are publicly owned. Institutional membership as such is, in turn, closely intertwined with the question of commission rates for institutional business since the prospect of commission savings is a major incentive to some institutions to seek Exchange membership.

The issues I have discussed are still being developed in our current commission rate structure hearings. Other issues which I have not discussed today are related to the matter of commission rate structure and will be the subject of further testimony in the hearing. These include the matter of intra-member minimum commission rates, access to transaction and floor information by competing markets, the impact of automation on competition between markets in exchangelisted securities, the determination of what practices are developing under the interim rate structure that became effective on December 5, 1968, and related matters.

I wish to make clear that the Commission intends to proceed as expeditiously as possible with the commission rate structure hearing. While issues which are the subject of the hearing are interrelated in varying degrees and while some of them may of necessity be the subject of long-term studies, we shall give the complex issues our most careful consideration and we shall deal promptly with those issues which we find susceptible of separate and prompt resolution.

While we intend to deal with these matters promptly, I do not believe it would be appropriate for me or for any other member of the Commission now to attempt to reach conclusions concerning the issues as to which the record is incomplete and as to which we have not had the benefit of staff recommendations or the views of all interested persons.

ATTACHMENT K-FREE CREDIT BALANCES OF CUSTOMERS, FAILS TO DELIVER, AND FAILS TO RECEIVE FOR THE 20 LARGEST BROKER-DEALERS AS REPORTED IN SEC FORM 17a-5 DURING 1968

Mr. Moss. The Chair recognizes Mr. Thompson.

Mr. THOMPSON. Thank you, Mr. Chairman.

I also would like to congratulate you on a very fine statement. Being a new member, I do have a few questions. I will try to limit my ques

tions to one or two.

On page 5 of your statement, you made mention of the fact that pension funds, insurance companies, and banks are shifting, to a sig

nificant degree, from investments in fixed income operations to investments in equity.

What effect do you feel this has had on the interest market for borrowed capital, homeowners, businesses that need money for expansion, and so forth?

Has the fact that insurance companies and other financial institutions which in the past have been large providers of long-term capital are going into the equity field with their money had any effect in driving interest rates up?

Mr. BUDGE. I would assume that as money is diverted to equity securities, there would be less available for the lending activities that you describe. The dimensions of the problem I would not be able to advise you about right now.

Mr. THOMPSON. Most insurance companies, I assume, operate under the supervision of the New York State Insurance Commission. I think that is recognized as being one of the regulatory agencies that regulates the insurance industry.

But are there restrictions on the various companies as to the amount of money that they could put into equity-type investments?

Mr. BUDGE. I could furnish that for the record. We, of course, have jurisdiction over insurance companies only somewhat collaterally, since, as you indicate, they are regulated primarily by the State authorities.

I will be happy to attempt to furnish that information.
(The following letter was received for the record:)

SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C., March 20, 1969.

HON. JOHN E. MOSS,
Chairman, Subcommittee on Commerce and Finance, House Committee on Inter-
state and Foreign Commerce, Rayburn House Office Building, Washington,
D.C.

DEAR MR. Moss: At the hearing before your subcommittee on February 25th Congressman Thompson requested information regarding the restrictions imposed by the New York state insurance laws on the percentage of assets which may be invested in equity securities by insurance companies subject to New York's jurisdiction.

The investment by an insurance company in equity-type securities is governed by the Insurance Laws of the State of New York (27 of McKinney's Cons. Laws of N.Y. (annotated)). Section 81 (13) of that Law provides, in general, that if certain earnings requirements are satisfied (1) no insurance company may acquire more than 2% of the total outstanding shares of any company and (2) the aggregate cost of all such investment in common stocks may not exceed the lesser of (a) 5% of the insurance company's total admitted assets, or (b) 1⁄2 of the surplus to policy holders of such insurance company. Section 81 (17) also provides that, notwithstanding the above, the aggregate cost of investments in common stocks of a domestic insurance company may not exceed 32% of its admitted assets.

The Commission understands that bills are now pending in the New York state legislature which would permit an insurance company to invest 10% of its admitted assets, or an amount equal to 100% of its surplus, whichever is less, in common stocks.

The above does not relate to an insurance company's "separate account" created to sell variable annuities. Section 227 of the Insurance Law provides that a separate account may invest all its assets in common stocks. The "separate account" must be maintained so that, among other things, income, gains and

losses, whether or not realized, from assets allocated to the separate account shall be credited to or charged against such account without regard to other income, gains or losses of the insurance company.

I hope that this information will prove useful to the Committee.

Sincerely,

HAMER H. BUDGE, Chairman.

Mr. BUDGE. Mr. Loomis has a comment. Mr. LOOMIS. I can provide a little information. There are restrictions on the amount of the assets underlying insurance policies which can be invested in equities.

It is only a small proportion. It varies from State to State. It is rarely ever over 10 percent.

In addition, the insurance industry recently has been evolving socalled variable annuities, including particular group variable annuities used to fund pension plans.

The underlying assets of those activities, which are quite substantial, are largely invested in equities.

Mr. THOMPSON. Let me ask one further question, Mr. Chairman. You indicate on page 8 that you estimate in fiscal 1969 that 1,500 companies who have never before gone public will file registration statements.

Do you feel that part of the reason for these companies going public is the lack of capital that they can borrow from conventional sources! The point I am trying to make here is simply this: Is the fact that so many pension funds, insurance companies, and banks are now going into the equity market having an adverse effect on business, homeowners, and so forth, who are seeking money for their purposes? As related to businesses who have never been public before, are they going public simply because they cannot obtain the necessary money from any other source?

