PROPOSED ORGANIZATION

Implementation of the provisions of the resolution will require the establishment of a new organization within the Commission which will be known as the Division of Securities Markets. This Division will be composed of the following organizational elements: (1) Office of the Director; (2) Office of the Chief Counsel; (3) Branch of Exchange Study; (4) Branch of Over-the-Counter Study; and (5) Branch of Reports and Analysis.

The Branches of Exchange and Over-the-Counter Study will be responsible for conducting the studies and investigations of the exchanges and over-the-counter markets, respectively. The Branch of Reports and Analysis will conduct broad economic studies of the current practices in all phases of the securities markets to determine their effect on the public interest and assist the two investigating branches in the analyses and preparation of reports and other material associated with the study and investigation. The attached organization chart shows the distribution of the positions requested. Two sections consisting of approximately 16 positions will be established in the New York regional office reporting directly to the Director, Division of Securities Markets.

HEARINGS

Hearings on the resolution were conducted by the Subcommittee on Commerce and Finance of the House Interstate and Foreign Commerce Committee on June 27, 28, 29, and July 10, 1961. The legislation is supported by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., and the American and New York Stock Exchanges. A substantial portion of the testimony at the hearings by the representatives of these four organizations consists not so much of consideration of the need and desirability of a study and investigation, which appears to have been presumed, but discusses a great number of matters which each witness felt was comprehended by, and appropriately should be taken up in, such study. No one appeared in opposition to the legislation. The House of Representatives passed the resolution on August 24, 1961.

On August 25, 1961, the Senate passed the resolution after the Committee on Banking and Currency authorized the chairman of that committee by unanimous vote to waive referral of the resolution to the Securities Subcommittee and requested that it be given immediate consideration on the floor of the Senate.

It is clearly the intent of Congress that the study authorized by House Joint Resolution 438 be comprehensive. As Chairman Oren Harris of the House Committee on Interstate and Foreign Commerce stated:

The scope of the investigation authorized by this resolution is exceedingly broad.

Similarly, Senator Williams, speaking for the Senate Committee on Banking and Currency, stated:

It is intended that this study and investigation be wide in scope; otherwise the resulting information will not enable Congress to examine the broad spectrum of the securities industry.

The Commission believes a broad study is necessary to effectuate the congressional purposes in enacting House Joint Resolution 438. I should like to outline briefly some of the general areas, which the Commission will analyze pursuant to this resolution.

CHANGES IN METHODS OF DISTRIBUTION AND MARKETING

Significant changes have been occurring in the methods of distributing and selling securities, including the increase of branch offices, the employment of part-time salesmen, and the use of novel methods of distributing certain securities. These changes raise questions as to possible assaults upon the integrity of marketing procedures and their effects and scope should be examined.

The growth of branch offices has increased the problems of training and supervision of salesmen, the regulation of whom is so important because of their immediate contact with the public. Moreover, an increasing number of securities salesmen work on a part-time basis; many have no particular qualifications to sell securities; and most important, many are not subject to the kind of supervision which insures high ethical standards. The possibility exists that these factors may have led to questionable merchandising techniques.

On the managerial level, the heavy trading volume has made it difficult for many broker-dealers to keep current the books and records required by statute and rules of this Commission. As a further illus tration, there appears to be a growing number of instances in which broker-dealers have failed to deliver securities or the proceeds of sale of securities. The decentralization of control, coupled with the influx of inexperienced salesmen, suggests the possible development of a lowering of standards in market operations.

OVER-THE-COUNTER MARKET

The expanding over-the-counter market, and the issues traded in that market, present problems to be studied. There is a lack of basic information concerning the over-the-counter market. For example, unlike the exchange markets, the volume of trading is not known. Thus, it is difficult to determine which securities are active and which inactive or whether price increases or decreases in a security have been accompanied by slight or heavy trading.

Fundamental information is absent also with respect to the issues traded in the over-the-counter market. Issuers of securities registered on a national securities exchange are required to file with the Commission monthly, semiannual and/or annual reports outlining the material events or facts which have occurred during the reporting period, including financial data, mergers, and transactions with insiders. Similar reports must be filed by other issuers which have registered, under the Securities Act of 1933, securities of a class aggregating more than $2 million. A large but unknown number of issuers, in whose securities there is a substantial public interest, are not subject to these reporting requirements. Thus, the investing public is deprived of financial information with respect to these companies, a void emphasized by the fact that many of them do not even appear in the standard financial reference works. This absence of

data is particularly unfortunate in the over-the-counter market area, where a great number of companies are speculative or unseasoned

ventures.

Other questions for inquiry with respect to the over-the-counter market relate to marketing and trading processes. Among the problems which have arisen is that presented by securities whose market price rises sharply immediately after an initial public offering. It will be necessary to consider whether these increases result solely from normal forces of supply and demand or whether unwholesome or even manipulative practices have contributed. Furthermore, a detailed study will be made of the "after market," the trading market which commences after a public offering of securities. In this connection, we will examine who places the initial quotations; the reasons why the quotations are made; and how trading prices are arrived at.

EXCHANGE RULES

Although the Exchange Act of 1934 grants to the Commission broad powers over the exchanges, the Commission has, in general, allowed the exchanges to police their own members. This approach reflects the view that the exchanges can and should exercise a substantial measure of self-regulation and self-discipline subject to the statutory standards and the ultimate authority of the Commission.

The Commission has announced that it was investigating the rules, policies, and procedures of the American Stock Exchange relating to the conduct of specialists and other members. I anticipate that we will coordinate our investigation of the American Stock Exchange with a study of the rules and practices of other exchanges to determine whether, and the extent to which, any changes in such rules and practices may be necessary.

PROBLEMS OF FINANCING

Another broad area of inquiry will be the employment of credit in the securities market. Generally speaking, brokers and dealers may lend only 30 percent against listed securities (the present margin requirements) and may not lend at all against over-the-counter securities. Similarly, banks may lend only 30 percent against listed securities, but may freely extend credit on over-the-counter securities. Aside from these two groups-banks and broker-dealers other persons, including moneylenders, are not subject to regulation with respect to extension of credit in this area. These gaps and inconsistencies in the present pattern of securities credit regulation will be examined to determine their effect on the securities market.

In connection with this credit problem, we will seek also to deter mine the extent to which controlling persons or issuers are using moneylenders as a vehicle for bailing out or distributing securities without complying with the registration provisions of the Securities Act of 1933. Šituations have come to our attention where, soon after a pledge of securities by a controlling person, the pledge has been foreclosed and the securities have been sold by the lender without registration.

The above remarks indicate by example the direction of the study to be carried out by the Commission pursuant to House Joint Resolution 438. This study will be broad in scope, and will cover many as pects of securities regulation. It will present an opportunity for an intensive review of existing rules and enforcement practices, such a review being necessary at this time in light of the significant changes in the securities markets.

I will be very happy to answer any questions you may have, with the assistance of the other Commissioners and the staff members who are present.

(The chart referred to above is as follows:)