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Gentlemen, I would like to welcome all of you here today. The purpose of this hearing is to afford the members of the investment community here in Chicago, which is the second largest financial center in the United States, an opportunity to present their views on some legislation which is now pending in the Congress, which has some rather far reaching implications with respect to the future of your business.
I felt that too oftentimes we in Washington, D.C., are in an atmosphere down there which does not always give us the broadest perspective, and it is desirable to have an opportunity to discuss with people in our own home communities their views on legislation which we are considering which will affect them.
It was in this context that this notice was sent out for this hearing here today. There was no one contacted or urged to come here to speak.
The purpose of this hearing is to give any of you who have a view on some of these important provisions of the bill to put your views on the record. We have a court reporter here present. This record will be transcribed. It will be presented to the subcommittee. I will request the chairman and members of the subcommittee to make it part of the hearings which will be in the legislative history of H.R. 5050.
So your views will be just as fully considered by the staff and by the members of the subcommittee as testimony which would take place in Washington, D.C.
I might say, also, that most of you are aware of this legislation, what it generally provides; but I thought I would just briefly cover it so that we would start off on a common understanding of what the bill provides.
One, there are some provisions in title I which are generally designed to make the SEC as independent as possible with respect to particularly the Executive Branch of Government and requiring that the reports of the budget of the SEC and recommendations for legislation be transmitted to the Congress at the same time as the Office of Management and Budget.
Secondly, the bill proposes to establish a timetable to eliminate fixed commissions on the Exchange, particularly the New York Stock Exchange, American Stock Exchange, and the other exchanges which now provide for fixed commission rates on trades of less than $300,000.
It also provides access to the Exchange to all qualified brokers and dealers who are registered with the SEC. It will abrogate Rule 394 of the New York Stock Exchange which requires members to transact their business on the floor of the Exchange.
It requires the rules of the national exchanges to provide a fair method of discipline and a fair method of passing on applications for membership with the right of appeal to the SEC.
It establishes authority of the SEC to pass on the rules of registered national securities exchanges and in effect by passing on them to change them or amend them, or to otherwise disapprove them.
It provides for a codification of the Martin Report, where the Martin Report recommended that the boards of the various exchanges have at least fifty percent public membership; and provides for the public members to re-elect or to provide for their succession on that board.
It requires the SEC to provide uniform capital rules and to classify dealers for the purpose of determining the capital requirements.
It requires the SEC with the cooperation of the NASD and the exchanges to provide uniform exams for salesmen and representatives.
It requires registered broker-dealers to file with the SEC and with their customers certified comparative financial statements of the status of the brokerdealer.
It also provides that the SEC will have the authority to require a composite tape of transactions occurring in the various markets and over-the-counter market and on the exchanges; and it could also require a similar composite system for bids and asks.
It would require the broker-dealer reports on lost or stolen securities to a central agency, or to the SEC, to better enable enforcement authorities to prevent the use of stolen securities as collateral or for other purposes of an illegal nature.
It also provides for the fingerprinting of broker-dealer employees. It provides for more uniform criminal penalties for the various acts that are defined as unlawful through the 1933 act and 1934 act. It authorizes the SEC to enforce action for violation of the exchanges' and the NASD rules, and the SEC is given
the authority to create a uniform national system for clearance and settlement of securities transactions.
Now, gentlemen, if any of you are familiar with the Securities Industry Study Report by the House Subcommittee on Commerce and Finance, which was prepared in August of 1972, H.R. 5050, I have brought three copies here.
If any of you want to have one of these extra copies—I will have to keep one for myself, why, you are perfectly welcome to avail yourself of one of those copies.
But this bill fairly well parallels some of the recommendations in the Securities Industry Report.
As you know, without saying, the securities industry, in my opinion, is probably the most regulated industry in the United States.
I can't think of any other industry that has the regulation that is imposed on members of its industry.
You have dual regulation with the States, you have voluntary regulation, you have the NASD, you have membership on other exchanges and if you haven't got regulation, nobody has got regulation.
