[From the American Banker, June 20, 1963] REASSURANCE FROM MR. CARY William L. Cary, Chairman of the Securities and Exchange Commission, is a reasonable man. And his quality of reasonableness this week did much to advance his particular cause, which is to get broad new legislation for supervision and control of the securities markets. The only significant element of opposition to Mr. Cary's requests had developed in the banking community, some members of which believe that banking is regulated quite enough. In his testimony this week, before a subcommittee of the Senate Banking Committee, Mr. Cary managed to reassure bankers who had been worried over his proposals, and thereby he virtually eliminated the most serious threat to the success of his program. He did this by the simple method of telling what he was trying to do, and why, in seeking to extend to bank investors the same minimal protections which the SEC provides for investors in other types of business. The sincerity of his purpose was emphasized by his reasonableness in suggesting that the regulations as they apply to banks should be administered by banking agencies. Mr. Cary made it clear that he would prefer that the SEC not be involved in formulating the precise program for the banks, nor in administering it, just so long as the principle of full disclosure is observed. "There would be no residual control in the Securities and Exchange Commission after this delegation" to the proper banking regulatory agency, he declared. "If the bill is not crystal clear on these points, we shall be glad to revise it accordingly," he said. And finally, on this point, as if to try to break through a barrier of disbelief, Mr. Cary said: "In sum, the Commission has no desire, and is indeed reluctant, to take direct responsibility over bank disclosure in any respect. It is only the principle of adequate disclosure which we assert." As to the background of his belief that banks need this additional protection for investors, Mr. Cary acknowledged that the great objectives of banking regulation for controls over the flows of credit, maintenance of an effective structure, and protection of depositors, are well served. But, he asserted, "these objectives neither utilize the same tools nor achieve the same ends as investor protection." And here the logic of his presentation is persuasive. "The purpose of disclosure is to place the investor in a position to make an informed judgment on the merits of a security, and to provide a basis for comparing that security with others issued by companies in the same or different industries." And therefore, he maintained that existing bank regulation is not "an effective substitute for the free exercise of an investor's judgment." That investor's judgment cannot be soundly made on the basis of information which banks now provide, as the Cary statement, printed on the opposite page, makes clear. But in seeking to establish a sound basis for judgment, Mr. Cary is more than willing that those agencies most familiar with the problems of banking be charged with the responsibility for doing so. In many cases there are areas where existing banking procedure provides adequate protection for the investor, even if not in the precise language of the SEC itself. In these cases, Mr. Cary is perfectly willing to let current practice stand. In other areas, where adjustments might have to be made, he is perfectly willing that these be made only so far as is necessary. For example, some SEC requirements call for external audits. In banking, where internal audits are widespread and effective, such a requirement might reasonably be expected to be waived. In some cases, where the bank has enough shareholders to be included within the SEC guidelines, but the stock is clearly not traded publicly on the market, a waiver of disclosure requirements might be made. Mr. Cary has made clear to the Congress his belief that the banking agencies should be given wide leeway by the Congress, to make exemptions and grant waivers as the characteristics of the industry suggest, and to establish only those changes which are absolutely necessary to meet the spirit of the legislation and the objectives of the Commission. There is mounting public concern over banks not being required to make full disclosure, and mounting industry concern that many necessary exemptions might be taken away in response to that concern. By insisting on those disclosures which the investor has a right to know, and by asking the banking regulatory agencies themselves to make sure they are provided with the minimum of distress within the industry, Mr. Cary has allayed significantly the fears of both sides. [From the Washington Post, June 9, 1963] RAISING MARKET STANDARDS The Security and Exchange Commission's proposals for tightening regulation of securities markets come at a time when the public, recovered from the trauma inflicted by last year's slump, is again less cautious. Bull markets must be nurtured by the naivete and recklessness of the amateurs whose judgment is periodically beclouded by visions of huge profits. But