are themselves revealing. On the other hand, ues in respect of market letters and selling -mbers' supervision in these areas have been has it begun to pay close attention to conduct

echnique, stock watching, is a pioneering effort izing automation to detect market irregulariprocedure should become increasingly sophissautomation program advances. Nevertheless, een as resourceful in adapting automation to ber conduct on the floor. As presently constiis an arduous and time-consuming task with to numerous inaccuracies because of the voled. Increased use of automation might result d permit the staff to devote less time to clerical lysis of the subtle and complex problems in

gulation of specialists, the Exchange's efforts systematic within the limits of its own coninadequate in total effect. They have tended neralized, and have failed to focus adequately ch as the applicability of the specialist's concific instances, and disparate performances fact that responsible officials of the Exchange -thirds of its specialists were accepting "notears in violation of law is an indication of the The facts that inaccuracies in floor trading ected, that late filings have been tolerated, and

as not exercised its authority under sec. 11 of the Exchange

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.3

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 additionaĺ 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.

In 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).

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 INSTITUTION

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.