Lapas attēli

a danger to future customs. The SIPC legislation in of itself will protect erist. ing customers and, significantly, customers of all firms, not just exchange members. This implies that all should be subject to comparable regulation. It is also to be hoped that industry organizations will be impelled to take more effectire action since almost all their members will have to pay assessments and the amount of these assessments will depend in considerable measure on their success, or lack of it, in spotting and avoiding problems.

In the second place, the SIPC legislation potentially commits public funds to the protection of customers of securities firms. This clearly introduces a ner dimension since regulatory authorities are now confronted with the additional necessity of protecting the taxpayers money. In the consideration of this legislation the Congress made it clear that this will call for considerably more effectire direct regulation by the Commission in financial and related areas. Specifically, the Commission is committed to adopting regulations concerning the securities of a customer's fully-paid securities and establishing reserves for a customer's fully-paid balances.

The experience of the past few years and the enactment of the SIPC bill obriously call for stronger regulation and empower and obligate the Commission to play an increasing part in the regulatory scheme. At the same time self-regulation should be asked to contribute vhateve it can to the common fort. Sincerely,

Hugh F. OWENS, Commissioner. Enclosures.



1. Physical Facilities :

Too small for volume of work.
Unsatisfactory working conditions for back office crew.
Custodial facilities inadequate.

Not centralized.
2. Back Office Personnel :

Too few.
Poorly paid, unmotivated.
Untrained, unsupervised.
Hours too long.

Infiltration of back office by criminal elements. 3. Automation:

Poor systems design and programming.
Inability of systems to interface.
Unreliability of equipment.
Failure to maintain parallel records.
Inexperience of employees.

Certificates and related documents were not machine readable. 4. Order Entry :

Errors of registered representatives in entering orders.
Inaccurate or incomplete account records.
Lack of adequate verification procedures.
Inadequate training of registered representatives in order processing.

Errors arising from mergers, stock splits, spin offs, and other changes in security names and prices. 5. Order Execution :

Errors of instruction clerk or executing broker.
Physical difficulties of execution during high volume periods.

Inaccurate memoranda of execution and prompt comparison procedures. 6. Trade Comparison :

Lack of locked-in trade systems.
Lack of an O-T-C comparison system.

Failure to resolve uncompared trades promptly. 7. Trade Settlement:

Lack of an ()-T-C settlement system.
Fails caused by.
Errors in trade execution process.

Certificates not in seller's possession-other delays in transfer.
Errors in trade settlement process.
Stock loan problems.

Inaccurate records of settlement. 8. Transfer:

Delay by transfer agent or registrar.
Errors in dividend payments resulting from transfer problems.
"Legal” transfers requiring special handling.
Stolen securities.

Inaccurate records and control of items in transfer. 9. Custody:

Physical facilities inadequate.
Infiltration of back office by criminal elements.
Constant physical movement of securities.

Segregation instructions not observed. 10. Interface with Banks :

Performance of transfer agents.
D.K. problem on C.O.D. transactions.
Performance of mutual fund custodians.

Confirmation requests re dividend payments, transfers. 11. Internal Controls :

Lack of managerial authority.
Lack of internal data collection and reporting.
Lack of comparative standards.
Lack of separate records, research, and compliance staff.

Infrequent box counts. 12. Customer Accounts:

Inadequate complaint processing.
Regulation Textensions, free riding.
Delayed delivery by customer of securities sold.

Failure to resolve items in suspense, error, and difference accounts. 13. Expansion Problems :

Difficulties in integrating operational systems of new branch offices and branch offices acquired from troubled firms.



1. Inadequate Capitalization:

Partnership and closed corporation form of business (no public ownership).
Extreme leverage through the use of subordinated debt capital.

Failure of subordinated accounts and secured demand notes to furnish working capital. 2. Impermanence of Capital :

Ready withdrawal of capital by partners and stockholders. Short-term maturity of debt obligations. Lack of freeze-in provisions in capital contribution agreements. Fluctuation of capital invested in securities positions with market conditions. 3. Reliance upon Customers' Assets:

Usage of customers' funds and securities traditionally authorized hy account agreements. lack of rules governing use of free credit balances and other cash equities.

lack of compliance with hypothecation and segregation rules to safeguard customers. 4. Internal Controls :

Lack of managerial authority.
Lack of internal data collection and reporting.
Lack of comparative standards.
Infrequent box counts and reconciliation of bank accounts.

[ocr errors][merged small][merged small]

5. Customer Accounts:

Failure to enforce Regulation T.
Failure to resolve items in suspense, error, and difference accounts.

Past due receivables.
6. Stock Record Differences:

Exposure from the sale of long stock record difference securities, and from failing to take market action with respect to short stock record difference securities. Mr. Moss. Are there additional observations by you, Commissioner Loomis? Mr. LOOMIS. Well, I will turn to Mr. Pollack in a moment.

a The chairman has said what I think has to be said at the moment. I will be happy to participate in answering questions.

Mr. POLLACK. I agree.

Mr. Moss. I want to take this opportunity to welcome you, Mr. Loomis, as a member of the Commission, appearing before this committee for the first time in that capacity. We have had a long association during your tenure as General Counsel and we welcome you as a member of the Commission.

Mr. Loomis. I thank you for that, Mr. Chairman.
Mr. Moss. Mr. Haack.



Mr. HAACK. Thank you, Mr. Chairman.

My name is Robert W. Haack, and I am president of the Neir York Stock Exchange. With me is Mr. Donald Calvin, a vice president of the exchange.

