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however, gave to a federal Commission extensive direct powers to establish standards for broker-dealer and exchange activity. The legislation which finally became the Exchange Act represented a compromise between the two approaches.

The Fletcher-Rayburn bill expressly prohibited trading and credit practices which the Senate's investigations had shown to be detrimental to market integrity and investor protection. With only sligh changes, these prohibitions are now embodied in sections 8 and 9 of the Exchange Act.15 Because legislation can not specify all present and future practices in the securities industry which might injure or be unfair to investors and other broker-dealers, the bill gave to the Com mission broad rule making authority in order to assure that there would be adequate governmental control of complex, varied and rapidly changing trading practices. These broad rule making powers are now contained in section 10 (short sales, stop-loss orders and manipulation and deceptive practices) 16 and Section 11 (floor trading, off-floor trading by members and operations of specialists and odd-lot traders) 17 of the Exchange Act.

The Fletcher-Rayburn bill gave the Commission the power, in Mr Dickinson's phrase, to come down on an exchange "like a ton of bricks” by suspending or withdrawing an exchange's registration if it violated the Act or rules thereunder or failed to enforce compliance therewith by a member. The Commission was also given the authority to suspend or expel members and officers of an exchange who violated the Act or rules thereunder. These powers are now contained in seetion 19(a) of the Exchange Act.

The most significant and controversial grant of authority to the Commission proposed by the Fletcher-Rayburn bill was section 18 (c), which authorized the Commission

to prescribe such rules and regulations for national securities exchanges, their members and persons transacting a business in securities through such members, in addition to those specifically provided in this Act, as it may deem necessary or appropriate in the public interest or for the

protection of investors. 15 Originally section 7 of the Fletcher-Rayburn bill prohibited the aggregate indebtedness of any member, broker or dealer from exceeding 1,000 percent of the net current assets owned by the borrower and employed in the business” and made unlawful "the hypothecation of more of any securities carried for the account of a customer than is fair and reasonable in view of the indebtedness of such customer.” Section 8 of the Exchange Act now restricts aggregate indebtedness to 2,000 percent "of the net capital (exclusive of fixed assets and value of exchange membership)

employed in the business." Section 8 of the Fletcher-Rayburn bill originally prohibited or imposed limits on such speculative activities as pools and the attendant devices of "wash and "matched" sales, planted rumors, unwarranted pegging or stabilization, and certain transactions in puts, calls and options. It also prohibited the acquisition of "substantial control of the floating supply of any security registered on a national securities exchange for the purpose of causing the price of such security to rise on the exchange because of such control of the floating supply" and permitted injured persons to recover the difference between the price fixed for the security and the lowest price for which the security sold during the ninety days preceding and

the ninety days
following the purchase. Section 9 of the

Exchange Act no longer contains a specific prohibition as to the acquisition of float but the remainder of the section is substantially the same as section 8 of the Fletcher-Rayburn bill.

16 Section 9 of the Fletcher-Rayburn bill, which was essentially enacted as section 10 of the Exchange Act,

permitted the SEC to prescribe rules regulating "... the sale of any security registered on a national securities exchange, which at the time of such sale was not owned by (the seller) or his principal stop-loss orders, and any device or construction which ... the Commission may by its rules and regulations find detrimental to the public interest or to the proper protection of investors." Section 10 of the Exchange Act prohibits the use of any manipulative or deceptive device or contrivance" in connection with the purchase or sale of any security registered on an exchange.

17 Section 10 of the Fletcher-Rayburn bill gave the SEC authority to establish rules for the proper conduct of specialists and was eventually enacted, with changes,

as section 11 of the Exchange Act.

While making clear that the Commission's authority over exchange rules was in no way limited, this section gave examples of the subjects "among other things” which the Commission could control.18

The drafters of the Fletcher-Rayburn bill were well aware that the bill would grant "large, wide and discretionary powers” to the Commission. They pointed out, however,“ : : . that these powers; these large powers are today being exercised not by the Government, but these powers are being exercised by the governing boards of the exchanges, and the fact that the Government steps in to assume or exercise those powers which work for the public good or public detriment, is not unusual.” 19 With regard to section 18(c) in particular, the drafters argued that, without this broad rule making authority, the Commission would be “in a position where it cannot correct an abuse on an exchange short of suspending the exchange and completely ruining the market for its securities.20

Representatives from the business community, the securities industry and the Roosevelt Administration roundly criticized the Fletcher-Rayburn bill and most specifically section 18(c). The critics charged that the bill created an improper balance of power between the government and the exchanges. As the principal leader of the industry's opposition, Richard Whitney, then president of the NYSE, stated with regard to section 18(c):

