build a viable base of broad public ownership so essential to the nation's economy. It may well be that at some time in the future, after more experience has been gained from the study of current problems and climate, a policy will be adopted indicating that restrictive arrangements of this nature would constitute a listing problem. The Exchange is also becoming increasingly concerned with the various types of securities being issued in connection with tender and exchange offers and for which, in some instances, the benefits of listing on the Exchange are being sought. Over the years the Exchange has refused to list long-term warrants because of the problems they have historically created. The creation and issuance of other securities will be examined even more extensively than heretofore, especially in the light of the size of a company, its capital structure, interest coverage, and results of its operations, prior to the granting of any authorization for listing. Under certain circumstances, failure to obtain the listing of the new securities could possibly result in consideration being given to the delisting of the company's common stock. PHILLIP L. WEST, Vice President. NEW YORK STOCK EXCHANGE, Hon. JOHN E. Moss, Chairman, Subcommittee on Commerce and Finance, Committee on Interstate and Foreign Commerce, Rayburn House Office Building, Washington, D.C. DEAR MR. CHAIRMAN: I have your letter of February 27 asking for a statement for the hearing record on institutional membership. The question of institutional membership on the national securities exchanges is one of the most important problems facing the securities industry today. Simply stated, the question is whether financial and other institutions should be permitted, directly or indirectly, to become members of a national securities exchange. Existing rules of the New York Stock Exchange which are regulatory in purpose, preclude publicly owned firms from becoming members of the Exchange. These requirements are fathomed in the public interest as they permit the Exchange to inquire into the ownership of member organizations. Similar requirements are not enforced on all national securities exchanges, however, and in recent years a number of institutions have acquired memberships on other exchanges. This issue is not simply a commission rate issue, but bears directly on the future structure of the securities industry and may have a substantial impact on public investors. The record of the hearings held before the Commerce and Finance Subcommittee during the week of February 23 contain detailed statistics on the growth and influence of institutions in the marketplace and give an indication of the increased influence of institutions in the future. If institutions become Exchange members in large numbers, it seems reasonable to assume that the structure of securities markets will undergo marked and significant changes. The auction market of today is made operative by the flow of small orders which trigger the pricing mechanism and provide the flow of transactions which are essential to providing a liquid market with the concomitant almost instantaneous execution and reporting of transactions. If institutions become members and are thereby in a position to handle their own transactions, it seems inevitable that public investors will be directly affected in a number of ways. The market may be dominated by the institutional members and the role of the small investor conversely downgraded in terms of being a significant factor. Similarly, the ability and willingness of member organizations to maintain and finance the facilities to service and solicit smaller transactions may lessen substantially with the result of favoring indirect investment in securities through institutions and the decline of direct ownership and direct individual participation in the market. At the present time, the SEC's Institutional Study and our own commission rate study should provide information which will be helpful in accessing these consequences. We are disturbed, however, that while these studies are in progress, the development is occurring in an unplanned way and a point may be reached where the consequences of institutional membership are apparent but the development may have progressed to the stage where it may be too late to deal with it adequately. Sincerely, ROBERT W. HAACK, President. Hon. JOHN E. Moss, NEW YORK STOCK EXCHANGE, Chairman, Subcommittee on Commerce and Finance, Committee on Interstate and Foreign Commerce, Rayburn House Office Building, Washington, D.C. DEAR CHAIRMAN Moss: My attention has been called to this extract from your colloquy with the Honorable Manuel F. Cohen on March 7 (Page 295 of the raw transcript): "Mr. Cohen, in the testimony before us by Mr. Haack and Mr. Saul, there seems to be a general brushing aside of the question as being one of the overthe-counter securities. Are not fails of a member, whether an Exchange or over-the-counter issue, a concern of the Exchange?" Beyond Mr. Cohen's answer, the point I would emphasize is that "a general brushing aside" is not the New York Stock Exchange's evalution or disposition of the fails problem. So that there is no misunderstanding