level. But this has increased the responsibilities imposed on an already inadequate staff. The essentially unsolved and gradually worsening-problem of the NASD is to find a mode of functioning effectively while not unduly sacrificing its emphasis on the "self" in selfregulation. The solution of this problem, it is believed, will require substantial rethinking as to (1) the composition and role of the fulltime staff in relation to the role of the volunteer officials, and also as to (2) the alloaction of responsibilities among volunteer member participants.

(1) With regard to the composition and role of the full-time staff, it is pertinent to refer briefly to the NYSE. The NYSE and the NASD obviously are not comparable institutions, yet in their strictly self-regulatory aspects comparison is not completely out of order. Some indication of the difference in their equipment is the Stock Exchange's staff of some 226 individuals engaged primarily in regulatory activities, headed by a full-time president, an executive vice president, 8 vice presidents and 9 directors of departments, as against the NASD staff of some 130 full-time employees headed by an executive director and his assistant, 3 secretaries of members' committees, a house counsel, and 14 district secretaries."

It is obvious from these facts alone that the NASD's conception of the role of a staff in the self-regulatory process is quite different from that of the Stock Exchange. It must also be concluded, without any criticism of individuals making up the staff, that the NASD version is inadequate except on a theory that the staff's role should be minimal, both in quantity and in responsibility, as compared to that of volunteer officials. As early as 1938, the NYSE went over to a system that deemphasized the role of member committees and increased the role of the permanent staff, headed by a full-time president as chief executive officer. The Amex has made similar changes in slower stages, the latest occurring in 1962 and still in process. The Midwest Stock Exchange has had a full-time president for some years. It seems obvious that the time has come, if it has not been long overdue, for the NASD to have an executive staff of adequate numbers and with adequate delegation of responsibilities. Only in this way can there be found any real hope for carrying the workload, in view of the inherent limitations on the time that can be devoted by members actually engaged in business. Moreover, only in this way is there any chance of assuring the continuity of program and administration that cannot be achieved through volunteer part-time officials elected in 1-year or 3-year cycles.

The creation of a larger staff with larger responsibilities should not weaken the fabric of self-regulation-even with the NASD's special emphasis on "self" but should serve to strengthen it. Obviously such a staff would work under the board of governors, not above it or apart from it. The fundamental point is that the enlarged staff, under adequate executive direction, could take over tasks that now are neglected or that excessively preoccupy the attention of the elected officials. It could also provide continuing assistance to the elected officials in dealing with the larger questions of policy and program

7 The cited figures for both the Stock Exchange and the NASD are as of the beginning of 1962. The NASD has 13 districts but district 2 has 2 district secretaries, one in San Francisco and one in Los Angeles.

to which the latter would be devoting greater attention than at present.

In the disciplinary area specifically (apart from other possibilities mentioned below) the staff might be expected to play a larger role in the processing of cases down to the point of actual decision and assessment of penalties, which would presumably always be by members in the securities business. For example, district business conduct committee determinations as to whether formal or informal disciplinary action is to be taken might be aided and expedited if staff recommendations were obtained regularly, instead of irregularly and infrequently as at present. Also, the various district processes for review of examinations and other investigative reports to consider the institution of disciplinary action should be backed up by an effective system of national office oversight, so that such district action, when inconsistent as it often is at present-with national policy, can be corrected at an early stage.

For the longer term, when the staff has grown in size and experience, consideration should be given to granting to the national executive office, on the basis of investigator reports reviewed and filed with it by the district secretaries, the authority to file formal complaints. A further objective for present or future consideration might be the employment in the districts of permanent hearing officers, in lieu of or in addition to member panels, to conduct hearings and prepare recommended decisions for the full business conduct committees. Again, the principal purposes of these possible modifications of the existing system would be to relieve volunteer committeemen and panel members of a large part of their current enforcement burden and at the same time promote conformity with national policy. Moreover, adoption of the latter practice would also tend to carry with it, as a not insignificant byproduct (which, in any event, should be pursued in its own right), a greater separation of those actively engaged in investigating and developing cases from those involved in decisionmaking and thus enhance the basic fairness of the disciplinary mechanism.