This long section . . . clearly is not a regulation of stock
exchanges and the brokerage business, but, in fact, gives
the ... Commission power to manage exchanges and dictate
brokerage practices. There is no single activity of a stock
exchange from the admission of members to their suspension
or expulsion that may not be controlled under this subsec-
tion. The election of the officers of an exchange and the
appointment of its committees are likewise within the
control of the ... Commission. This is not regulation but

domination.21 "[T]o meet the legitimate criticisms” 22 of the Fletcher-Rayburn bill, a revised bill was prepared and introduced by Congressman Rayburn

18 "The authority above given the Commission shall include, among other things, authority to prescribe such rules and regulations for national securities exchanges, their members and persons transacting a business in securities through such members, in addition to those specifically provided in this Act, as it may deem necessary or appropriate in the public

interest or for the protection of investors, and may by its rules and regulations more specifically define the form and

procedure to be followed in carrying the provisions of this Act into effect. The Commission, among other things, may prescribe the time and method of making settlements, payments, and deliveries, the time and method of calculating margin requirements, and the time and method of closing out under-margined accounts. The Commission, among other things, may by rules and regulations prescribe rules for the conduct of business on exchanges, for the classification of members, for the election of officers and committees to ensure a fair representation of the membership, for the suspension, expulsion, or disciplining of members, for the listing or striking from listing of any security with right of appeal by the issuer to the Commission, for the reporting of transactions on the exchanges and upon tickers maintained by or with the consent of any exchange, including the method of reporting short sales, sales of securities in default in bankruptcy or receivership, and sales involving other special circumstances. The Commission may fix or prescribe the method of fixing uniform rates of commission, interests, and other charges, may prescribe minimum units of trading, rules limiting the manner, method, and place of soliciting business, rules for odd-lot purchases and sales, rules regarding minimum deposits on marginal accounts, and rules limiting or prohibiting the registration or trading in any security within a specified period after the issuance or primary distribution thereof, prescribe rules governing the carrying of accounts and to prohibit fictitious or numbered accounts and require the disclosure of the real and beneficial owners, thereof. The Commission shall have power to fix the hours of trading, and, if the public interest in its opinion so requires, summarily to suspend trading in any registered security or upon any registered exchange for a period not exceeding ninety days." Section 18(c) of H.R. 7852 and S. 2693, 738 Congress, 2d Sess. (1934).

19 Hearings on H. Ř. 7852 and H.R. 8720 Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., 1st Sess. at 22 (1934) (testimony of J. M. Landis).

20 Hearings on S. Res. 84, S. Res. 56 and s. Res. 97 Before the Senate Comm. on Banking and Currency, 73d Cong., 1st Sess., pt. 15 at 6569 (1934) (testimony of Thomas G. Corcoran).

21 Id. at 6638-39. 22 Hearings on H.R. 7852 and H. R. 8720 Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., ist Sess. at 625 (1934) (statement by Committee Chairman Sam Rayburn).

26

on March 19, 1934.23 In seeking to achieve a satisfactory compromise, section 18(c) was considerably revised and became section 18(5) of the new bill. Instead of giving the Commission the authority by rule to prescribe the rules and regulations of an exchange directly, section 18(5) established a quasi-adjudicatory procedure to achieve the same objective. The Commission could request an exchange to effect specific changes in its own rules. If the exchange refused, the Commission was required to give it "notice and opportunity for hearing” before taking action. If the Commission determined after the hearing that the changes were “necessary for the protection of investors or for the insuring of fair dealing in securities traded in upon such exchange or for the insuring of fair administration of such exchange," it could "alter or add to” the rules of an exchange in respect of "such matters as” fourteen subjects, all but one of which had been specified in sec. tion 18(c). Therefore, although the power was now somewhat more difficult to use, the Commission still had broad authority over stock exchange rules. 24

The stock exchanges continued to oppose the bill, focusing their attack primarily on the substantive reach of proposed section 18(5). As a final compromise, the matters subject to Commission authority under this section were modified to exclude authority over the classification of members and methods of election of officers and committees to insure a fair representation of the membership”, and “the suspension, expulsion and disciplining of members" and a new category, “similar matters”, was added 25 As so modified, the section was incorporated in the Exchange Act as section 19(b).

