try, instead of every other newspaper article saying how much trouble the brokers are in.

Mr. YOUNG. Well, do you favor elimination of fixed commissions, or are you saying that if you are going to eliminate the fixed commission then you should have a minimum commission? Or would you

Mr. KEITH. I wish you would quit saying minimum commission. I am talking about a service charge, in effect.

Mr. YOUNG. There has got to be a minimum charge?

Mr. KEITH. I don't think I am in favor of negotiated rates.

What we are all-but I think we would be better to have negotiated rates if it is handled properly, and coupled with something else. But if you go into negotiated rates today, the institution—and to a great extent it is already under the present system, would dictate to us our commissions; and that we want to avoid. But if you went into negotiated rates, coupled with a minimum service charge that we would have to put on, then it might work, and we could all stay in busi

ness.

Mr. YOUNG. All right. I apologize for using minimum commission; minimum service charge sounds better. There has to be a charge of a minimum nature? Mr. KEITH. Commission is one thing, and the cost for your service is another. Mr. YOUNG. Very good.

Mr. KEITH. Commission would indicate a profit.

Mr. YOUNG. On some of the other aspects of the bill, do you think that a composite tape would be helpful, a waste of time, or serve any real public interest? Mr. KEITH. As Bob Podesta said, this is what I think, and I don't-but again speaking from the standpoint of a small regional firm, this is a pretty strong word. It is rather ridiculous that in order for us to be fully competitive that we have to belong to five or six exchanges, and five or six different clearing organizations.

Now, I don't know what the composite tape-what the full connotation of it is; but this I will say, that it is rather ridiculous that we don't have a national clearing operation which automatically decreases all of our costs, and as Mr. Farwell said, we can deliver here in Chicago and be competitive with the guy in New York and San Francisco without that horrendous shipping charge, and so forth.

Mr. YOUNG. But the composite tape, most of the witnesses have understood that to mean that it is simply a tape coming out of your electronics equipment which would show the trades on all of the exchanges and all of the markets, third market, over-the-counter market, American, New York, Midwest and so forth, so that they would all be on one reporting tape. That is what is meant by the composite tape.

Mr. KEITH. Well, I understand that, but let me finish my point.

If the whole system surrounding a composite tape meant that we didn't have to belong to all of these exchanges in order to be competitive, then put in a composite tape even if it gives more information to somebody than we really need. But what we have got to get is-and what the public is entitled to is a system where all the transactions will be reported, and you don't have a third market going wild here, and NASD has done a lot for the over-the-counter market. It can be picked up.

We have to report the trades on it, and the volume is there. That has been great. Now, maybe it is a decreased volume, but it has still been good.

Now, if we can get all of the transactions on some kind of a system, and I don't care whether you call it a composite tape, or what you call it, just so it is reported and you don't have one firm taking a different position from another in executing a trade with the public, fine.

But right along that line, I would like to add, too, the competition that we are getting from banks.

I mean, if they are going to compete with us the way they are, they should be required to report their trades and transactions, and so forth, and that would be part of the reporting system, so that the public knows what is happening and they are not proselytizing on us because they are taking advantage of us on what they can do in the marketplace that we can as members.

Mr. YOUNG. All right. I have no other questions at this time, Mr. Keith. I want to thank you for being here today.

Mr. KEITH. Thank you for calling me.

Mr. YOUNG. And thank you for giving us the benefit of your views.

Mr. KEITH. Right, sir.

Mr. YOUNG. Now, we have heard from quite a few of the regional firms here in Chicago. Are there any representatives here from a New York headquartered firm? Lee, would you like to make a statement, if you would?

STATEMENT OF LEON HERBERT, JR.

Mr. HERBERT. Thank you, Sam.

My name is Leon Herbert, Jr., with the firm of Clark Dodge and Company, headquartered in New York.

Sam, I speak as an individual, I have never testified before, and I have thought about many of the things that were said here today.

My remarks I think I would rather make as a person at the age and time I am in the business.

Mr. YOUNG. You might describe your age and time in the business.

Mr. HERBERT. Well, I used to say "young," but I am not so sure it is young. I will be 50, I have been in the business eighteen years.

