« ForrigeFortsett »
prove the change before it becomes effective. The Commission is also empowered by section 15A(k)(1) to "abrogate” any securities association rule, if the Commission determines after hearing that such action is necessary to assure fair dealing, equitable representation or investor protection. However, whereas the Commission may alter or supplement substantive rules of an exchange in accordance with the procedure in section 19(b), under section 15A(k)(2) the Commission may alter or supplement association rules only with respect to four categories of procedural and organizational matters.35
The Commission is authorized to suspend or revoke the registration of a securities association if it determines that the association has violated the Exchange Act or rules thereunder, has failed to enforce compliance therewith, “or has engaged in any other activity tending to defeat the purposes of this section.” (section 15A(e)). It also has the additional power, which it does not have with respect to exchanges, to “. . . remove from office any officer or director of a registered securities association who, the Commission finds, has willfully failed to enforce the rules of the association, or has willfully abused his authority."
There is a significant difference in the Commission power to review specific actions of associations and exchanges. Under section 15A(g) the SEC may review, on its own motion or upon application, any disciplinary action by an association against a member or the denial of membership in the association to any broker or dealer. The Commission has no comparable power over exchanges.36
At the time the Maloney Act was adopted, section 15(c) of the Exchange Act was amended to give the Commission direct rule making power over fictitious quotations, fraudulent or manipulative acts or practices, and safeguards with respect to financial responsibility of all broker-dealers.37 Ås the Special Study pointed out, following these amendments “. . . the Commission's direct rule making authority under section 15(e) is quite broad and may be broad enough to encompass all or substantially all regulatory needs.” 38
2. EVALUATION OF SELF-REGULATION
The inherent limitations in allowing an industry to regulate itself are well known: the natural lack of enthusiasm for regulation on the part of the group to be regulated, the temptation to use a facade of industry regulation as a shield to ward off more meaningful regulation, the tendency for businessmen to use collective action to advance their interests through the imposition of purely anti-competitive restraints as opposed to those justified by regulatory needs, and a resistance to changes in the regulatory pattern because of vested economic interests in its preservation.
35 Section 15A (k) (2) as originally drafted was very similar to section 19(b), for it set forth thirteen areas in which the SEC would have power to alter or supplement association rules. As the result of industry opposition, three of the subiect matters were placed under the Commission's direct rule-making authority, four were dropped entirely and four retained. See Special Study, pt. 4, at 716-717.
36 Except for the requirement in section 6(b) that a securities exchange establish rules for the disciplining of its members "... for conduct or proceeding inconsistent with just and equitable principles of trade there are no provisions under the Exchange Act governing an exchange's disciplinary procedures or providing the Commission with an opportunity
to review exchange disciplinary actions and denials of membership. 37 These subjects were originally contained in section 15A(K)(2). 38 SEC, Report of Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., pt. 4 at 717 (1963). 39 See id., pt. 4 at 501-04, 693-97 for a discussion of the inherent limitations of self-regulation.
The inherent limitations of entrusting an industry with the responsibility of regulating itself were much more than theoretical possibilities to the Congress when it passed the Exchange Act in 1934. The Report of the House Committee on Interstate and Foreign Commerce states:
The fundamental fact behind the necessity for this bill is that the leaders of private business, whether because of inertia, pressure of vested interests, lack of organization, or otherwise, have not since the war been able to act to protect themselves by compelling a continuous and orderly program of change in methods and standards of doing business to match the degree to which the economic system has itself been constantly changing-changing in the proportion of the wealth of the Nation invested in liquid corporate securities traded in on the stock exchanges, changing in the relationship of the distribution of securities and the trading in securities to the balanced utilization of the Nation's credit resources in the financing of agriculture, commerce, and industry. The repetition in the summer of 1933 of the blindness and abuses of 1929 has convinced a patient public that enlightened self-interest in private leadership is not sufficiently powerful to effect the necessary changes alone-that private i leadership seeking to make changes must be given Govern-:
ment help and protection.49 Nevertheless, despite the dangers of relying on the securities industry to regulate itself, the Congress was well aware of the serious practical problems confronting the government if it were to assume the entire regulatory burden. As John Dickinson, Assistant Secretary of Commerce, expressed the point in his testimony before the House of Representatives:
In framing a regulatory measure, the practical problem of administration has always to be faced and when regulation gets beyond a certain point the sheer ineffectiveness of attempting to exercise it directly through government on a wide scale counterbalances the fact that possibly the exchanges might not be as diligent as we would wish them to be about regulating themselves or as diligent as the Government would be if the task were compact enough to fall within the
limits of effective governmental performance.41 In enacting the Exchange Act, the Congress balanced the limitations and dangers of permitting the securities industry to regulate itself against "the sheer ineffectiveness of attempting to assure [regulation) directly through the Government on a wide scale and established for this industry a unique pattern of regulation combining both industry and government responsibility. The fundamental pattern established in 1934 has not been essentially changed since then:
- The SEC has the authority and responsibility to assure
compliance by all broker-dealers with the legal require40 H.R. Rep. No. 1383, 73d Cong., 2d Sess. 3 (1934). 4 Hearing on H.R. 7852 and H.R. 8720 Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., 1st Sess. at 514,
ments of the Act and of the rules which the SEC is au-
requirements laid down in the Act.
power in order to assure that it is used effectively to fulfill
interest or unfair to public investors. 42 In an effort to emphasize the fact that both the industry and the government have regulatory responsibilities under the Exchange Act, many people have referred to the "partnership” between the selfregulatory organizations and the SEC, or to the "cooperative" character of the regulatory system.43 Indeed, the recent Securities Industry Study Report of the House Subcommittee on Commerce and Finance went so far as to conclude“. . . that the phrase 'self-regulation' must be consigned to the past. Cooperative regulation' best describes the common task of protecting investors and the public interest." 44 The Subcommittee concurs in the need to reaffirm the mutual regulatory responsibilities of the industry and the SEC. If the term “self-regulation' is misleading, then by all means it should be discarded. However, care should be exercised, lest the use of phrases such as "partnership" and "cooperative regulation" lead to the impression that the industry and the government fulfill the same function in the regulatory framework or that they enjoy the same order of authority or deserve the same degree of deference, whether by firms, courts or the Congress.
