Reserve Bank system. XIII. Conclusion Whatever the shape of the ultimate securities industry structure the prim factor guiding the Congress and the SEC should be to what extent will million of individual investors be able to survive in that structure. Much as one ma like to compromise between the various special interest factions within th securities industry the result will not be beneficial if prime consideration not given to the public interest since it is the public that in the end finance corporate America. And as a final plea I would like to urge the SEC, as I did las year, to define what it means by "securities commission related business." Th See my testimony, House Appropriations Subcommittee, May 13, 1971. entire fair disposition of the commission rate question is based on a need for this definition. If the SEC is unable, after having been in existence for 36 years, to define this crucial term, then I don't see how it possibly can make any judgment about the future of the securities industry. A good deal of today's securities industry problems are due to the SEC's own procrastinations. Addenda No. II.-Once competitive trades are made applicable to all trades institutional activity on the third market is likely to diminish and return to the traditional market place where the individual investor currently operates. This would then result in even greater institutional domination of the individual investor. Therefore a separate market for him remains imperative. [From the New York Times, Tuesday, July 14, 1971] BIG BOARD REPORT OMITTED INTEREST FACT EMERGES AT HEARINGS ON SURCHARGE BY S.E.C. WASHINGTON, July 13.-The New York Stock Exchange, in calculating the earnings of its member firms to make its case for an extension of the special surcharge on small orders, did not include a major item of income for member firms that its own economic consultants said should have been included. This fact was brought out today as hearings opened before a Securities and Exchange Commission examiner on continuation of the surcharge, which is imposed on trades of 1,000 shares or less. The surcharge amounts to $15 or half the regular commission, whichever is smaller. The omitted item of income is the interest earned by firms on the cash balance that some customers leave in their brokers' hands for varying periods of time. National Economic Research Associates, Inc., the economic consulting firm that has done the basic study of the costs and earnings of member firms, reached the flat conclusion that interest income of this type had to be included in calculating the firms' earnings for purposes of establishing what the sales commission should be. The arguments for continuation of the surcharge were also attacked on a number of other grounds during the course of the hearings. "URGENT" NEED CITED The exchange president, Robert W. Haack, characterized continuation of the charge as "urgent." The charge was first permitted by the Securities and Exchange Commission for 90 days, while permanent changes in the exchange's schedule of commission charges were under consideration. The 90-day period expired last Monday, and the surcharge has been extended for an indefinite period. Mr. Haack's statement was the same one that he delivered before the commission itself a week ago, citing the recent losses or diminished profits of member árms of various types. His figures showed, for example, that 54 firms doing primarily a retail business with the public would have lost $26.1 million on their Securities-trading business in May had there been no surcharge, instead of the 39.9 million they did lose. These figures were based on what are known as the "income and expense" statements of member firms. They do not include interest income from margin accounts. FIGURES NOT EXAMINED Irwin Stelzer, the president of N.E.R.A., said that his organization had not looked at the May figures-May was the first full month of the surcharge-but that the inclusion of the interest income would not have wiped out the losses these firms incurred in the first quarter of the year. A number of other points in the New York Stock Exchange presentation were challenged at the hearing. Sheldon Rappaport, associate director of the S.E.C.'s Division of Trading and Markets, asked why the surcharge had been limited to orders of 1,000 shares or William Freund, vice president and economist of the exchange, said that "the financial plight was most serious" among member firms that primarily handled the smaller, retail orders. When Mr. Rappaport inquired whether those who placed the orders for 1,000 shares or more at a time did not "rely on the auction market that is created by smaller orders" and thus have a financial stake in that market, Mr. Haack conceded that "that is true to a large degree, yes." Mr. Rappaport also wanted to know whether the exchange had ever considered helping the retail firms by cutting the charges made to them by members who actually executed their orders, on the exchange floor. Mr. Haack replied that this had not been considered but that even eliminating these charges would have "inconsequential" effects on the losses of firms doing a retail business. NATIONAL SHAREHOLDERS ASSOCIATION, Re: New York Stock Exchange Commissions. Hon. C. JACKSON GRAYSON, JR., Chairman, Price Board, U.S. Treasury Department, DEAR CHAIRMAN GRAYSON: This is a formal request that the Price Board prevent the newly proposed New York Stock Exchange commission schedule from going into effect on November 15th. The proposed commission schedule, recently approved by the Securities and Exchange Commission, is highly inflationary and discriminates in particular against millions of small investors. The new commission schedule when compared to