transactions, are recorded. In the over-the-counter market you are primarily dealing only through marketmakers who are willing to take positions and develop a market in a stock. Also many over-thecounter companies are new companies that need their underwriter both as a director and as a marketmaker. It is a different group. It is a different market.

Mr. DINGELL. In other words, Mr. Cary, you are saying that we should not give the right on an auction market where the information is generally available to the public. Am I correct?

Mr. CARY. There is no need for it, that is right.

Mr. DINGELL. But you are saying, where there is no or a much more limited amount of information available to the public, that we should give marketmakers, who thereby have a greater advantage, the opportunity to use their private information, information achieved through their position for their private benefit, and this I disagree with.

Mr. CARY. Of course, the bill itself provides for more information so that the point that you have made is not totally accurate in that there will be information being given at the same time pursuant to this bill with respect to the securities involved.

Mr. DINGELL. Thank you, Mr. Chairman.

Mr. STAGGERS. Mr. Dingell, I think you have raised a very important point with respect to the memorandum that was submitted about the committee and also with respect to the bill and I think it is something we have to take into consideration in executive session. Mr. Glenn?

Mr. GLENN. Mr. Cary, while we are on that subject, and while I must admit I do not quite understand the portent of the discussion of the legal authority by my colleague, Mr. Dingell, I am willing to give some of my time to you, and particularly to Mr. Cohen, if it helps to clarify what has gone on.

Mr. CARY. Maybe Mr. Cohen can now give another objective interpretation.

Mr. COHEN. I just want to make a few points. First of all, section 16(b) does not now apply to marketmakers in the over-the-counter market and has never applied to them, so that the exemption written into the statute would preserve the present situation as to marketmakers.

No. 2, the exemption, even as written in, does not condone, sanction, or endorse in any way the use, misuse, or abuse of inside information. The antifraud provisions are designed to deal with that situation and there would be prohibition against such abuses whether or not 16(b) is in the statute and applies to marketmakers; 16(b) is a section which merely provides a civil remedy on behalf of the company to recover, irrespective to use or misuse of inside information, profits realized by certain directors and officers in connection with short-run transactions. The third point I want to make is that the exemption does not provide any exemption at all, even as to over-the-counter companies, with respect to officers, directors, or principal stockholders, other than this limited group of marketmakers.

The fourth point I want to make is that the special study report did not recommend flatly against any exemption. It urged rather that there was no justification for a general exemption, but urged further that there be authority in the Commission to grant exemption on an ad hoc or case-by-case basis.

As the chairman has pointed out, the leaders of the industry suggested that in the over-the-counter market you were dealing with many smaller companies, companies that, in many cases, were substantially different than the companies that enjoy trading on the stock exchange, that the element of sponsorship was very important to the distribution of securities, particularly securities of smaller or medium-sized companies in this country, and in order to obtain the services needed by such medium-sized companies and smaller companies, of investment bankers, it was desirable, if not necessary, in many situations, as the study recognized itself, in some situations

Mr. DINGELL. Mr. Cohen, if you will yield, the study made no mention of that point and as a matter of fact, the study, just to keep the record straight, specifically recommended against giving that authority, and specifically-and I read from the study-recommended against giving an exemption from insider trading prohibitions under the very matters we are discussing today.

Mr. COHEN. I didn't say to the contrary, and if it sounded that way I am sorry. What I did say was that the study recommended that there not be this general exemption, but did suggest that the Commission have authority to grant exemption in certain situations, situations of the characer hat I have now described.

I think it was in the context of this entire discussion and with these various considerations in mind that the Commission determined to recommend legislation in the form that is now before you. I really want to emphasize as my last point, the point that Mr. Loomis made, that this provision is limited solely to transactions in the over-thecounter market.

Mr. GLENN. Mr. Cary, going back to the subject which you covered first on the life insurance companies making reports to the SEC, as you know, we had considerable testimony from the companies and also from the National Association of Insurance Commissions that they have for years given great protection to policyholders, and they did also show that they have started within the past few years giving some protection to stockholders.

