Mr. YOUNG. Are there any other volunteers who would like to express their opinions on H.R. 5050?

Mr. WEITHERS. I want to volunteer for somebody else. We have George Barnes here, who is known to everybody in the room, and who was at least a doctor in attendance when the commission rates, fixed commission rates were born. He has been watching that child grow and change through the years.

I think if George would make some comments on his experience and concerns for commission rates and the provisions of the bill in this area, I think it would be an addition to your record.

Mr. YOUNG. That was Mr. John Weithers speaking.
Mr. Barnes, would you come up, please.

STATEMENT OF GEORGE BARNES

Mr. BARNES. My name is George Barnes, senior partner in Wayne Hummer and Company. This is my forty-sixth year, so I am not a youngster in the business, but I did do something for our industry back in 1941 when I turned an income tax table upside down, and I was responsible for the present rate structure of money involved, and that has been used ever since by the Exchange. There are some variations.

My firm does business in every state in the Union practically every week. A lot of it is by mail. We are great believers in the small investor, and we think the small investor is a great part of our market.

Our business hasn't been affected as much as some of yours because of the fact that we do business in a smaller unit bracket.

When we buy ten shares of telephone, or what have you, for a customer, that is a life service that we give that customer. People don't realize that, that when you buy ten shares of telephone for someone the service continues for the life of that investment, and you wonder why that would be the case, but that is because he may get some offerings which he doesn't understand, he may get some debentures or a letter that is not clear to him.

So when we make an investment on the stock exchanges for someone today, the service is for life. That is the reason why I am a great believer in having a fixed rate of commission, a minimum rate of commission.

Today there is a great-there would be a great loss of confidence in our industry if rates were not uniform.

There are some troubles with our-I executed the other day an order for 224 shares of Eastman Kodak, the commission on each hundred was $65; on the 24 shares the commission was $65 on account of the minimum.

So there are some changes that should be made on even our minimum rates to make them better understood by the public.

But the public has great confidence in member firms today because of our uniform rates, and I would hesitate to see that disturbed all the way down to one share and up.

Now, another thing is the fact that when a customer calls us to buy, say, 200 shares of Telephone for this member of the family, 200 shares for that member of the family, and then he can go over to some bank and they will put it all into one order and charge practically maybe one-fourth the commission that we would charge, we think that has got to be done away with.

If we do come to any form of negotiated rates, we have got to get the institutions out of this business of serving customers. They have got to be on the same basis as member firms. Now, that is very important, Congressman.

I would be willing to settle for negotiated rates in this country if you had the banks and other institutions having to conform to the same standards as ours, but it certainly is not the same today.

I think that is all I have to say, Congressman; I appreciate the opportunity. Mr. YOUNG. Well, Mr. Barnes, I know of your long experience in this business and the fact that you are a well-recognized investment banker. I do appreciate

Mr. BARNES. We are not investment bankers. We are strictly brokers. We make a living on commissions, and we are doing pretty well at it. But it is the smaller orders that are taking care of our overheads, not the large orders.

See, what happened in 1969, people don't realize this, that the rates in 1969 and 1968 were reduced on these large orders as much as seventy or eighty percent, whereas we raised the rates on the small orders.

Well, we are never going to come to the time when the small order will be self-sustaining. But we need the small investor in this country to make it possible for the guy with one or two thousand shares to sell, and we never want to get away from that.

We want to keep the small buyer. That is the reason why I should like to have uniform rates on transactions, because I think it is going to mean a great loss of confidence, as said in the beginning, if we do not have uniform rates.

We do business with people-and I know that if we deviated or charged them more, that we are going to hear about it. It would destroy confidence in our firm. If Merrill Lynch charged one price and we charged another, that would destroy confidence in our industry. I want to see that the confidence in our industry is maintained.

Mr. YOUNG. Thank you.

Are there any other-there are approximately 55 to 60 people here, and I think the record should show that is, as I say, either a factor of good interest or bad business! [Laughter.]

But I am glad to have all of you here. Are there any other individuals who are here who would like to express their opinions on any of the provisions of this bill? I notice that Tom Hawkett was here a few minutes ago, who is a former securities commissioner of Illinois.

