« AnteriorContinuar »
evaluation and there is an almost complete absence of information about the sources of income and expense for large segments of the industry. Conferences with industry leaders are continuing. Level and Structure of Commission Rate
During the fiscal year, the staff continued its research on the level of the exchange commission rate. Considerable effort was devoted to improving the quality and quantity of available data. As noted above a proposed report form for broker-dealers has been drafted. Pending resolution of the problems in developing such a report, the New York Stock Exchange, following conferences with the Commission staff, improved and made mandatory the filing of the Exchange's income and expense report by all members doing a public commission business. It also adopted a form to provide supplementary balance sheet information for the firms filing such reports.
The Commission staff has also continued its consultations on the commission rate structure with the New York Stock Exchange staff and others. These were directed towards gaining a fuller understanding of the various practices which now permit arrangements qualifying the fixed minimum commission schedule established by the Exchange. Based partly on these discussions, the Commission, with a view to insuring a reasonable commission rate structure, has been evaluating such current practices as "give-ups" and "give-aways”, reciprocal arrangements, and the provision of special services. Odd-Lot Studies
The Special Study recommended that the New York Stock Exchange, with appropriate participation by the Commission, undertake a cost study of the odd-lot business. It also recommended that the Commission, in conjunction with other exchanges, undertake studies of the methods and costs of handling odd-lots on those exchanges. During the fiscal year the Commission reviewed the odd-lot differential charged by New York Stock Exchange firms in the light of the cost studies of the Exchange discussed in last year's annual report," the analysis made by the Commission's staff, and the numerous conferences with the exchanges on the matter.
On June 16, 1966, effective July 1, 1966, the New York Stock Exchange, at the request of the Commission, adjusted its odd-lot differential. The new differential is 1212 cents on each share of stock selling for less than $55 and 25 cents on each share selling for $55
The previous “break point” was $40. In requesting this change the Commission indicated that it expected that a further review of the odd-lot differential charge of the New York Stock Ex
change would be made promptly after the end of 1966. In addition, the Commission determined to extend its inquiry into the mechanics and principles under which odd-lot transactions are effected in all securities markets. It has requested the comments of all the exchanges and the NASD with regard to a number of significant issues and problems pertinent to such a study. Review of Exchange Rules Regarding Off-Board Trading
The Special Study Report recommended that the Commission and its staff give continuing attention to “factors contributing to or detracting from the public's ready access to all markets,” as well as limitations on competition between markets and the effects of such limitations on the fair and orderly functioning of the markets.
Until recently Rule 394 of the New York Stock Exchange prohibited all off-board transactions in listed securities, whether effected on a principal or agency basis, unless the securities are specifically exempted by the Exchange. The other national securities exchanges have similar rules. Near the close of fiscal 1965 the Commission's staff began a study to determine whether such prohibitions were consistent with the standards established under Section 19(b) of the Securities Exchange Act for fair dealing in securities traded on exchanges. This inquiry was conducted during fiscal 1966. Following the end of the year, the Exchange, at the request of the Commission, amended Rule 394 to permit member broker-dealers to execute transactions with certain non-member broker-dealers who maintain markets in listed securities. The rule is designed to promote competition between the exchange specialist and the non-member market-maker and to provide the public customer with the benefits of the best available market.
Automation of Market Facilities
During the past year the Commission appointed certain members of its staff to an Electronic Data Processing Committee. The Committee's responsibilities include (1) the continuous examination of industry practices and Commission rules to insure that the development and use of automation in the securities industry fulfills the needs of both the industry and the Commission; and (2) the recommendation of policies and procedures to implement its findings.
The Committee has met with representatives of the various exchanges, the National Association of Securities Dealers, suppliers of stock market data and other interested parties to discuss various aspects of automation in the securities industry. Discussions with the exchanges have dealt with such matters as the establishment of central
* See Securities Exchange Act Release No. 7981 (October 20, 1966).
bookkeeping systems and central depositories for securities, the improvement of quotations, the automation of surveillance procedures and the clearing operation, and the automation of the execution of odd-lot transactions. Automation in the over-the-counter market has been discussed with the National Association of Securities Dealers, with broker-dealers, and with vendors who hope to supply the equipment and related services for any such program.
