« AnteriorContinuar »
On the other hand, its leadership has been much less noticeable and its accomplishments much less noteworthy in respect of selling and advisory practices. Until recently it seems to have devoted little attention to selling practices and supervision by its member firms of their branch offices despite disturbing evidence that serious abuses were occurring. The concept of suitability was largely subsumed under the “know your customer” rule, where emphasis has traditionally been on protection of firms rather than of customers. And at least until recently its concern with market letters and investment advice has been focused more on questions of good taste than on the qualifications and standards of research departments of its member firms. Moves recently undertaken by the Exchange to strengthen its programs in these areas are no less welcome for being belated, but great opportunities remain.
A different kind of illustration of the Exchange's failure to exercise regulatory initiative is described in chapter VI.E in connection with odd-lot trading on the Exchange. Although two member firms dominate this important aspect of the exchange market and the Exchange acknowledges it has full power to regulate such trading, this power has not been exercised in the last 25 years.
The surveillance techniques employed by the Exchange likewise differ widely. The visitation program of Exchange examiners is an excellent factfinding mechanism and an effective means of detecting irregularities, particularly those related to net capital and other areas where books and records are themselves revealing. On the other hand, its surveillance techniques in respect of market letters and selling activities and of its members' supervision in these areas have been minimal. Only recently has it begun to pay close attention to conduct in branch offices.
Another surveillance technique, stock watching, is a pioneering effort by the Exchange in utilizing automation to detect market irregularities. The stock watching procedure should become increasingly sophisticated as the Exchange's automation program advances. Nevertheless, the Exchange has not been as resourceful in adapting automation to the surveillance of member conduct on the floor. As presently constituted, floor surveillance is an arduous and time-consuming task with the final product subject to numerous inaccuracies because of the volume of statistics involved. Increased use of automation might result in more accurate data and permit the staff to devote less time to clerical duties and more to analysis of the subtle and complex problems involved in floor regulation.
With regard to the regulation of specialists, the Exchange's efforts have been intensive and systematic within the limits of its own concepts, yet they have been inadequate in total effect. They have tended to be mechanical and generalized, and have failed to focus adequately on concrete problems, such as the applicability of the specialist's conflicts of interest in specific instances, and disparate performances among specialists. The fact that responsible officials of the Exchange were unaware that two-thirds of its specialists were accepting "notheld" orders for many years in violation of law is an indication of the limits of its program. The facts that inaccuracies in floor trading reports have gone undetected, that late filings have been tolerated, and
i Similarly, the Commission has not exercised its authority under sec. 11 of the Exchange Act to regulate odd-lot trading.
that repeated violations have been disposed of without disciplinary sanctions, are further examples.
A significant limitation in the Exchange's self-regulatory functioning is its handling of public complaints involving its member firms. Instead of using this source of information to advantage as an important tool of self-regulation, the Exchange has performed essentially a buffering function. Complaints of serious impact have gone uninvestigated, while complaining customers have been led to believe that an investigation had been made when this was not the case. Furthermore, in contrast to its professed impartiality in such matters, the Exchange's responses have occasionally been made in such a manner as to strengthen the member's defense. It is to be hoped that the recent changes adopted by the Exchange in the handling of these complaints will result in more effective utilization of them as a surveillance device.
Related to the handling of public complaints is the Exchange's arbitration machinery. It appears to operate efficiently and fairlyindeed, with respect to the machinery itself, geographic expansion to make it more conveniently available to customers throughout the country would seem desirable. The arbitration machinery should not, however, operate as a substitute for, or a limitation on, the Exchange's exercise of its own disciplinary responsibilities where the serious import of a complaint indicates the need for investigation and action by the Exchange itself.
In the disciplinary area—the handling of revealed violations—the Exchange leans toward tenderness rather than severity, but with some unevenness in respect of different types of violations. The Exchange appears more willing to impose severe disciplinary sanctions where the interests of its membership are directly at stake, such as cases involving enforcement of the minimum commission schedule, than where violations involve ethical standards in dealing with customers, such as supervision of salesmen or trading against advice given in a market letter. Admonitions and censures ("severe” or otherwise) are often the extent of punishment meted out, even for substantial infractions; an illustration is the Exchange's recent disposition of a disciplinary matter involving massive violations of its gratuities rule by a leading member.
