removal from the business; and the second their activities and responsibilities in the course of that business and the related controls. Chapter IV deals with primary and secondary distributions of securities to the public, with particular emphasis on new issues and briefer review of other specific areas such as registration of seasoned issues, unregistered distributions, intrastate offerings, and real estate securities.

Chapters V, VI, VII, and VIII extensively explore the functions, structures and problems of markets in which securities are traded after their distribution. Chapter V is a general introduction to this group of chapters. Chapter VI covers the exchange markets, with special attention to the most important of these, the New York Stock Exchange. The chapter reviews the functions and activities of various specialized categories of members, particularly specialists, odd-lot brokers and dealers, and floor traders, and also deals with the subjects of short selling and commission rate structures. Chapter VII discusses the over-the-counter markets, their vast and heterogeneous character, their wholesale and retail components, the quotations systems, and present controls over all of them. Chapter VIII then examines various interrelationships among trading markets, including patterns of distribution of securities among exchange and overthe-counter markets, institutional participation in various markets, over-the-counter trading in listed securities, and the regional exchanges as "dual" and primary markets.

Chapter IX reviews the legal requirements and standards in respect of reporting, proxy solicitation and "insider" trading which are applicable to issuers of securities in public hands, contrasting those relating to securities listed on exchanges with those relating to over-thecounter securities and emphasizing the need for legislation in the latter area. It also considers problems in the dissemination of corporate publicity by issuers of both kinds of securities. Chapter X deals with the purposes, effects, and enforcement of securities credit and margin regulations and some inconsistencies and anomalies of the present regulatory pattern. Chapter XI is concerned with certain aspects of open-end investment companies ("mutual funds") which are covered neither by the recent industry study conducted by the Wharton School of Finance and Commerce nor by continuing inquiries of the Commission's Division of Corporate Regulation. It contains the results of an investor survey and also specifically treats with selling practices, contractual plans, and certain problems in connection with fund portfolio transactions. Chapter XII deals with the self-regulatory pattern which is largely unique to the securities industry. It evaluates the regulatory functioning of the New York Stock Exchange, the American Stock Exchange, the principal regional exchanges, the National Association of Securities Dealers, Inc. and certain quasiregulatory agencies, notes the absence of self-regulatory organizations in certain areas, and assesses the role of the Commission in relation to all of them.

The market break of May 1962 was thought to merit separate examination as a major market phenomenon, and also afforded an opportunity to study certain aspects of the securities markets, already studied under more normal conditions, in the circumstances of a precipitous decline. The results of this study are set forth in chapter XIII, although other chapters dealing with particular topics also reflect the findings of this special inquiry. Chapter XIV, still tenta

tive in nature, is reserved for a few general topics that may fit neither within the scope of any of the previous chapters nor within the limits of a further transmittal letter.

In general, each of these chapters provides an intensive evaluation of the subjects indicated, based upon detailed questionnaires, public and private hearings, interviews with members of the industry, and review of existing data of many kinds. In addition to the basic analyses of this material, specific conclusions and recommendations are set forth in each chapter except I and V. When all chapters are completed, it is also planned to prepare a summary volume bringing together all of these conclusions and recommendations.

Ambitious though the scope of the investigation undertaken by the Special Study may have been, it still could not embrace the full potential of the enabling statute and its legislative history. In selecting those areas which it was felt could be thoroughly and responsibly studied within the limits of available time and manpower, it was necessary to exclude others of unquestionable importance. Among the subjects omitted from the study and report there are undoubtedly some that merit separate study by the Commission in the future.

In presenting a report of the size and scope of the present one, it is perhaps appropriate to add some general comments which reflect impressions resulting form the entire work of the Special Study but which may not find a place in the report itself. Other general comments may be added in transmitting the balance of the report.

The enormous growth of the securities markets experienced since the original enactment of the Federal securities laws, reflecting both the vigor of the industry's own activities and the general expansion of the country's economy and population in the intervening years, has been accompanied by many qualitative changes in methods, practices, controls, and standards. A basic objective of the Special Study was an evaluation, in the light of both quantitative and qualitative changes, of the theories and mechanics of direct governmental regulation and industry self-regulation originally envisaged by those laws. The study and report indicate that under the stresses of its expanded role the framework of regulation needs considerable adjusting and strengthening, but its basic design appears to have stood the test of time and to have worked effectively in most areas.