Mr. BUDGE. If I may, I would like to analyze that and furnish a little more thoughtful answer for the record.

I might say, however, that a lot of the companies which have gone public or are in the process of going public now are completely unseasoned. They have no earnings record. We, of course, in the Commission, under the law, are not supposed to make any value judgment as to the merits of those issues.

We don't act, of course, as a blue sky commissioner of a State in attempting to evaluate whether they are good, bad, or indifferent. Certainly, it is one of the areas that would indicate speculative activity in today's market, this type of company which is today going public. Mr. THOMPSON. Thank you very much, Mr. Chairman.

That is all I have.

Mr. Moss. Before recognizing the next member, I would like to deal with one subject, Mr. Chairman, in the list upon which discussion was requested.

I wish to refer to the use of inside information. I wonder if you would discuss this briefly for us in terms of an illustration such as the Merrill Lynch, Douglas underwriting. I think the problem of the use of inside information is a most difficult one. I am sure that we are all troubled as to just how this can be handled and how conflicts of interest can be avoided.

It appears in the Merrill Lynch, Douglas case that as a result of information received for a proposed underwriting, certain customers of Merrill Lynch were treated differently in the information they received.

Has the Commission given any consideration as to whether or not an approach to the resolution of this problem would entail its reconsideration of the study which it had made in the late 1930's regarding the segregation of the functions of brokers from those of dealers?

Mr. BUDGE. No, Mr. Chairman, the Commission has not restudied that. I think it is certainly an excellent suggestion.

In the Merrill Lynch case, of course, the charges were made by the staff of the Commission, and an offer of settlement was made by Merrill Lynch to the Commission.

We never actually heard evidence in that case. I see very clearly what you would like us to restudy. The Commission will do that. Mr. Moss. I thank the chairman for that assurance.

I will now recognize the gentleman from Texas, Mr. Eckhardt. Mr. ECKHARDT. Mr. Budge, I have a question that goes somewhat to Mr. Stuckey's first questions or comments. It struck me that a great amount of testimony concerning conglomerates, concerning the question around them, concerning the shift from acquisition money obtained through stock as opposed to acquisition money from debt financing, seemed to lead up to a recommendation of some type, perhaps a recommendation of slightly broader scope in Commission activity.

Then in the paragraph on page 29, there is a rerecitation of the limitation of the Commission's courses of action, largely to disclosure and to dealing with hard-core fraud.

It would seem to me that there might be some reason, against this background of change, to consider some minimum level of fair and equitable practice short of fraud that might possibly be controlled by the Commission, either by denial of the right to engage in the market, or by some method of warning to the public where such practice were used.

For instance, I believe you described in your discussion the fact that conglomerates are rather difficult to analyze. Perhaps some type of limitation, some minimum level of disclosure, and a breaking down of the conglomerate's operations might be required, or if it were not met with it might result in some general warning to the investigating public that the information available was perhaps inadequate in the view of the SEC.

Mr. BUDGE. I would like to answer that in two parts, if I may. The regulations of the Commission now provide that a reporting company has to report the sections of the company which comprise 15 percent or more of its profit or its sales.

The Commission now has under consideration a rule which would reduce that 15 percent to 10 percent. In the other area, I think at the present time, if there is an acquisition of 10 percent or more, as soon as it hits 10 percent by the acquiring company of the target company, it has to be reported to the Commission.

The Commission has under consideration reducing that 10 percent figure to 5 percent. I think that would take legislation. Actually, the 10 percent requirement as it now exists may amount to several million shares in really large companies.

We have thought about requesting this committee specifically to consider reducing that 10 percent requirement and making it 5 percent. We will study that further and make our recommendation to the committee.

Mr. ECKHARDT. That would, of course, tend to meet the question I was raising, an area where conglomerates' operations might not be fully disclosed.

This would require a further disclosure and the minimal operations would become further minimal because of the increased size of the conglomerate.

Mr. BUDGE. If they comprised the present 15 percent or the proposed 10 percent of the overall operation of the conglomerate, they would have to be reported, yes, sir.

I may say that this conglomerate is a new phenomenon. One of the most informative things I have seen on it was this month's issue of Fortune magazine. There is an excellent discussion. A lot of it was news to me as it is described in the article. It is something with which the Commission, as such, has not really dealt with for a very long period of time because it is a new phenomenon.

Mr. ECKHARDT. Thank you, sir.

Mr. Moss. Mr. Keith?

Mr. KEITH. Thank you, Mr. Chairman.

I regret that I could not be here to hear your testimony, Chairman Budge, so I am not, perhaps, in a position to ask many questions at this time. I will go over your statement carefully.

As you know, I have sponsored two bills, one in the 90th Congress on institutional trading and another in the 91st on the question of conglomeration.

Have you any observations to make concerning the problem of institutional trading?

Mr. BUDGE. I think I should report particularly to you and to Chairman Moss, because you were the authors of the legislation that set up the study which the Commission is undertaking, that we encountered some substantial delays, first in appropriations and second in recruiting of personnel to conduct this study.

We do now have a director of the study and we are filling some of the positions with people who will actually conduct the study.

We have had the industry groups in. It was our representation to you that this would be conducted in full cooperation with the industry. We have set up an advisory committee which has a very broad representation of American business and banking interests and securities interests.

I feel that the study is now really about to be fully launched. We do have the feeling, as I have indicated in my statement, that there is a very real, substantial impact on the markets from the activities of institutional investors. We hope the study will give us the answers as to just exactly what takes place, and the results.

Mr. KEITH. The question is sometimes a difficult one to comprehend, but do you think there is adequate information available to the public