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NATIONAL SECURITIES MARKET SYSTEM ACT OF 1973

HEARINGS

BEFORE THE

SUBCOMMITTEE ON SECURITIES

OF THE

COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS

UNITED STATES SENATE

NINETY-THIRD CONGRESS

FIRST SESSION

ON

S. 2519

TO AMEND THE SECURITIES EXCHANGE ACT OF 1934 TO
FACILITATE THE DEVELOPMENT OF A NATIONAL MARKET
SYSTEM, TO PROVIDE FOR REGULATION OF SECURITIES
INFORMATION PROCESSORS, TO REMOVE UNNECESSARY
BURDENS ON COMPETITION, TO STRENGTHEN AND IM-
PROVE THE SECURITIES AND EXCHANGE COMMISSION'S
OVERSIGHT OF SELF-REGULATORY ORGANIZATIONS, AND

FOR OTHER PURPOSES

NOVEMBER 12, 13, AND 14, 1973

Printed for the use of the
Committee on Banking, Housing and Urban Affairs

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 1973

25-406 0

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS

JOHN SPARKMAN, Alabama, Chairman WILLIAM PROXMIRE, Wisconsin

JOHN TOWER, Texas HARRISON A. WILLIAMS, JR., New Jersey WALLACE F. BENNETT, Utah THOMAS J. MCINTYRE, New Hampshire EDWARD W. BROOKE, Massachusetts ALAN CRANSTON, California

BOB PACKWOOD, Oregon ADLAI E. STEVENSON III, Illinois

BILL BROCK, Tennessee J. BENNETT JOHNSTON, JR., Louisiana ROBERT TAFT, JR., Ohio WILLIAM D. HATHAWAY, Maine

LOWELL P. WEICKER, JR., Connecticut JOSEPH R. BIDEN, JR., Delaware

DUDLEY L. O'NEAL, Jr., Staj Director and General Counsel
WM. HOWARD BEASLEY III, Director of Minority Stai

STEPHEN J. PARADISE, A88i8tant Counsel

SUBCOMMITTEE ON SECURITIES

HARRISON A. WILLIAMS, JR., New Jersey, Chairman WILLIAM PROXMIRE, Wisconsin

EDWARD W. BROOKE, Massachusetts THOMAS J. MCINTYRE, New Hampshire WALLACE F. BENNETT, Utah JOSEPH R. BIDEN, JR., Delaware

LOWELL P. WEICKER, JR., Connecticut
ALTON B. HARRIS, Counsel
H. HOLTON WOOD, Jr., Professional Staf Member

HOWARD A. MENELL, A 88istant Counsel

CONTENTS

Page

3

650

S. 2519.-

NYSE suggested revisions.

LIST OF WITNESSES

MONDAY, NOVEMBER 12

Ray Garrett, Jr., Chairman, Securities and Exchange Commission;

accompanied by: Lee A. Pickard, Driector, Division of Market Regula-

tion; and Harvey L. Pitt, Executive Assistant.

Gordon S. Macklin, president, National Association of Securities Dealers,

Inc.; accompanied by: Lloyd J. Derrickson, senior vice president and

general counsel.

Jerome M. Pustilnik, president, Institutional Networks Corp.; accompanied

by: David Collin and R. Bartlett Renfrew, Institutional Networks Co.;

and Richard H. Paul and Wade H. Nichols, Paul, Weiss, Rifkind, Whar-

ton & Garrison...

TUESDAY, NOVEMBER 13

James J. Needham, chairman, Board of Directors, New York Stock Ex-

change; accompanied by Donald L. Calvin, vice president, and Dr.

William C. Freund, vice president and chief economist.

Paul Kolton, chairman of the board, American Stock Exchange; accom-

panied by Norman Poser, senior vice president in charge of policy plan-

ning, and Gordon Nash, counsel..

John C. Whitehead, chairman of the board, Securities Industry Association;

accompanied by H. Virgil Sherrill, president, Shields & Co., Inc., and

Leon T. Kendall, president, Securities Industry Association.---

T. Lawrence Jones, president, American Insurance Association; accom-

panied by Walter Ď. Vinyard, Jr., counsel..