Since the Federal securities laws have been in force for a full generation, it is hardly surprising that the Special Study has not disclosed the prevalence of gross abuses such as were characteristic of the era which preceded their enactment. Nevertheless, as will be evident from the entire report, many serious problems do exist and important improvements are needed. It is inevitable that in reflecting the results of any investigation, a final report will give greatest attention to the problems uncovered and the areas in which the need for improvement is most pressing. Nevertheless, the emphasis in this report on present shortcomings should neither obscure nor detract from the many aspects of the securities business and its regulation and self-regulation which afford reason for pride and satisfaction. The strength of the American economy and its free-enterprise system both reflect and are dependent upon an investment banking system and market institutions that

are basically strong and sound, but this makes it all the more, rather than less, necessary to expose and correct the weaknesses and abuses that still exist. Many of the substantive recommendations in the report can, indeed, be regarded as attempts to raise the entire securities industry to the best standards which the industry itself proclaims and to the highest levels of attainment which some of its participants have in some sectors achieved.

Because of the number and variety of subjects covered it was, of course, necessary to devise sampling procedures of different kinds for different subjects. In each case the attempt was made to use as broad and representative a sample as possible while still holding down the total burden on members of the industry and distributing the burden among them as equitably as was practical. Nevertheless, it has undoubtedly happened that the names of some firms appear in the report, in connection with particular practices, incidents or viewpoints, more frequently than those of comparable firms. It should be recognized that the naming of any particular firm in this way, whether favorably or unfavorably, often means, not that the matter under discussion is unique to it, but that the processes of study and investigation happened to bring that firm's name to the fore, rather than another's, in the particular context.

Given the scope and complexity of the studies undertaken and the limited resources of time and manpower available, it would be presumptuous to suggest that the Special Study could propose complete or "final" answers to all the questions that call for answers. No such effort is made in the report. For some of the problems considered, fairly immediate and specific measures are recommended; for others, broader long-range programs are outlined; and for some of the most knotty there is merely an indication of possible approaches-sometimes alternative or multiple ones-that may point the way to future solutions.

Prompt adoption of the specific measures and rapid implementation of the longer range programs hopefully will be the earliest fruits of the study, but perhaps an equal contribution will have been made in the areas where solutions are least clear, for surely one goal of any study of this kind is to create a ferment of thought and discussion. Where the report has not itself produced answers, it may at least have posed the important issues for which the securities industry and regulatory authorities must seek solutions.

A corollary of prime importance is that broad-gaged studies of the kind undertaken by the Special Study cannot be once-in-a-generation affairs but should be a major part of the Commission's regular and continuous activities. To be able to see the forest instead of just the trees, to be able to evaluate current trends and future potentials as well as past results, the Commission should have a permanent staff group, small but expertly manned, that is free from routine administration and assigned the responsibility of observing and measuring important trends, identifying and evaluating new developments, and from time to time making special studies of particular subjects. By and large the functions of continuous study, long-range planning and broad policymaking have been too much subordinated to day-to-day administration, except for the very earliest years of the Commission's exist

ence.

If the experience of the Special Study is any guide, not the least benefit of more continuous activities of this kind would be their in

vigorating effect on the self-regulatory institutions and their admonitory effect on members of the industry generally. The period since the study began has witnessed a quite remarkable display of fence mending, roof patching and even foundation strengthening. Some of the specific items may have been merely coincidental, some may merely have represented acceleration of developments that would otherwise have occurred, but unquestionably many of them were in some degroo a valuable byproduct of the study itself.

The original Federal securities laws of 1933 and 1934 were a remarkable legislative achievement, and have well served the needs for which they were designed for over a quarter century. Nevertheless the review of past experience and current conditions which has been completed by the Special Study makes evident the urgent need for some amendments which can make them as effective now and in the foreseeable future as they have been in the past. The tremendous growth of the financial community and of public involvement in the securities markets, the increased importance of the over-the-counter markets, and the immense improvements in means of communication and data-processing, account for the major legislative recommendations of the report. In the chapters presently transmitted, the principal such recommendations are for stronger controls over entry into the securities business and better disclosure protections for investors in over-the-counter securities.

