Mr. ECKHARDT. No, Mr. Chairman. Mr. Moss. Mr. Stern, do you have further questions? Mr. STERN. NO, Mr. Chairman. Mr. Moss. Gentlemen and Dr. Kreps, we are most appreciative of your appearance here. We do assure you that we will consider the points raised by you and the material which you will submit in furtherance of the request both of the committee and of the members of the panel. We thank you for your appearance. With that, the committee will now stand adjourned until 10 o'clock tomorrow morning, when we convene again in this room. Mr. NEEDHAM. Thank you, Mr. Chairman. [Whereupon, at 2:45 p.m., the subcommittee adjourned, to reconvene at 10 a.m. Friday, July 20, 1973.] DOCUMENTS SUBMITTED BY NEW YORK STOCK EXCHANGE, INC., IN MEMORANDUM OF COMMENTS OF THE NEW YORK STOCK EXCHANGE, INC., ON This memorandum of comment contains the current position of the Board of Directors of the New York Stock Exchange, Inc. on H.R. 5050, except for Title IV of the Bill dealing with "Securities Processing" which will be dealt with separately in a subsequent filing. These comments are being submitted to the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce of the House of Representatives pursuant to the Subcommittee's recent invitation for written comments in advance of hearings on H.R. 5050. These comments are, of course, preliminary to any testimony the Exchange might offer at the time of its appearance at hearings to be held on H.R. 5050. The Board of Directors of the New York Stock Exchange has devoted a great deal of time and study in its review of the provisions of H.R. 5050 and the recommendations and conclusions in the Subcommittee's August, 1972 Report on its Study of the Securities Industry, upon which many of the provisions of the bill are based. At this point in time, the Board has focused primarily on the provisions of H.R. 5050 which it deems merit support and consequently could be acted upon without delay. Most of these provisions of the bill are included in Title III ("Financial Responsibility; Regulation of Brokers, Dealers, and Members; Reports and Examinations") and Title V ("Miscellaneous"). The Board generally supports the proposals in both these Titles, subject to certain exceptions noted in these comments. The overall impact of the provisions in Title III which the Exchange supports is to upgrade the standards for entry into the securities industry and to strengthen the authority of the Securities and Exchange Commission and, in some instances, the self-regulatory authorities to survey the activities of broker-dealers. The Exchange's comments on the provisions of Title III are discussed in the following pages in terms of the quoted recommendation in the Subcommittee's August, 1972 Report and the counterpart section of Title III of H.R. 5050. RECOMMENDATION-NEW SEC RULE ON HYPOTHECATION OF SECURITIES "The Subcommittee therefore recommends that section 8(c) of the Securities Exchange Act be amended to cover specifically the loan of securities as well as their hypothecation. Corresponding`amendments should be made to section 15(e) (2) to expressly include improper hypothecation and loans as violations of the law." (Page 47) Section 301 DISCUSSION The Subcommittee's report discussed the current SEC rules on hypothecation and loan of customer securities and found they do not provide as high a degree of customer protection as do the rules of the self-regulatory agencies. Although the Commission feels its presently broadly worded rules cover improper hypothecation and loans, they have proposed amendments to tighten their rule. The Subcommittee recommends that the Commission tighten the rule even further by expressly covering the loaning and hypothecation of customer securities. TENTATIVE POSITION The Exchange agrees with this proposal. As the Subcommittee report points out, the NYSE has had such rules on its books for a long time. RECOMMENDATION-CERTIFICATION OF FINANCIAL STATEMENTS IN SEC BROKER-DEALER APPLICATION FORMS "Since rule 15bl-2 now requires only that the statement of financial condition filed with form BD must be accompanied by an oath or affirmation that such statement is true and correct to the best knowledge and belief of the person making such oath or affirmation, the Subcommittee believes that the Commission should amend this rule further to require that such financial statements be certified by independent certified public accountants." (Page 24)-Sec. 303 DISCUSSION In reviewing this recommendation, the Subcommittee cited the Demise Study which showed that some firms in submitting an application for registration as a broker-dealer included assets of questionable value. This led the Committee to the conclusion that some control should exist over the valuation placed on assets of broker-dealers. They ask that consideration be given to studying the adequacy of form BD (the application form submitted to the SEC in connection with applicants to become registered with the SEC as a broker-dealer) as a vehicle for disclosing the assets and liabilities of a broker-dealer. TENTATIVE POSITION The Exchange agrees with this recommendation. The Exchange believes that the BD form should be amended to require information in detail equivalent to that contained in the "Joint Regulatory Report of Broker-Dealer Financial and Operational Condition", which is required by the Exchange and the NASD, so that an evaluation of the applicant can be performed by the Commission. Undoubtedly requiring audited financial statements could involve added expense