Mr. YOUNG. Have you spent-how much time have you spent in Chicago? Mr. HERBERT. I was going to explain that. Eight years of my original years in the business was as a broker, as an account executive. The balance of the time has been managing branch offices, both in New York and in Chicago. For two years I was a regional Vice President with a firm that is now no longer in business.

I came in the business, as I said, eighteen years ago because of the attraction of the business, of being probably one of the last businesses that represented an opportunity to be paid for the effort-there was some relationship to the effort that you put out.

I always say I backed into management, because it was a very-it has always treated me well as a broker.

I didn't make any of the fancy figures that I hear bandied about, but it did provide some relationship between what I did and what I was paid.

It was a hard decision to change to go into management, because there was no real thought-out plan at that time as to how you would be paid, and you gave up some security by the fact that you gave up your customers and changed to management.

Later I was able to invest my money in the firm, what little money there was, as risk capital, and very fortunately, before the other firm that I was with went out of business, unbeknownst to me, I did withdraw to join this other firm. So whatever money I have made or have today, whatever capital I have today, has been made in the business over the past ten years as a management person, middle management person.

My job as a manager has been primarily, obviously, to keep a profitable branch office running, and I have always felt one of my main jobs was to attract good young men to come into the productive end of the business as well as keep good operational people.

Now, as the business has gone in the last year, and I think primarily because of the fully competitive rates or pardon me, the negotiated rate situation, which has taken some of the profitability out of the business, and the fact that the public has not been in the market due to some of the things that have been mentioned, most of the firms are losing money which means that I as others who have risk capital in the firm are losing our capital. That in itself is unattractive to me, and I am sure to others. [Laughter.]

And if it continues, we may have only one choice, and that is to withdraw or ask to withdraw our capital and go back into a sales position, which the only risk is doing a job.

If I am in the or consider myself in the middle management and have, say ten or fifteen more years to go, and I want to take that position, and if my ten years of experience are meaningful, and I don't like to speak just about myself, I think this is the feeling of other men that I know that are in the same position, where are we going to get the talent, and where are we going to get the capital that should be running these firms in the next ten or fifteen years?

We had a gap after the Depression in 1929, that from the early 1930's, until after the War, there was a void of young men that came in the business, simply because they couldn't afford to come in it and because there wasn't a way to make a living in it.

I think some of our problems stem from that; and as I sit and think about it. I can only see a fully negotiated rate situation creating more headaches for the public, for the industry that we have yet to finance, and for the country as a whole, and for those of us that are in it with our capital at risk.

I don't personally understand how fully competitive rates will work and be of advantage to us.

I think at this point I would just like to stop there. I have suggestions, but I think I would just like to make that statement as a personal statement, as a feeling from somebody that is in, I would like to think, middle management.

Mr. YOUNG. Well, Clark Dodge, of course, is a member of the New York Stock Exchange, are they not?

Mr. HERBERT. That's right.

Mr. YOUNG. What has happened to the price of the New York Stock Exchange seats in the last three or four years?

Mr. HERBERT. They have gone down.

Mr. YOUNG. What is the current or recent bid?

Mr. HERBERT. This is a guess, but I think they got as low as somebody else here may be able to tell you. Maybe Frank Schank, or somebody. I think they got down as low as ninety-five

FROM THE FLOOR. Seventy-two thousand.

Mr. HERBERT. Seventy-two thousand, and bounced back to a hundred some thousand now.

Mr. YOUNG. Now, if this bill

Mr. HERBERT. May I make a point there, Congressman?

Mr. YOUNG. Go ahead.

Mr. HERBERT. Our capital-that is, my little bits of capital-I don't want to overemphasize a lot of capital, but it is a contribution to the firm, but my capital is affected by the change in the price of those seats.

We could make a profit in the firm, and the price of the seats could change, and we could end up with a book value which affects our stock price that would be left at the end of the year. So the stock exchange seats are quite meaningful to us who supply capital.

Mr. YOUNG. If this bill were to pass, and any firm that is registered with the SEC is eligible for membership on the New York Stock Exchange, do you think there would be any incentive for you to continue membership in the New York Stock Exchange?

Mr. HERBERT. Personally, I wouldn't, no, I don't; but these things are much broader than maybe what I understand. But the way I conceptualize it, no, I don't.

Mr. YOUNG. Now, do you consider at this particular time that there is competition, say, with the New York Stock Exchange market and the third market, doesn't it provide any competition for the New York Stock Exchange?

