Washington. A prompt determination is made as to whether the Commission will make application for an injunction or rely upon NASD action. In either case priority is given to immediate cessation of the business if risk to the public or other broker/dealers is apparent. Duplication of effort is avoided to the extent possible such as parallel proceedings based on the same facts. Similarly, Association examinations are scheduled only after coordination with the appropriate regional office of the Commission and the other self-regulatory organizations so as to avoid conflicting or closely overlapping examinations.

In certain instances, at the request of the Commission, we conduct special examinations of members. We also provide the Commission with industry financial and operational data when such is needed in emergency type situations. Recently the Association cooperated with the SEC in examining members to offer their securities publicly for the first time. The information provided by the Association to the Commission was requested to assist in its review of the registration statements of these broker/dealers. In all, we believe this cooperative regulation has operated in a manner intended by the framers of the Maloney Act.

SECURITIES INVESTORS PROTECTION CORPORATION

The Securities Investors Protection Act of 1970 calls for a division of responsibility between the self-regulatory organizations as to surveillance of their members. This division of authority follows the regulatory pattern established by the 1934 Act as to the exchanges, the Association and the Commission. Our practice, as required under the Act, is to advise both the SEC and SIPC of information relating to members which are approaching or are in financial difficulty. Our clearing subsidiary, the National Clearing Corporation (NCC), which is now clearing New York over-the-counter transactions on a balance order basis, is and will continue to be of great assistance in determining when members are approaching financial difficulty. NCC members having liquidity problems quickly come to the attention of the Corporation through irregularities in daily receipts, deliveries and payments. We are coordinating information received from this Source with what we have traditionally received so that when a financial problem arises warning is available at the earliest opportunity. This involves notification to all interested organizations including the exchanges, SIPC and the SEC.

EXCHANGE COOPERATION

A cooperative arrangement exists with the New York and American Stock Exchanges concerning the jurisdiction of the respective organizations. Where a net capital problem of an exchange member comes to our attention, we advise the exchange. Under the arrangement the organization having the predominant interest will proceed with investigation, and when necessary, disciplinary action. In general, the division of jurisdiction is based upon the type of security involved. whether or not one organization has a specific rule covering the subject matter of the violation and whether one organization may have lost jurisdiction over possible respondents. The arrangement has worked well in our view. In unclear situations we attempt to eliminate duplication both in administration and enforcement. For example, the Association's rules in the advertising area, which are similar to those of the New York Stock Exchange, are not applicable to an exchange member filing under Exchange rules. The NASD reviews general advertising and sales literature for all NASD members who do not belong to the New York Stock Exchange or who belong to an exchange which does have comparable rules.

Joint efforts are continuing to eliminate duplicate reporting requirements. Recently the NASD, NYSE and AMEX developed a uniform financial report which is to be submitted by members of each to the three organizations. The implementation of this joint reporting is scheduled for January, 1972.

Other cooperative efforts have existed in the past such as those relating to the industry operational and financial crisis which commenced in 1968. In order to efficiently utilize available manpower and to cover the greatest number of firms in the industry, the NASD undertook a special program of examination for compliance relating to NASD members. The exchanges, on the other hand, concentrated their efforts on exchange members. The program was undertaken with the knowledge of the Securities and Exchange Commission in an effort to assure, to the extent possible, nationwide coverage of all firms considering the shortage of experienced personnel. In February, 1968 the Association, in conjunction with the New York and American Exchanges, began regular meetings to consider the 67-228-72-pt. 3-28

operational and financial condition of the industry. A monitoring system to assess the amount and age of unsettled securities transactions was instituted with the NASD focusing its attention on sole NASD members. The resulting reports were evaluated by the joint committee as well as by each organization. The reports provided necessary information upon which to base recommendations as to actions to regulate and control the operational and financial problems.

BROKER/DEALERS REGISTERED WITH SEC ONLY (SECO)

Broker/dealers which are not NASD or exchange members, as indicated above, are not subject to NASD surveillance or regulation. So far as we are aware, the Commission has sought to regulate such broker/dealers in a fashion similar to that done by the NASD.