the old commission schedule without the "temporary" surcharge results in a commission increase of as much as 50% for small transactions. In order to disguise this inflationary and discrim inatory increase both the NYSE and SEC are comparing the new commission schedule to the combined old commission plus surcharge. NYSE and SEC officials have actually admitted publicly that the 90-day temporary surcharge, which was to have expired "automatically" in June 1970, was purposely maintained long beyond its original expiration date so that the eventual new and higher commis sion schedule would appear less exorbitant and inflationary. This deception should not be accepted and I am therefore requesting that the new commission schedule not be permitted to become effective and that the "temporary" surcharge be abandoned immediately. The new commission schedule, as the present surcharge, will in effect result in "windfall profits" for the nation's largest brokerage firm, Merrill Lynch, Pierce, Fenner & Smith. Merrill Lynch spokesmen have publicly and repeatedly claimed that they neither need nor want the surcharge or fixed commission system which are being imposed on small investors. Yet since they are the larg est single caterers to small investors they are the biggest profiters from fixed higher commission. Furthermore, since thousands of account executives ar not getting any portion of the proposed higher commission schedule nor from the present surcharge, brokerage firms are benefitting from higher commission without passing any portion on to their salesmen and thus are reaping "wind fall profits." Merrill Lynch, especially, has admitted record breaking profits thi year. During the first nine months of 1971 it had net earnings of $50.3 million compared to $24.1 million for the same 1970 period. In the public interest I therefore appeal to you and the Price Board to im mediately deny the implementation of the new commission schedule. I am a your disposal for any formal or private hearings or discussions you may wish t undertake regarding this matter. Since J. Wilson Newman is a member of the Board of Governors of the NYS I trust that he will not participate in the deliberations and the decision regard ing this matter. Respectfully submitted, Mr. Moss. Mr. Painter? HANS RANDOLPH REINISCH, President. Mr. PAINTER. Mr. Reinisch, I have only a few questions which relat to the latter part of your statement. There, you make several recon mendations regarding future regulation of the securities industry. Yo suggest that there be joint regulation of the leading exchanges by ha ing on the boards of governors corporate and institutional represent tion, individual investor representation, and "ad hoc" governmental representation by such bodies as the SEC and SIPC. However, earlier in your paper, you observed that the three "public representatives" which have served on the New York Stock Exchange's board of governors "do not represent the individual shareholder viewpoint." Thus, you observe that "there is absolutely no shareholder representation on the board of governors." If your proposal for joint regulation of the leading exchanges, along with corporate, institutional, and individual representation on the governing boards, be adopted, what grounds do you have for believing that these public representatives will any more represent the publicand actually the small investor-than do the three public representatives which now serve on the board of governors of the New York Stock Exchange? Mr. REINISCH. Obviously, it depends on the individuals who are appointed to the board of governors. At the moment, I feel that the socalled public representatives, or corporate executives, have a conflict of interest. In other words, if the brokerage firms need more money, part of which they have to pay into this Special Trust Fund to bail out the inefficient firms, then the corporate executives currently serving would rather impose a surcharge on the small investors than raise corporate listing fees. If there is genuine small investor representation, let us say, people like Lewis Gilbert or Ralph Nader or Phil Moore, I do not think they would be inclined to permit the imposition of the surcharge. Mr. PAINTER. Now, under your suggested scheme, how would these representatives be chosen and how often would they be changed? Mr. REINISCH. I would think they could conceivably be chosen by congressional committee and Securities and Exchange Commission recommendations to the various boards of governors. Mr. PAINTER. You consider that a congressional committee would make a recommendation to designate, and particularly Mr. REINISCH. The appropriate congressional committees. This one here, in particular, and the Senate Securities Subcommittee under Senator Williams. Mr. PAINTER. This would still leave us with the question: Would these people serve indefinitely, and how often would they be changed? Mr. REINISCH. I would say every 2 years, with the ability to serve another 2 years. A maximum of, let us say, 4 years. Mr. PAINTER. But these public representatives would be chosen by a process of recommendation from either the SEC or Mr. REINISCH. A combination of the SEC and congressional recommendations. Mr. PAINTER. Then they are being chosen as public representatives, but they are being recommended by a subcommittee of the Congress or by the SEC? This is not really what you call a process of public election, is it? Mr. REINISCH. I don't think we would have a national election on this. I think that the appropriate congressional committees and the SEC, aware of individuals concerned with shareholders activities, probably have a better knowledge of who would function well in the public interest than any other group. |