So the industry has been the subject of quite a bit of study here by the Congress, particularly with respect to the problems that developed with the back office problems. The Securities Processing Act and, of course, the specific legislation, was a result of some of the consideration by Congress of matters affecting your industry.
Now, for those reasons I do feel that since I represent the North Shore District of Chicago, and I think probably a pretty fair percentage of the investment banking community happens to live in my district, and because I also in a broader perspective am trying to legislate on matters which affect the investment banking community throughout the United States, and with the City of Chicago being such an important part of it, the purpose of this hearing is to give any of you who are here today—and I would have to say this is a good showing of people who have an interest, to appear here today because of this legislation and on very short notice.
The notice was not as adequate as might have been, and I take responsibility for that.
But at any rate, I would like to ask if the Midwest Stock Exchange, which is headquartered here in Chicago—I believe there is a representative here, executive vice president John Weithers.
John, would you care to make any statement? I know that you have already testified in Washington, D.C., and probably sent copies of your material around to members of your exchange, but if you have anything you would like to add at this time, I think it is highly appropriate, since I think the Midwest Stock Exchange is headquartered here and you have many members here you might make a statement as to what you think might be appropriate.
STATEMENT OF JOHN G. WEITHERS, EXECUTIVE VICE PRESIDENT,
MIDWEST STOCK EXCHANGE
Mr. WEITHERS My name is John G. Weithers, W-e-i-t-h-e-r-s.
Congressman, we appreciate the opportunity to meet with you again on this subject.
I want to express the regret of both chairman George Becker of our exchange, and our president Mike Tobin, who because of the short notice of this hearing were unable to change an important meeting on the depository subject, which I know is dear to your heart, as well as to the hearts of the other people in this room.
As you mentioned, we did file a lengthy statement on H.R. 5050. We have circulated those views to all of our member firms, and it would be, I think, a waste of valuable time for the people in this room to go through a rehash of that.
I think that you should be complimented on this idea of bringing the opportunity for people to be heard closer to their residence.
I would like to tell the people in this room that testifying in Washington is not as foreboding or forbidding as you might think at first. We did quite a bit of work and spent many hours going through the report of your Committee, studying the proposed legislation.
Our committees and our governors, and representatives of some of the firms who are here today, spent many long hours articulating the views that we have put onto the record on H.R. 5050. But I also want to tell the people in this room that if and when they ever decide to go to Washington that the committees are
quite cordial and present the opportunity for people to be heard and get their views onto the record.
I think that what you are doing here, though, is something that I would like to see more of, because most people just cannot take the time to get into Washington to express their views.
So based on that, I would like to turn the record back over to you and let the people in the room who haven't had an opportunity to speak on this subject give their views on the record.
Mr. YOUNG. Well, thank you, Mr. Weithers.
I would like to have the names and addresses of everybody who is here today, which I think will indicate to other members of my subcommittee the interest in this legislation which the Chicago investment banking community has, so I think you will have an impact, if for no other reasons that you have taken the time to be here to listen and to participate in this hearing.
One of the individuals that I know is here, and I am looking at him right now, Mr. Frank Schank, is a former president of the Investment Banking Association, and he is quite articulate, and he has recently written to me on this subject, and I wonder, Frank, if you would like to come up here and make your views known on some of the provisions of this bill.
STATEMENT OF FRANCIS B. SCHANK
Mr. SCHANK. Thank you, Mr. Congressman.
My name is Francis R. Schank, S-c-h-a-n-k, “S" as in Schenectady, school and schedule.
I am a managing partner of Bacon Whipple and Company, a medium-sized Chicago headquartered firm. We have nineteen general partners and nine limited partners.
All of our capital is supplied by the partners. We operate in Chicago, are headquartered in Chicago, with the New York office since January 1, 1926.
We have active accounts of some 4,200 people, excluding brokers and dealers.
I am unalterably opposed to some of the provisions of H.R. 5050; and in general I would like to say and get on the record that I think this is a period in which less legislation is called for and less supervision of the business.
I think that Congress's efforts should be directed toward helping the industry upgrade the quality of people that get into this business.