Mr. HAWKETT. I still am, but I decline the opportunity to speak.

Mr. YOUNG. Well, if there are no other questions here, one of the things is there are a couple of people who said they would come at 2:00 o'clock.

So I might say this, that if any of you are staying for lunch, the Chicago Bar Association would be able to accommodate you on this floor or on the eleventh floor.

But we will recess until 2 p.m., because there are one or two people who are coming here at 2:00 o'clock, and I would hope that all of you would sign the record here and let us know that you are present, and if you have any views you would like to get considered you can still submit them in writing. So I solicit your viewpoints in writing, if not orally. Thank you.

[Whereupon the hearing was recessed, to reconvene at 2 p.m. the same day.]

AFTER RECESS

[The hearing reconvened at 2 p.m., Honorable Samuel H. Young, presiding.] Mr. YOUNG. Gentlemen, I would like to reconvene this hearing pursuant to our recess at lunchtime; and at this time I would like to ask if there are any other persons present who would like to make a statement for inclusion in this record on H.R. 5050.

Yes, sir, come up and identify yourself and be seated and proceed.

STATEMENT OF JOHN ROSE

Mr. ROSE. My name is John Rose, R-o-s-e. I am a partner in a small brokerage firm in the Board of Trade Building, Rose and Company. Our business-our firm is approximately two years old. What we do is we buy and sell stocks for the individual investor who knows what he wants to do in the marketplace. We do it at an unbundled or a reduced commission rate as charged on the Exchange. Our concept of doing business is to get the best net price for the individual investor in small institutions.

We go about this by examining the bid and offers on the Exchange and comparing them with the bid and offers in the third market, and execute the order at the best market price, be it on the Exchange or on the third market.

When we execute on the Exchange, we have to charge a full Exchange commission rate.

I would like to mention that I found out about this meeting last night in the Daily News, and I was not prepared this morning to speak. But I just took your notes here, and I would like to go through them and give you my feeling as far as H.R. 5050 is concerned.

Your number one point, help establish the independence of the SEC from the Executive Branch, I think this is very important. I think we should have, obviously, a very independent SEC and a strong SEC.

From my experience with the SEC, I feel that at times their staff is not adequately prepared to handle the brokerage industry in the manner that they are supposed to; the same thing for NASD.

Number two, set up a timetable for the elimination of fixed brokerage commissions. From my own vested interest, as long as they keep the fixed brokerage commissions, our firm is in a nice position. But as far as the Exchange members are concerned, currently they could raise commissions. Right now they are charging minimum commissions.

They can always go to Congress to get Government approval for raising commissions, but as I understand it there is no need to do this.

Now, three and four I think are very important.

Mr. YOUNG. Excuse me, before you get to that, do you favor elimination of fixed commissions?

Mr. ROSE. Yes, I do.

Mr. YOUNG. Okay.

Mr. ROSE. I think it would be in everybody's best interest, especially the Exchange community.

Mr. YOUNG. Are you a member of any Exchange?

Mr. ROSE. No. But it is a problem that keeps on developing and developing and developing, and the solution is to just have negotiated commissions. They probably will raise them, which they should, you know in some areas, because certain investors do get very good service from Exchange members, and they should pay for it.

Likewise, I think the whole concept of commissions should be one of the unbundling concept. You pay for what you get.

If you just want an order executed and you want your stock delivered to you, that is one charge.

If you want research, holding the stocks and margin accounts, and that sort of thing, then you pay another commission rate.

Rule 394, this rule forbids members of Exchanges to do business off the Exchange if the stock is listed there. I think this rule is absolutely terrible. I think it doesn't serve the purpose of the individual investor at all.

We have found in the last six months that we have had indications of interest in buying and selling securities on Autex, and we have gotten calls from a number of firms, and we haven't been able to execute the orders because, one, they can't leave the Exchange and, two, our investors do not want to go on the Exchange and pay the full commission rates.

So everybody loses with reference to Rule 394. I think many times a third market dealer will have a position in a stock that they are very willing to sell, and likewise a member firm will have a desire to buy a stock, an it just is unfair that they do not have the right to go off the Exchange and execute this order. Number six, give the SEC authority to oversee and overrule regulations and rules set up by National securities exchanges. That is fine.