Given the roles to be played in the regulatory system for the securities industry by both the industry and the SEC, the simple question of whether "self-regulation” has worked or should be continued is not a particularly useful one. To approach the matter in this way tends to obscure the fact that self-regulation involves a balance between the initiative and responsibility assumed by the industry on the one hand and by the SEC on the other. The question of whether self-regulation has worked is more fruitfully approached in terms of whether the present balance between the industry's role and the government's role in the regulatory system is working effectively and efficiently to advance the objectives of the Exchange Act; or, more specifically, whether the various balances that have been struck in particular areas of regulatory responsibility are working in this manner.
Many proposals have been made recently for changes in the organization and operation of the self-regulatory system. They range from the establishment of an entirely new "parent” self-regulatory organization to be placed between the SEC and the exchanges and the NASD to minor adjustments in the procedures to be followed by the Commission and the self-regulatory agencies. The proposed remedies differ, but there appears to be a nearly unanimous belief on the part of those familiar with the securities industry that changes are called for in the regulatory structure.
42 Section 4 of the Securities Exchange Act established the SEC. 43 Hearings on Self-Regulation in the Securities Industry Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing & Urban Affairs, pt.3, at 38, (1971) (Statements of SEC Commissioner Phillip A. Loomis on Aug. 8 and Oct. 5, 1972). Address by former SEC Chairman Manuel F. Cohen to Institute of Investment Banking, Phila., Pa., March 10, 1964. Silver v. New York Stock Exchange, 373 U.S. 341, 366 (1963). 44 Subcomm. on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, 92d Cong., 2d Sess., Report of Securities Industry Study 85 (Subcomm. Print 1972).
In order to properly evaluate both the need for regulatory changes and the recommendations that have been made to accomplish it, the staff of the Subcommittee prepared in-depth case studies of the operation of the self-regulatory system in concrete situations. The case studies cover (1) the decisions involved in the inclusion of listed securities in NASD, (2) the decisions involved in permitting member organizations of the New York and Midwest Stock Exchanges to sell life insurance, (3) the interpretation and enforcement of the net capital rule of the New York Stock Exchange, and (4) the regulation of special ists on the New York and American Stock Exchanges. Extensive written comments were solicited from interested persons on all of the studies; hearings were held on two of these studies and a general hearing involving representatives of the SEC and all principal selfregulatory agencies was held on the broad topic of self-regulation, Based on this extensive record and material available from other as pects of the Subcommittee's investigation of the securities industry, specific weaknesses and failures of the present regulatory system have been identified. The sections which follow discuss these problem areas and contain recommendations for correcting them.
B. THE OPERATIONS OF THE SELF-REGULATORY AGENCIES As noted in the introduction to this section, the principal reason the Congress has relied so heavily on self-regulation in the securities industry is “the sheer ineffectiveness of attempting to (regulate] directly through government on a wide scale. . .. 1 In addition to its practicality, however, self-regulation has significant advantages in its own right. Obvious examples include the expertise and intimate familiarity with complex securities operations which members of the industry can bring to bear on regulatory problems, and the informality and flexibility of self-regulatory procedures. Further, self-regulation has the advantage of making the people who are subject to regulation actual participants in the regulatory process. By providing an opportunity to participate in the regulatory process, self-regulation may make the members of the securities industry more aware of the goals of regulation and their own stake in them while at the same time making the imposition of regulatory controls more palatable. The most important advantage of self-regulation, however, is its potential for establishing and enforcing what Mr. Justice Douglas referred to as “ethical standards beyond those any law can establish." 3 As he stated:
Self-regulation ... can be pervasive and subtle in its conditioning influence over business practices and business morality. By and large, government can operate satisfactorily only by proscription. That leaves untouched large areas of conduct and activity; some of it susceptible of government regulation but in fact too minute for satisfactory control; some of it lying beyond the periphery of the law in the realm of ethics and morality. Into these larger areas self-govern
ment and self-government alone, can effectively reach.4 The Congress has always recognized that the practicality and positive advantages of self-regulation must be balanced against its fundamental weaknesses and limitations. Inherent in self-regulation is the "private” formulation of restrictive standards of business conduct and their enforcement by exclusionary and other "anticompetitive” practices. Therefore, the temptation will always be present for businessmen to use their self-regulatory powers to impair competition in order to advance private economic interests rather than to satisfy regulatory needs. A further and more subtle weakness of self-regulation is the natural tendency of self-regulators to be less
1 Hearing on H. R. 7852 and H. R. 8720 Before the House Comm. on Interstate and Foreign Commerce, 73rd Cong., 1st Sess. at 514 (testimony of John Dickinson).
2 See Jennings, Self-Regulation in the Securities Industry: The Role of the Securities and Exchange Commise sion, 29 Law and Contemp. Prob. 663, 678 (1964). 3 Address Before the Bond Club of Hartford, Conn., Jan. 7, 1938. 4 Id. 6 See section III.E infra. 6 See e.g. Hearings on H.R. 7852 and H.R. 8720 before the House Comm. on Interstate and Foreign Commerce, 73rd Cong., 1st Sess. at 514 (testimony of John Dickinson).
7 See SEC, Report of Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., pt. 4 at 501-4,693-97 (1963) (hereinafter cited as “Special Study').