SUMMARY

Ohio is a State of many, many small industries which will or may be affected by this bill. Investment dealers form a financial lifeline between these small industries and the thousands of investors who furnish the capital for Ohio's industries. As an investment dealer we are not directly affected by this bill. But we feel a duty to oppose legislation which will impose unnecessary financial burdens on small companies, our clients, and possibly affect the soundness of their securities. Therefore, our position is that

(1) In view of the excellent reporting job which corporations generally are now doing, not only in the interest of better public relations with their shareholders but in their own self-interest as well, there is no need for this legislation as was demonstrated by the study made by the SEC and referred to herein.

(2) The laws of most States provide for the supplying of information to shareholders and make the books and records of corporations available at all reasonable times except for improper purposes. Therefore, the extension of Federal regulation to cover small corporations whose business is primarily intrastate would impose unnecessary and unduly burdensome obligations on such corporations.

(3) The expense of administration and enforcement of the legislation would create additional burdens on taxpayers when budgetary requirements are already high.

On the basis of our experience and knowledge of the reporting and other practices of companies which would be affected by the proposed legislation, and in the light of our analysis of the SEC study, we earnestly urge that the bill be amended to exempt companies with assets in the range of $15 to $20 million and 1,500 to 2,000 shareholders from the registration, reporting, and other provisions of the Securities Exchange Act.

The CHAIRMAN. The next witness is Mr. Richard Ney, of Richard Ney & Associates.

Mr. Ney, you may put your statement, as the other witnesses have done, in the record, and if you wish to summarize it, we will be glad to have you do so.

STATEMENT OF RICHARD NEY, RICHARD NEY & ASSOCIATES

Mr. NEY. Thank you, Mr. Chairman. I want to say at this point that this is the biggest moment of my life, being able to appear before you. I feel that this is why I am alive. I will be very honest with you. It is a great honor and it makes me feel more patriotic than anything that I have ever done to be able to appear before you gentlemen, Senators, here today.

The CHAIRMAN. I appreciate that. You may proceed.

Mr. NEY. I worked until 5 o'clock this morning trying to capsulate some of the material that is in this brochure I want to discuss. And with reference to the proposals, I think they are perfect as far as they go. I don't think they go far enough concerning the Federal securities. And I want to say if you dealt, possibly, with investors the way I do and saw the agony when they come to you, not as clients, but just as individuals, the cogency, perhaps the overemphasis that I place on some of these things would be better understood. In the SEC explanation of the proposed legislation it states here that it should be emphasized that the common goal is the raising of standards in the securities markets, particularly the over-the-counter markets-particularly, perhaps, but I hope not exclusively.

I discussed the over-the-counter market; I also tried to discuss the listed exchange here, and with reference to the Securities Act amendments of 1934, which states that

Each proposal would be an important advance, but it is the sum of all of them which will produce the maximum benefit in the public interest.

And

to secure the dissemination of accurate information to investors and maintain investor confidence.

Particularly with respect to that I would like to comment more

now.

I would like it understood at the outset that I consider the securities markets a great American achievement. They are the symbols and keystone of our American way of life. They are things of will and intelligence, and I have come here in the hope that I may contribute to the improvement of their potential by helping to illumine some of their blunders and abuses in order that they may be converted into more viable instruments-instruments that will serve the purpose of our way of life rather than the purposes of our enemies. Nor can I overemphasize the seriousness of these blunders and abuses or the need implicit in them for more realistic regulations. For, although regulations are anathema to our way of life, in this instance they are imperative, I believe, if the way of life we all cherish is to survive, for the Nation cannot much longer tolerate what has, in fact, become a bureaucracy unto itself a system of highly privileged men divorced from an awareness of, or the needs of, our human traditions. And all this in the pursuit of their immediate, definite, and tangible, but myopic materialism.

Prior to my departure for Washington from Los Angeles yesterday, I located this brochure. It is called "Marketing Methods for Your Block of Stock" and is referred to on the title page as "An Investment Manager's Handbook from the New York Stock Exchange." It might, I believe, be more appropriately titled "The New Machiavelli or How To Put One Over on the Public Without Trying."

