The other major steps we propose may be grouped into

three broad categories:

first, regulation to maintain the

integrity of the communications system, such as eligibility criteria for securities included, short sale regulation and anti-manipulative rules; second, regulation of competing market makers within the system, particularly with regard to their responsibilities to the market; and third, regulation to ensure that the system will maintain the best auction features of the exchange markets and thereby provide a welcome environment for individual public investors, such as the auction trading rule and the public preference rule.

A list of the steps to be taken includes:

1.

Republication of Securities Exchange Act

Rule 17a-14, as revised, for comment.

2. Adoption by the exchanges of a uniform rule

regulating exchange membership.

3. Revision of the Commission's short sale rule to impose uniform regulation of short sales in all markets.

4. Adoption by all exchanges of a uniform rule regulating manipulative practices.

5. Revocation by the Commission of the exemption from Securities Exchange Act Rule 11b-1 for regional exchanges.

6.

Adoption by the Commission of a rule requiring

the NASD to file with it a plan imposing market responsibilities

on third market makers.

7. Establishment of eligibility criteria for listed securities to be included in the trade reporting and

quotation systems.

8. Adoption by all exchanges of a nonmember access

rule which permits access to be negotiated up to a

substantially higher level (to be determined by the Commission

at a later date) than the 40 percent now in effect.

9. Rescission by the NYSE of Rule 394 and rescission

of all comparable rules of other exchanges.

10.

Adoption by the Commission of the trading rules

described in Section III of this statement.

Furthermore, the Commission intends to have its staff commence a study of the potential implications of permitting widespread upstairs market making by exchange members and plans to solicit comments on the problems associated with access by foreign entities.

This statement is intended to serve as a guide for the

future structural development of the securities markets.

The Commission recognizes that the present performance of these

markets is far superior to that of capital markets anywhere else in the world and that care must be taken not to impair their functioning. Nevertheless, the markets are constantly evolving, and to the extent that a rational course can be

charted for this evolution to follow it would appear

desirable to do so.

This statement of the Commission's views should not be regarded as inflexible. The complexity and interrelationship of the many issues discussed herein make it imperative that they receive careful scrutiny from as many diverse sources as possible, including the self-regulatory bodies, which should be playing a leadership role in seeking to develop a central market system. Accordingly, the Commission welcomes comments

on any of the views expressed herein from all interested persons. Such comments should be addressed to John M. Liftin,

Associate Director, Division of Market Regulation, Securities and Exchange Commission, 500 North Capitol Street,

Washington, D.C. 20549.

Mr. STERN. Mr. Frank, I understand your concern with the abolition of rule 394, but I think what is troublesome about such a rule isand the SEC policy statement does dwell upon this—that it would seem to fly in the face of the general fiduciary obligation of a broker to get the best possible price for his customer. Would you comment on that?

Mr. FRANK. Quite the opposite result would obtain, I believe. I believe that the broker can get the best execution by the full exploring of the auction market, and only after the exploration of the auction market can he determine whether the end result of his execution would be better made elsewhere.

What the comments made about rule 394 do not include are the actual workings of the auction market. It does not lean only on a bid or an offer. It leans heavily on the results of the negotiations between buyer and seller in between the dealer spread.

It would be detrimental to the public, as I said before, to public investors, if the member firms were freed of that requirement to fully explore the auction market before they sought execution of the customer's order.

Mr. STERN. As you know, Mr. Frank, during the testimony of witnesses in the hearings we held last year, the indication we received was that rule 394 (b) is so cumbersome that in practice virtually no orders find their way off the floor. Would you care to respond to that? Mr. FRANK. Yes.

The procedures that are established for the protection of the public customer-now there might be some who describe them as cumbersome—however, there is a basic philosophy that supports each of the procedures in the rule.

The cumbersome procedures that are described in that manner are those that suggest that after an auction market is explored and then the order is taken to the third market that there be a checkback procedure. That check back procedure is the part that is described as cumbersome by the critics of rule 394.

However, the basic philosophy underlying that checkback procedure is to assure any public customer who has entered into the market in that interim period in which the executing broker has sought the third-market execution, give that public customer the opportunity to participate in the execution, and also on behalf of the client whose broker seeks the outside execution, that should in the interim a better bid or better execution become available in the auction market, that execution is afforded him through the safety provisions of the checkback procedure. It may be described as cumbersome, but the basic philosophy supporting it is sound and in the public interest.

Mr. NEEDHAM. Mr. Stern, if I may, this problem again will disappear when we have the central market system with equal rules and regulations dealing not only with trading practices but also with membership.

I guess our position is as Mr. Frank has stated it. We do not agree with the SEC policy statement, and we will just let the record stand that way.

Mr. Moss. I think it will probably assist in clarification on this particular question on rule 394 if we recall the testimony of Mr.

panel and underwent extensive examination by members of the committee and other members of the panel. I assume that you have read that testimony. Does it substantively agree with the views that you hold on this matter?

Mr. FRANK. Mr. Chairman, it is some time back since I read it, but having had the experience of being one of the authors of rule 394 (b) and the one who led the discussion with the SEC some 7 years ago, I think my firm opinions are such that I may not have studied his testimony too carefully, having pretty much of a closed mind, myself, as to the value of 394.

Mr. Moss. I point it out for the purpose of the hearing record here, to make it very clear that we are not passing lightly over this matter. We have a very extensive record on it in the files of the committee.

Mr. NEEDHAM. Mr. Chairman, for the record let me state that the subcommittee does have a record on it. It is just that we disagree with the conclusions that the subcommittee infers from the record. Mr. Moss. Well, we have yet to reach final conclusions, Mr. Needham. Had we reached final conclusions, we would not have continued the legislative process.

Mr. FRANK. There is hope for my position then?

Mr. Moss. There is always hope or those of us in Washington would probably all collapse.

Mr. NEEDHAM. Mr. Chairman, given the present state of the industry, may I state that hope springs eternal with us, too.

Mr. ECKHARDT. Mr. Chairman, as I remember Mr. Peck's statement, it was not so much with respect to favoring the rule or not favoring the rule, but I recall he, an extremely experienced specialist, could not recall precisely what was done under section B, under the exception to the rule, which indicated to me that if an extremely experienced specialist could not remember that precise procedure, then it is not used very much. That is what I recall.

Mr. Moss. The gentleman from Texas, as usual, has an uncanny ability to recall.

Mr. NEEDHAM. Mr. Eckhardt, it is because of the fact that the floor of the exchange is composed of human beings and our awareness of the fact that the recallability of certain human beings is greater than others that we have floor officials who help specialists remember what the rules are.

Mr. ECKHARDT. I don't believe Mr. Peck had difficulty remembering what the rules were. He had difficulty in remembering exactly what had happened the last time he used the rule.

Mr. NEEDHAM. That only indicates, Mr. Eckhardt, the strength of our markets and that there is very seldom a reason to go elsewhere. Mr. Moss. An interesting observation, but it did not underlie the thrust of the testimony on that occasion.

Mr. FRANK. Mr. Eckhardt, I would be happy to respond to anything you want to ask me concerning it. I don't mean to go back to hearings

Mr. Moss. We will delay that until Mr. Stern has completed his questioning.

Mr. STERN. I have only two small points here.

Mr. Needham, in your comments of May 18 on title III and title V of H.R. 5050, the exchange indicated general support for title III