the SEC's Special Study of Securities Markets indicates that the securities industry also played a role in precipitating the near-disaster of May 1962. And it now recommends legislation which would tighten the regulation of the over-the-counter (OTC) markets, provide necessary information for investors, eliminate the unscrupulous tactics that have been employed in the floating of new issues and enforce standards of ethical conduct. There are nearly 16 million Americans who own unlisted securities that are traded on the OTC markets. Under the present law, companies engaged in intrastate commerce or those with fewer than 750 shareholders are exempted from many of the regulations which compel other publicly held companies to provide full information to their shareholders. The SEC proposes that its investorprotection laws be extended to cover all companies with assets of more than $1 million which distribute their securities through the mails to 500 or more persons. Other provisions would enable the SEC to regulate the transmission of the proxies and suspend trading in OTC securities whenever it is in the public interest. In its study of the distribution of so-called hot issues, the SEC uncovered evidence of manipulations based upon inside information and the dissemination of rumors. It proposes to dampen unhealthy speculation in these new issues by extending the time for the delivery of prospectuses from 40 to 90 days. Finally, the SEC would raise standards for persons in the securities industry by requiring all registered brokers and dealers to become members of the National Association of Security Dealers (NASD). And the NASD, in turn, would be empowered to discipline its members for infractions of regulations by suspension or expulsion. Basic qualifications also would be established for salesmen, managers and other persons engaged in the distribution of securities to the public. It is regrettable that the SEC failed to request legislation for the regulation of privately owned security quotation systems. But its carefully drafted package of reforms makes provision for most of the reforms which must be enacted if the public is to be afforded adequate protection and the economy shielded from the destabilizing impacts of another market cycle of boom-and-bust. Senator WILLIAMS. I do not have anything further. Again for the committee, we are very grateful, Mr. Kelly. Mr. KELLY. Thank you, Senator, very much. Again I am most appreciative to you. Thank you. Senator WILLIAMS. The committee will stand adjourned. (The following material was received for the record:) Senator HARRISON A. WILLIAMS, Jr., Washington, D.C. U.S. SAVINGS AND LOAN LEAGUE, DEAR SENATOR: Enclosed is some language to bring up to date and modernize the definition of a domestic building association or savings and loan association under the Securities Act. I am hopeful that this language can be incorporated in any bill your subcommittee reports amending the SEC Act. Briefly, the problem is as follows: Under the existing language which has been in the law for many, many years, a domestic building and loan association is defined as one that does substantially all of its business with members. In recent years, the interpretation of this language has created confusion and some doubt. Last year when the tax bill was written, this definition was amended to bring it up to date in the Internal Revenue Code. The SEC law is the only other statute which contains a definition of a building and loan, and we would hope that the definition would be broad enough to include all legitimately operated savings and loans. The attached language merely says that State chartered, supervised, and regulated savings and loan associations are, in fact, building and loan or saving and loan associations. I might add that the language of the suggested amendment is similar to the language that the SEC put in their proposed legislation exempting associations from having to file registration certificates with the SEC insofar as a normal savings account is concerned. Sincerely, GLEN TROOP, Staff Vice President. SECTION 3(a) (5) OF THE SECURITIES ACT OF 1933 "(5) Any security issued by a building and loan association, homestead association, domestic savings and loan association, cooperative bank, or similar institution, which institution is supervised by Federal or state authorities having jurisdiction over savings and loan institutions or cooperative banks, but the foregoing exemption shall not apply with respect to any such security where the issuer takes from the total amount paid or deposited by purchaser, by way of any fee, cash value or other device whatsoever, either upon termination of the investment at maturity or before maturity, an aggregate amount in excess of 3 per centum of the face value of such security, or any security issued by a farmers' cooperative association as defined in paragraphs (12)-(14) of section 103 of the Revenue Act of 1932." BOSTON, MASS., June 19, 1963. Hon. HARRISON A. WILLIAMS, Jr., The Boston Stock Exchange wishes to go on record in support of the Senate bill 1642 