I gather from what you say here today, and you clarified considerable of the testimony which we had from them, that even though this may be so, you still feel that what they are doing is not sufficient for the protection of the general public in their requirements which they propose to have for the stockholders.

Is that right?

Mr. CARY. Yes, sir. I would say that we have never said that they are not giving adequate protection to the policyholders. Indeed, that is just the point. They have been giving protection to policyholders and really no others. This questionnaire is the first sort of effort in

the direction of thinking about shareholders that has come up since our own bill has been proposed. I did say that I really think it is halfhearted. I think it is woefully inadequate. It isn't compulsory. It doesn't have review by the Commissioner itself. It is really just sending out a questionnaire: Did you send these things? It doesn't say you must send it. It doesn't have any application, for example, to the point that Mr. Dingell has been bringing up, the application basically of an insider trading rule.

Naturally under this you may, or you must I suppose, supply information if you are a director, an officer, or a 10-percent shareholder on an annual basis of any trade you made in a security, but giving it on an annual basis and then having a few months lag after that is really giving stale information. Furthermore, the whole point, the whole philosophy, that we have adopted of having an annual report go out with a proxy statement, proxy material-this disclosure of the type of information that the investor would like-all of that is absent in their questionnaire.

Mr. GLENN. One last question. I was amazed at the summation which you gave on page 48 of the report as to the nominal cost of the dues of being a member of the self-regulatory associations. We were led to believe in the testimony submitted that this would be a large factor, but you say it would be between $100 and $199 as to about 77 percent of the membership. What would be the result of joining an association as to the other 23 percent which you have not included. Would it be greater or less?

Mr. CARY. I assume they would be greater, sir, and it would all depend on the number of registered representatives that the particular firm has. In other words, as it moves up in number I am sure that they would be subject to a higher fee, and, as Mr. Woodside mentions, the kind of business that they do, underwriting or otherwise, because there is a substantial charge, as I recall, based on their underwriting activities.

Mr. GLENN. Would it be very much greater, or would you say, just in comparison with this figure, a nominal figure?

Mr. CARY. I think Mr. Saul could give you more or less the exact charges in this area. I might ask him to speak to that point.

Mr. SAUL. Mr. Glenn, I don't have the precise charges in front of me, but there is a maximum and I believe that the maximum charge that is incurred by any firm in the NASD is somewhere in the neighborhood of about $12,000, but most of the members, as pointed out in the chairman's statement, do pay these minimal fees, primarily because they have few branch offices and few salesmen. I just don't know what the impact would be though on the other 23 percent.

Mr. GLENN. Could you prepare some sort of a chart that would show this and have it made a part of the record?

Mr. CARY. We would be glad to do so, sir, very definitely.

(The statement referred to follows:)

National Association of Securities Dealers, Inc., assessments, year ended Sept. 30, 19631

! The basis for the computation of firms' annual dues is discussed on the following page. 'Some members actually paid less than $100 because they were not members for all of the year. Those members are nevertheless put in the $100 to $199 category.

BASIS OF COMPUTATION OF ANNUAL DUES (ASSESSMENTS) FOR NASD'S FISCAL YEAR ENDED SEPTEMBER 30, 1963

In summary, for the NASD's fiscal year ended September 30, 1963, the annual dues for a member consisted of the total of the following three elements: (a) A basic membership fee of $100.

(b) A "head tax" of $5 per person within the organization devoting time to the investment banking or securities business.

(c) Members participating in underwriting were assessed 0.003 percent on the principal amount thereof, with the exception of investment company underwriters or sponsors, who were assessed 0.006 percent of gross sales of investment company shares for which they acted as sponsor or underwriter.

A $7,500 limit was applicable to item (b), a $7,500 limit was applicable to item (c), and the aggregate annual dues were subject to an overall $10,000 limit. The various elements of the NASD's annual dues structure for the NASD's current fiscal year, which began on October 1, 1963, are 33% to 50 percent higher than the elements of the dues structure for the year ended September 30, 1963. The annual dues structure for the current fiscal year and the other fees that the NASD imposes are discussed in the accompanying memorandum.