(2) With respect to the allocation of work among member participants in the government of the association, several possibilities should have early and serious consideration. First, the board of governors, as such, should be relieved of participation in individual disciplinary proceedings to the greatest extent possible. This might be accomplished by giving final authority at the national level to an entirely separate business conduct committee, or preferably to such a committee made up of a limited number from the board and a larger number of separately elected members. On a purely discretionary basis, the board itself would review only those cases involving a novel principle or an important change from previous expressions of policy. It would, of course, as in all other areas, have ultimate responsibility and authority as to questions of administration and policy in the discipli

nary area.

Secondly, the role of "substantive" committees, such as the Quotations Committee or the Investment Companies Committee, should be clarified and their liaison with the board of governors strengthened. On the one hand, delegation of responsibility to permanent or ad hoc committees is essential if complex and time-consuming questions of policy are to receive attention beyond what the board as a whole can give them. On the other hand, such committees should act as arms

of the full board and subject to its overall direction and coordination. As in the case of the business conduct committee, the chairman and/or part of the membership of each such committee should be board members, but presumably most members would be from outside the board, by election or appointment. Staff assistancce should be made available as needed by each committee, but again under the overall direction of the heads of staff so as to assure efficient integration of separate areas of interest into the total self-regulatory effort. Very likely there would be other aspects of the association's work, not now dealt with through committees, for which this general pattern of member committees with staff assistance would be a useful one.

The association's bylaws provide that nominating committees "shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the board of governors of all classes and types of firms," and there is a similar provision as to nominations for district committees but with the additional requirement that "various sections" within the district be appropriately and fairly represented. At the national level, there has been only limited success in conforming to the bylaw provision, at least partly because the geographic (i.e., district) emphasis in the selection of members of the board of governors, with most districts nominating only a single board member once every 3 years, makes it inherently difficult to provide at the same time for representation of "all classes and types of firms." A possible approach to satisfying the latter requirement might be to provide for a limited number of governors elected at large, so that the various classes and types of business could be taken into account in their nomination. At the district level, there is greater flexibility because the committees all have at least six members, and greater emphasis could be given to this criterion than appears to have been the case. Since membership on the national board normally follows service on a district committee, this emphasis at the district level might itself have some indirect effect in assuring wider representation of various classes and types of firms on the national board.

In addition to these comments on the organizational structure of the NASD, a few specific conclusions of the study should be expressed:

The association has placed comparatively heavy reliance on the examination program in its surveillance of member conduct. This reliance has yielded significant results in uncovering rule violations ascertainable through inspection of books and records but has left. much to be desired in other spheres. Association experience with other methods of surveillance, such as the advance filing procedures used for mutual fund sales literature and underwriters' compensation and the questionnaire device, employed in instances of suspected freeriding, suggests that still other possibilities for supplementing or augmenting the examination program may exist. In any event, the examination program itself seems to require a large degree of bolstering. The association's frequency goals are relatively modest, but even with limitations on followup procedures apparently caused, at least in part, by the pressure to keep on schedule, these goals have not been met, notably those for branch offices and newly admitted members.

While the conduct of disciplinary proceedings has been generally fair, certain policies and practices have tended to inhibit their effectiveness as a remedial tool. In addition to problems brought about by

the increasing delays in disposing of cases, their corrective value appears to have been noticeably impaired (at least until recently) by restrictive policies toward publication of results, while disparity in the penalties assessed against violators may raise questions of fairness in particular instances.

As the 1962 chairman of the board of governors recently told NASD

members:

Obviously, additional staff will mean additional expenses and although our 1963 budget substantially exceeds that of 1962, the industry must be prepared to finance the benefits allowed it under the Maloney Act.