Related to the above, as cause or effect, is the high degree of informality and privacy surrounding Exchange disciplinary proceedings. It may be argued that, under the theory of self-regulation, these qualities, or at least the former, are preferable to their opposites, but it is still a question of drawing lines. Unlike the case of the NASD, where the Exchange Act expressly provides for certain formalities in disciplinary cases, there is no statutory provision applicable to exchanges. In practice the NYSE does not hold formal hearings except in proceedings before the board. In rendering disciplinary decisions the board of governors and the advisory committee do not write opinions containing either findings of fact or reasons for the decision. The member or allied member is not entitled to be represented by counsel. Registered representatives are subject to a more summary procedure, although the Exchange has recently adopted changes designed to make these proceedings more closely parallel those involving members. The
2 Of the disciplinary cases handled by the Exchange during 1957–61, approximately 70 percent were decided by the advisory committee.
Supreme Court has recently emphasized the crucial significance of fair procedures in self-regulatory actions affecting nonmembers and it would seem that similar considerations might broadly apply to cases affecting registered representatives, applicants for membership, and members.
The Exchange's policy regarding publicity of disciplinary actions may be assumed to be attributable, at least in part, to a natural reluctance to publish anything adverse about any of its members. Also, publicity about a sanction imposed may itself constitute an additional sanction. These considerations must be balanced, however, against the public's interest in the conduct or misconduct of firms or persons with whom it deals and in the integrity of a public marketplace. As a general principle, with such general or specific exceptions as the Commission may approve, Exchange disciplinary actions resulting in the imposition of a penalty by the advisory committee or the board of governors should be publicly reported.
În the background of many of the Exchange's self-regulatory activities is its interest in public relations. Basically three elements are involved, promotion of share ownership by an ever-larger segment of the public, informing potential investors about securities and securities markets and counselling them about good investment practices, and advertising the quality of the Exchange's market and its member firms. The more that the Exchange does to encourage share ownership by "little” investors, who tend to be new and unsophisticated investors, the greater its obligation to provide rules and practices that are actually in accord with the needs of such investors, and the greater also its obligation to avoid exaggerations and misunderstandings of what the actualities are.
While it would be unfair to suggest that the Exchange has been unmindful of its substantive obligations to the people it invites to deal with its member firms in its market, in recent years it appears to have been disproportionately concerned with the image of itself and its members that it projects. A good example is in the area of research and investment advice as discussed in chapter III.C; the Exchange has devoted very little attention to the research capacity of its member firms but considerable attention to assisting them in advertising that capacity. Similarly, the Exchange misses few opportunities to praise its specialists as a group but does miss many opportunities to improve the performance of individual specialists whom the praises do not fit. Even if the publicity were always justified by the facts, it may
be open to question whether advertising the quality of its market and member firms is wholly compatible with the Exchange's statutory role as self-regulator. From the point of view of the public interest, the best that can be said for this emphasis is that competition among markets is beneficial and this publicity is a superficial form of competition. It would seem, however, that this role might more fittingly be performed by the members themselves, through their Association of Stock Exchange Firms, for example. In its role as self-regulator the Exchange stands in the shoes of the government itself, and must have an appropriate degree of aloofness from those it is regulating. To be sure, the very concept of self-regulation involves a merging
8 See ch. XII.I (pt. 4). * For a discussion of the activities of this organization, see ch. XII.H (pt. 4).
of regulator and regulatee, but nevertheless the effectiveness of selfregulation is certain to be dulled where the same individuals who are responsible for policing an organization and elevating its practices and standards are simultaneously concerned with advertising how good it already is.
