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My views today, I would like to make it clear, are my own, because those of you who know Jack Harris know he has his own views, so I am speaking for myself and not on behalf of the Chicago Corporation.

The first thing I would like to say is I support John Weithers' remarks, because having been in Washington I would like to assure all those who think I was crazy for going, and think maybe Sam was crazy for going, that the system really does work, and it is very interesting to watch the committees and the subcommittees work. They are interested in varying degrees. They are, also, awfully busy.

You come up before a committee today, and say there are only three guys today, but if you went there and looked at them, in four days they have got four confiicting assignments, 62 constitutents in their office demanding their times to get their kids out of Viet Nam or something.

I think the system works, but I think it works better when Congressmen, like Congressman Young, and representatives go out and talk to the people in the field, because there is just no way that the atmosphere in Washington is conducive to any objective thinking.

I think it is particularly bad for our industry, because there are only a few voices down there that understand what we I think believe as an article of faith, that the industry is at the very heart of the free enterprise system.

It is an overworked word, it is a cliche, but things get to be cliches and overworked because they are true.

There is a sort of a feeling down there, I gather, of, "Okay, you guys are always griping, so you won't make $600,000 this year, you will make $400,000.”

They don't understand that the blood is flowing on Wall Street, and particularly in the regions.

I think I feel more strongly, Sam, than Frank does on two things. One is that the regional firms will survive. In fact, they have some built-in advantages at the moment that the larger, let's say, wire houses, at least the firms with hundreds of offices, don't have.

But I also believe that a lot of them are going to disappear, because the rules and regulations are so complex and so overlapping that smaller firms who went into business in their desire to sort of project their own feeling of entrepreneurship, there is something about the people in the investment industry, most of them want to be dealing, they don't want to be arguing with John Weithers about the stock exchange regulations.

They want to transact a block of stock. Frank would be out of here in a minute if he got a call from some firm they are working on, or wouldn't even have come, and neither would the rest of these gentlemen.

So I feel very strongly on that.

Mr. YOUNG. I guess the reason everybody is here is business is so bad! [Laughter.]

Mr. PODESTA. Listen, if you get all your competitors in one room, you are home free. Who is not here? (Laughter.]

But you asked me if I had read H.R. 5050, and I haven't; but I have read some of the position papers and followed the things in the press.

But a couple of things strike me. I would say in the simplest form the thing that I find appalling is the sort of doing away with self regulation. It doesn't say that, but in effect it does.

Now, most of the people in this room, the seniors, have been griping for years about first the time we spend on them, and secondly the money we pay the staffssorry about that, staff, of various people who do the same thing.

I think, Mr. Congressman, when you were head of the Securities Division of the State of Illinois, you had different guys coming down as municipal fellows, as traders, as analysts, all speaking for the industry, and we are, I think, tired of it, and furthermore we can't afford it any more. So if you are really in effect going to do away with self-regulation, which says go ahead and do your thing, but if you don't do it right we will put you in jail, I think our industry ought to say forget it, boys, if you are going to regulate, you regulate. We will take your all on in the courts and try to live up to whatever laws are passed. That is my personal opinion.

I think on the common tape, it is interesting to watch what the newspapers did. Now, there are members of the press here. Supposing the Congress were to tell the press, with the public's right to know, which they defend all the time, it would insist that they get all the quotes on all the securities traded?

In the first place, they would go out of business, and in the second place, you would get the goshdarndest outcry. A common tape is going to tell people more

than people want to know, in my judgment. I think a common tape that shows the trades in the third market and listed securities, that ought to be shown.

I find it very offensive that third market guys do not live up to our regulations. One of the simplest things that Congress doesn't understand is shorting on an uptick, which a specialist can—has to do, whereas the third market guys can do anything they want, including retreating from even trading a stock, if they don't feel like it, or if it starts to go against them. It is like a guy walking out of a gin rummy game when he starts to lose.

On the banks' role, I feel very strongly that they should be regulated. The banks have four or five different hats. One of them is taking deliveries.

Now, I don't know what it is now, but I remember distinctly on large block trades where unless they have changed the rules they will not get an under instruction from their clients.

You go to deliver a block, it will not take in some cases partial deliveries. This may be changed, I have been out of town for a while.