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION ON COSTS OF MEMBERSHIP IN THE NASD

This memorandum deals with the costs of membership in the NASD. Although the proposal in H.R. 6789 is one of membership in a registered securities association and therefore would not necessarily require membership in the NASD, perhaps the most concrete idea of the costs of membership in a registered securities association can be gained from an examination of the NASD fee structure. Three points should be noted at the outset. First, the costs incurred by broker-dealers for membership in a registered securities association are costs incurred for essential regulation that directly benefits investors. The NASD is not organized or operated for profit. NASD dues and fees are designed solely

to offset the costs of its regulatory activities such as inspection of member firms and development and administration of examinations to test the knowledge of personnel new to the securities business.

Second, the costs of membership are costs incurred for regulation that would otherwise be provided by the Government. The cost of the alternative governmental regulation would either be borne by the Government, meaning the taxpayers, or, as the Commission believes would be more equitable, through fees collected by the Commission from nonmember broker-dealers to defray the costs of the added regulation. For example, if membership is not required, the Commission believes that it should be empowered to prescribe and administer examinations testing the knowledge of nonmember broker-dealers and their personnel. The costs of any such examinations should be borne by the nonmembers rather than the taxpayers, since members of the NASD themselves bear the cost of NASD examinations. Thus, the costs of membership in a registered securities association are not additional costs that would be incurred solely because of a requirement of membership. If membership is not required and if, as the Con mission believes would be equitable, the Commission is empowered to levy fees upon nonmembers to defray the costs of the additional governmental regulation occasioned by their nonmembership, the absence of a requirement of membership would result in no savings to the nonmembers.

Third, the Commission is charged by statute with the responsibility of reviewing the dues structure of a registered securities association to assure that it is equitable.

Attached is a copy of the portion of the NASD's bylaws that sets forth the NASD fee structure for its current fiscal year, which began on October 1, 1963. The fee structure consists of two separate elements: "annual dues," and what can conveniently be referred to as "other fees."

In summary, the annual dues for a member consist of the total of the following three elements:

(a) A basic membership fee of $150.

(b) A "head tax" of $7 per person within the organization devoting time to the investment banking or securities business.

(c) Members participating in underwriting are assessed 0.004 percent on the principal amount thereof, with the exception of investment company underwriters or sponsors, who are assessed 0.008 percent of gross sales of investment company shares for which they acted as sponsor or underwriter.

A $10,000 limit is placed on item (b), a $10,000 limit is placed on item (c). and the aggregate annual dues are subject to an overall $12,500 limit.

The other fees that the NASD assesses are:

(a) A $30 fee for each branch office open any time during the year.

(b) A $25 fee for each application by one of the firm's personnel for status as "registered representative." Generally speaking, a sole proprietor, partner. officer, supervisor, or salesman of a member firm would be required to register as a registered representative. This is in addition to any fees under (c) or (d) below.

(c) A $20 fee for each examination administered in connection with registration of one of the firm's personnel (other than a principal) as a registered representative.

(d) A $25 fee for each examination administered in connection with the ap plication of one of the firm's principals as a registered representative. In general, a principal is an officer, partner, or sole proprietor.

(e) A $150 fee for an application by a firm for membership.

These other fees are in addition to the anuual dues and are not subject to any of the limits applicable in computing annual dues. The fees set forth in (b). (c), and (d) are not periodic fees and are incurred only upon a change in personnel. The examination fees set forth in (c) and (d) would be incurred only where the applicant for registered representative status has less than 1 year's experience in the business; no examination is required of applicants with experience of 1 year or more. The fee set forth in (e) is strictly a one-time cost. For the overwhelming majority of firms that are members of the NASD, the annual costs of membership are modest. A breakdown of the annual dues paid by the 4.823 NASD members during the NASD's fiscal year ended September 30. 1963, shows that during that fiscal year about 77 percent (3.740) of the NASD members paid annual dues of $100 to $199: about 16 percent paid annual dues of

1 Some members actually paid less than $100 because they were members for less than the full year. Such members are, however, placed in the $100 to $199 category.