23 H.R. 8720, 73d Cong., 2d Sess. (1934). 24 "If after appropriate request in writing to a national securities exchange that such exchange should effect on its own behalf specified changes in its rules and practices, and after appropriate notice and opportunity for hearing, the Commission determines that such exchange has not made the changes so requested and that such changes are necessary for the protection of investors or for the insuring of fair dealing in securities traded in upon such exchange or for the insuring of fair administration of such exchange, to alter or add to the rules, regulations, and practices of such exchange in respect of such matters as the classification of members and the methods of election of officers and committees to insure a fair representation of the membership; the suspension, expulsion, or disciplining of members [1] safeguards in respect of the financial responsibility of members and adequate provision against the evasion of financial responsibility through the use of corporate forms or special partnerships; [2] the limitation or prohibition of the registration or trading in any security within a specified period after the issuance or primary distribution thereof; [3] the listing or striking from listing of any security; (4) hours of trading; [5] the manner, method, and place of soliciting business; (6) fictitious or numbered accounts; [7] the time and method of making settlements, payments, and deliveries by members and customers; [8] the reporting of transactions on the exchange and upon tickers maintained

by or with the consent of the exchange, including the method of reporting short sales, stopped sales, sales of securities of issuers in default, in bankruptcy or receivership, and sales involving other special circumstances; [9] the fixing of uniform rates of commission, interest and other charges; [10] minimum units of trading; 111) odd-lot purchases and sales, minimum deposits on margin accounts." Section 18(5) of H.R. 8720, 73d Cong., 2d Šess. (1934).

25 The SEC was instructed in section 19(c) of the Exchange Act to make a study of stock exchange rules with respect to the deleted subjects and to report the results of its investigation and its recommendations to Congress on or before January 3, 1935. On January 25, 1935, the Commission submitted its report in which it presented eleven recommendations and suggested that they "be put into effect by the

voluntary action of the exchanges themselves without resort to legislation." Report on the Government of Securities Exchanges, Letter from the Chairman of the Securities and Exchange Commission Transmitting the Commission's Report of the Investigation of Stock Government, Together With Its Recommendations, H.R. Doc. No. 85, 74th Cong., 1st Sess. 17 (1935). In 1941 the securities industry proposed that the "similar matters' provision in section 19(b) of the Exchange Act be deleted. The SEC opposed this proposal and, in turn, proposed to add to section 19(b) the three categories specified in section 19(c). However, the industry opposed the Commission's proposal and no further action was taken. 2 L. Loss, Securities Regulation 1183 n. 40 (2d ed. 1961).

28 “The Commission is ... authorized by rules or regulation or by order to alter or supplement the rules of each exchange in respect of such matters as (1) safeguards in respect of the financial responsibility

of members and adequate provision against the evasion of financial responsibility through the use of corporate firms or special partnerships; (2) the limitation or prohibition of the registration or trading

in any

security within a specified period after the issuance or primary distribution thereof; (3) the listing or striking from listing of any security; (4) hours of trading; (5) the manner, method, and place of soliciting business; (6) fictitious or numbered accounts; (7) the time and method of making settlements, payments, and deliveries and of closing accounts; (8) the reporting of transactions on the exchange and upon tickers maintained by or with the consent of the exchange, including the method of reporting short sales, stopped sales, sales of securities of issuers in default, bankruptcy or receivership, and sales involving other special circumstances; (9) the fixing of reasonable rates of commission, interest,

listing, and other charges; (10) minimum units of trading; (11) odd-lot purchases and sales; (12) minimum deposits on margin accounts; and (13) similar

matters.” Section 19(b) of Securities Exchange Act of 1934.

The Exchange Act, as adopted, thus represents a compromise between the recommendations of the Roper Committee and the Fletcher-Rayburn bill. The Act retains the approach of the original bill with respect to the Commission's broad rule-making authority over the activities of investors and exchange members. Thus the Commission has direct regulatory authority over specialists, odd-lot traders, floor traders, all other exchange members insofar as they engage in "excessive trading” and, since 1938, financial responsibility standards for all broker-dealers. It also has direct control over short sales and stop-loss orders, and the authority to define and prohibit "manipulative and deceptive devices.” Despite these broad powers of direct rule making, the Exchange Act leaves a wide measure of initiative and responsibility with the exchanges in accordance with the Roper Committee's recommendations. Whereas it was originally proposed that the Commission's authority with respect to exchanges be of the same type as its authority over trading practices and members' floor activities, concern for both fostering the initiative and responsibility of the exchanges and avoiding an unwieldy federal bureaucracy led to the modified procedure for control of exchange rules in section 19(b). In accordance with the Roper Committee's recommendations, however, this section and the sanctions available in section 19(a) provide the Commission with powerful "reserved control . . . if the exchanges do not meet their responsibilities." 27

