securities have been increasing in recent years. This could be viewed as evidence of organized crime, but cannot be presumed as conclusive.

Similarly, we cannot determine precisely how stolen securities are disposed. From our discussions with law enforcement authorities, we understand that stolen securities are often used as collateral for loans with out-of-town or for eign banks. Depending on whether the security is in bearer or registered form. and on the relative ease of negotiability, stolen securities may be sold directly to buyers for a discount from market value. The buyer would then attempt to receive value for the stolen securities, either through a sale on the market using false identification or by offering the securities as collateral for the loan.

The New York Stock Exchange encourages member organizations and banks to report lost or stolen securities to a subsidiary of the Exchange, the Stock Clearing Corporation. We estimate that in 1967, securities with a total value of some $37 million were reported to the Stock Clearing Corporation as being lost or stolen. The comparable figure for 1966 was $9.1 million-less than 25% of the 1967 figure. Figures for 1968, although not complete, indicate that this figure did not increase further. While these totals of lost and stolen securities are in the millions of dollars and are a source of concern, their magnitude refutes any hint that stolen securities are a significant cause of member firms failing to deliver securities to purchasers.

In addition to the steps taken by the New York Stock Exchange, and which are discussed in the succeeding paragraphs, a Joint Bank-Securities Industry Securities Protection Committee was organized in January 1969. Its duties are threefold: to acquire precise knowledge of the problem, to formulate compre hensive remedial programs and recommend them to the appropriate implementing organizations. This Committee, consisting of eleven members, has representatives from banks, brokerage firms, the national securities exchanges and other industry organizations. The Committee is working on the fingerprinting problems described hereafter, on an education program to make the securities industry and the banking community aware of basic precautions which can be taken to help prevent theft and the liquidation of securites, and other steps including possible new Exchange rules regulating internal security of member firms.

Mr. Murphy's reference to large numbers of new employees highlights one of the most difficult aspects of our problem. It is practically impossible now to obtain reliable background records on new employees of either national securities exchanges or member firms in the New York area. To obtain positive identification and reliable background information, it is necessary to fingerprint employees and to have those fingerprints classified and identified by an agency having trained personnel and comprehensive records.

The New York State Labor Law prohibits fingerprinting as a condition of securing employment or of continuing employment. That law provides in pertinent part as follows:

"201-a Fingerprinting of Employees Prohibited

"Except as otherwise provided by law, no person, as a condition of securing employment or of continuing employment shall be required to be fingerprinted. This provision shall not apply to employees of the state or any municipal subdivisions or departments thereof, or to the employees of legally incorporated hospitals, supported in whole or in part by public funds or private endowment, or të the employees of medical colleges affiliated with such hospitals."

There are no other provisions of law which permit fingerprinting of employees of securities exchanges or member firms and which thus come within the exception stated as the first clause of the above section.

The Code of Federal Regulations, which governs the FBI, does not include national securities exchanges or registered brokers and dealers among those organizations with which the FBI is authorized to exchange fingerprint informstion. The Code of Federal Regulations, in pertinent part, provides as follows: "28 CFR 0.85 General Functions

"Subject to the general supervision and direction of the Attorney General, the Director of the Federal Bureau of Investigation shall:

"(b) Conduct the acquisition, collection, exchange classification, and preservation of identification records including personal fingerprints voluntarily submitted on a mutually beneficial basis, from law enforcement and other govern

mental agencies, insurance companies, railroad police, national banks, member banks of the Federal Reserve System, FDIC-Reserve-Insured Banks, and banking institutions insured by the Federal Savings and Loan Insurance Corporation; provide expert testimony in Federal or local courts as to fingerprint examinations; and provide identification assistance in disasters and in missing persons type cases."

It should be noted that this section permits the FBI to exchange fingerprint information with insurance companies and banks.

The Police Department of New York City maintains personal background records, but it is a policy of the Police Department that these records be kept confidential. Primarily these are records of criminal activity in New York City and they are not reliable for persons who have spent a substantial part of their life away from New York City.

The New York Stock Exchange and many of the member firms feel that it is imperative to know more about the background of those who work in the securities industry. From data available for 1968, we estimate that there were approximately 152,000 people employed in the securities industry. As I stated before you on Wednesday, the Exchange's Stock Clearing Corporation, the American Stock Exchange Clearing Corporation, and the National Over-theCounter Clearing Corporation in New York process approximately $1.5 billion of securities daily. These securities are handled in the offices of member firms as well as in the clearing corporations. With thousands of people handling over a billion dollars in securities each day, it is possible that undesirable people will be placed in a situation where they can steal.