2. ASSESSMENT OF SELF-REGULATION

Self or cooperative regulation has worked and should be continued and improved. Assessments made in the Special Study of Securities Markets of 1963, as well as by the Congress in the Investment Company Amendments Act of 1970, indicate general acceptance of this proposition. You will recall that the 1970 Act vests certain authority in the Association in establishing the level of sales charges for investment company shares. The Commission, of course, will have oversight. As is the case with any regulatory body, a farsighted ability to perceive future requirements and to adapt to change are necessities for continued and effective existence. We are constantly working upon ways to improve industry regulation and are always seeking to assess new and improved technology so as to improve the market place and its regulation. The recent implementation of the NASDAQ System attests to this. So also do plans for implementation of a new nationwide system for clearing securities on a continuous net system through the National Clearing Corporation. Initial planning has also commenced to tie together NASDAQ facilities and NCC so that transaction reports and clearing can be accomplished.

Changes in long established patterns for trading securities have taken place since implementation of the NASDAQ System, and we anticipate other changes as a result of operations of the National Clearing Corporation. The assistance and oversight of the Commission have been beneficial to our efforts and these results could not have been accomplished without their cooperation and support.

We recommend no specific changes in the regulatory framework at this time. It would be premature to recommend precise modifications in the self-regulatory structure pending a clearer determination of what the makeup of the future market place will be. As further developments bearing on the latter point permit, we would expect to be in a position to suggest possible specific changes. However, it is our opinion that the following basic principles should be the cornerstones of the entire regulatory framework.

There should be equality of regulatory standards among all organizations, taking into account differences in types of firms and functions performed. Such equality should cover interpretation and enforcement of rules, as well as disciplinary procedures.

There should be elimination of duplication in surveillance and inspection activity. Implicit in this is the recognition of a logical division of labor among regulators where broker/dealers are subject to the rules of more than one regulatory body.

There should also be sufficient latitude in establishing membership qualifications to assure high professional standards without unfairly or arbitrarily restricting access to the broker/dealer community.

We stand ready to assess and evaluate any changes which may be suggested by others. It is our desire and intention to cooperate fully with the current investigations of the industry. Our goal is to develop regulatory practices which stimulate competition between and among markets to the fullest extent.

3. COMMISSION OVERSIGHT OVER NATIONAL SECURITIES EXCHANGES In general, we believe uniformity of oversight as to rules of self-regulatory organizations to be desirable. Not being parties in the relationships between the Commission and the exchanges, we do not believe it is appropriate for us to comment directly upon this question. However, it may be of assistance to the Committee to comment upon Commission oversight as to the Association.

NASD RULES

Under Section 15A (j) of the 1934 Act, the Association is required to file rule changes and additions with the Commission before they can become effective. A new or changed rule becomes effective upon the thirtieth day from the date of filing with the Commission unless disapproved by it. Prior to formal filing, however, there are numerous discussions with the Commission's staff relative to the intendment of and reasons for the rule proposals.

ABROGATION OR ALTERATION OF NASD RULES BY SEC

The Commission also has formal power, after notice and opportunity for a hearing under Section 15A(k) (1), to abrogate a rule if such is necessary to assure fair dealing, fair representation or otherwise protect investors or effectuate the purposes of the Act. In addition under Section 15A (k) (2), the Commission may request the Association to alter or supplement its rules in certain specified areas. If the Association fails to accede to such requests, the Commission may itself alter or supplement the rules.

There have been two proceedings under the abrogation section. The first, in 1944, related to the Association's regulation of mark-ups in the retail sale of securities to customers. After a hearing, limited to briefs and oral argument, the Commission concluded that no action should be taken to abrogate. A current proceeding is pending before the Commission concerning the Association's rule, specifically adopted under the 1934 Act and long accepted by the SEC, which prohibits members from joining in the distribution of securities with non-members. The petitioners there seek a construction of Association rules which would permit them to sell equities through Association members despite their nonmembership in the NASD. The matter is now pending before the Commission.

