Mr. LEMKAU. Well, of course, it is always difficult to wear two hats. But it seems to me that a broker-dealer who is making a market is functioning in a buy-and-sell area for the short swing-that is all this applies to-and would conduct his operation there as the market demanded, as the supply came in or as demand came in.

Mr. Lowe. You would feel that whatever the disadvantages such a circumstance might pose, the advantages of permitting the director to also be a marketmaker and not subject to 16(b) would far outweigh these disadvantages? This would be your conclusion? Mr. LEMKAU. That is correct.

Mr. Lowe. I wonder if we might go to page 4 of your statement?
Mr. LEMKAU. Mr. Rockefeller wanted to add one comment.
Mr. Lowe. Certainly.

Mr. ROCKEFELLER. În many cases the nonsponsoring marketmaker may feel, under the pressure of the way the market is moving, that he wishes to abandon that market, whereas, as I think you brought out before, the sponsoring marketmaker does feel a responsibility in varying degrees of sticking with that market no matter what may

come.

Mr. Lowe. Thank you. Now, how many companies, Mr. Lemkau, do you estimate would be covered under the 1,000-shareholder test? For your information, the special study group found that approximately 2,500 companies would be covered under this test.

Mr. LEMKAU. We have been so informed.

Mr. Lowe. Do you feel that there is any reason why banks and insurance companies should not be included in this group?

Mr. LEMKAU. Well, we feel that banks and insurance companies should give full disclosure just as any other company does.

Mr. Lowe. In other words, you would say that the investors of bank and insurance companies are entitled to adequate protection just as the investors of other companies are?

Mr. LEMKAU. I certainly would think so.

Mr. Lowe. You state on page 4 of your statement:

We would favor modified reporting requirements to stockholders for companies with from 500 to 1,000 stockholders.

Section 5(c) of S. 1642 provides that a company not soliciting proxies would, nevertheless, when the time comes for elections, send the shareholders the type of information which would ordinarily appear in a proxy statement.

Would this requirement be burdensome for companies at the 500 to 1,000 shareholder level which do not choose to solicit proxies?

Mr. LEMKAU. That is the way we felt about it. You have to pick some figure, and it was our judgment that the 1,000 shareholder figure, with the $1 million assets, was one where there was sufficiently broad trading in the security that that would be the level at which we would cut off.

Mr. Lowe. And this cutoff would also apply to insider trading provisions for those with shareholders of less than 1,000?

Mr. LEMKAU. It would not have any reporting on it.

Senator WILLIAMS. At the bottom of the fifth page, or rather toward the middle, you mentioned rule 3 (a) 12-3. Would legislation be required in order to fulfill your recommendation here?

20-22663- -6

Mr. WHITE. It is our understanding that the present rule 3 (a) 12-3 has the effect of exempting from the provisions of section 14, which is the proxy solicitation, and section 16, the insider trading restrictions, foreign securities, whether governmental issues or private issues. The rule itself says that issuers reporting on certain numbered forms are exempt from sections 14 and 16.

I believe that the Commission could expand that rule or adopt another one which would afford the same treatment to foreign securities which would come under this bill if they made the finding necessary to change the blanket exemption.

Mr. LowE. So legislation would not be required to meet your request here?

Mr. WHITE. That is correct.

Mr. ROCKEFELLER. Could I go back one step? When you asked about reporting of banks, I think Mr. Cary handled this very well yesterday in his testimony when he said:

To say that bank regulation renders this disclosure philosophy unnecessary is to say that bank regulation is an effective substitute for the free exercise of an investor's judgment. Controls which protect against embezzlement and which assure adequate reserves serve important objectives, but not the objective of informed investment. To hold otherwise would be to imply that, because of such regulation, bank securities are, without more, worthy investments.

Mr. LowE. Thank you, Mr. Rockefeller.

Mr. ROCKEFELLER. I just wanted to tag that before we went on. Mr. Lowe. I wonder if we might go to page 8 now? Would you like to tell the subcommittee what additional regulations you have in mind under the quotations section?

Mr. WHITE. Well, generally speaking, we have been studying the area of quotations for some time. We found a few instances where perhaps we need certain rules. About the time we arrived at that conclusion, the study group was also investigating and studying the area of quotations.

The association felt that there might be something in this study report relating to quotations soon to be released which would require specific rules of the association in this area. We felt that it would be helpful to have a statutory base for those rules. And that is the reason that I think the Commission agreed to submit this particular section of the bill, or one of the reasons I might say.