In an effort to obtain the best available information on all employees in the securities industry, the Exchange has approached Federal and local government to seek their help. Discussions were held during 1967 and 1968 with the FBI and the Justice Department concerning the posibility of including registered national securities exchanges and brokers and dealers registered with the Securities and Exchange Commission within the provisions of Section (b), 28 CFR 0.85, quoted above. This would permit the FBI to exchange fingerprint information with securities industry organizations. We were advised in the Spring of 1968 that the funds, personnel and facilities of the FBI could not accommodate the processing of additional fingerprints. Although sympathetic to our problem, they did not accept our request.

In the 1968 session of the New York State Legislature, a bill, supported by the Exchange, was introduced in the Assembly to amend the Labor Law to permit fingerprinting as a condition of employment for certain employees of national securities exchanges. The law now provides that under certain circumstances public galleries of art and hospitals may require fingerprinting as a condition of employment. The bill would have added to this list only clearing corporations affiliated with any national securities exchange registered with the Federal Securities and Exchange Commission. It would affect only a few hundred new employees each year. This limited bill was not passed. The same bill has been introduced in both Houses in the present session of the New York State Legislature.

Discussions also have been held with officials of the New York City departments affected in 1967 and 1968. The Police Department has stated that they are not authorized to supply records to private organizations and that the workload which would result from checking background records for the entire securities industry would be too great, although it was indicated that the Department would not oppose the bill introduced in the New York State Assembly.

The securities industry has taken other steps to deal with the problem of stolen securities which do not involve government. Lost or stolen securities which are reported to the New York Stock Exchange or the Stock Clearing Corporation are publicized by means of a lost securities bulletin. These are mailed to all member firms and to all banks located in New York City. This is intended to deprive stolen securities of their marketability and their utility as collateral.

The Department of Member Firms of the New York Stock Exchange, by letter dated March 14, 1968, cautioned all firms against accepting statements of prior business history of new employees at face value without adequate verification. The letter cited the provisions of Exchange Rule 345.19 that firms should check previous employers and should verify the previous ten-year business history of employees.

In summary, the basic problem of stolen securities is one which must be dealt with by the law enforcement authorities and the action which the Exchange and its members might take is limited, but is being thoroughly explored by us. Access to the fingerprint records of the law enforcement agencies would be most helpful and the Exchange would support legislation providing for that access as we have done in New York State.

Sincerely,

Mr. MURPHY. Mr. Keith.

Mr. KEITH. Thank you, Mr. Chairman.

ROBERT W. HAACK, President.

On an earlier question, I discussed the matter of certificate clearinghouses.

The purpose of the exchange, it seems to me, is to enable the people of America to buy a share of ownership in a corporation that is going to be worth something in the long run.

Is that generally so?

Mr. HAACK. Yes.

Mr. KEITH. So if you make it easier for them to get in and out, are you not, in effect, encouraging speculation? Rather than encouraging them to buy something for the long haul, you are making it possible even for the little fellow to move into and out of the market three or four times in the course of a day.

Mr. HAACK. I think you will all recall from history that there are periods when the public, rightfully or wrongfully, wishes to speculate. I think that speculation, per se, is not wrong. It is a necessary ingredient.

Our concern is with speculation when it becomes excessive. I seriously question whether the exchange can, on its own motion, put the public on the couch, so to speak, and question its motives as to why it is buying United States Steel. You might be buying United States Steel today because you think it is a long-term investment, and I might buy United States Steel today because somebody is going to take the company over tomorrow.

I think your right and my right to buy United States Steel, regardless of our motives, should be uninterrupted.

I would say that my purposes might be as valid and as bona fide as

yours.

Mr. KEITH. It seems to me that you have the best of both worlds in your testimony. You talked about how little speculation there was in the New York Exchange; not any, practically.

Mr. HAACK. It is there, but we think it is entirely within reason. Mr. KEITH. When you have the certificate clearing system that will enable you and the American Exchange to catch up with the over-thecounter market, it would be easy.

Mr. CUNNINGHAM. We think the present system is better for the New York Stock Exchange than it is for the other markets.

Mr. KEITH. The availability of this certificate clearing system makes it easier for you to service peoples' desire to participate in short-term movements.

Mr. HAACK. I would question that, Mr. Keith. I would think that the majority of the people who buy or sell speculatively, never want to see a certificate in their life anyway.

Mr. KEITH. I realize that, but the present rules of the game require that they have possession.

Mr. HAACK. No. You can buy 100 shares of United States Steel today and leave it with your broker, and you could have done that a year ago or 10 years ago.

Mr. KEITH. I do not mean that. Your broker is your agent in that case, and after a while he has to actually have these things in his possession before he piles up too many transactions under the present system.