NASD DISCIPLINARY ACTIONS

The Commission is empowered by the Act to review all Association disciplinary action upon petition of any aggrieved person or on its own motion. After notice and opportunity for hearing, the Commission may dismiss the application for review or modify the penalties imposed by the Association where it is determined that they are excessive or oppressive. Only a small percentage of all Association actions have been appealed to the Commission. The Commission has Occasionally reversed Association findings and it has, although sustaining findings, modified penalties in numerous cases.

NASD MEMBERSHIP QUALIFICATIONS

The Association may not accept as a member a broker/dealer who is disqualified from membership by virtue of some previous misconduct, nor may the Association continue a member in membership while the member is employing an individual who has engaged in pior misconduct. The disqualifications are set forth in Section 15A (b) (4) of the Act and the Association's By-Laws. They include such matters as suspension or expulsion from the Association or from a national securities exchange, revocation of a broker/dealer's registration with the Commission, revocation of an individual's registration with the Association, and barring or suspending an individual from being associated with any broker/ dealer or member of the Association or national securities exchange and specified criminal violations. Commission approval must be obtained if the Association makes a determination, which almost invariably involves a hearing, that an applicant should be admitted to or continued in membership despite the disqualification. In cases where the Association refuses membership or the continuation of membership, the member involved may apply for review to the Commission. Numerous applications have been filed by the Association recommending favorable consideration by the Commission, and it is only on rare occasions that the Commission has disagreed. There also have been a number of instances where the Association has declined to make a favorable recommendation because it appeared inappropriate and contrary to the public interest to do so, and in almost all such cases, the applicants have chosen not to pursue their right to have the matter reviewed by the Commission.

In sum, a healthy interplay is created under the Act. It has been without disagreement, and as the records of proceedings will indicate, it is based upon informed judgments.

4. PROCEDURES FOR ADOPTING EXCHANGE RULES

The process of adopting rules of national securities exchanges is a subject to which other panelists who have participated in such matters will probably address comments.

We have reviewed the article referred to in your outline which is critical of the Commission's oversight in this area and which recommends adoption of formalized procedures as to exchange rules under which the Commission would (1) give notice to and solicit comment from the public as to proposed changes in the rules of the exchanges; (2) convene public hearings on issues of major importance: and (3) write opinions articulating Commission views as to rule changes. It would appear that the reforms contemplated by the author would flow from amendments to the 1934 Act which would vest the Commission with new powers to approve or disapprove exchange rules prior to adoption.

Generally, we believe it beneficial that notice and comment be obtained from interested parties respecting rule changes relating to securities industry regulation. Proposed changes in Association By-Laws and rules are submitted to our membership for comment in advance of adoption. The policy of submitting rule proposals for comment (notification is also given to the press and securities publications and receives wide distribution) was adopted in 1970.

Our experience to date has been favorable. In general, however, matters pertaining to internal industry operating procedures seem to be of little public or member interest. We believe this is because such rules have in large measure been formulated through Association committees consisting of numerous experts in the fields under consideration. In addition, the views and comments of the Commission and the Commission's staff are almost always received during the rule formulation process. On the other hand, matters pertaining to underwritings of broker/dealers and tax sheltered offerings were the subjects of considerable comment.

5. INDEPENDENCE OF THE SECURITIES AND EXCHANGE COMMISSION

(a) Self-funding: We do not believe we are in a position to be of assistance in the Committee's determinations relating to self-funding for the Commission. Obviously, the Commission's work extends throughout the nation and affects all citizens, albeit certain classes of citizens may receive more direct benefit than others. To date we have failed to see reason why the funding of the Commission should not continue in the same manner as is appropriate for other independent agencies. This is so despite the fact that we realize the Commission has not had sufficient funds to carry out activities which would be desirable. Also, insufficient funding might occur under a self-funding type of arrangement. If a self-funding proposal would create ample funds on a continuous basis for the efficient functioning of the Commission, we believe it should be considered.

(b) Legislative proposals: We must disclaim any expertise concerning problems that have been presented relative to Commission legislative proposals or comment as a result of Executive Branch requirements. If problems have been present, they have not come to our attention.