(The brochure referred to is on file with the committee.)

Mr. NEY. In the course of my talks I have suggested that the New York Stock Exchange is very much like a vast chainstore whose principal function is to prosper commissionwise by serving the institutional account at the wholesale level at the public's expense at the retail level. This is not penetratingly described in this brochure. Remembering that the securities exchanges always refer to themselves as an auction market, let me read to you some excerpts from this handbook that has been prepared for the managers of large portfolios-quite a few of whom are investment advisers like myself:

From page 5:

If the customer's requirements cannot be fulfilled quickly in the auction market, his member firm might recommend one of the special procedures for handling blocks, as described in the following pages.

In other words, while the fund doesn't have to deal in the auction. market, the public does. In fact, it can be shown that the public

obligation to exist only in the auction market is the sine qua non of the fund's existence. The public doesn't need the fund, but the fund needs the public and the specialist.

On page 8:

*the first of the Stock Exchange's special block procedures available to the investment manager and his member firm is called the specialist block purchase or sale.

A typical instance is then provided:

*** the floor broker disclosed the details of the order (to sell 5,000 shares of stock) to the specialist and told him privately how much stock was involved and stressed the need for speed. By thus confiding in the specialist, the floor broker enlisted a strong ally.

The trade was made privately. There was no print on the ticker *** and more than once the New York Stock Exchange likes to stress the fact that the transaction is not printed on the ticker and that, in other words, the public never learns of it, so that the process can be repeated and repeated until a large distribution is effected, the public holding the bag again—

*

no announcement of any kind, before or after * * no entry in the specialist's book. The specialist block purchase developed as a logical outcome of assessing the auction market first.

So much for the proper dissemination of knowledge to the public, one of the primary functions of all of our present regulations.

This fantastic document then pays tribute to a verbal conscience, to a lip morality when, with extreme irrelevance it states, "the block transaction would not affect the price structure in the auction market adversely." In market parlance, "adversely" means to send the price structure down so that this statement is quite right. The price structure is not affected adversely-but it should have been had the laws of the auction market been allowed to function. And who pays for it? The public, of course. The specialist has made it necessary for him to pay 5 or 6 points more for the stock so that the New York Stock Exchange could make an extra fee and the fund get out with a price advantage. Pure and simple legal larceny.

On page 10, the New York Stock Exchange states the same procedures apply for the buy side, and it is demonstrated how the investment manager can accumulate just as efficiently as he can distribute with the aid of the specialist.

In the case of an "exchange distribution" the brochure states:

No prior public announcement of a forthcoming exchange distribution is made.

And I ask you again, at whose expense?

On page 15, discussing another large block technique: "The special offering. "*** buyers are attracted by the net price offering, while the incentive commission invites special brokerage efforts * * *" while to "acquire" stock, the reverse procedure known as a "special bid" is also available.

Sellers in this case find the net price offering attractive and the special commission invites member firm brokerage efforts. ***

In other words, the fund decides that now is the time to accumulate stock of the XYZ company and "special brokerage efforts" help them to buy or accumulate one stock while "special brokerage efforts"

help them distribute another. In this way the public continues the vicious cycle of always selling when he should have bought, and buying when he should have sold. The special incentive to excite special brokerage efforts being $1 a share which is apparently enough of a balm to enough brokers to get them to push one stock for the bonus rather than another stock for more fundamental

reasons.

Toward the close of this book of revelations there is this:

As in the case of all special block procedures, stock exchange authorization by the member firm usually can be obtained quickly.

No wonder investor confidence is still lacking. And can it be expected that self-regulation will correct any of these abuses? These men have come to believe in what they are doing as being right and just, and the more parochial their outlook the more cosmic their abuses will become. Effective self-regulation, where it concerns the foregoing and the following testimony, is nothing more or less than a "cloud-cuckooland" dream.

can.

I will come to some of the testimony, making it as brief as I I realize that luncheon is late, and all I can say is that I have traveled 6,000 miles to say what I can say and as quickly as I can possibly say it.