I do not want to make a big point of this. I just want to indicate that there are some weak points in the certificate approach, the clearinghouse approach, in my view, but it is not anything that I would want to stop.

I just wanted to make the record clear that it does make it easier. Mr. HAACK. Following that same line of thought, a reduction in commissions would equally induce speculative activity because it could enable people to get in and out of the market at less cost.

Mr. KEITH. That raises some questions on which I am not really sufficiently informed this morning to comment upon.

Getting back to the hedge fund matter, I take it you really do not know of any hedge fund partnerships that would require the New York Stock Exchange to issue rules dealing with that subject?

Mr. HAACK. At this point we have no factual documentation of any abuses.

Mr. KEITH. Have you made any effort? It seems to me that it is wide open as a means. You have people who, as in the Merrill Lynch case, indicated a willingness to act on behalf of one client, to make some money, and to make some money on the other end of the deal for another one who was not in possession of the same information. This came to light rather inadvertently, I think, from what I have heard. But the existence of a hedge fund would make it more difficult to comprehend that kind of transaction, would it not?

Mr. HAACK. I would say possibly, because of the present nonrequirement for these funds to comply with the same type of regulations that more orthodox funds do.

Mr. KEITH. Don't you feel that in keeping with the objects of the constitution of the New York Stock Exchange, to maintain high standards of commercial morals among its members, and integrity, and to promote and develop high principles of trade and business, you both have the responsibility and the moral responsibility to pursue this question?

Mr. HAACK. I don't think we have the authority at this point, which is one of the present problems. I don't know under what auspices we could go into a hedge fund and make the type of investigation that you might have in mind.

Mr. LEVY. Mr. Keith, a hedge fund is nothing but a client of a member firm, but larger than an individual client. Its activities are regulated in the sense that if there are any manipulative practices going on, they are watched by the stock exchange, the same as it is with anybody.

There are no facts and no indications that hedge funds get inside information on any subject whatsoever.

Mr. KEITH. I may be under a misconception. In view of the questions that I have asked, I better make public the misconception I have had on the hedge fund.

I thought of it as being a sort of private investment partnership, usually made up of a small group of wealthy men, who pool some of their capital to trade in the stock market and are in a position to engage in speculative practices.

I have been under the impression that the SEC had this same concept and asked hedge funds for some detailed statements about their organizations and trading practices.

Mr. HAACK. I think your definition concurs very quickly with the quick, off the top of my head definition that I gave you.

But the hedge fund is a customer of a member firm of the New York Stock Exchange, just the way any other customer is.

Mr. KEITH. But aren't they oftentimes members of the New York Stock Exchange?

Mr. HAACK. No.

Mr. KEITH. I mean participating partners.

Mr. CUNNINGHAM. It is conceivable, let's say, that an officer of firm A may be an investor privately in some other firm B, but he is not in control of the funds, nor is he in operation of it or any aspect like that.

Mr. KEITH. But he is an exception to the fact.

Mr. CUNNINGHAM. No; because he usually has nothing to do with the trading that is done in that account. The account is examined by the examiners of our exchange for all the rules and regulations in the same manner that any other customer's account is.

Likewise, if the SEC were to examine the account for rules and regulations. The member firm that operates the account for the customer is never benefitting from that account himself directly.

He is just treating it as any other customer. But the fact that it may or may not be speculative, and there may or may not be tax advantages, has really nothing to do with the way the member firm, itself, operates that hedge fund.

Mr. LEVY. Don't forget, Mr. Keith, as you know, many of our member firms operate investment companies, mutual funds, under the Act, and there is no conflict that I can see.

They have never been accused of it, anyhow.

Mr. KEITH. But do you have ways and means of keeping close surveillance on them?

Mr. LEVY. Their transactions are reported. The only difference. I believe, is that the mutual fund transactions are reported quarterly, publicly, and monthly to the SEC.

Mr. KEITH. I think the SEC's ability to observe the activities of a speculative nature in that situation you later described are much greater than in the case of a hedge fund.

The question is: Is the hedge fund a tool that has escaped from the kind of surveillance that might be desired in the public interest?

Mr. LEVY. We survey the activities of the hedge fund, just like we do of any other customer. A hedge fund is an entity that is a customer of a member firm. Therefore, any of its activities are scrutinized to the same extent that any other customer's is.

Mr. KEITH. And your surveillance indicates what?

Mr. LEVY. As far as inside information, that kind of thing, as far as we know, it is not practiced. But there is no way of telling.

Mr. KEITH. You do not think there is any need for any legislation or Securities and Exchange Commission action?