Now, number seven, adopt guidelines for composition of boards of directors of the Exchange based on the Martin Report.

I always find it a joke when the New York Stock Exchange talks about their public board of directors, which includes the Chairman of the Board of General Motors and an executive of American Telephone and, you know, these large corporations.

I really do not feel that that board of directors represents the public's interest.

I think it is an overstatement to feel that the New York Stock Exchange Board of Directors really represents the individual investor. I find that difficult to believe.

Mr. YOUNG. You favor this provision, then?
Mr. ROSE. Yes, definitely.

I think they would be better off having a dentist from Chicago, you know, who has knowledge and a little savvy of the market and who represents the everyday people on the Exchange.

Let's see. I am totally in favor of uniform capital requirements for brokerdealers. I think that would be good, I think it should be more stringent and should be quickly, you know, adopted.

As far as No. 9, requiring the SEC and NASD to have uniform examinations for registered salesmen, I think the present requirements are adequate.

I think there should be more uniform examination for new firms getting into the business. I would think that would be more important than their salesmen. It says require broker-dealers to file with the SEC and provide their customers with certified comparative financial statements. Currently, we do have this rule, to report quarterly to our clients on our financial condition.

As far as No. 7, a composite tape, I am totally in favor of a composite tape where all trades and listed securities are reported on a tape.

I have run into a situation where we would get a very competitive bid, our firm would be selling X, Y, Z stock, and say the bid would be 20% off the market with a third market dealer or the Exchange market might be 202, but we would

be out of range if we were to sell at this 20%, because 2014 is the low for the day, let's say, and we have had to go to the Exchange to sell the stock just to be within range for that day's trading, even though the best bid was the third market. So I think that if the composite tape were brought in, it would give competition to the specialists on the Exchange, it would provide more liquidity in the marketplace and the total feasibility of buying and selling stocks in larger blocks would be better.

No. 12, require broker-dealer to report all lost or sold securities to SEC, I think if we had a central place to report this it would be very good.

Fingerprinting every employee for broker-dealers. That is fine.

Provide uniform criminal penalties for Federal securities violations, I think this is very important also.

It seems that I have always been reading about people, two years ago, who were fired for some type of fraudulent activities and starting up new brokerage firms. They just have a new name, a couple of new dollars, and they are back in business and doing the same thing.

I think you should get blackballed if you pull shenanigans in the securities marketplace.

I think No. 16, authorize the SEC to create a uniform national system of clearance and settlement of securities, I think before the SEC gets into this I think this should be maybe taken out of H.R. 5050.

I think it is a new ballgame all by itself, and most brokerage firms either make it or don't make it on their ability to clear their trades.

If we had a uniform national system for clearance, it might be fine for the brokers in Chicago and New York, but the fellow up in Michigan, who has a small shop up there, he just might not be able to live with it and it might drive a lot of the small brokers away, one, because of the location and, two, because of the cost of the business.

Third, I think meetings like this or not third, but lastly, meetings like this should be publicized a little further in advance. I found out about it last night, and I could have maybe been prepared a little more.

But I think the provisions of H.R. 5050, from what I can see, are very good. I think it is aimed at the individual investor, which I think we definitely need to get back into the marketplace, and I think everybody in the whole brokerage community will be better off for it.

Mr. YOUNG. Well, Mr. Rose, you have been in business now under the Rose and Company name for the last two years?

Mr. ROSE. Yes. It will be two years shortly.

Mr. YOUNG. Are you a correspondent brokerage firm with any in New York City?

Mr. ROSE. Yes, W. E. Hutton and Company.

Mr. YOUNG. You clear all your trades through them?

Mr. ROSE. No. We do our clearing in house. We provide full clearance on cash accounts.

Mr. YOUNG. You just do your trading through them?

Mr. ROSE. Yes. When we have gone to the Exchange, we have gone with W.E. Hutton on a forty percent give-up.

Approximately 75 percent of our transactions, listed transactions, are done on the third market. About 25 percent of our trades are done on the Exchange. Our basis of operation is to avoid conflict of interest. We do not make any markets. We are purely an agent for our customers; and when he comes to us we try to give him the confidence that we will endeavor to get the best price at that time.