Mr. Lowe. In its public hearings last year the special study group of the SEC that is, in its hearings on the sales practices of the industry-left the impression that the staff of the NASD should be increased in order to provide the type of self-regulation which the Commission had in mind.

Would you care to comment on your action in this respect since those hearings and also on what plans you have in meeting the increased responsibility which enactment of S. 1642 would require?

Mr. LEMKAU. Mr. Lowe, I believe at the time of those hearings we had 30 examiners, which we have since increased to 37 at the moment, and 5 new ones coming on who are in training, which will be 42. Overall last year the staff of the NASD was 164. This year we are budgeting for a total of 174.

So we realize that there are possibly going to be many additional responsibilities which the organization will have to undertake, and we are getting ourselves set for it.

Mr. Lowe. Thank you.

Senator WILLIAMS. Senator McIntyre?
Senator MCINTYRE. No questions.

Senator WILLIAMS. Senator Dominick?

Senator DOMINICK. No questions.

Senator WILLIAMS. We are very grateful to you, Mr. Lemkau, and to the other representatives of the NASD who are with you. And let me reiterate our feeling that you statement represents high quality statesmanship.

Mr. LEMKAU. Thank you very much, Mr. Chairman.

STATEMENT OF BAYARD DOMINICK, DOMINICK & DOMINICK, NEW YORK, N.Y., AND PRESIDENT OF THE ASSOCIATION OF STOCK EXCHANGE FIRMS; ACCOMPANIED BY GEORGE J. OTTO, IRVING LUNDBORG & CO., SAN FRANCISCO, CALIF., CHAIRMAN OF THE PACIFIC COAST STOCK EXCHANGE; G. SHELBY FRIEDRICHS, HOWARD, WEIL, LABOUISSE, FRIEDRICHS & CO., NEW ORLEANS, LA., A CURRENT GOVERNOR OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; JAMES CRANE KELLOGG III., SPEAR, LEEDS & KELLOGG, NEW YORK, N.Y., FORMER CHAIRMAN OF THE NEW YORK STOCK EXCHANGE; AND FRANCIS J. HUGHES, GENERAL COUNSEL, ASSOCIATION OF STOCK EXCHANGE FIRMS

Senator WILLIAMS. We are privileged to have Mr. Bayard Dominick with us this morning. He is president of the Association of Stock Exchange Firms. Mr. Dominick, I would say that you must feel as though you are coming before a very friendly forum.

Mr. DOMINICK. Thank you. I certainly do, Mr. Chairman. Senator WILLIAMS. Perhaps one of your friends might like to say a word at this point. Senator Dominick.

Senator DOMINICK. Thank you, Mr. Chairman. I want to welcome my esteemed brother to the witness stand. I think it only fair to say, Mr. Chairman, that, as you know, I am not a member of this subcommittee, and I think I should add to this that I know very little about the securities business except what I learned in my legal practice in trying to get various issues qualified before the SEC.

As a further disclaimer, I suppose I should also add that I have no interest, financial interest, of any kind in the firm of which my brother is one of the head partners. But having said all that, I welcome him here and hope that we will have a friendly discussion.

Mr. DOMINICK. Thank you very much, Senator Dominick. I did not know you were going to be here. I am delighted.

Senator WILLIAMS. I wish you would introduce your associates and friends who are with you, Mr. Dominick.

Mr. DOMINICK. Do you want me to start right at the beginning and start reading my report?

Senator WILLIAMS. Perhaps you would care to introduce your friends and associates first.

Mr. DOMINICK. All right.

Senator WILLIAMS. I see my friend Jim Kellogg.

Mr. DOMINICK. On my right is Mr. George J. Otto, of Irving Lundborg & Co., San Francisco, chairman of the Pacific Coast Stock Exchange. On my left is Mr. G. Shelby Friedrichs, of Howard, Weil, Labouisse, Friedrichs & Co., New Orleans, a current governor of the National Association of Securities Dealers, Inc. On his left is Mr.. James Crane Kellogg III, of Spear, Leeds & Kellogg, New York,. former chairman of the New York Stock Exchange. On his left is Mr. Francis J. Hughes of New York, general counsel of the Association of Stock Exchange Firms.

Senator WILLIAMS. Fine. Thank you. Proceed, please.