(c) Supreme Court litigation: Our experience with Commission Supreme Court litigation is limited but constrictions upon the authority of the Commission to assert its positions are not apparent to us nor are we aware that its independence has been questioned.

(d) Automatic reappointment: The automatic reappointment of Commissioners who are filling unexpired terms of their predecessors is another area where we must disclaim experience. It has never appeared to us that the Commission has not functioned properly because reappointment is not automatic, and hence, without further information we would not be inclined to recommend a change.

6. CREATION OF A NEW SELF-REGULATORY BODY

The suggestion of Messrs. Cary and Werner of a new self-regulatory organization, to act as a parent organization between the Commission and the existing self-regulation organizations, is interesting and provocative. It is our impression that the authors foresee emerging trends in the securities markets which, as a result of improved technology, could result in a central market with one communications system in which the existing marketplaces would be integral components. The suggestion that a parent self-regulatory organization be

created, like the Association, on a nationwide basis and subject to the jurisdiction of the Commission under similar standards is based upon the proposition that the marketplace of the future will be far more integrated than are today's marketplaces. Since this is not likely to occur in the immediate future, it seems to us premature to weigh this suggestion. At a future date, however, with the further development of central market concepts, there will be adequate time to consider the proposal as well as alternatives for assuring adequate coordination of regulatory activities.

7. COMPOSITION OF SELF-REGULATORY BODIES

Self-regulation presupposes the participation of those actively engaged in the industry. Persons engaged in the industry have the intimate knowledge necessary to institute constructive and enlightened regulatory controls over the industry.

The industry has expanded concomitantly with the economy and forces have come into play which require a searching re-examination of established practices. One area of re-examination is the composition of the self-regulatory bodies to the end that the views of all, not merely the majority, may be fairly represented in the context of changing industry needs.

I would like to describe briefly the composition of our Board. Under Section 15A (b) (6) of the Act, Association rules must insure a fair representation of its members in all phases of the administration of the Association's affairs. For many years the Board consisted of 21 individuals, elected by the membership in our 13 districts, each of which has the right to elect a specified number from its geographic area. The Association's By-Laws provide that the Board shall consider the fairness of representation of the various districts, and whenever it finds any unfairness to exist, recommend appropriate changes. Pursuant to this mandate, in 1970 the Board voted to increase the number of Board members based upon changes in the membership within the district. In addition to governors elected by the membership, one governor at large is now elected by the Board from among the underwriters of investment companies and an additional governor at large from insurance industry members. The By-Laws also provide for the election of a third governor at large to take office in 1971 (which has occurred), a fourth in 1972 and a fifth in 1973.

In 1971 the Board directed establishment of a new Committee to review election processes and procedures of the Association. A major study is being undertaken by this Committee so as to review the total composition of the membership, changes within the membership, new members, manners and procedures for their elections, and such other data as may have a bearing in the matter. The Board's desire to establish as fully and completely as possible an election process which stimulates the interest of the members so that the most competent persons in the industry will make themselves available to the Association. One of the aims of the Committee will be to seek ways to make the processes by which these persons are elected responsive to the needs of the total membership. Further, the Committee will study the interests of issuers whose stock is traded by the membership, as well as groups representing public investors of all types and classes. When this study and the recommendations of the Committee have been completed and the results and conclusions of the Board will be made known to the SEC and, of course, to this Committee, and will be publicized. Should these recommendations include provisions for public and corporate members or others, it is possible that amendment to Section 15A (b) (6) of the 1934 Act will be necessary since this provision could be said to limit representation to persons associated with members.

8. ESTABLISHMENT OF SEC PLANNING ORGANIZATION (OR EXPANSION

OF THE OFFICE OF CHIEF ECONOMIST)

Creation of a new Commission division to act as a planning arm which would view the industry as a whole so as to prevent regulation by reaction to specific problems as they arise would probably be beneficial although we have not as ret attempted to fully analyze this suggestion. For an informed view, we would eed to know matters concerning structure, staff, financing and independence. The transmittal letter from the Commission to Congress (Part 4) submitting the 1963 Special Study points out by way of self-criticism that the Commission had been preoccupied with the day-to-day problems of the industry and had not