The Special Study concludes and recommends:
1. The influence and prestige of the New York Stock Exchange and the importance of its membership in all sectors of the securities business have provided it with a unique opportunity and responsibility as a self-regulatory agency. Fittingly, it has been foremost among self-regulators in the breadth of its activities, and in many areas it has provided vigorous leadership and produced excellent results. Its record, nevertheless, is an uneven one. Although it has viewed its regulatory role broadly, it has fallen considerably short of its own best levels of achievement in many specific areas critically affecting the public, both in formulating rules and standards to meet changing needs and circumstances and also in providing effective enforcement of its rules and standards. Other chapters, particularly chapters II, III, and VI, contain substantive conclusions and recommendations pertinent to the Exchange's role as self-regulator. The following are confined to the organizational and procedural aspects of this role.
2. A disproportionate influence of floor professionals in the government of the Exchange stems ultimately from the concept of "seats" and the allocation of voting power in the Exchange constitution, since only the holder of a seat ("regular" member) may vote in elections or on constitutional changes. This should be corrected by extending full or partial voting rights to allied members. In addition, the composition of the board of governors, advisory committee, nominating committee, and other governing bodies of the Exchange should be altered to give increased representation to firms without specialist affiliation doing business directly with the public.
3. In respect of floor regulation the role of the floor department of the staff should be strengthened in relation to the floor governors. In particular, its investigatory authority and responsibility should be expanded in the manner of the department of member firms in respect of off-floor regulation. Specific actions taken by a member on the authority of a floor governor should be regularly reported to the floor department.
4. The enforcement and surveillance techniques of the Exchange range from highly effective ones to quite inadequate ones. Through expansion of the present use of automation or otherwise, more significant and sensitive techniques of surveillance of members' conformity with rules and standards applicable to floor activities can and should be developed, along lines recommended in chapter VI. As to off-floor activities, the Exchange's programs for surveillance of market letters, selling activities, and members' supervision of branch offices should receive early and substantial attention, along lines recommended in chapter III.
5. The Exchange's handling of customers' complaints against member firms should be reoriented. Complaints of serious import should occasion serious investigation of facts, to determine whether disciplinary action is warranted. In cases of this kind, the Exchange should act in a self-regulatory role and not in a protective role toward its members; it has recently made moves in this direction. The Exchange's arbitration machinery, generally efficient and fair though it appears to be, should not be used as a substitute for or in derogation of the Exchange's exercise of its disciplinary responsibilities.
6. For self-regulation to be effective the Exchange should impose punishments that fit the infractions involved, particularly those involving ethical standards in dealing with the public, where marked leniency has sometimes been shown. While formality in disciplinary matters should not be sought for its own sake, there should be enough of it to provide basic fairness and also to assure adequate accountability at all levels of the selfregulatory process. As a general principle, with such general or specific exceptions as the Commission may approve, disciplinary matters resulting in the imposition of a penalty by the advisory committee or the board of governors should be publicly reported; staff-imposed sanctions should be periodically reported to the Commission.
7. The Exchange's program of encouraging widespread investment in listed securities by the general public entails a heavy responsibility to see that its own rules and standards and the practices of its members are in keeping with reasonable protection of unsophisticated investors. The Exchange's public relations efforts directed toward informing potential investors about securities markets and counseling them about good investment practices should be continued or even increased, as should its publication of significant economic and statistical data. On the other hand, public relations efforts directed toward emphasizing the merits of the Exchange's mechanisms or members are not wholly compatible with the Exchange's self-regulatory role and should be left to individual members or their unofficial organizations.
PART C. THE AMERICAN STOCK EXCHANGE AS A SELF-REGULATORY
The picture revealed at the American Stock Exchange prior to January 1962 was a complete distortion of the self-regulatory system embodied in the Exchange Act. The "general deficiency of standards” and "fundamental failure of controls" noted in the staff report required prompt and drastic remedial action for the protection of the public interest.
During 1962 the Exchange made major moves in the direction of establishing a regulatory system sufficient to meet its responsibilities under the act. A new management, committed to establishing and enforcing high standards of commercial honor and integrity, assumed control of the Exchange's government. A new constitution was put into effect embodying provisions aimed at providing responsible selfgovernment. The standing committee system was discarded and a staff system of administering the Exchange was substituted. Stricter listing and delisting standards were adopted, and existing specialist controls were strengthened. Disciplinary action was taken against members who were found to have violated Exchange rules and Federal law.