But with present prime money rates and brokers' rates, if you present part of a delivery on Friday and they won't take it at whatever our rate is now, ten and a half percent over the weekend on a half a million dollar trade is a big expense; and very capriciously those guys behind the room say out, and besides the delivery windows close at 12:30, and they say bring it in the morning, which is one day's interest.

I believe they should be subject to regulations.

I only have one other thing. You know, it is an old feeling of myself, which I don't think everybody agrees with, and that is it started when I was chairman of the Federal and State Securities Legislation of the Investment Bankers Association, and it doesn't mean a thing now because we can't bring out very many new issues, but I believe that the State regulation of the issuance of non-exempt securities that are already approved at the Federal level is an anachronism.

I honestly believe that the various—I think it hurts the residents of certain states that have very tough laws, because the syndicate manager of a large offering which is in great demand almost delights in saying I am sorry, fellows, it isn't qualified in name your State.

So he can immediately leave out all the people in that state which he wants to do, anyway.

So I think that is something that isn't even addressed to in H.R. 5050, and I think it ought to be.

As far as access to the business, I recommend to all of you something I did a few years ago, and I bet you three to one it hasn't changed, open the Yellow Pages and look under investments, and you will see who is in there, and you will absolutely gag at who holds themselves forth to the public. If you are going to walk through the pages and look for investments, open it sometime and see who says they hold themselves out to be in the investment business.

Mr. Young. Well, thank you, Mr. Podesta.

I would say that I did receive a letter from Jack Harris about his views with respect to the need to have a strong securities business; and he also wanted to get on record as being opposed to negotiated rates.

So I think I will make this part of the record. If you want to put your initials on it, why, we will just include this as part of your testimony, if you will.

Mr. PODESTA. The vice chairman is good for something.

Mr. YOUNG. All right, Bob, one of the things I wanted to ask you about, too, do you feel that the negotiated rate issue, do you feel that there should be negotiated rates, or do you feel that they should be continued to be fixed by the Exchange?

Mr. PODESTA. Let me put my answer in perspective. I don't think we should be where we are now. So you have to answer what do we do now, Coach? I mean, I think if negotiated rates are instituted all the way down to nothing, the first thing there is going to be an increase in rates.

But knowing the Congress and certain of the members, they are going to say it is negotiated, but only one way, it is negotiated down. * Now, I think getting from where we are now to fully negotiated rates is going to be very bloody for some people, and in my book it is going to eliminate people from the securities business. When it gets there and when the smoke settles, we might do better. But I don't see what it does for the investing public, so that I would say that I strongly—I didn't even know Jack had written that letter, but that happens to be my view. I think we ought to stop right where we are right now.

Mr. Young. Have you had any first-hand experience with having an institution request you to handle over $300,000 orders and then telling you what the commission would be?

Mr. PODESTA. The firm has, but I am not familiar with the details. But I am sure there are people here who have that can testify on that.

Mr. Young. Very good. Well, if you have nothing else further, I appreciate your viewpoints on this and am glad to have it as part of this record.

Mr. PODESTA. Thanks for a chance to testify.
Mr. YOUNG. Now, as I say, there is no particular order here. If anyone

Frank Farwell, I notice that you had talked with me about the fact you might have something to say. Would you want to take the chair and present your views?

Would you identify your name and firm for the record ?

STATEMENT OF FRANK FARWELL

Mr. FARWELL. I am Frank Farwell, partner in William Blair and Company, Chicago.

I am delighted to have this opportunity to talk with you today, Sam, and give you a few views on H.R. 5050.

May I make a few general comments, first of all ?
Mr. YOUNG. The floor is yours.

Mr. FARWELL. First of all, I would like to say that while I thoroughly agree with the intent of the bill, I think that it has a certain rigidity to it that perhaps will be detrimental to the industry over a period of time.

By that I mean if the SEC is not able to function in its administrative capacity and its regulation is legislated out, I think great harm will be done to the industry.

The whole free world has marveled at the ability of the American markets to raise capital, and I think all of us are aware now that the smaller growth company that isn't known too well is finding it virtually impossible to go to the public market to raise that equity capital that it needs in order to survive and to grow and to provide jobs.