In recent years the New York Stock Exchange has worked toward the development of a centralized system for the handling and delivery of securities through the use of automated procedures. To further the development of such systems, the Commission during fiscal year 1966 amended Rules 8c-1 and 15c2-1 under the Exchange Act ' to provide that the hypothecation of customers' securities held by a clearing corporation or other subsidiary organization of a national securities exchange or national securities association or by a custodian bank pursuant to a central system in which customers' securities are commingled with securities of others will not of itself constitute a commingling prohibited by those rules. Generally speaking, the exemption is available only where the custodian agrees to deliver the securities it holds as directed by the system and not to assert any claim against them; the system has safeguards for the handling, transfer and delivery of the securities; and the system provides for fidelity bond coverage of employees and agents of the clearing corporation or other subsidiary organization and for periodic examination by independent public accountants. In addition, the Commission must find that the custody agreement and the safeguards established are adequate for the protection of investors. At the time the Commission amended the rules it found that the New York Stock Exchange's Central Certificate Service met the specified standards.*
While the amendment makes clear that the presence within a system of a stock certificate representing the interests of various customers and other parties, including pledgees, does not constitute a prohibited commingling, it does not make legal a hypothecation prohibited by Rules 8c-1 and 15c2–1. Thus, it would still constitute a violation of these rules to hypothecate the securities of more than one customer of a member, broker or dealer to secure a loan unless the consent of each customer is obtained, or to hypothecate the securities of a customer with those of any person other than a customer to secure a loan.
The Special Study pointed out serious inadequacies in the supervisory controls utilized by broker-dealers in their surveillance of the
* Securities Exchange Act Release No. 7896 (May 25, 1966).
selling activities of salesmen and other employees and recommended the strengthening of such procedures and the adoption by the selfregulatory agencies of clearer standards and stronger enforcement procedures to assure more effective supervision by their member firms.
The Commission's staff initiated discussion with the NASD to deal with these problems and on July 1, 1965, the NASD adopted rules dealing with supervision procedures and selling practices of Association members. Among other things, these rules require the establishment and enforcement of written supervisory procedures and designation of a partner or officer to be responsible for their execution. The internal procedures must include periodic review of customer accounts and at least an annual inspection of each branch office. The NASD rule governing discretionary accounts has also been amended to require written customer authorization, supervisory review, and approval of activity in such accounts. A revised statement summarizing many of the selling practices which violate a member's responsibility for fair dealing also was adopted. To aid in the implementation of these new rules, the Association has prepared and distributed to its members a separate comprehensive manual which contains detailed guidelines and suggestions for effective supervisory procedures. All of these areas were subjects of Special Study recommendations.
During the year a number of further conferences were held between the NASD and the Commission staff concerning the NASD markup policy. The NASD has had a special committee reviewing the Association's markup policy, which also was the subject of a number of significant recommendations by the Special Study. The Association hopes to present a revised markup policy to its Board of Governors for adoption in the near future.
As noted in last year's annual report, the NASD engaged an outside management consulting firm to study the effects of its revised newspaper quotations system which was adopted in response to the provisions of Section 15A (b) (12) of the Securities Exchange Act as amended in 1964 and the recommendations of the Special Study. The study was also designed to assist in evaluating the possible effects and appropriateness of the Special Study's recommendations regarding the prohibition of so-called “riskless” principal transactions in the over-the-counter markets and the disclosure of prevailing inter-dealer markets to investors. In October 1966, the findings and conclusions of the study were announced by the NASD. The study found that the quotations revisions made in 1965 had had no substantial impact on the markets for the securities affected, and that the issuers of these securities as well as well as those quoted in local lists sponsored by the NASD favored publication of inter-dealer (i.e. wholesale) quotations.
The NASD has revised its rules to provide that all over-the-counter quotations in national news media reflect inter-dealer markets including those in securities traded only on a local basis. With respect to the possible impact of adoption of the other Special Study proposals, the consulting firm concluded that certain types of NASD members would be adversely affected. These conclusions are now being reviewed by the Commission's staff. Coordination of Regulatory Efforts
During the past year, the Commission gave increased emphasis to the coordination of its regulatory activities with those of the various states and the self-regulatory institutions to improve the effectiveness of regulation and at the same time to reduce the burdens of compliance. The regional offices took steps to improve the coordination of inspection and other activities with state securities administrators and with the NASD in those areas where the respective jurisdictions overlap. Staff members of the Commission and of certain of the state authorities have conducted joint inspections which have strengthened and made more effective the entire inspection program.
The Commission has also developed procedures for informing state administrators about important investigations the Commission is conducting in their respective states and for advising them of injunctive or public administrative proceedings which are to be instituted there.
To make information filed with the Commission more readily available to the states, the Commission now furnishes to the interested state administrators a copy of the prospectus in the first registration statement filed by a company under the Securities Act of 1933. The Commission will also send a copy of any broker-dealer withdrawal form to the state administrator in the state in which the firm's principal office is located. This form may help the state administrator determine whether any regulatory action under state law is appropriate.
To reduce the burden on persons filing broker-dealer application forms, the North American Securities Administrators recently approved the adoption of a uniform form, which will be available to all administrators. A common core of information would be provided by the Commission's broker-dealer registration form, and that information would be supplemented by information, if any, required by a particular jurisdiction. This new form will reduce the burden on firms who must now furnish the same or similar information to various regulatory bodies.
Significant progress has also been made to coordinate the administration of examinations given to securities salesmen, to relieve them of the need to take essentially duplicative examinations. In its exami