I would much prefer it to a political appointment coming from the White House, for example.

Mr. PAINTER. This would be done every 2 years or so, under your scheme?

Mr. REINISCH. Every 2 years, yes; but I am flexible on that time period.

Mr. PAINTER. Moving on, you suggest joint regulation of the leading exchanges. Would you exclude any exchanges from your proposal for joint regulation? What exchanges do you have in mind?

Mr. REINISCH. That is a good point. The reason I made that is because I feared that the SEC and SIPC might not have enough highly placed staff members to serve on the numerous exchanges, including the regional exchanges.

That is why I submitted my SEC testimony of last week in which I proposed dual markets, one being an institutional investor market and one being an individual investor market. Each market would be governed by a board of governors.

If that is ultimately adopted, then there would be only two boards of governors on which public representatives would serve.

Mr. PAINTER. Are you really talking about a type of two-tiered market?

Mr. REINISCH. Yes.

Mr. PAINTER. So then you would be really talking about only two exchanges, two markets?

Mr. REINISCH. Yes.

Mr. PAINTER. To be more specific.

Mr. REINISCH. If that concept would not be looked upon favorably by the Securities and Exchange Commission-and we have the AMEX, the big board, and various regional exchanges you may have public representatives on all of the exchanges, but SEC and SIPC act with ex officio membership only on the leading exchanges simply because there may not be sufficient staff members available.

Mr. PAINTER. Could you sharpen up a little more your concept of the role of the SEC under your proposal for joint regulation? What would be the extent of the SEC's authority under your proposal?

Mr. REINISCH. It would have the same authority it has now and hopefully some of the earlier suggestions made today would be sharp ened up.

As I pointed out, one does not necessarily need more funding, or larger staff, to act in the public interest. Basic policy decisions can b made by Chairman Casey or the five Commissioners if they have th desire to do so.

Yesterday, before the Federal Court of Appeals in New York the asked the court to dismiss a suit against the SEC and its approval o the New York Stock Exchange commissions.

The argument that the SEC made was that its September 24 lette of approval was merely a comment. So they had the audacity to wease around the word "comment"-when in effect it was an order.

They may be given all the authority in the world, all of the power but if they do not exercise it then there is very little we can do unti Congress specifically directs it to act in behalf of the public interest

Mr. PAINTER. I have a question here on your proposal that new stoc issues be rated. This is on page 12 of your statement. You suggest tha

new issues be rated the way bonds are. May there be problems in rating new issues that are more subtle than those involved in rating bonds? Would you say, for example, that it is the SEC's function to pass upon whether a new issue has been realistically valued? For example, what would you, as the SEC, have done, in the COMSAT financing of a few years ago, where there was very little to go on in pricing the issue since, at the time the issue came out, the company really didn't have any earnings? Some thought that it might really be selling what was characterized as "pie in the sky." I believe that was the phrase which was humorously applied.

Would you have required that the SEC prevent the COMSAT issue from becoming effective if it were unable to show in some convincing way just how that issue was being priced?

What I am really asking you, I suppose, is: Aren't there real difficulties in rating certain types of new issues which you really don't have when you are dealing with bonds?

How would you propose that the SEC meet these difficulties in your proposals?

Mr. REINISCH. It is precisely those difficulties you are speaking about where a gullible public is deluded or pressured by the salesman into buying these securities. I made the same proposal last Wednesday, and Chairman Casey himself cross-examined me at length on this particular problem.

A new issue, let us say, like COMSAT, where there are no earnings, which has no dividend or earnings record, I would rate as being of D quality. A company that has been privately held for many years that nevertheless has a substantial earnings record, that has paid dividends, that has product and product development, conceivably could be rated A.

Obviously, we live in a thriving economy and we must have things like COMSAT, which may be, as you put it, "pie in the sky," but we must take certain calculated risks, and neither the SEC nor anyone else should deny anyone from financing that type of thing.

But we must make the investor aware that it is a highly speculative undertaking, and therefore, if we would rate new issues A, B, C, and D. according to the earnings and dividend history and the possibility of failure, then the public would be guarded, I think, against speculative excesses.

Mr. PAINTER. Doesn't the Commission currently require on the prospectus some indication that this is a high-risk issue? I am really unclear as to what your proposal is. For example, suppose the issuer came out with a price which the Commission considered to be unrealistic. Suppose the proposed offering price is $40, and the Commission thinks this stock should really not sell for more than $20.