Mr. HERBERT. That would have been my further remarks, about the third market.

I think either you do away with the third market or bring them into the same competitive position that we are in.

I think the problem that I see with this concentration on the third market is not thought of as broadly as it should.

The third market, as I see it, just provides one of the functions that we as a broadly run business conduct.

They provide a secondary market for securities that have already been-have been underwritten. That is one of our functions. But it does provide a lot of capital for a lot of income, I would rather put it that way, a lot of income for us to take care of our other services. Therefore, they are sapping off an important part of our income to help us provide the full scale services.

Mr. YOUNG. Well, do you consider, like the Philadelphia, Baltimore and Washington Exchanges, isn't that a competitive market with the New York Stock Exchange, don't they have many securities which are listed on both?

Mr. HERBERT. It isn't for this reason that their rules are different. Bob Podesta, I think, referred to just one rule that is different and can make a tremendous difference of being able to sell short on an uptick.

We have a very specific rule that you can't do that. So that in itself would drive the institutions who are permitted to go through,, or other large investors, out of our market.

I will give one other example that is quite disturbing to us. Yet I see how the banks are fully justified, or legally, in what they do.

We have all had, I think, a lessening of business from the banks, because— this is just one reason, where they go into the third market. They are the trustee in many cases of trusts, and in that case they act as a fiduciary and are subject to legal lawsuits, in the case of them not doing everything that is in the best interest of that trust. So if you go down and talk to the banks, they will say, “Well, we are obliged to go into the third market, sometimes we can get a lesser commission, and if we didn't do that we could be open to lawsuit. You fellows would

charge us more to do the same trade under your fixed commissions, whereas the third market can do it for a lesser amount.

"Therefore, we just have to go there."

We are at an unfair competitive advantage. I really don't think that if we were to be on the same basis, competitively, with the third market at the rates that they are doing these trades, with small and large trades, it would be economical. The third market is able to do this because, one, they don't provide the services we provide. They don't have the same overhead. They act, in my opinion, as a-I don't like to use the word, "leech."

They are getting all of the things we provide for them. We provide-they trade off our tape.

In other words, we provide the market prices for them to be able to undercut us; and I think it they are going to exist then let's make them come in and compete on the same basis that we compete.

Mr. YOUNG. Well, I am not trying to take any sides in this. But some of the people who abrogate the third market claim that the New York Stock Exchange has been unrealistic as to the pricing of its commissions.

I think I have heard some members of the New York Stock Exchange say that in connection with their arguments they are opposed to negotiated commissions, etc. But they say just because we have, shall we say, been unwise in the setting of rates doesn't mean that we still shouldn't continue to set rates. In effect, they admitted they felt that there had been some unrealistic commission rates set on the New York Stock Exchange and this, of course, is what helped develop the third market.

From that standpoint, I suppose the public may have benefited in the New York Stock Exchange setting non-competitive rates.

Do you have any reaction to those arguments, that are used by those people? Mr. HERBERT. It is not a tough question to answer. But it is a tough question to answer pointedly as to what the dollar amounts should be. Obviously, I wouldn't begin to sit here and say that.

It is obvious that the third market is able to undercut us, and I say they are able to undercut us primarily because they don't have the same overhead as we do.

Now, what is a desirable, full service that should be provided to the public, to the industry and to the country? That is something that has to be determined. We happen to think that we are providing that, and it costs us x-number of dollars.

Now, I think we can compete on a two-tier situation, where we will just execute trades and do it very fiercely with anybody. But I think in addition we should be allowed to have a rate that also takes into account spending the time you spend with Mrs. So and and So, who takes an hour out of your day to buy 25 shares. It isn't that you don't want to give her that service, but it does cost more to give that service and provide her with research and so forth.

Mr. YOUNG. I thank you very much, Mr. Herbert. I appreciate your giving us your views. I think it is particularly helpful because you have presented a viewpoint from a person of your position that we haven't heard too much. Mr. HERBERT. Thank you for my being able to say it.

Mr. YOUNG. Is there another representative? Yes, sir. Would you take the seat and identify yourself and your firm.