Mr. DOMINICK. Chairman Williams and members of the Securities. Subcommittee, my name is Bayard Dominick. I am president of the Association of Stock Exchange Firms, 120 Broadway, New York, N.Y., and a general partner of Dominick & Dominick, 14 Wall Street, New York, N.Y., a member firm of the New York Stock Exchange. I welcome the opportunity to appear before you to testify in behalf of the pending legislation.

With me today, as noted a moment ago, are three of my fellow governors of our association and our general counsel. They are here to assist me during my testimony and to answer your questions as: required.

The Association of Stock Exchange Firms is a voluntary association representing member organizations of the New York Stock Exchange and was created 50 years ago to aid members in dealing with individual and industry problems. We have 600 members ranging from individuals to the largest member firms in the United States. Our members have offices in every State of the Union with the exception of Alaska.

The association is governed by a board of 38 leaders of the securities: industry, at least half of whom represent areas outside of New York, in metropolitan financial centers across the country. Our members have approximately 70,000 employees and are responsible for the vast majority of securities transactions, not only on the New York Stock Exchange but also in the over-the-counter markets, the regional exchanges, and the markets for foreign securities. In fact, the customers of our members truly represent the investing public of America. Inasmuch as the association is a voluntary organization, we perform no regulatory functions. With this in mind, my statement today deals broadly with the principles involved in the proposed legislation, rather than with the technical aspects of these amendments to the various Securities Acts. A year and a half and an impressive array of industry and legal talent have been involved in ironing out technical problems always present in an undertaking of this scope.

As our members' business operations cut across all segments of the securities industry, we really speak for a broad cross-section of the industry. To elaborate on this statement, I would like to point out that currently our board of governors has 10 members who were or are governors of the New York Stock Exchange, 4 members who are or were governors of the National Association of Securities Dealers, Inc., 1 who is a governor of the American Stock Exchange, and 7 who are or were governors of the Investment Bankers Association of America.

In order to provide the subcommittee with some idea of our deep interest in the special study report and our practical participation in the present legislative program, the following background will be helpful.

With the delivery of the first segment of the report of the Special Study of Securities Markets to Congress, and at Chairman Cary's suggestion, a Securities Industry Liaison Group was formed to represent the industry in discussions with the Commission on these legislative proposals. I represented our association board on this liaison group at a number of the industry-Commission sessions and have been aided in this area by my fellow governors, Mr. William D. Kerr, of Wertheim & Co., New York, and Mr. George J. Leness, president of Merrill Lynch, Pierce, Fenner & Smith, Inc., New York.

All during the discussions of the special study report and the followup legislative recommendations, we have been in constant touch with our board of governors and our members, keeping them advised of developments as they occurred. During the current year we have had two board meetings, one in Houston, Tex., and the other in Richmond, Va. Commissioner Jack M. Whitney II participated in the meeting at Houston, and Chairman William L. Cary met with our board in Richmond to discuss the special study report and the initial legislative proposals. Our regional governors were urged before and after each board meeting to hold discussion meetings in their areas with regional members.

As a result of all this, I am confident that I am reporting the true opinion of our board and membership.

The association membership strongly favors the principles implicit in the legislative proposals before your subcommittee. The Securities Acts of 1933 and 1934 were written almost 30 years ago. It is only natural that they should be brought up to date at this time and that the public who are our clients should be protected from abuses which have been generated by fringe elements of the industry. Our first thought is for the protection of the investing public.

Further, after studying the legislation which has been presented to you by the Securities and Exchange Commission, we believe that this is enlightened legislation. We expect that the Comimssion will use the same enlightened judgment in preparing rules and regulations not subject to legislative action and that the remaining chapters of the report, which have not yet been made public, will show the same desire to protect the American public by constructive regulation, not by unwarranted punitive action which might impair our capital markets.

If, Mr. Chairman, I may digress for a moment, I would like to emphasize Senator Javits statement yesterday. He referred to Chairman Cary's April 3 letter which noted that:

The functions of the [special study] report and of any changes proposed are to strengthen the mechanisms facilitating the free flow of capital into the markets and to raise the standards of investor protection.

I feel that this is a most important philosophy.

Certain of the proposals contained in this legislation now before your subcommittee have been espoused by industry leaders for many years. We feel that the proposed reforms are long overdue. Senator Williams, in your remarks to the Senate on June 4th, in connection