Imágenes de páginas
PDF
EPUB

to mid-April 1961, when on high volume the market successfully tested the 685 Dow-Jones ceiling, on all 5 days, when trading was at its most hysterical pitch and the biggest gains were made in the averages, specialists were buying on balance and adding to the hysteria. The specialist better than anyone else demonstrates that when either a bull or a bear is trying to run away, rather than hold him by the tail, he lets him run-and makes a nice profit as he chases after him.

The London Stock Market long ago separated the broker-dealer operations of the specialist. It was considered in this country in the late thirties, but the pressures against depriving the exchanges of this license to legal larceny were too much and the idea was abandoned. Another of the advantages of such a separation would be that it would prevent the specialist from the highly unethical privilege of being the only person who knows his book, and therefore possessing a monopoly of profitable information.

As pointed out earlier, an attendant could be taught to record market and limit orders and really carry out the functions of maintaining a fair and orderly market, not by trading for his own account, but for the Exchange. Only in this instance the exchange would profit from the transactions, since it would be functioning as a sort of bank, and from these service fees it could establish a nonprofit stabilizing fund which would really stabilize the market and do away with a great deal of the volatility that makes so much trading and speculation a constant threat to the Nation's security and causes so much heartbreak not only in our country but throughout the world.

Short selling should be discontinued. It works contrary to the laws of supply and demand and therefore creates for the price of an equity, whether it be in the over-the-counter market or on listed exchanges, a fictitious price for that stock. That is because the more worthless the situation becomes, the more likely it is that those who are aware of the fundamental unsoundness of the situation will sell it short. Inevitably, then, when they cover their short positions they act as a support for the situation. If gambling is illegal in this country, and for all practical purposes it is, then the law is substituting short selling by the privileged few for card-playing by the underprivileged many. Unlike the principle of accepting a risk in order to create something, to form a new business which will in turn produce goods and services, a short sale creates nothing. There is no ethical or moral difference then between the men who conduct short-selling operations and those who conduct legalized gambling operations at race tracks.

Because it has so much to do with improving the standards of the investment market, I would like to conclude my remarks by commenting on Mr. Keith Funston's (the president of the New York Stock Exchange) comments before the House Ways and Means Committee, concerning President Kennedy's plan for extending the present capital gains period from 6 months to 1 year. The burden of Mr. Funston's comments to the committee was that a longer holding period, while it might provide the investor with some tax advantages, was too high a price to pay for lower taxes on profits from the sale of securities. It would "freeze" capital, he maintained. He rejected

the President's argument that the present 6-month holding period encourages purely speculative trading and went so far as to recommend it be reduced to 3 months. "The shorter the period," Mr. Funston said, "the less it interferes with the ability of the investor to correct his mistake." The fact is if you make a commitment in the situation today and find out tomorrow that you are taking a loss in the situation, your capital gains attitude will be one of the last things you will consider. What, I believe, Mr. Funston is arguing for, is a shorter holding period in order to increase turnover of stocks, which, of course, would increase speculation, and which, incidentally, would also increase commissions for the New York Stock Exchange.

As things now stand, President Kennedy's proposal, coupled with the across-the-board drop in income tax rates, would result in capital gains tax rates ranging from 4.2 percent to a maximum of 19 percent whereas the present range is from 10 to 25 percent. Asked his feeling if faced with a choice between both proposals, Mr. Funston declared he would prefer to leave things as they are. Faced with the alternative whereby an investor might stand to profit from the lower tax rate on the one hand, or reduced commissions for the stock exchange on the other, Mr. Funston seems to plunk for his commissions. Mr. Funston is an important man. What Mr. Funston says is important and what Mr. Funston doesn't say is equally important.

The fact is, however, the President's proposal is without any question one of the most important investment decisions to be made in the interests of a sound economy. It takes a major step toward ridding the country of the tragic consequences of booms and busts.

The stock market is the most cordial but most cruel of all environments. In many ways it is like a vast chainstore that sells you its products at top Tiffany prices and when you return with the merchandise and ask for your money back you begin to wonder if maybe you didn't confuse Tiffany with a dime store. The New York Stock Exchange is, as stated before, in the nature of a public utility and it should be regulated accordingly. Unless the New York Stock Exchange is a private club, then the fees it charges the public in order to use its facilities should be no different than the fees it charges its members. Yet a floor trader is provided an unfair trading advantage and is able to trade in a stock paying virtually no commission whatsoever.

Self-regulation, then, cannot be expected to correct the foregoing abuses. Indeed, my experience leads me to believe that in many instances, self-regulation is about as effective as would be the case were one to ask an Al Capone to see to it that Dutch Schultz didn't break the law. And yet, for the New York Stock Exchange to go unregulated is about as sane as it would be to have our freeways unregulated, for the crashes caused in the one area can be no greater than the agony caused by the crashes in the other. Moreover, one should consider this: that it is unlikely that self-regulation can be expected to correct an abuse or affect an improvement in investment standards, when that improvement might mean a further restriction or an elimination of commissions.