Whether or not the point was in the chairman's mind, implementation of the recommendations of this report would undoubtedly tend in this direction, although presumably capable of being at least partially offset by the raising of entry standards for members (see ch. II) and by better coordination and elimination of duplication among agencies (see pt. J). In any event, there is reason to believe that the financial burden on the general membership of the association need not be materially increased if there is greater resort to some classes of members who may not now bear a fair share of the costs. For example, the fee structure provides for a special charge measured by underwriting activities but not for trading activities. Thus the 67 largest over-the-counter firms, each of which had more than $100 million in over-the-counter sales in 1961 and accounted for 54 percent of all such business in that year, paid only 16 percent of the total assessments collected by the NASD in fiscal 1961; and 27 of these firms, with 16 percent of the sales volume, each paid under $1,000 in assessments and a total of a little more than 1 percent of aggregate member assessments in 1961. In addition, the maximum assessment limits applicable to all firms may have unduly limited the association's revenues from some of the largest firms.

Finally, what must be considered the greatest lack in the NASD's performance as a self-regulatory body is its failure to address itself to various important problems of the over-the-counter markets. It has made many important advances throughout its history, but some of its major achievements have represented not a taking of initiative to grapple with a problem but rather a defensive response to a pending proposal or imminent action of the Commission. The "markup" and "free riding" policies of the association are examples of NASD accomplishments in response to impending Government action. In other areas described in this report the NASD either has not acted or has taken what must be considered as inadequate action in dealing with problems that would seem to have called for greater attention.

It is appropriate to repeat here as to the NASD's self-regulatory activities what has already been said in part A of self-regulation generally-that it has basically proven itself in practice despite the shortcomings pointed out in the report. The study's discussion of the latter is not intended to overshadow or disparge the record of accomplishment but to point toward an even stronger future role.

The Special Study concludes and recommends:

1. The NASD's job of self-regulation is a peculiarly difficult one, involving as it does a unique combination of these factors, among others: (a) Its membership is very large and not preselectedit is compelled to open its doors to all qualified persons, and the

qualifications have not been particularly selective. (b) Its membership is nationwide and virtually all embracing, so that differences in practices and concepts resulting from different kinds and sizes of firms and their different locations and varied activities must be encompassed and in some degree reconciled. (c) Its scope of responsibility is very broad-virtually as broad and varied as the securities business-but at the same time it has primary responsibility in the vast but relatively uncharted overthe-counter area. (d) Its emphasis has been on members regulating and disciplining themselves as distinguished from being regulated and disciplined by a hired staff, yet the enormity of the job to be done is difficult to reconcile with the limited demands that can be made on individuals volunteering time away from their main business. (e) Its purpose of promoting voluntary compliance with ethical standards beyond the reach of formal regulation has limited its resort to codification or other "legalistic" techniques that might ease its burden of day-to-day regulation.

2. Despite many accomplishments in its relatively brief history, the NASD has fallen short of its potential as a self-regulatory agency-not only in sometimes failing to reach adequate results in areas that it has undertaken to deal with, but in failing to deal with some areas that would seem to have called for self-regulatory attention. If the association is to fulfill its role as the principal self-regulatory agency for nonexchange members and is not to collapse under the weight of its job in relation to its organizational structure, the structure must be basically modified and strengthened. This would be true even assuming no increase in the breadth or depth of the association's activities; the need may be even greater in light of the substantive conclusions and recommendations in various chapters of this report that would enlarge its role of self-regulation.

3. A prime and urgent need is to realign functions and responsibilities, as between member officials and paid staff and also as among member officials, so that the chairman and board of governors may perform their paramount role of leadership in policy determinations. The recommendations in the following two paragraphs, which stop considerably short of what the major exchanges have done in the direction of diminished reliance or member committees and increased reliance on full-time staffs, must be regarded as minimum organizational changes needed at this time.

4. Without limiting the concept of self-regulation by members themselves, but rather in furtherance of that concept, the NASD's paid staff should be increased in size, stature, and responsibility. The office of executive director should be upgraded to that of president and he should be made a voting member of the board and some or all of its standing committees. With adequate assistance of vice presidents and department heads, he should have responsibility for continuous administration by the entire staff, both in national and district offices, subject to the overall direction and control of the board of governors. To further these objectives, consideration might be given to granting tenure for a limited period of years to a holder of the office, as in the case of