Should it allow the registration statement to become effective, or should it just put "D" on the prospectus? Which way does it go?

Mr. REINISCH. In a case like that, I would hope that the SEC would put both the "D" on it, with the understanding that it would also put on there an explanation that it feels it is highly overvalued. That might force the underwriter to value it more realistically.

Mr. PAINTER. You will concede there are difficulties in this proposal to rate new issues that are certainly more subtle and the comparison

to bonds is a difficult one to make? In other words, bonds can be much more easily rated than hot issues, new issues, and so on?

Mr. REINISCH. It is precisely because it is more difficult that I raise the point and that we have to do something about it.

Now, as far as bonds are concerned, Moody's Investor Services rates bonds. Moody's happens to be owned by an investment banking firm: Donaldson, Lufflin & Jenrette. This is an investment advisory service that has been taken over that rates bonds of corporations. I think this is another matter, that no investment advisory service that supposedly gives independent investment advice and ratings should in fact be a subsidiary of an investment firm.

Mr. PAINTER. Mr. Chairman, perhaps Mr. Rowen has some questions.

Mr. Moss. I have one at this time.

On page 11, you state that Congress should specifically subject the New York Stock Exchange and the entire securities industry to the antitrust laws of the United States.

You would propose, then, by that language, to urge that it go beyond the limitation imposed by the Silver case?

Mr. REINISCH. Yes, very much so, because at the moment my own antitrust case against the New York Stock Exchange is in court. and I know from personal experience that the Silver case, in and of itself. is not sufficient clearly interpreted by other courts as specifically stating that the New York Stock Exchange is not exempt from antitrust laws.

Mr. Moss. The Chair would want to make it clear again that this committee recognizes the jurisdiction of the Committee on the Judiciary over questions of antitrust.

Mr. REINISCH. I appreciate the fact that you do, and it was with that in mind that I had the privilege of meeting with Congressman Celler last March and pleaded with him to take some action in this regard. I am delighted to see that he took that very fine and commendable position today.

I might say, I have also met with Senator Philip Hart of the Senate Antitrust Subcommittee. Hopefully, we will have the same results on the Senate side.

Mr. Moss. Are there any further questions?

If not, Mr. Reinisch, we want to thank you for appearing before the committee and give us the benefit of your views.

Mr. REINISCH. Thank you very much, Mr. Chairman.

Mr. Moss. The committee will now adjourn until 10 o'clock tomorrow morning, when it meets with a panel composed of: Honorable William J. Casey, Chairman, Securities and Exchange Commission: Hon. Philip A. Loomis, Jr., Commissioner, Securities and Exchange Commission; Mr. Irving M. Pollack, Director, Division of Trading and Markets, Securities and Exchange Commission; Mr. Robert W. Haack, president, New York Stock Exchange, Inc.; Mr. Donald L. Calvin, vice president, New York Stock Exchange, Inc.; Mr. Gordon Macklin, president, National Association of Securities Dealers. Inc.; and Mr. Lloyd Derrickson, vice president and general counsel, National Association of Securities Dealers, Inc.

The committee will now stand adjourned.

(The following release was subsequently added to the record:)

[For release Tuesday, December 14, 1971]

SECURITIES AND EXCHANGE COMMISSION,

SECURITIES EXCHANGE ACT OF 1934

Release No. 9426

Washington, D.C.

The Securities and Exchange Commission announced today that it had decided to release to the public the Staff Report on Rule 394 of the New York Stock Exchange, which was prepared for the Commission's use in 1965. That report was based on an extensive investigation by the Commission's staff of the rules, regulations and practices of national securities exchange relating to off-board transactions by their member firms (both as agents and as principals) in securities admitted to trading on such exchanges. The investigation eventually led the Commission to request the New York Exchange to modify its Rule 394; the Exchange thereafter amended Rule 394 to its present form.

The public is cautioned that the opinions expressed by the authors of the report do not necessarily express views that the Commission has held in the past or may hold at present, and that the Commission does not vouch for the accuracy of any factual assertions or conclusions that the report may contain. It should also be noted in this regard that the data contained in the report is now more than six years old; the relevance, if any, of the factual information contained in the report to present conditions should be given the most careful consideration.

The report may be examined at, and copies may be obtained from the Public Reference Section, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549.

(Whereupon, at 1:30 p.m., the subcommittee recessed, to reconvene at 10 a.m., Wednesday, November 17, 1971.)

67-228-72-pt. 3-26