I think unless we create an atmosphere that is more flexible, more adaptable to the circumstances, we may be harming this whole process. That concerns me.

Secondly, I feel very strongly about the position that the Midwest Stock Exchange has adopted on rates, and perhaps I could recall some of those particular facets about it.

You may recall in the testimony that Mike Tobin and John Weithers and George Becker gave, whereby they stated that they thought that the next move should not be two hundred thousand and then one hundred thousand, as H.R. 5050 is suggesting, but rather that we should go from the three hundred thousand level where we currently are standing to fully negotiated rates with two very important provisos: One that we have a national system of depositories established first with interfacing.

I emphasize a national system and not just a single system because I feel very strongly that for the benefit of the industry we have got to have competitive factors in that particular facet of it; and, secondly, that we should have national clearing abilities based on the same type of approach, and that is interfacing of systems on a national basis, rather than just legislating one system.

I think this will provide an environment in which we can go to a fully competitive basis, and I would support that basis.

I think maybe today is an interesting day to explain this a little bit, because I think many firms that are doing institutional business find that a delivery in New York, where most big institutional deliveries take place, this being Thursday before a holiday weekend, that all of a sudden it will be DK'd.

Those firms of us who are located outside of New York are operating at an enormous disadvantage because the cost of this money over a five-day period does not put us in the same arena with those that are domiciled where delivery takes place.

We feel strongly about that in your area, Sam. We think it is an important factor that should be attended to before we get to fully negotiated rates. Let's make the competitive arena comparable throughout the country before we make the competitive rate structure comparable.

I think there is another factor that we might examine. You may recall that the Midwest Stock Exchange talked at great length about the separation of money management and brokerage. I feel strongly that this was an attempt to do what is best for the industry; and money management in my understanding, and in my definition. would be professional advice that is given on a contractual basis for a fee; and I feel strongly that when that is the case, with the money management market, that the brokers should be disassociated from that; and by the same token institutions would be welcomed to join in the exchange provided that none of their business was being done for affiliates. This would put everybody on the same competitive basis. It would not provide an atmosphere where there was rate cutting, because of rebates, if you will, of brokerage; and I think it would put the industry on a more sound basis, and all of us here are concerned with the viability of our particular industry.

We have got to get costs under control. We want to get the confidence of the public back in the market, and I think these are some of the things that 5050 is attempting to do.

I am not quite sure that the procedure is the most logical approach that one could take.

Mr. Young. I have a couple of questions, too, I would like to address to you along the lines I did to the other witnesses.

Do you think that competitive rates will help or hurt the small investor, or have no effect on them?

Mr. Farwell. I think competitive rates will help the small investor.

Mr. YOUNG. In what way do you think the rates will be cheaper for a small investor, if we have competitive rates?

Mr. FARWELL. Not necessarily cheaper, but I think the services rendered will be well worth the money that he is paying.

At the moment, in many instances, the small investor is being subsidized. In other words, he is not paying his fair share for the advice and for the service that he is receiving.

Mr. YOUNG. Well, do you think it is the service that he is receiving and the services that are available to him that he may or may not want? Becanse some small investors may call up and say, "Buy me one hundred shares of X, Y, Z," and another investor may call up and say, "What shall I do with my $5,000," and then you have to give them some investment recommendations.

Now, there are two different situations. Do you think that if we have competitive rates that one will get charged a higher fee than the other? How will that work?

Mr. FARWELL. From a practical point of view, Sam, I think it will evolve just the way the over-the-counter market does. A good customer who is only purchasing a hundred shares of stock probably gets a little better net price than one who demands and wants a lot of service.

Mr. YOUNG. Now, the president of Merrill Lynch has stated that they intend to continue to supply a certain amount of general research to their customers which will be part of the service that they get, and where they won't have to pay anything extra for it.

Do you think that a smaller firm in a regional office in Forth Worth or in Chicago, or Danville, will they be at a competitive disadvantage under a system whereby they don't have that type of service to give? And they don't have to compete with

Mr. FARWELL. On the contrary. I think it will benefit the small customer, because most small firms tend to recommend securities in a given company in which they have an affiliation or an affinity or an understanding, and try to guide their customer purchases into one so that they can give them constant research, not only on the initial purchase, but on the follow-up service.