Mr. YOUNG. What is the size of your firm?

Mr. ROSE. We have three partners, two part-time salesmen and, you know, a girl that helps us.

Mr. YOUNG. Before you formed your own firm, were you with another firm? Mr. ROSE. Yes. I was with Dean Witter and Company for six years as a registered rep.

Mr. YOUNG. Representative?

Mr. ROSE. Yes.

Mr. YOUNG. Here in Chicago?

Mr. ROSE. Yes.

Mr. YOUNG. In your opinion, then you believe that H.R. 5050 would be a good thing, then, on behalf of the public?

Mr. Rose. Yes, generally speaking, except for No. 16 on clearance. I think you should be very, very careful there.

20-306-74-pt. 5-17

Mr. YOUNG. What provisions do you think should be included in a bill of the nature you just mentioned which could not be handled under this bill by giving the SEC the authority to spell out the necessary regulations to speed up the processing and to get a better and more efficient transfer processing program? Mr. ROSE. Well, from our point of view, Rose and Company, I think the settlement situation in the brokerage industry is quite good right now. We are what they call physical delivery on our securities and get our check, and likewise they deliver to us. We are small, we don't have the problems of Merrill Lynch in settlement transactions. So I am not a clearance expert for a large firm. I think they might not look at it completely different than what we do.

As far as I am concerned, it could stay just the way it is right now, because we are here in Chicago, we can make most of our deliveries in Chicago, we can make our New York deliveries overnight in New York and, you know, we run a rather smooth ship as far as our clients are concerned.

Mr. YOUNG. How do you handle your deliveries in New York?

Mr. ROSE. We handle it through Securities Processing Service, or the Continental Bank. We draft through the Continental Bank most of the time. Mr. YOUNG. Thank you very much. I have no other questions.

Mr. ROSE. The only thing I would just like to add, as far as the exchange marketplace, or the marketplace is concerned, I think one of the things that they have to do is to have more competition for the specialist system.

I think it is unfair to have a specialist system in New York, where one person is basically making the marketplace over the telephone.

One, he generally doesn't have the capital to make a good marketplace for large size trades that we have; and, two, competition would narrow the bid and ask, and, you know, I think in the long run the marketplace would be run more smoothly.

Mr. YOUNG. Are you able under your present system of doing business to give a customer a lower commission than he would be charged if he bought on the New York Stock Exchange?

Mr. ROSE. The design of our company is to do that.

Mr. YOUNG. What percentage of savings do you ordinarily give to your customers?

Mr. ROSE. On an average fifty percent.

Mr. YOUNG. Fifty?

Mr. ROSE. Fifty percent of the commission; and we have been profitable since we have been in business.

Likewise, we don't give a lot of service. We don't hold stocks, we don't give any research, no margin accounts. We are a small office and we, you know, cut the frills and fancy.

Mr. YOUNG. You think you are able to compete with Merrill Lynch, if they have negotiated commissions and they can set the commission rates that they want, do you think their cost of doing business will still continue to be greater than yours so you will be able to compete the way you are doing now?

Mr. ROSE. Well, I think-I would like to think I don't think they can compete with us because of their substantial overhead. We can control our costs much easier than they can.

Sometimes I don't feel that they can clear a trade as cheaply as we can make money on a trade. So I don't fear that.

In fact, I would like to have the commission situation cleared up. It is unfair for the member firms to always-I always think of a registered rep. situation where he has to defend himself not only on his advice, but on the marketplace and on commission rates and the SEC, and firms are going out of business.

It is a very difficult situation for everybody in the securities industry right

now.

Mr. YOUNG. Well, from that standpoint, do you feel that negotiated rates would add continued uncertainty in that area? One firm charging this, another firm charging that?

Mr. ROSE. I think you would have a tier base. Your wirehouses would have a commission rate that they pretty much follow, and then your specialty houses

Mr. YOUNG. You think that the commissions would be about the same level they are now, if they were subject to negotiation?

Mr. ROSE. I think they should be unbundled. I think if you are an investor and you want to just simply buy 200 shares of Texaco and have it delivered out to you and put it in your safety deposit box, you should be charged a commission, a fair commission, so the brokerage firm makes the money.