To my way of thinking, where most of us in the investment industry fail is in our sympathies. Unless our interest in our fellow man is as great as our knowledge, then our knowledge is not only worthless, it is dangerous. Our regulations in the public interests and our advice to the public must be addressed to the needs of the public. Instead, it is directed to their hopes, not only because it is easier but because it is so much more profitable to tell the public what it wants to hear rather than what it should hear.

I want to thank you for your courtesy.

The CHAIRMAN. We appreciate your appearance, and we thank you for your testimony.

The committee will stand in recess until 10 o'clock tomorrow. (Whereupon, at 11:37 a.m., the hearing was recessed, to reconvene at 10 a.m., Friday, June 21, 1963.)

SEC LEGISLATION, 1963

FRIDAY, JUNE 21, 1963

U.S. SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON SECURITIES, Washington, D.C. The subcommittee met, pursuant to recess, at 10:07 a.m., Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding. Present: Senators Williams and Javits.

Senator WILLIAMS. The subcommittee will come to order and continue its deliberations on S. 1642. We have had remarkable cooperation from the witnesses thus far, and I know that today will be no exception in that respect. Mr. G. Keith Funston, president of the New York Stock Exchange, is our first witness. Mr. Funston has been a highly respected figure in the securities industry for many years, and he has been of significant help to this committee on many

occasions.

Mr. Funston, we welcome you. You may proceed in any way you

want.

STATEMENT OF G. KEITH FUNSTON, PRESIDENT, NEW YORK STOCK EXCHANGE; ACCOMPANIED BY EDWARD C. GRAY, EXECUTIVE VICE PRESIDENT, AND SAMUEL L. ROSENBERRY, COUNSEL, NEW YORK STOCK EXCHANGE

Mr. FUNSTON. Thank you, Senator. My name is G. Keith Funston. I am president of the New York Stock Exchange, and my home is in Greenwich, Conn. With me today are Edward C. Gray, executive vice president of the exchange, and Samuel L. Rosenberry, of Milbank, Tweed, Hadley & McCloy, counsel to the exchange.

I appreciate the privilege of appearing before you to present the exchange's view on the Senate bill 1642.

The bill before you would substantially reinforce two of the principal instruments of the Securities Exchange Act of 1934 disclosure and self-regulation. In addition, it would provide the SEC with new enforcement tools similar to those which the exchange, in areas of our enforcement jurisdiction, has found to be essential.

ADEQUATE DISCLOSURE

The Federal securities acts presume that the public interest can best be served if adequate information is made available to investors, information on which they can base their own investment decisions in accordance with their own personal situation and objectives. While

20-226-63- -10

this has proved to be a very sound philosophy over the years, unfortunately it has not been applied universally. Companies which are listed on an exchange are required to furnish such information, but those whose securities are not listed on an exchange have no such obligation. As the SEC study group found, a significant number of publicly held unlisted companies furnished no financial statements to their shareowners, and many which did provide them had no certification by an independent accountant.

In the matter of proxy solicitation the shortcomings are equally serious. Twenty-nine percent of the industrial companies surveyed did not even solicit proxies. A sizable majority of the remainder failed to state the names of the nominees for election of directors and omitted to explain the effect on security holders of proposed mergers, consolidations, acquisitions, and similar matters. Based upon long experience in the area of its jurisdiction, the exchange does not believe that such lack of information should be permitted to continue with respect to publicly owned companies. This experience of ours goes back to 1900. Since then the exchange has required listed companies to furnish prompt annual reports to stockholders and, since 1933, the financial statements in industrial companies' reports have had to be certified by independent public accountants. Beginning in 1955, companies applying for listing have agreed to solicit proxies for stockholders' meetings, a requirement extended to all listed companies in May 1959.

As regards publicly held banks, the exchange believes their shareowners should have much of the information which is presently made available to the shareowners of listed companies. The exchange agrees that the administration of the act as it pertains to banks should rest in the hands of the Federal banking authorities. But it is absolutely esssential that requirements affecting the banks should be the same whether the bank stocks are listed or unlisted.

Through the years the exchange has believed, and still maintains, that the investing public is entitled to adequate information concerning the affairs of publicly held corporations. Since 1941, it has advocated legislation to eliminate the illogical double standard under which the shareholders of unlisted companies do not receive the benefits of disclosure that listed companies are required to accord to their shareholders.

S. 1642 would extend to publicly held unlisted companies those provisions of the 1934 act relating to financial reporting, the solicitation of proxies, and the disclosure by corporate insiders of their transactions in the equity securities of their companies. In the exchange's opinion, such a measure would go a long way toward the solution of the problem of inadequate disclosure.

GAPS IN SELF-REGULATION

A second basic principle of the 1934 act is that under Government oversight the securities industry should regulate and police itself to the maximum extent feasible. In general, the implementation of this policy has accomplished a great deal. While neither self-regulation, nor Government regulation, can be expected to achieve perfection as long a human beings are involved, the approach has proved to be

« AnteriorContinuar »