The Commission's powers of direct rule making in sections 10, 11 and 15(c) and its “reserved” authority in section 19 are complementary. Taken together they provide the Commission with pervasive regulatory authority over and responsibility for the operations of exchange markets and the conduct of persons who use those markets. 6. National Securities Associations

Prior to the passage of the Exchange Act the Twentieth Century Fund's Study of the Security Markets noted:

The benefits that would accrue as the result of raising the
standard of securities exchanges might be nullified if the
over-the-counter markets were left unregulated and uncon-
trolled. They are of vast proportions and they would serve
as a refuge for any business that might seek to escape the
discipline of the exchanges; and the more exacting that dis-
cipline, the greater the temptation to escape from it. ...
To leave the over-the-counter markets out of a regulatory
system would be to destroy the effects of regulating the

organized exchanges.28 As originally enacted, the Exchange Act contained a section authorizing the SEC to adopt rules

and regulations for the over-the-counter markets"... necessary or appropriate in the public interest and to insure investors protection comparable to that provided . . . in the case of national securities exchanges.” 29 It was later explained that "[t]he brevity and generality of this treatment arose from a realistic recognition of the great difficulties of working out in any detail a suitable plan of regulation at that time, in view of the fact that so little was then known concerning these markets.” 30

27 H.R. Rept. 1383, 73d Cong., 20 Sess. 15 (1934). 28 The Securities Markets: Findings and Recommendations of a Special Staff of the Twentieth Century Fund 668 (A. Bernheim and M. Schreider eds. 1935).

SS. 4 (1938).

29 Section 15.
30 S. Rep. No. 1455, 75t

Cong., 3d

In 1938 Congress enacted the Maloney Act 31 (embodied in the Exchange Act as section 15A which provided for internal government of the over-the-counter market by allowing eligible associations of brokers or dealers to register with the SEC as "national securities associations.” 82 The final report of the Senate Banking and Currency Committee on this Act reasoned, as had the Roper Committee five years earlier, that self-regulation rather than complete government control of this market was desirable. The report introduced a new phrase, "cooperative regulation”, to describe the relationship between SEC oversight, and self-regulatory functions:

The committee believes that there are two alternative pro-
grams by which this problem [of adequate regulation of the
over-the-counter market) could be met. The first would
involve a pronounced expansion of the organization of the
Securities and Exchange Commission; the multiplication
of branch offices; a large increase in the expenditure of blic
funds; an increase in the problem of avoiding the evils of
bureaucracy; and a minute, detailed, and rigid regulation of
business conduct by law. It might very well mean expanding
the present process of registration of brokers and dealers
with the Commission to include the proscription not only of
the dishonest, but also of those unwilling or unable to conform
to rigid standards of financial responsibility, professional
conduct, and technical proficiency. The second of these alter-
native programs, which the committee believes distinctly
preferable to the first, is embodied in S. 3255. This program
is based upon cooperative regulation, in which the task will
be largely performed by representative organizations of
investment bankers, dealers, and brokers, with the Govern-
ment exercising appropriate supervision in the public interest,
and exercising supplementary powers of direct regulation. In
the concept of a really well organized and well-conducted
stock exchange, under the supervision provided by the
Securities Exchange Act of 1934, one may perceive some-

thing of the possibilities of such a program.33 The Valoney Act departed, however, in several significant respects from the pattern of Commission oversight of the exchanges in the Exchange Act. (Then SEC Chairman Mr. Justice William O. Douglas described these changes as "1938 improvements” on the existing statutory structure). 34 Section 15A(a) requires securities associations to file a registration statement with the Commission containing information similar to that required of exchanges, but section 15 A(b) sets forth more definite standards with respect to the internal functions of securities associations that must be met before the SEC will permit registration. Whereas exchanges are required to furnish the Commission copies of rule amendments "forthwith upon their adoption," section 15A(g) requires securities associations to file rule changes 30 days before effectiveness and gives the SEC the authority to disap

31 S. 3255, 75th Cong., 3d Sess. (1938). 32 The Exchange Act does not restrict the number of national securities associations that may be formed. However, the SEC and securities industry members agreed that a single national association would be most effective. Thus the National Association of Securities Dealers was formed and received Commission approval in 1939. SEC, Report of Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong. ist Sess., pt. 4 at 606 (1963).

33 S. Rep. No. 1455, 75th Cong., 3d Sess. 3-4 (1938).
34 Address before the Bond Club of Hartford, Conn., Jan. 7, 1938.

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