Mr. Chairman, I would like to, rather than dwell on the statement ve filed, just paraphrase in very brief form our reaction to any questions that you asked, the first of which related to the self-regulatory responsibility. Your letter asks that we describe briefly the way in which the various self-regulatory organizations have divided their various responsibilities.

The New York Stock Exchange has been and continues to be the principal self-regulatory authority over its own members. In that role. it generally makes no distinction with respect to its members or member organizations which are also members of other securities er changes or the NASD.

We have developed over the years a number of cooperative practices and the various exchanges generally look to the organization which i principally responsible on those matters that arise out of activities ir their own area. For example, the stock exchange defers to the NASD ; any investigation which involves one of our members' activities in the over-the-counter market, or in an over-the-counter security.

More recently, the SIPC addressed this question and authority wa given to the SIPC Board in this respect. The New York Stock Es change is the examining authority for all its member firms, whethe members of another exchange or the NASD.

The second question relates to self-regulation, how it has worke whether it should be continued or modified, and if so, in what respect:

We think that self-regulation in the securities industry has worked and should be continued. It is, when coupled with SEC and Congressional oversight, the most efficient and most realistic way of regulating the securities industry.

Out of all this has evolved a system of cooperative regulation, and we think that the concept of self-regulation gains from the fact that much of the regulatory effort comes from people in the firms involved on a day-to-day basis with changing conditions and emerging trends in the industry.

The experience of these people, their closeness to the marketplace, and their firsthand knowledge of the operations of brokerage firms, make up a unique and indispensible contribution.

It is difficult for us to be brief when discussing the merits of selfregulation, since it is such an integral part of the securities industry and is so basic to everything we do in our day-to-day activities.

Self-regulation has not been, nor should it be, static. While important changes have been made in the past, equally important changes need to be made in the future. At the moment there are at least 20 important new programs or modifications in self-regulatory procedures or practices which are either underway or in the advanced planning stage. There is a listing of those in the more detailed statement.

I would submit that the record of self-regulation demonstrates that it has worked in the public interest. It has not always worked as well as it should. Nevertheless, prior congressional and SEC inquiries into the effectiveness of self-regulation have confirmed its merit. Modifications have been continually made in regulatory practices and procedures, and will need to be made in the future as well.

The third question asked is to whether the 1934 act should be amended to provide the commission with the same oversight of the national securities exchanges as it has over the NASD.

We have reviewed the regulatory powers over the stock exchanges as compared to the NASD. Our review leads us to conclude that the differences in regulatory or oversight powers of the SEC rest basically on the differences in the history of the exchange and the over-the-counter markets. The major differences which are not related to the differences between the exchange and the over-the-counter market are essentially in two areas:

The first area of difference has to do with the SEC's right to initiate or abrogate rules of the NASD and the exchanges. In this area the sections of the Maloney Act relating to the NASD give the SEC the authority to abrogate any NASD rule, and to disapprove any amendment of existing rules or the adoption of a new rule. The SEC's power to initiate NASD rules extends only to four enumerated areas dealing with requirements for membership, rulemaking procedures, selection of officers and directors, and affiliations with other associations.

Section 19(b) relating to exchanges gives the SEC authority over 12 key areas of exchange activity including such matters as financial responsibility of members, listing of securities, reporting of transactions, fixing reasonable areas of commissions and other charges, solicitation of business and similar matters.

In addition, the SEC has the authority under section 9 (f) of the Securities Investor Protection Act to require any self-regulatory or

ganization to adopt rules with respect to the scope of inspections and examinations relating to the financial condition of their members and to require reports, inspections, and examinations relating to financial condition of their members.

A major difference is that the areas where the Commission may act to initiate or change exchange rules are much broader under section 19(b) than they are under the Maloney Act. We do not think this area of SEC authority over exchange rules should be narrowed.

The second area of differing treatment is SEC review of NASD disciplinary procedures.

The SEČ ħas broad power, on its own motion or on the application by an aggrieved person to review any disciplinary action taken by the NASD including any denial of membership of any action barring anyone from being associated with a member. Unless the Commission otherwise determines, the association's action is stayed until the Commission proceeding is terminated. The Commission may cancel, reduce, or require the remission of any penalty imposed by the association.

While the Commission has power under section 19(a) (3) of the 1954 act to suspend or expel an exchange member for violations of the 1934 act or the rules thereunder it is not authorized to review eschange disciplinary actions.

The stock exchange reports actions taken in disciplinary matters to the Commission and from time to time the Commission reviews the exchange's disciplinary procedures. The most recent review was in March of this year. The exchange staff also consults frequently with the Commission staff on pending investigations and pending disciplinary proceedings, which are current.

In all cases, the person charged has an opportunity to reply written charges prepared by the exchange itself. Depending upon the type of case, the response must be given in 10 to 30 days. If the case is pursued, a hearing is held before a staff or committee hearing panel composed of people who have not participated in the investigation. Cases heard by staff panels are reviewed by an officer or officers of the erchange before decision on a penalty is reached.

In all cases the party charged has a right to have his case appealed to the exchange board of governors. In cases involving members or member organizations where the penalty would result in suspension or expulsion, the party charged may have a full trial before the board of governors.

The entire exchange disciplinary procedure is designed to afford fair treatment to all persons charged with a violation.

As I stated, all persons on whom a penalty is imposed have a right to appeal to the board of governors, except those cases which are tried before the board.

In all these actions, the time consumed is relatively brief. If another layer of review of disciplinary action—by way of appeal to the SECis provided, we are concerned that this might delay the entire er. change disciplinary procedures.

Your fourth question inquired as to how, or by what method rules of national securities exchanges are adopted, how this could be made more public, and you give as a reference a recent article in the Yale Law Journal.

« iepriekšējāTurpināt »