There is probably only one practical way to do that, and that is by increasing capital requirements.
But for Congress as envisaged in H.R. 5050, to make it legal for any brokerdealer licensed by the SEC to do business on the New York Stock Exchange, is to me detrimental to the long term, best interests of the investing community and the investing public we serve.
I think that other things planned by this piece of legislation are also detrimental to the interests of the investors.
I think that there is no group, no body in the country as vitally interested in becoming more efficient or in furthering the development of a good marketplace than those of us who own and operate the business.
For Congress to direct the SEC to establish a central market doesn't make any more sense to me than it would for us in the investment business to be given control of the legal profession.
The people who know the investment business aren't the staff members on the commission, members of the SEC, nor are they members of Congress. They are the people who own and operate our businesses.
It is to our direct benefit and our constant day-to-day—it is a constant day-today necessity on our part to operate as efficiently and effectively and at as low a cost as possible.
Many of the regulatory agencies that are now competing to direct our activities have just added to the cost of our doing business and made it harder for us to serve the public effectively, with the number of forms we fill in each month and the required questionnaires.
I would say, in general, Mr. Congressman, that I would like to see less legislation affecting the securities industry, and I would hope that Congress at some point would back up our efforts from the industry side to upgrade the standards of responsibility of people being permitted to enter into our business.
Mr. YOUNG. Well, Mr. Schank, let me ask you a couple of questions that occur to me with respect to the provisions of this bill.
Assuming that this bill were passed and that any person or any firm that was registered with the SEC could participate as a member of an exchange, what effect would that, do you think, have on exchange membership? What would happen to the value of the membership of the Exchange, in your opinion?
Mr. SCHANK. Well, I think it would seriously-it would continue to erode the value of the membership.
The present capital requirements and standards enforced by the various exchanges, and particularly the New York Exchange, are much higher than those imposed on NASD members. And to make those seats less valuable, and to make membership a less—to lower the standards of membership, would, it seems to me, further erode the value of the New York Stock Exchange.
Mr. YOUNG. Well, now, another question: What do you think the effect would be on commissions that would be charged to, say, the small investors, the person who purchases in lots of a hundred shares, or approximately that amount, or odd lots? Do you have negotiated rates? Will there be true negotiation with respect to that type of commission?
Mr. SCHANK. No. I think that irrespective of whether the law supports the fixed commission rate or not, there will be a standard rate which will have to be used for most small investors; and I would say that with the present conditions that exist, and the present difficulty of making a reasonable return on money invested in the securities industry, that small commissions will be apt to increase as the larger buyers and sellers are in a more competitive position.
I think that the securities industry will be a good business, in spite of what legislation has occurred so far. But my thought is that we should try to keep it a healthy business and keep it a place where capital is willing to go at risk.
Mr. YOUNG. Do you have any opinion as to what the effect of completely negotiated rates would be on, say, regional firms of the size of Bacon Whipple if this legislation were passed?
Mr. SHRANK. I think in all candor, I think that regional firms can make a reasonable return under conditions that large national firms can, also.
While it is true that most heavily capitalized large firms, if they wanted to engage in a price war could, undoubtedly, hurt regional firms.
But I think that realistically the larger national firms, several of which are represented here in this room, know that to have a healthy marketplace they need regional firms and need strong effective regional firms.
I think the industry can get along with itself all right, if Congress and the regulatory bodies have less to do with us.
Mr. YOUNG. Well, let me ask you a question now about the so-called central market system. Actually, I don't think anybody has testified as to what the socalled national market system, or central market system, will be.
There have been various position papers that the SEC has written on this subject, and there have been the opinions of certain members of the investment banking community who have one view or another as to how that system will develop
But do you see any objection if the so-called national market system were simply a method of combining and reporting all of the transactions on one broad tape, so that the information would be available to all members who wanted to subscribe to such a tape system?
Mr. SCHANK. I think before I answer that question, or try to, I will refer to the question Senator Harrison Williams asked recently, a rhetorical question, where is leadership of the securities industry, and why weren't they agreeing with his proposal on this, which is similar, in effect, to the Moss Bill.