STATEMENT OF PAUL MCQUILLEN

Mr. MCQUILLEN. Paul McQuillen, I am the Sales Manager with Bache and Company here in Chicago. For ten years I was a registered rep., and I was with a regional firm for two years, and back with Bache and Company where I started originally in the capacity of dealing with salesmen and the public.

The only thing I want to insert into this hearing was some of the things I have seen going on in the industry in terms of banks.

A couple of weeks ago Chase Manhattan Bank began a purchase program for the individual investor, in which you can purchase up to $6,000 a year through them in a given number of securities. This is cutting into, I think, all of our territories dealing with the public.

I wrote for the coupon, and they sent to me and they gave me a form on how to enter such a program.

In our industry, in working with ourselves and customers, when we open an account, the SEC requires that we find out about suitability, background on the person, check their references, et cetera, and we do this, which encompasses time work and time of staff, et cetera.

In the coupon I saw from the Chase Manhattan, all I needed was a signature. There was no suitability features to be followed. The person just signed their name, sent it in, and if you had the money you could buy the stock. It was interesting that the list of stocks they sent were of twenty-five-twenty-five major companies, which gets back again to this two-tiered market we are in—probably the twenty-five major holdings of the bank.

Well, my question to the Committee and Congress, et cetera, is if they are allowed to bypass some of the SEC regulations by doing this-and I don't say this is real dangerous right now, where is it going to go from here?

Also, in the brochure they said that the Chase Manhattan Bank is not recommending any securities, that this isn't their function.

But with twenty-five stocks on a list of about fifty thousand different securities, I would call that some sort of a recommendation; and the suitability to buy a high multiple stock for a widow, when you don't know whose name is coming back in, apparently this doesn't seem to be a problem with the bank, the point being that if the banks, et cetera, make inroads in this area, who is ever going to sell securities to the public in young emerging companies, like the Chicago Corporations and the Bacon Whipples and other fine regional firms here in Chicago, if the public is being sold a bill of goods by other institutions?

The whole thing that Chase was stressing in their literature was that "We can buy it for you at a lower rate, because we buy in large blocks, and you are in with all the rest of our large institutional accounts."

I think this is very disturbing for the brokerage industry, and it seems that the timing of that assault by any of the major banks-and you see more of it all the time, the Harris Trust here in Chicago, for example, is running large ads: "If you have ten to a hundred thousand dollars to invest, join in our supervisory program."

Looking at the Harris Trust and their format, it seemed like it was just a market letter that a person would receive four times a year, with a list of twelve stocks, no better, no worse than most of the brokerage firms put out for free. But for this service you pay $200.

Now, it seems that the inroads being made by the banks coming at a time when the brokerage industry is in trouble itself, and that the public is very aware of these problems, and are very reluctant to leave stock with brokerage firms, and they feel more comfortable maybe with a big bank like the Harris Trust or others. I think that the brokerage firms can compete with this if everyone would go under the same rules.

I think the brokerage firms would be in better shape right now if they were allowed to pay interest on the credit balances and their cash accounts. Let us pay passbook rates at five percent, and that would be that much more money we would have available that we wouldn't have to be paying ten and eleven to the banks for.

That is pretty much what I wanted to say.

Mr. YOUNG. Thank you, Mr. McQuillen.

Do you have any other comments on the other provisions of this bill, insofar as your experience would lend you to feel you would like to make an opinion on? Mr. MCQUILLEN. I think in the whole area of rates, the negotiated part of the rates has really gotten us into a lot of trouble on the institutional level.

Types of business firms, like Bache and other majors that have gone into it, have found that is not so profitable either because the rates have been pared down to nothing.

I think negotiated rates would work all the way around if you unbundled some of the costs and changes.

The brokerage firms, I think, offer too many free services; and the regular brokerage guy who is coming in, maybe on a trading account that is buying five hundred and selling five hundred, seems to be paying for everything, for all the services.

I think if accounts were categorized, you know, as trading types, et cetera, that it could be done at a reasonable rate to the public and et cetera.

That was another thing in the Chase thing, they held the securities for you and charged you for that custodial service, which brokerage firms do not.

A lot of the brokerage firms, I think in general, regional and wires, have a lot of this, which they brought on themselves by not being a little more coordinated in its public relations and education with the public.

Mr. YOUNG. Thank you.

Mr. MCQUILLEN. Okay.