Another category of desirable amendments would be those designed, not to provide new protections, but to make existing ones more flexible and adaptable. The problems of today are more complex and subtle than the gross abuses disclosed in the hearings that followed the traumatic experience of the 1929 market crash, and more flexible instruments are needed to deal with them. In many areas the Commission today must either take drastic action or take none at all. It may revoke a broker-dealer's registration for a violation of law, but it may not proceed administratively against an individual perpetrator of the violation. It may impose no sanction to enforce the obligations of an exchange other than suspension or withdrawal of its registration. It may, with the approval of the President, suspend trading on an exchange for up to 90 days but it has no lesser powers to deal with periods of general market crisis. Various intermediate powers are needed to enable the Commission to avoid the hard choice between no action and excessive action.

An impression repeatedly and forcefully brought home in the course of the study is that aggregated or averaged data, although of unquestionable importance and usefulness for many purposes, may be useless or misleading in arriving at conclusions on some types of questions. To give a few of many possible examples: the average percentage of institutional transactions for all securities may obscure the fact or miss the point that institutional transactions in particular securities can be many times the average for all securities; the total quantity of short selling or floor trading over a period of time in all securities may mask the significance of crucial transactions at particular times in particular securities; averaged or aggregated figures for specialists as a class may conceal great disparities in the performance of individual specialists.

It is quite clear from the study that the data now compiled and used routinely for many purposes of regulatory surveillance and public information are inadequate or misleading in showing only totals or

averages where particulars or ranges are needed. The aim of many separate studies in the course of the Special Study was precisely to go behind available aggregated data and provide crucial "disaggregated" data. It may be open to dispute whether the Special Study has always succeeded in carrying out this aim, but the lesson for the future seems clear: Both the self-regulatory agencies and the Commission need to give consideration to the many places where presently provided data, in aggregated or averaged form, appear inadequate for regulatory needs or public information.

One final general comment is in order at this time. If the securities industry is to operate on the level of ethical standards at which its regulatory and self-regulatory organizations aim, it is important that the public's understanding of the securities markets and the securities business not be clouded by many illusions and misconceptions which now surround them. It is an excellent thing to aspire toward high standards of professionalism, undivided loyalty to customers, expert and unbiased investment advice, more responsibility of specialists, greater diligence and responsibility of underwriters, more liquidity and stability of markets, stronger regulatory and self-regulatory protections, and so forth the list is legion-but it is an entirely different thing to encourage the investing public to believe that the aspiration is now the fact. Mere lipservice or exaggeration in these matters may do more harm than good, because the investing public may be led to expect too much in the way of certainty and protection, may fail to appreciate the risks inherent in investment, and may not exercise the vigilance and care required of the investor even under a statutory philosophy that emphasizes caveat vendor instead of caveat emptor. Perhaps the most pressing need of all, without any diminution of efforts to improve the securities markets in the respects mentioned and in other respects, is to foster accurate and realistic public understanding. This has been a major function, and hopefully will be a major result, of the Special Study and its report.

The report is the product of the staff of the Special Study of Securities Markets, which has varied in number from time to time but has averaged approximately 65 persons, of whom about half were attorneys, economists, analysts, and investigators, and the balance were clerks, secretaries, and stenographers. It is impossible adequately to express appreciation for the diligent efforts and sacrifices on the part of everyone who participated in the enormous task with which the Special Study was faced.

The study operated with a flexible organization under which all personnel were available for whatever duties needed to be performed, and no person has been exclusively responsible for any part or parts of the report. The work of the study was divided into more than 30 separate projects, each of which had a project head and 1 or more contributors. Some persons headed one or more projects and contributed to others, while other persons made substantial contributions to a number of projects. It would be invidious to single out individuals for special mention, except for a few who, if there had been a more formal organizational structure, would undoubtedly have had supervisory titles reflecting their actual roles: Robert L. Knauss, Robert N. Leavell, Martin Moskowitz, Frederick Moss, Norman S. Poser, Eugene H. Rotberg, Arthur J. Rothkopf, and David Silver.