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tion of problems of independent, unaffiliated directors; (b) prohibition of purchases or sales of securities, directly or indirectly by any person covered by the policy, within 30 days prior to or following the date of a portfolio transaction in the same security issue, subject to reasonable exceptions, as in the case of hardship or with respect to such types of securities as the Commission might exempt from application of such policy; (c) a requirement that persons covered by the policy report to the investment company on transactions in issues in its portfolio, such reports not to be made public but to be available for Commission inspection, and (d) appropriate provision for sanctions in the event of violations of the policy.



[Part A (Introduction—Self-Regulation in the Securities Business) discusses generally the concept of self-regulation in the securities industry and the need for public supervision of self-regulation.]



The influence and prestige of the New York Stock Exchange among the self-regulatory institutions are unrivaled. It occupied a singular position in the securities industry when the Securities Exchange Act of 1934 was adopted, and this is at least equally true today. The Exchange is uniquely important as an agency of self-regulation not only because of its outstanding importance as a securities market but also because of the dominant position of its membership in the entire securities business. Thus, the quantity and quality of its self-regulatory activities are of special significance: Considered by themselves and in comparison with other self-regulatory agencies, they are the most important single measure of the strengths and weaknesses, the accomplishments and limitations, of the self-regulatory concept.

It is appropriate to repeat here as to the NYSE's self-regulatory activities what has already been said in part A on self-regulation generally—that it has basically proved itself in practice despite the shortcomings pointed out below. The study's discussion of the latter is not intended to overshadow or disparage the record of accomplishment but to point toward an even stronger future role. That some of the problems of self-regulation have their counterparts in the Commission's performance of its total role may be seen at various places in the Report and particularly part I of this chapter.

The Exchange has conceived of its regulatory role very broadly; it has regarded very few, if any, aspects of its member's business and therefore of the entire securities business-as being outside the sphere of its concern, and to one degree or another it has addressed itself to the most important of them.

The Exchange has provided constructive leadership and excellent results in many important areas. Its regulatory performance must be rated unsatisfactory in others, however, sometimes seriously so. The Exchange's accomplishments impressively illustrate its ability and potential to raise industry and corporate standards. This and other chapters of the report, however, also reflect areas where the Exchange has been willing to accept the status quo uncritically, where it has failed to perceive new needs for self-regulatory intervention, or where its intervention has been halfhearted or its methods have become outmoded. It has sometimes seemed to be excessively concerned

with defending its members from public criticism and insufficiently concerned with governing their conduct in a public market as the Exchange Act requires it to do. That the Exchange has failed to bring its accomplishments in all areas to the level of quality achieved in some is the more regrettable in view of the opportunity afforded by its dominant position and influence.

The unsatisfactory performance in some spheres of self-regulation undoubtedly has many explanations. Among them, there appears still to be a disproportionate influence of floor professionals in the government of the Exchange, stemming ultimately from the allocation of voting power in the Exchange constitution. Only regular members, i.e., holders of "seats,” are entitled to vote at Exchange elections and on matters requiring approval by a vote of the membership. Only 97 seats, or 7 percent, are held by those firms providing 50 percent of public commission business, 48 percent of the registered representatives, and 42 percent of branch offices, whereas at the other end of the scale, over 800 seats, or 60 percent, are held by members whose firms do 10 percent of public commission business, have 10 percent of the total registered representatives and 13 percent of the total branch offices. Of 29 elected governors, 17 are required to be regular members, and 14 of them, including the chairman and vice chairman, are generally floor members. The floor members control the important advisory committee, while the nominating committee, which in effect selects the elected members of the board of governors and the next nominating committee, has twice as many regular as allied members. An increasing number of specialists have served as governors, floor governors, and floor officials in recent years, and specialists with a limited amount of public business have been elected to the board of governors as partners of firms "engaged in a business involving direct contact with the public.” The influence of the floor professionals was most clearly demonstrated by the adoption of the floor-oriented program of the Committee of 17 in 1949-50.

The seat concept has deep roots, reflecting the original privateclub concept of the Exchange. It is only natural to think of those having a substantial investment in a seat as being proprietors and therefore holders of the franchise. Yet it is anomalous that voting power is so closely tied to floor participation that, on the one hand, a firm whose function involves floor operations—the prime example is an odd-lot firm-must have seats, i.e., votes, in proportion to its floor business, whereas, on the other hand, a firm whose business is with the public and primarily away from the floor may build a massive and farflung exchange business around a single or very few seats. The anomaly is emphasized by the fact that many seats held in the names of individual members are actually owned and controlled by their firms and that frequently the office partners of a member firm have a larger financial stake in the firm than the floor partners.

The floor has ceased to be a place where the most important members of the Exchange community trade with one another. The floor professionals—specialists, odd-lot dealers and brokers, and floor brokers—are not necessarily the most talented for administration or regulation or the most responsive to public needs, even though the nature of their operations requires them

to own seats and to be at the Exchange during the working day. Office partners located in New

York or in offices throughout the country may be more sensitive to the public character of the Exchange and more cognizant of the needs of public investors, even though they have fewer seats and little occasion to be in the actual marketplace. In light of this, it would seem that full or partial voting rights should be extended to allied members; i.e., partners or voting stockholders of member firms. Also, the composition of the governing bodies of the Exchange should be altered to give increased representation to firms without specialist affiliation doing business directly with the public.

In most respects, the organizational structure of the Exchange as a self-regulatory agency seems basically sound. The reforms recommended by the Conway Committee in 1938 and adopted by the Exchange have proved to be effective on the whole. Policymaking authority is properly vested in the board of governors which is also the repository of regulatory power.

The chairman of the board, who is required to be à regular member and is invariably a floor member, plays an important part in the disciplinary mechanism of the Exchange. Apart from his board membership he is also a member of the informal committee, which screens major disciplinary cases before they are referred to the board. In addition, the chairman has special responsibilities in supervising floor conduct and is considered “chief on the floor."

The president is the Exchange's chief executive officer and its official representative in all public matters. The full-time staff is responsible for administering the Exchange and is generally of adequate size and quality. With regard to regulation of members' and member firms conduct off the floor, the staff has sufficient authority and responsibility to carry out its regulatory duties. The regulation of conduct on the floor is complicated, however, by the existence of the floor governors, who resemble in material respects the standing committees who governed the Exchange prior to the adoption of the reforms recommended by the Conway Committee. Because the floor governors are considered to be the experts on floor matters, there has been a tendency for the staff and even the board to defer to the judgment of the floor governors or an individual floor governor in resolving specific questions, and the authority and responsibility of the staff with regard to floor matters have tended to be limited accordingly. The recent action of the Exchange in giving the Floor Department greater authority in floor regulation should be followed by additional steps in the same direction, so that the role of the Floor Department in this area will be equivalent to that of the Department of Member Firms in off-floor regulation.

As already indicated, there is a great diversity in the Exchange's initiative and effectiveness in taking hold of different kinds of regulatory problems. To mention a few examples at the high end of the scale: In respect of the all-important matter of qualifications of those entering the securities business, its contribution has been of a high order. The administration of its net capital rule has been generally vigorous and resourceful. Its promulgation and enforcement of controls relating to listed companies, such as periodic financial reports, proxy solicitation, and timely disclosure, have significantly contributed to increased investor protection, and it also took the initiative in establishing and enforcing standards in the area of underwriters' compensation.

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