which might discourage some applications. However, we believe this proposal gives proper weight to the importance of full and accurate disclosures as to the capital position of brokers. RECOMMENDATION-S.E.C. REGISTRATION PROCEDURE "The Subcommittee recommends that section 15 (b) of the Securities Exchange Act be amended to require affirmative action on the part of the Commission before the registration of a new broker-dealer applicant can become effective. The suggested change in the law would prevent registration application from becoming effective by default or inadvertence on the part of the SEC. It recommends further that the Commission be required to approve or deny a registration application within 45 days of filing. The Commission would, of course, have the right to refuse an application on the grounds that a person in a control relationship is the subject of pending disciplinary proceedings. While the Subcommittee recognizes that this would increase the administrative burden of the SEC and that additional funds may have to be budgeted for this activity, nevertheless it believes such a step is necessary to insure proper entry standards in the securities industry." (Page 24) DISCUSSION At the present time, an application for registration as a broker-dealer becomes effective 30 days after it is filed with the SEC in the absence of any action by the Commission. This recommendation would eliminate this automatic approval and require approval or disapproval by the Commission. It would extend the present 30 day period to 45 days. TENTATIVE POSITION The Exchange agrees with the recommendation. RECOMMENDATION-EARLY INSPECTION OF NEW BROKER-DEALERS "The Subcommittee believes that such early and frequent inspections of new entrants by the SEC or the appropriate cooperative regulatory bodies are critically important to nip incipient problems in the bud and recommends that DISCUSSION This recommendation is an attempt to codify a statement of intent by the SEC to examine the capital position and books of new broker-dealers in order to prevent a drift into capital problems by such new firms. With regard to new members of this Exchange, it is our practice to make a thorough examination of firms wishing to become members prior to their filing an application. Of course, most new NYSE firms are not new entrants into the business and have a history of business experience to be examined, which is not the case with new broker-dealer applications submitted to the SEC. The Exchange follows the practice of examining a member organization as soon as possible or in any event within the first 4 months that they have been member organizations. TENTATIVE POSITION The Exchange agrees with the recommendation. RECOMMENDATION-STANDARDS OF INTEGRITY FOR ENTRY INTO SECURITIES IN- "It is anomalous that, while conviction within the past 10 years for some felonies and misdemeanors such as violations of the securities laws, embezzlement, and fraud disqualify applicants for registration, persons convicted of such crimes as armed robbery and grand larceny are not similarly disqualified by law. Since good character and integrity should be prerequisities for those who wish to engage in the brokerage business, the Subcommittee recommends that section 15(b) (5) (B) of the Securities Exchange Act be amended to bar persons convicted within the preceding 10 years of such serious offenses." (Page 21)-Sec. 303. DISCUSSION In the reviewing of applications of individuals seeking to enter the securities industry, the New York Stock Exchange takes into consideration all indications of character and integrity including convictions for felonies and misdemeanors not connected with the securities laws. However, the Fair Credit Reporting Act, bars the Exchange from seeking information about convictions more than 7 years old. Widening the scope of the Commission's statutory grounds for denying registration would be a step in the direction of conforming the commission's standards with those of the self-regulatory agencies. The 10-year period suggested by the Moss Committee will have to be considered in light of the restrictions of the Fair Credit Reporting Act. TENTATIVE POSITION The Exchange agrees that convictions for serious criminal offenses such as larceny, burglary, etc., within a period of 10 years of an application should be a bar to admission to the securities business. To effect this recommendation, the Exchange suggests that the SEC and the self-regulatory agencies be granted a partial exemption from the Fair Credit Reporting Act in order to be able to ascertain whether an applicant has been convicted of such offenses within the preceding 10 years. RECOMMENDATION-COMPREHENSIVE EXAMINATIONS FOR PRINCIPALS "The Subcommittee recommends that sections 15 and 15A of the Securities Exchange Act be amended to give the SEC the clear authority and responsibility to develop a comprehensive examination program for principals, including questions relating to bookkeeping, accounting, internal control over cash and securities, proper supervision of employees, proper maintenance of records, and generally how to run a firm, areas that have apparently received scant attention so far. This would not, of course, preclude cooperative regulatory bodies from establishing for their own members more stringent examination requirements." (Page 22)-Section 303. DISCUSSION The Subcommittee believes that many broker-dealers have failed because of incompetent management and accordingly recommends that the Commission |