The CHAIRMAN. We understand that you have come 6,000 miles, and we want to be as generous as we can, but please make it brief.

Mr. NEY. I am greatly disturbed that I have to take so long to say it, but the way I feel about having talked to the people who have lost everything they have, is that each one of the things I have to say is so important that it is worth the trip here.

The CHAIRMAN. All right, proceed, sir.

Mr. NEY. It is emphasized in the special report of the Federal securities law reports, published by the Commerce Clearing House, that the bill to amend the Securities Act of 1933 and the Securities Exchange Act of 1934, which may be cited as the Securities Acts Amendments of 1963, are recommendations that "are interrelated and have a common goal, the raising of standards in the securities

markets * * * This special report concludes the opening statement of the Securities and Exchange Commission's explanation of the proposed legislation with "Each proposal would be an important advance, but it is the sum of all of them which will produce the maximum benefit in the public interest." In this connection, the 25th annual report of the SEC pointed out that the Federal securities laws were designed, among other reasons, "to secure the dissemination of accurate information to investors and maintain investor confidence."

To the end, therefore, of improving standards in the securities markets and "to secure the dissemination of accurate information to investors and maintain investor confidence," I submit the whole of the following testimony.

The over-the-counter quotations published by financial periodicals are of too broad a range and are sometimes taken advantage of by dealers who act as principals. The quotations published should be taken from the pink sheets, published by the National Daily Quotation Service, which represent inside quotes exclusive of any commissions and as quotes are therefore similar to those for listed stocks.

At present, the broker acting as principal can effect the transaction, add his 5-precent commission, and still be within the limits of the spread as it is quoted in most financial publications. In this connection, it should be obligatory that the broker advise the client that he has a choice, that the transaction can be effected for him on an agency or a principal basis. Oftentimes, the public is not aware that when a broker makes a transaction for them and is acting as principal, the commission rates are higher. Indeed, it would be in the public interest if the brokerage firm-and I think this is important could only act as principal during an underwriting and that in all other instances, the firm be obliged to act as agent.

In this same connection, that is, concerning rules relating to quotations which, to quote from the bill

shall be designed to produce fair and informative quotations at the wholesale and retail level, to prevent fictitious or misleading quotations *

**

I would like to cite the ticker tape: As it is presently constituted, the ticker tape is the umbilical cord to a vast body of flagrant abuses, and, because of the ticker tape, the inexperienced investor is often tricked into guessing wrong, into thinking, for example, that accumulation is coming into the market when in reality, the problem posed is one of savage and callous distribution. Big money is more often than not more informed money, and information could and should be added to the tape to indicate in the case, say, of a 1,000-or-more share transaction, whether the 1,000-or-more share transaction was initiated by a buyer or a seller. So that, when the big block is a sale on an uptick, the public would know it was a sale and not, as is ofttimes assumed at present, a purchase by the big money interests; and in the reverse situation, when, say, 1,000 or more shares of a stock are registered on the tape as a downtick, whether in fact, that downtick represents a sale or, in fact, a purchase by big or the more informed money interests.

In the reverse situation-and I might say in this connection that I have helped unload large blocks of stock and been a part of the whole practice of getting my clients out. I can take care of myself in the most savage of markets, but I don't believe the public can, and I think there must be someone here to talk in the public interest, because the market should not be a place where you make money, it should be a place where you keep what you have, and their work should be in the Senate or in some other area of activity. And you do not enter the market to double your money, but to make a fair and reasonable return.

Continuing, in the reverse situation, when, say, 1,000 or more. shares of a stock are registered on the tape as a downtick, whether or not the downtick represents a sale or, in fact, a purchase by the big or more informed money interests. In this connection, there is no reason why every transaction going across the tape should not be labeled as an uptick or a downtick. More than anything else now under consideration, such regulations would serve to "secure the dissemination of accurate information to investors." There can be no question that, as presently constituted, such quotations are not only unfair and insufficiently informative, but are misleading, particularly as it concerns the movement of big money. In consequence, they work to the disadvantage of the public at large and ultimately destroy investor confidence.