WEDNESDAY, NOVEMBER 14

Donald Weeden, chairman of the board, Weeden & Co.--

Michael E. Tobin, president, Midwest Stock Exchange; accompanied by:

George R. Becker, chairman, John G. Weithers, executive vice president,

and Milton H. Cohen, general counsel.

Elkins Wetherill, president, Philadelphia-Washington-Baltimore Stock

Exchange; accompanied by: George Ŝ. Hender, vice president.,

Alan F. Kay, president, AutĚx, Inc.; accompanied by: William A. Truslow,

counsel, and Leonard Grimaldi, securities division..

ADDITIONAL STATEMENTS AND DATA

194

207

512

456

76

175

644

Justice Department:

Letter containing views on certain important competitive issues raised

by the NYSE and SEC, from Thomas E. Kauper, Assistant Attorney

General, Antitrust Division----
Post trial brief, Thill Securities Corp., et al. v. New York Stock

Exchange
New York Stock Exchange :

Letter to Senator Williams from James J. Needham, chairman,

Board of Directors -
Research report on incentives to exchange membership in a central

market system.---
Securities and Exchange Commission:

Comments on S. 2519_-
Comments at the request of Senator Williams on NYSE proposals put

forward during testimony---
December 10 letter from Chairman Garrett, commentary on NYSE's

proposed revisions to S. 2519_-
Letter to Subcommittee on Commerce and Finance, Committee on In-

terstate and Foreign Commerce, House of Representatives----
Release No. 10218 (June 13, 1973), containing the text of the Commis-

sion's letter of comments to the sponsors of the composite tape plan

filed with the Commission on March 2, 1973..
Letter dated July 3, 1973, from James J. Needham to former Commis-

sioner Owens, on behalf of the New York Stock Exchange, request-
ing an extension of time to respond to the Commission's letter of
comments and raising the question of "equal regulation" and the

composite tape_-
Letter dated July 17, 1973, from former Commissioner Owens to James

L. Needham responding to Mr. Needham's letter of July 3, 1973.-
Letter dated August 10, 1973 from James J. Needham to Chairman

Garrett responding to the Commission's letter of comments on behalf

of the New York Stock Exchange--Securities Industry Association, letter from Leon T. Kendall, president, answering additional written questions of Senato

ns.

107

115

119

120

121

733

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U.S. SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,

SUBCOMMITTEE ON SECURITIES,

Washington, D.C. The subcommittee met at 2:07 a.m. in room 5302, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr., chairman of the subcommittee, presiding:

Present: Senators Williams and Biden.
Senator WILLIAMS. The subcommittee will come to order.

We will begin hearings on S. 2519, the National Securities Market System Act. This bill is the third in a series of bills growing out of the 18-month study of the securities industry conducted by this subcommittee. The Senate has already passed S: 470, dealing with institutional membership and commission rates, and $. 2058, which regulates clearing agencies and securities depositories.

S. 2519, the bill we are taking up today, is perhaps the most important and far-reaching of the three. When enacted, it would accomplish much-needed reforms over the basic regulatory processes for the securities industry. At the same time, it would establish the foundation for a true national market system. Not since 1938 when the Maloney Act established the NASD, has the Congress undertaken such an extensive reevaluation of self-regulation and the SEC's general regulatory powers.

S. 2519 has two basic purposes.

Its first purpose is to provide for the creation of a national market system and to give jurisdiction over the system to the SEC. The application of the computer and modern communications systems to the securities markets is revolutionizing securities trading. These changes, by and large, appear to be beneficial and we should strive to remove any unnecessary competitive obstacle to their realization. At the same time, however, we must be sure that our regulatory apparatus keeps pace with the mechanisms of the markets and the methods by which securities are traded. This bill is intended to achieve such a result.

There is an active and ongoing debate within the securities industry as to the precise characteristics that a national market system should have. I do not believe that the Congress can or should step into this debate and spell out in detail what the national market's characteristics should be. In my opinion the proper legislative approach is one which establishes broad nublic policy objectives for that market and which vests in the SEC clear power to control the development of the market in accordance with the needs of investors.

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