generally the most active NYSE stocks, with the greatest number of shares outstanding and the most shareholders. In the typical situation, the splitting of the market through dual trading does not appear to affect adversely the quality of the New York market; and to the extent that competition is afforded, the regional exchange market may work to improve the primary market. In some situations, however, dual trading may cause impairment of depth in the primary market. The regional exchange markets in solely traded and dually traded stocks operate in different ways. Round lots in solely traded stocks apparently are traded in much the same way as stocks are on the NYSE and Amex, although the relatively thin markets and limited public participation in these stocks make it more difficult for a continuous auction to take place. Although there is greater need for specialist participation in inactive stocks, specialists are reluctant to take positions or make close markets in these stocks. Odd-lot trading in solely traded stocks uses the same mechanism as on the principal exchanges, with the function of odd-lot dealer and specialist combined, as on the Amex. Trading in a dual stock is essentially based on the prices and quotations of the primary exchange. The specialist participates in most transactions and on one or more of the exchanges is required to, or does in practice, quote at least one side of the market as favorable as in New York. A variety of special arrangements have been developed on the regional exchanges by which a customer may be enabled to receive a price substantially equivalent to that in the primary market, but one or two of these arrangements may raise questions of whether customers receive the best available execution. However, by checking both the regional market and the New York market, a broker is in a position to obtain whichever price is the more favorable. Odd-lot orders in dually traded stocks are mechanically executed based on prices appearing on the NYSE (or Amex) tape, with a time interval designed to provide the same price on the regional exchange as would have been obtained on the principal exchange. However, the degree of surveillance given to such transactions differs from exchange to exchange. The odd-lot dealer-specialists in the course of trading odd lots and round lots in dual stocks may accumulate positions. They have several methods of liquidating a position; they can make their round-lot quotes better than the primary exchange's quote or they can sell stock off the regional exchange by trading over the counter or on the primary exchange. There is no evidence that such offsetting transactions on the NYSE have had any harmful impact on that market. Although there are significant numbers of sole members, regional exchange members deriving the greatest portion of the income earned on the regional exchanges are dual members; i.e., members of both regional exchanges and the NYSE, but the regional exchanges do not provide the most important source of income for them. Sole members of regional exchanges, as a group, also do not receive the major portion of their income from the regional exchanges; other activities-overthe-counter activities and mutual fund sales are larger sources of income. However, there are many sole members who receive a substantial portion of their income from their regional exchange activities. The commission rate structure of the NYSE (see ch. VI.I) prevents nonmember broker-dealers from directly receiving or sharing in commissions on transactions in NYSE stocks. The dual trading system (together with the over-the-counter market in listed securities) permits such nonmember broker-dealers to deal in a large number of securities trading on the NYSE and retain all or part of the commissions. Dual trading also facilitates the channeling of reciprocal business to sole members who send orders which cannot be executed on the regional exchange to New York for execution. Further, it permits savings for dual members who do not have their own execution and clearance facilities in New York. The dual trading system also permits institutions such as mutual funds to channel business in return for sales of mutual fund shares to broker-dealers who are not members of the New York exchanges and in some cases to brokerdealers who are not even members of regional exchanges. In certain areas the regional exchanges have provided technological competition with the major exchanges; one current example of this is the automated centralized bookkeeping system in effect on the Midwest Stock Exchange. In a wider sense, too, the public interest is served by maintaining and fostering competitive markets as distinguished from having excessive concentration in a very few markets. From this point of view the role of regional exchanges as primary markets is particularly significant but in practice has been progressively reduced in importance. In general, the regional exchanges as primary markets have experienced declining importance on declining prestige. Nevertheless, strenuous efforts to secure further listings as the disparities between the disclosure requirements for stocks traded over the counter and on exchanges are removed-coupled with other measures such as modified market mechanisms and possible further mergers, interconnections and/or reciprocal memberships among exchanges might serve to arrest and even reverse the trend. The Special Study concludes and recommends: 1. Over recent decades, the character of most regional exchanges has markedly changed to the point where most of them are far more important as "dual" or "multiple" markets for securities listed on a New York exchange than as primary markets, and their memberships_consist predominantly of "dual" members (members of a New York exchange) rather than "sole" members. The Commission's administration of section 12(f) (2) of the Exchange Act has allowed the regional exchanges substantial freedom in selecting securities in which to establish dual or multiple markets. By helping to promote the multiple trading of the regional exchanges, which has become the mainstay of their existence, this policy has encouraged competition in the securities markets. The evidence points to the conclusion that the benefits of this competition outweigh any possible effects on the depth of the existing markets. 2. Given the present dependence of regional exchanges on multiple trading, for the most part conducted as an adjunct to the New York markets rather than on an independent basis, any program for providing a volume or block discount in commission rate structures or for providing preferential access by nonmember broker-dealers to New York markets (see ch. VI.I) should be planned and carried forward with due regard for the potential impact on regional exchanges. 3. The survival of one or more regional exchanges as primary markets, significantly competing for primary listings with the New York exchanges, would appear to be generally in the public interest. These exchanges should be encouraged and assisted in developing and effectuating (a) combinations, interconnections and/or reciprocal membership arrangements with other exchanges, to provide larger combined memberships, broader stock lists, and stronger resources, market facilities, and self-regu latory mechanisms; (b) trading rules and practices consistent with their character as centralized markets and with basic protection of investors, but adapted, so far as practicable, to the special needs of listed securities of less than optimum depth on a nationwide basis; (c) programs for wider publication of stock lists and quotations and for general enhancement of prestige and public acceptance. 