inasmuch as this proposed legislation is definitely in the best interest of the securities business as well as the general public. WESTON W. ADAMS, President. DETROIT, MICH., June 19, 1963. Hon. HARRISON A. WILLIAMS, Jr., The Detroit Stock Exchange would like to go on record as being in agreement with the proposed legislation contained in Senate bill 1642, as we believe it to be in the best interests of the investing public as well as of the securities industry. WALTER A. BAYER, President, Detroit Stock Exchange. THE NATIONAL STOCK EXCHANGE, Re: Repeal of 12b Rule and Retention of 12f-3 Rule of the 1934 SEC Act. MY DEAR SENATOR WILLIAMS: In your present hearings as chairman of the Subcommittee on Securities of the Senate Committee on Banking and Currency, you are trying to find the proper legislative answer to the long overdue further regulation of the securities industry. Unfortunately the spokesmen for the securities industry have consulted, according to press reports, represent very special areas of economic interest with large collateral aims, in spite of the apparently different segments of the industry they represent. Thus with a largely one sided and perhaps carefully conferenced position being advanced consistently in your hearings, your committee may be reasonably well insulated from some vital factors carefully avoided by industry spokesmen seeking jointly to protect their respective interests. The small or regional exchanges represent the third element or voice in the national securities industry, standing between the major exchanges and the giant over-the-counter market who have quite similar objectives; i.e., to maintain the status quo, as nearly possible, in light of recent events. Hypothetically speaking, if the big exchange group and the big OTC group were to state their positions candidly, they might be expected to make statements as follows: (1) Exchange group: "Do not repeal the 12b rule of the 1934 act for we, as the major firms, wish to continue to concentrate all of the national public investment business we control through our vast private wire (news and order) systems on the major exchanges which we control and where we can operate at the maximum profits without competition from other brokers on the smaller and regional exchanges. Because these exchanges would list, almost overnight, if 12b did not protect us, thousands of the best unlisted companies in the OTC market on their exchanges and thus make active regional exchange markets in other cities throughout the country where we would then have to compete on an even footing. Our monopoly is benevolent and we need to have the Government guaranteed protection we have had for the past 29 years." (2) OTC group: "Do not repeal the 12b rule of the 1934 act for we wish to continue to operate our vast comparatively unregulated OTC market as we have in the past by private negotiation, by private wire, without public record of trades, prices, etc. If the protection of the 12b rule was withdrawn, the smaller and regional exchanges could then list and trade our most profitable issues almost immediately and we could be forced to join these exchanges with all of their regulations and public disclosure of our trading, with serious effects on our profits. We need the continued protection of the Government for our operations through the 12b rule which created the OTC market in its present profitable form." The 12b rule prevents registered exchanges from listing and trading corporate issues of their selection without the company first agreeing to full disclosure, insider and proxy rules; an unrealistic but popular law now being used most effectively to limit the proper growth of the regulated public auction markets offered by the smaller and regional exchanges. Companies naturally prefer the lease disclosure, but if the public buys the stock anyway, why not on regional exchanges which keep the trading in public view as against the "secret" OTC market operations? The SEC has wisely recommended that publicly traded companies of certain size be required to make full public disclosure, follow proxy rules, and require insider trading reports as required under the 1934 SEC Act; thus making unlisted companies report the same as listed companies in the public interest. Therefore, if the unlisted companies are doing all that the listed companies are doing, then no matter of public protection can be involved if registered national securities exchanges under SEC control can freely list and trade whatever stocks they choose, which was the historical pattern of the securities industry prior to 1934. It was only the 12b rule which created the monster OTC market which so badly needs control according to the recent SEC report. Government economy must be considered in any legislative program and it must be clear that it is far less costly to supervise the proper trading of securities on a registered national securities exchange under SEC control than to watch over thousands of hot backroom telephone operations constantly on the move. The NASD, self-policing, of course, tries, but the hot-issue