of our position, I would like to refer to the following recapitulation of some of my testimony on February 26. From my prepared statement (beginning on Page 87 of the transcript): “At the outset, I think it is important to emphasize that the paperwork backlog is not only a New York Stock Exchange matter, but encompasses other national exchange markets, regional exchanges, and the over-the-counter market; it includes banks and it includes institutions. It is an extremely broad topic with many and varied organizations involved...." Page 88-89: "Consequently, it was necessary for the Exchange to develop operational safeguards, in addition to its historical self-regulatory policies. "This has been accomplished and countinues to be a priority among the Exchange's activities. Now, as a matter of policy, member firms not able to handle their business properly are restricted and not allowed to do business as usual. "Finally, in terms of cause and effect of paperwork, the pile-up is greater in some segments of the industry than others. . . ." Page 91: "I should like to say parenthetically that the New York Stock Exchange in no way is attempting to reflect on any other marketplace. "I would accompany that statement by the fact that the bulk of the over-thecounter traffic is conducted by members of our Exchange." Finally (Page 126), this question and answer exchange between Congressman Stuckey and myself: "Mr. Stuckey: This brings us to the next question, going back to your testimony and your statement you just made: the New York Stock Exchange is actually keeping up with the paperwork, so this has not really been a tremendous problem, with the exception, as you mentioned, of some of the over-thecounter transactions within member firms and some of the transactions which member firms have on the American Stock Exchange. "Mr. Haack: I wouldn't unconditionally bless all of our members. Don't read that into it. "Mr. Stuckey: But basically you are able to handle the paperwork as it is now on 11 million or 12 million trades a day? "Mr. Haack: And in addition to handling that, make substantial inroads into the backlog, yes, sir." It was against that background and in that context, that I was attempting to make the point I reiterate now: That while the so-called “aged fail" problem is particularly acute in the over-the-counter market, it is no less a part of a serious, far-reaching, over-all problem of deep and direct concern to all securities markets. Briefly and in summary, it is very much the concern and responsibility of the New York Stock Exchange. It has top priority among the self-regulatory problems that the Subcommittee has pinpointed this past week, and that will be the case until it has been resolved to your and our satisfaction. With deep appreciation for your continuing patience and courtesy. Sincerely, ROBERT W. HAACK, President. NEW YORK STOCK EXCHANGE, Hon. JOHN E. Moss, Chairman, Subcommittee on Commerce and Finance, Rayburn House Office Building, Washington, D.C. DEAR CHAIRMAN Moss: As my testimony initially indicated, O-T-C fails are our most perplexing problem. This is so simply because the unlisted markets do not yet have meaningful rules and requirements for fail resolution. There is no evidence of a lack of desire of NYSE members or others for that matter to attack the O-T-C fail difficulties, the problem simply is that the means have not been provided. Listed fails are subject to the benefits of security clearances and mandatory buy-in provisions for contracts not settled in 30 days. Both techniques have proved to be significant aids. As you know, only minimal clearance of O-T-C issues is available, and there are no buy-in requirements for O-T-C issues. The Exchange has a major area for oversight in the O-T-C fail matter, and this involves the capital charge on fails open 39 days or more. The "haircut” so involved is graduated from 10% to 30% depending upon the age of the fails above 39 days. This aspect is reviewed, along with the firm's overall financial and operating results, by our accounting-examining staff, and for a number of those firms under restriction by separate report to the Exchange on a weekly basis. We have been in constant discussion with the NASD seeking to remedy the problem by the institution of mandatory buy-in requirements for O-T-C issues. Our recent meetings with NASD representatives indicates that recommendations for mandatory buy-in will be made to their Board of Governors in the near future. While the recommendation may not be on as short a basis as the Exchange's 30 days, we are nonetheless encouraged by this development. The NASD did institute in December a requirement for market makers that, in substance, would bar markets in any O-T-C issues where a firm has unsettled contracts open 120 days after settlement. The NASD reviews all its members, including those who are also members of this Exchange, for compliance with this rule. We appreciate your deep interest in this matter. Sincerely, ROBERT W. HAACK, President. (Whereupon, at 11:58 a.m. the subcommittee adjourned, to reconvene at 10 a.m., Thursday, February 27, 1969.) SECURITIES MARKETS AGENCIES THURSDAY, FEBRUARY 27, 1969 