4. An important byproduct of legislation extending the protec tions of sections 13, 14, and 16 of the Exchange Act to investors in over-the-counter markets (see ch. IX) would be to remove what is now an artificial barrier to exchange listing of securities entirely suitable for an auction market. To improve the stature of the regional exchanges as primary markets, to provide a nationwide market pattern of maximum strength, and to avoid excessive concentration in the New York exchanges, there is every reason to promote the attainment by the regionals of a status which invites new listings. As progress is made in enhancing the stature of the regional exchanges and in furtherance of such progress, consideration should be given to further raising the listing and delisting standards of the NYSE, and possibly the Amex, and encouraging the transfer of listings that might find more suitable markets on other exchanges. 5. Multiple exchange memberships, at least when so extensive that the membership of any one exchange may become the most important membership of others (as is now true of the NYSE in respect of most regional exchanges), tend to limit the independence of such other exchanges and their ability to compete. If and to the extent that it is realistic to contemplate some of the regional exchanges' becoming important, competitive primary markets (see 3 and 4, above), regulation of multiple memberships may be an appropriate long-range goal of public policy, although not a realistic possibility under present circumstances. In light of the present importance of multiple memberships, the Commission's continuous surveillance of rules and practices must be designed to assure the freedom of the regional exchanges from the possibility of control by the NYSE or its members in areas of potential competition. PART F. GENERAL CONSIDERATIONS The market scene is kaleidoscopic rather than static, with various currents of change operating beneath the surface of daily business. Rules and practices of the marketplace must be periodically reap praised both to determine whether they themselves are accountable for possibly unintended changes in market patterns and also to consider whether trading or regulatory mechanisms need to be adapted to new conditions. The currents of change are sometimes in the same direction, sometimes in opposite directions, and often circular in their interaction. Though they may operate slowly and imperceptibly, they may lead to results of basic importance. Among the most significant phenomena examined in this chapter and chapters V to VII are the importance of the NYSE and its membership in other markets and the participation of other markets and nonmember broker-dealers in the trading of NYSE-listed securities. These particular phenomena and others discussed in these chapters raise fundamental issues as to, among other matters, the appropriate extent and limits of competition in the securities markets, as well as rights and obligations in respect of access to particular markets and assurances of best executions. Broad questions of this kind should receive more positive and continuous attention in the performance of the Commission's total role and responsibility to protect the public interest and the interest of investors. Since market patterns in which these questions arise are constantly subject to change, the Commission should be equipped, in facilities, personnel, and programs to be the repository of essential information and the wellspring of public policy in these areas. The Special Study concludes and recommends: 1. It is essential for the Commission to improve its facilities and programs for continuous accumulation of data with respect to fundamental, but often obscure, changes in the components, uses and needs of the total pattern of trading markets; i.e., the separate markets when considered in relation to each other. This need, together with others discussed in chapters VI, VII, and VIII, calls for both a reappraisal of present reporting systems, with full regard to the burden of supplying particular information in relation to its utility in the public interest, and a considerably wider perspective as to potential uses of data processing equipment in discharging the Commission's regulatory responsibilities. 2. The Commission should establish a separate, permanent policy and planning unit within its staff, having the responsibility of accumulating and analyzing pertinent data bearing on market patterns and practices generally, making special studies as the need may be indicated, and reviewing policies and regulations in light of changing circumstances. 3. Among the subjects that appear to need further and continuing attention of such a staff group and of the Commission are: (a) types and forms of competition and of limitations on competition actually or potentially existing within and among markets, and their impact on the free, fair, and orderly functioning of the various markets; and (b) factors contributing to or detracting from the public's ready access to all markets and its assurance of obtaining the best execution of any particular transaction. CHAPTER IX OBLIGATIONS OF ISSUERS OF PUBLICLY HELD SECURITIES [Part A (Introduction) discusses generally the need for adequate availability and dissemination of information about issuers and the need to extend to unlisted securities the safeguards now applicable to listed securities under the Exchange Act.] PART B. PROTECTIONS FOR INVESTORS IN LISTED AND UNLISTED SECURITIES Disclosure is the cornerstone of Federal securities regulation; it is the great safeguard that governs the conduct of corporate managements in many of their activities; it is the best bulwark against reckless corporate publicity and irresponsible recommendation and sale of securities. In light of such considerations, it seems wholly indefensible, in terms of logic and of public policy, that most investors in over-the-counter securities should be afforded drastically less protection than is provided for investors in exchange-listed securities through sections 13, 14, and 16 of the Exchange Act. It is also highly anomalous that market allocations (in the sense of selections between exchange markets and over-the-counter markets) should be importantly affected by a sort of Gresham's law whereby many issuers may avoid the protective measures applicable to all listed securities by simply electing to have their securities traded over the counter. Issues traded in over-the-counter markets are far too numerous and important-partly as a result of this Gresham's law-to permit the present anomalous distinction to continue. Investors in all exchange-listed securities are afforded protection both by statute and by rules of various of the exchanges. The Exchange Act requires full information about an issuer to be disclosed in a publicly filed application for registration before securities of the issuer may be listed for trading on an exchange, and requires the information to be kept current by subsequent periodic and current (special) reports (sec. 13). It also requires that complete information be supplied shareholders in accordance with_Commission rules when proxies are solicited (sec. 14). Finally, the Exchange Act controls the use of confidential corporate information for personal gain by requiring public disclosure of insiders' transactions in the equity securities of their corporations and providing for the corporate recovery of resulting "short-swing" profits. Statutory protections are supplemented by the exchanges. The principal New York exchanges, for example, in their listing agreements require all listed companies to disseminate independently audited financial statements to shareholders annually, and require most |