study and the present recommendations to Congress would not have been made if this private wire trading could have been well regulated at any price less than an astronomical budget figure a high price to pay to keep the 12b rule and its special preserves. The third voice in the securities industry (as yet unheard on the pending legislation), that of the small exchanges, is in danger of being extinguished entirely if another rule change is made; i.e., the repeal of the 12f-3 rule on unlisted trading privileges. The repeal of this rule could strip the smaller exchanges of further trading volume and prevent the listing of full disclosure companies and therefore leave the national public investment business to be divided between the two major forces, each of which would gain greatly by such an apparently innocuous move. The real danger in this 12f-3 repeal is that it will keep the unlisted companies off the regional exchanges (unless they apply) even when they meet all the 1934 act reporting requirements and thus protect the bread and butter of the OTC group. Naturally this has strong OTC backing. It is most essential that a real understanding of these rule changes and the underlying issues be achieved, for this is a highly complex industry and vast amounts of money are involved; so even small changes can have far-reaching effects on the industry and on the national economy itself and especially on the pocketbooks of special interests who are anxious to keep the whole matter "out of the light." There is a real need for the smaller and regional exchanges so subservient to the volume of major brokerage firms and the New York Stock Exchange ticker system, because through these local exchanges local funds can be reemployed in local industry instead of being exported to major financial centers (New York) where the money often serves only to make blue chip issues more than ever overpriced (comparatively) and thus more susceptible to future "May breaks" as national public investing continues to be concentrated in too limited a number of national blue chip issues. The 12b rule was passed 30 years ago for reasons entirely different than exist today and to solve problems which no longer exist. There was no thought by the architects of the 1934 act that anything like the present OTC market could be created by this small clause in the Exchange Regulation Act of 1934. If you would care to inquire of Dean James Landis, one of the architects of the 1934 act and one of the first SEC Chairmen as to his opinion of the 12b rule, I believe that you will be interested to hear he has been strongly in favor of the full disclosure recommendations of the SEC and the logical and necessary repeal of the 12b rule. When previous efforts to place further necessary controls on the security industry were undertaken in the past, legislation was defeated by the opponents by a curious device; that of progressively raising the reporting size of the unlisted companies to a point where all the smaller companies needing the most supervision were no longer in a reporting status and the need for passing the bill for large companies only was so little that the bill was dropped. A similar pattern appears to be developing which would be unfortunate indeed as the smaller companies need this control most of all and the reporting would take only a tiny fraction of their budgets instead of causing prohibitive expense as the testimony tries to show. Naturally the companies themselves not wishing to report their affairs cry "excessive costs" which is echoed by their spokesmen in their effort again to raise the minimum reporting size to exempt the thousands of smaller companies. In point, the minimum reporting size was recommended in May at 300 stockholders, then 500, then 750 (one million net worth) and today a 1,000 minimum was recommended. In conclusion, Senator, this is a critical area requiring thoughtful study and free undirected testimony to clarify the great need for the repeal of the 12b rule and the retention of the 12f-3 rule when the unlisted companies are brought under the full disclosure requirements of the 1934 act. Some of the finest and most highly paid minds with impeccable connections are no doubt aggressively at work, considering the size of the stakes, and the true issues may therefore be even more difficult to bring out in testimony. Strange alliances indeed are formed when mutuality of objectives can be found in the financial world I am sure, as in the political world, and I can appreciate the problem you may have in hearing the validity of one small voice through the duet of two major voices in opposition to our fight for repeal of 12b and for our survival and growth. Thank you for your consideration. LAWRENCE H. TAYLOR, HARRIS TRUST AND SAVINGS BANK, Hon. A. WILLIS ROBERTSON, Chairman, Senate Committee on Banking and Currency, DEAR SENATOR ROBERTSON: As a State-chartered bank and as a member bank of the Federal Reserve System, we would like to present to you and your committee our views on S. 1642 providing for certain amendments to the Securities Exchange Act. |