3-2-73 gift MAR 23 1973 LETTER OF TRANSMITTAL February 1973. Hon. JOHN SPARKMAN, Chairman, Committee on Banking, Housing and Urban Affairs, DEAR MR. CHAIRMAN: Transmitted herewith is the final report of the Subcommittee on Securities in connection with its study of the securities industry. Senate Resolution 109, agreed to June 21, 1971, authorized expenditures and employment of personnel by the Committee on Banking, Housing and Urban Affairs "to examine, investigate and make a complete study of any and all matters pertaining to the securities industry and securities markets of the United States." Senate Resolution 244, agreed to March 6, 1972, authorized additional expenditures for this purpose and directed the Committee to "report its findings, together with such recommendations for legislation as it deems advisable to the Senate at the earliest practicable date, but not later than February 28, 1973." Pursuant to this authorization, the Subcommittee on Securities has obtained information by means of letters, interviews, questionnaires, and public hearings. The Subcommittee's analysis of this information, together with recommendations for legislation, is set forth in this report. The Chairman of the Subcommittee wishes to thank the members and staff of the Securities and Exchange Commission, the officers and staff of the national securities exchanges and the National Association of Securities Dealers, and representatives of industry groups and individual firms for their cooperation and assistance in making information available to the Subcommittee. Sincerely, HARRISON A. WILLIAMS, Jr., Chairman, Subcommittee on Securities. (III) CONTENTS A. Regulation of Financial and Operational Aspects of the Securities c. Case Study of NYSE Net Capital Rule. d. Securities Investor Protection Act of 1970_ ii. Unsafe and Unsound Practices Report.... iii. Regulatory Improvements... g. Subcommittee's Recommendations_ 1. The Benefits of Competitive Commission Rates. b. Difficulty of Ascertaining Appropriate Rates-- ii. Impediment to Industry Adjustment.. c. Fixed Commissions as a Cause of Market Distortions. 2. The Arguments Against Competition--- c. Effect on Individual Investors_. ii. Research and Other Services. i. Institutional Acquisition of Brokerage Affiliates__ ii. Brokers' Expansion into Money Management_-_ d. Exchange Reaction to Institutional Membership. C. Institutional Membership-Continued 2. Problems Resulting from Combination of Money Management Page b. Barriers to Communication and Competition... c. Central Communications Systems.. i. Composite Transaction Reporting System.. ii. Composite Quotation System... d. Elimination of Regulatory Barriers.. B. What Kind of Central Market System?.. 1. "Auction" and "Dealer" Markets. 2. Goals of a Central Market System. 3. Characteristics of Present Markets. 4. Implementation of a Central Market System. a. Priority for Public Orders _ . . c. Regulation of the Activities of Market Makers. i 116 6. Which Securities Should be Traded on Exchanges?. a. Characteristics of Listed and Unlisted Issues- Page Agencies B. The Operations of the Self-Regulatory Agencies. 1. Procedural Standards for Self-Regulatory Action... a. Actions Directed Against Particular Persons.. ii. Denial of Membership. iii. Actions Affecting Non-Members b. Policy Formulation___ 2. Jurisdiction of the Self-Regulatory Agencies_ a. Relation to the SEC Jurisdiction. b. Allocation of Jurisdiction Among Self-Regulatory C. The Authority and Procedures of the SEC.. 149 150 150 151 153 154 155 157 160 164 170 1. The SEC's Request for Additional Authority to Oversee the 170 a. The SEC's Authority over the Content of Self-Regula- 172 i. Power to Disapprove Proposed Rules 172 ii. Power to Alter Existing Rules.. iii. Procedures Employed in Disapproving or Alter- b. The SEC's Authority to Enforce Self-Regulatory Rules 2. The SEC's Use of Its Existing Oversight Powers.... 174 175 177 179 180 a. The SEC's Implementation of Its Regulatory Recom- b. The SEC's Reliance on Its Staff for the Performance of iv. Conclusions and Recommendations.. c. Performance of Continuing Oversight Responsibilities-- ii. Surveillance of the Allocation of Securities to Specialists_ iii. Conclusions and Recommendations.. 3. Procedures for Reviewing Proposed Self-Regulatory Rules. b. Approval of Self-Regulatory Rules. 4. Private Contact Between the SEC and the Self-Regulatory 1. Judicial Review of Commission and Self-Regulatory Action_. ii. NASD Action....... iii. Action of National Securities Exchanges. 193 194 194 195 196 196 197 199 201 205 205 207 208 210 211 211 v. Collateral Attack on Self-Regulatory Action... --b. Conclusions and Recommendations; Availability of Judicial Review___ 212 213 c. The Importance of Reasons, Findings and Conclusions__ 215 |