It is the same type of service that Merrill Lynch gives, but it is localized. One of the provisions of H.R. 5050 has to do with the public governor aspect of an exchange, whereby it is half public governors and half come from the membership.

Now, in addition to that, 5050 requires that legal counsel be provided for these public governors, staff, statisticians and what have you.

I would just like to remark as it affects Chicago, and specifically the Midwest Stock Exchange, this would prove enormously burdensome on the finances of that.

They have the access to—in the case of the Midwest Stock Exchange, all governors have access to the legal staff as it is.

It would be my feeling that that money, in the event there were other funds, could be better utilized for the protection of the public and for the operation of the exchange in surveillance, in research, more modern programs, or something like that.

I would feel strongly that this is too harsh a provision as it affects the Midwest.

Mr. YOUNG. Well, this provision, of course, is based on the study made of, I guess, the New York Stock Exchange, in particular by Martin.

I wonder, do you know whether or not he had the idea or contemplated that in connection with that type of program, where you have fifty percent of the public, fifty percent of the Board would be public members, that you would have as much oversight as the SEC is being given from H.R. 5050?

In other words, here again are we doing what Mr. Podesta mentioned, where we are getting a duplication here? Perhaps if the SEC is going to have the power to change or to modify any of the rules of any of the exchange, do you need a public-do you need public members of exchanges under those conditions?

In other words, is the SEC sufficiently—maybe the public advisory committee ought to be a public advisory committee to the SEC, rather than having each one of the exchanges having to have their Board public.

Do you have any feeling about that, the desirability of it, one way or the other?

Mr. FARWELL. I can only respond that in our brief experience with public governors on the stock exchange, although our constitution provides for half and half, we only have a three, and I would say that the contribution of those three has been equal, if not more, to the affairs of the exchange than the rest of the governorship that comes from the membership.

I think it is important, and it is a very beneficial attribute of an exchange to have public governors. It is just the expense of supporting a separate staff that I am questioning.

Mr. YOUNG. Do you have anything else you would like to state?
Mr. FARWELL. No, sir.
Mr. Young. Thank you, Mr. Farwell.
Mr. FARWELL. I appreciate the opportunity to talk with you, Sam.
Mr. YOUNG. All right.

Mr. Keith, you asked for an opportunity-you mentioned you would like to have an opportunity to say something for the record. Would you like to do that now?

STATEMENT OF CLYDE KEITH

Mr. KEITH. Mr. Congressman, you asked me if I would like to make a statement. I certainly am unprepared. I will just make one, and it will be very short. Thank you.

Mr. YOUNG. We would be very happy to have your views.

Mr. KEITH. Well, if my views don't coincide with my associates and competitors' here, you have got me on the spot.

My name is Clyde Keith, K-e-i-t-h, President of the Illinois Company.

We are a local regional firm. If I put myself in the category of Bacon Whipple and the Chicago Corporation, I might be criticized, but we are.

Mr. Congressman, you and I had a conversation the other evening, and I expressed one view which I believe you disagreed with a little bit, but I will express it again. And

Mr. Young. I don't know as I really expressed any views; but go ahead, I try not to. [Laughter.]

Mr. KEITH. My point was this, that Congress and the public, and the brokers particularly, are well aware of the difficulties the securities industry had in 1970. That was a very good happening, as a result of those difficulties, and that is that a surcharge was put on each transaction that a broker put through. There was no public objection to it. It was very valuable to everybody in the business it brought their bottom line from red to black in, I would say, a big percentage of the cases.

So I said to you if it is necessary to keep a very strong, viable public distribution of securities in order to keep our capital markets free and be a successful as it has been in the past, then it is necessary to keep the industry strong and keep everybody in and not let it boil down to a few strong probably centrally located houses.

Now, my point is that in this negotiated rate squabble, if it keeps going, and we have to go on a negotiated rate, it appears to me there should be attached to that a requirement, possibly, or an add-on covering the cost of each brokerage house. You can figure out what the cost is of processing a ticket, add that on compulsorily, probably, and then go negotiated from there.

It would have the same effect as the surcharge, would put everybody on the alert to process their business for the public and for the institution as cheaply as possible, and would keep the smaller fellow in the business, and everything would be on a much more competitive basis.

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