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE AND FINANCE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2123, Rayburn House Office Building, Hon. John E. Moss (chairman of the subcommittee) presiding. Mr. Moss. The subcommittee will be in order. This morning, the Subcommittee on Commerce and Finance is continuing its hearings on the administration of the laws pertaining to the regulation of the securities markets by the administrative agency and by the self-regulatory agencies involved. We have with us today Mr. Kenneth H. Sayre, chairman of the board of governors of the National Association of Securities Dealers, Inc., accompanied by Mr. Richard Walbert, president of the association, who will present to us a discussion of some of the major problems facing this self-regulatory agency. Mr. Walbert, I would like to say that we appreciate your being with us today. We realize that you just returned to the office after some outside activity, or inactivity. Let me say that I compliment you on the progress yor are making. Mr. WALBERT. Thank you, sir. Mr. Moss. I fully understand why we will now hear from Mr. Sayre in the presentation of your statement. Mr. WALBERT. Thank you once again. STATEMENT OF KENNETH H. SAYRE, CHAIRMAN OF THE BOARD OF GOVERNORS, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; ACCOMPANIED BY RICHARD WALBERT, PRESIDENT; LLOYD DERRICKSON, GENERAL COUNSEL AND SECRETARY; FRANK WILSON, ASSOCIATE GENERAL COUNSEL; RICHARD PETERS, SPECIAL COORDINATOR, FAILS PROGRAM; LEE MONET, DIRECTOR, UNIFORM PRACTICE COMMITTEE; RALPH BURGESS, CHIEF ECONOMIST; AND THORPE WRIGHT Mr. SAYRE. Mr. Chairman, my name is Kenneth H. Sayre. I am chairman of the board of governors of the National Association of Securities Dealers, Inc., and managing partner of the securities firm of Irving Lundborg & Co., San Francisco, Calif. To my left is Mr. Lee Monet, director of the uniform practice committee of the NASD. Of course, Mr. Walbert is to my right. Next to him is Lloyd Derrickson, our general counsel and Secretary. Behind the four of us are Richard Petes, special coordinator, fails program, NASD; Frank Wilson, associate general counsel; Ralph Burgess, chief economist of the NASD, and Mr. Thorpe Wright, senior staff member of Arthur D. Little & Co., Cambridge, Mass. This is my first appearance before your committee but I am well aware of the fact that our association has previously on numerous occasions appeared before this committee to testify in respect to proposed legislation on matters of great concern involving the securities industry. The association is pleased to accept your invitation to testify today in the context of a general review of significant matters before the association. Your letter of invitation also inquired specifically in respect to the existing speculative and inflationary psychology and our efforts to dampen them, our efforts to combat the "fails" situation which has developed, the apparent reluctance on the part of some broker-dealers to accept small orders and certain insider activity. I will attempt to comment on these matters to the extent of the association's expertise in respect thereto. I will also comment briefly on the action which the association has taken since the publication of the special study of the securities markets in 1963 and the passage of the Securities Acts Amendments of 1964 to perform more fully its regulatory obligations. BACKGROUND AND ORGANIZATION OF THE ASSOCIATION I know I do not have to state the genesis or purposes of the association to the committee, but I believe it would be appropriate for purposes of the record to state that contrary to the impressions which exist in some quarters the association is a self-regulatory body rather than a trade association, and I can assure this committee that it willingly and aggressively asserts that distinction and accepts all of the duties and obligations inherent in its designation as such. The association, as you know, was organized in 1938 pursuant to an act of Congress, the Maloney Act, and it receives all of its authority from that act which was enacted for the purpose of completing the Federal regulatory scheme in the securities industry; that is, it provided a regulatory mechanism over the ethical standards of brokerdealers in the over-the-counter securities market. Such was not previously subject to close regulation. The association is, therefore, an integral part of the overall system of Federal regulation. In many respects, its regulatory function is broader than that of Government regulators who are concerned only with the legality as distinguished from the ethical propriety of broker-dealer activities. The association like all other aspects of the securities industry is experiencing a period of growth and feverish activity. In this connection our membership as of December 31, 1968, was composed of 3,906 broker-dealers in all segments of the securities industry. This figure is up from 3,669 members 1 year earlier, and 3,691 members 2 years earlier. We have registered as representatives with members of the association as of January 30, 1969, 132,705 individuals up from 97,538, 1 year earlier, and from 87,806, 2 years earlier. I think the dramatic |