The leadership of the investment banking industry and the securities industry is not nearly as sure of the right routes into the future as are, apparently, the Congressmen and Senators and members of the SEC staff.
The reason the leadership is divided, and the reason on one day one member of the industry will testify in one direction, and the next day somebody will come in and testify 180 degrees opposite, is that we aren't sure.
We have more respect for the vicissitudes of the market and the tremendous technological changes that are taking place than do the people who aren't in our business,
Having been in the business since 1928, I have seen periods come and go for the first-am I right, Bob, fifteen years of our existence we weren't members of an exchange, and we probably won't be again if changes in our ability to serve the public don't warrant that membership.
Now, specifically. I think that most of us in the business are extremely anxious to become more efficient and to make the maximum use of the technologicalthe black boxes that we can make.
But we aren't sure that elimination of the autonomy of the exchanges, as such, would be in the long term best interest of the business.
We are reasonably sure that standard methods of regulation should apply to all firms engaged in the same lines of business.
We are sure of a few things, but we are not sure that the way Senator Williams or Congressman Moss, the conclusions arrived at in the legislative body, are right; and I am virtually certain that the SEC hasn't got the capacity or the desire to establish a central market system, and I think if they were charged with that responsibility by Congress it would be a ghastly mistake.
Mr. YOUNG. I would like your comments and views with respect to the provision of this bill which are designed to give the SEC authority to in effect speed up the clearance and transfer of securities.
Do you feel this is desirable, or do you feel that there is a problem here?
Mr. SCHANK. I think there is a problem. I think it is very complicated because of the banks' role, and the whole business.
Now, th banks are getting directly into our business and soliciting our customers, and soliciting the small investor. I think they are kind of eliminating the Banking Act of 1933.
Mr. YOUNG. You are talking about the common trust fund?
Mr. SCHANK. Yes. And they are soliciting now our customers and saying, "We can do it cheaper, and come with us," saying in effect that there is no sense in a hundred-share buyer doing business with a member firm of the New York Stock Exchange, because we can do it on the third market cheaper than they can.
But I think their role in clearing transactions is such that for the SEC—well, I am wandering around.
I think that the SEC, or that some central body probably should have responsibility for oversight of clearance.
Mr. YOUNG. Well, for example, the mutual funds for years have gotten along without stock certificates in 99 percent of their cases.
Is there any reason why the ordinary business corporation couldn't in effect do about the same thing?
Mr. SCHANK. I don't think so at all. I think the days of the stock certificates are numbered, and it has to go.
Mr. YOUNG. Wouldn't this be helpful to the securities industry if you didn't have to wait for delivery of that certificate from the customer, and if you didn't have to borrow in order to make that delivery?
Mr. SCHANK. We are all aiming at that. It is a question of how we can get there with the state laws being what they are, and the conflict of responsibilities so far as the banks are concerned. They have different regulators.
Mr. YOUNG. You do believe it would be highly desirable to speed up that process?
Mr. Young. As you say, there are laws already involved, particularly your state corporation laws.
Well, if you have anything further, I would be happy to have it.
Mr. SCHANK. I would have about a six-months statement, probably, if I could take the time to collect my thoughts.
Mr. Young. Well, I appreciate your coming here, Mr. Schank, and I thank you for expressing your views for the benefit of the committee.
Mr. SCHANK. Thank you, Congressman.
Bob, would you like to come up and make a statement on your views of this subject? You have participated in this not only in the industry, but in the government.
STATEMENT OF ROBERT A. PODESTA
Mr. PODESTA. Would I like to? Is the Pope a Catholic?
Mr. PODESTA. My name is Robert A. Podesta, half Italian, half Irish. I am the vice chairman of the Chicago Corporation, which is another regional firm.
I would like to think we are in the same class as Bacon, Whipple and Company.
Our partners are people of long experience in the business. One of them, Jack Harris, our chairman, has been chairman of the board of the Midwest Stock Exchange, along with Frank Schank, president of the Bankers Association.