munity in each other's stability and responsibility-for these and other reasons, a minimum net capital provision should be deemed an essential qualification for any broker-dealer entering the securities business. The obligations, duties, and responsibilities of the proprietor go well beyond those of a salesman, and an individual who assumes them should be expected to meet correspondingly higher qualification standards. In the past, no more has been required of an inexperienced principal of a firm applying for NASD membership than that he be free of statutory bars and that he pass the same examination given for registered representatives. The NASD is to be commended on its recent steps towards requiring special examinations for inexperienced broker-dealer principals, as is the NYSE for its recently instituted examinations for members and allied members; but however effective experience proves these examinations to be as tests of knowledge, they cannot adequately substitute for experience or evaluate good character. Although the NYSE and some other exchanges now require an apprenticeship training period for floor members and members who deal with the public, and also investigate the backgrounds of all principals of member firms, the NASD still has no rules requiring minimum experience and makes no investigation of principals of prospective members except to check for the existence of statutory disqualifications. Furthermore, foreclosed by the 1942 Commission decision, the NASD has no requirement of a minimum capital commitment to the business. If the public is to be protected from the perils of incompetent and irresponsible broker-dealers, there should be erected uniform, minimum standards of competence, experience, character, and capital which are applicable to the entire securities industry. 3. SALESMEN The qualifications of salesmen, who more than any other group represent the securities industry to the investing public, require particular attention. Out of the recent rapid growth and heavy turnover of salesmen have arisen two types of problems for the industry: the large number of inexperienced salesmen it has attempted to absorb, and the reservoir of "boiler-room floaters" who circulate from firm to firm. The growth of the securities industry has forced it to recruit inexperienced sales personnel in large numbers. About 25 percent of all registered representatives employed by NASD member firms as of the end of 1960 had less than a year's experience; for 1961 the percentage was 29, and for 1962 it was about 15 percent. Among firms specializing in mutual fund sales, inexperience is often preferred. This mass of inexperienced salesmen encompasses the broadest range of educational achievement, from those with graduate degrees to those without high school diplomas, and the greatest diversity of backgrounds, from a number with business, supervisory, selling, or professional histories to persons with such occupations as machinist, chef, or baseball player. While approximately half of the incoming salesmen have chosen to work part time, the Special Study has found no evidence which shows a causal link between part-time work as such and a peculiarly high degree of insufficient training or inexperience. The findings of the study in employing firm has not dischar The ultimate responsibility lie in the firms which employ t an interest in having salesm training. An unhappily large munity scores poorly in this siderable investigation of th employees, and carry on exter programs, sometimes includi Far more firms, however, take sibility. The more typical fir ground of a prospective sales ing to his previous employer o only step necessary to comply tification of good character. merely relies on an exchange, company, if through choice o As to training, there is a best, exemplified by the few worst, or no training at all. is found among the larger, Exchange firms, whose progra of the Exchange requirement men (other than limited regis before being permitted to sell. the-job training, which may me ably calculated to give them u tions, or may on the other han 2 See ch. III.B.6.b (1) and (2) (pt. 1) selling practices. 96-746-63-pt. 5- -4 sit around watching the old hands sell. Encouraging developments are the increased reliance of many firms, whose own resources are too limited for successful training, upon courses given by outside institutions and the training materials which the NYSE has recently published. All too frequently, however, a firm regards its training program as a stepchild, made necessary by exchange training requirements or the importance of having trainees pass an examination, and to be supplied on a minimal basis. The self-regulatory agencies for the most part take a neutral attitude toward training programs. Apart from the PhiladelphiaBaltimore-Washington Exchange, which uses a review of firm training programs rather than an examination to determine the qualifications of new salesmen, the usual approach is to encourage the use of organized training programs, and even, in the case of the NYSE, to provide advice concerning them, but to set no minimum standards for them (other than the NYSE and Amex requirements of 6 months' duration), and neither to approve nor disapprove any particular programs. The basic instrument for assuring the public that a salesman has a reasonable minimum of competence has been, and must continue to be, the examination. The examination instituted by the NASD in January 1962 represents a considerable advance over its old memory test, which had proved almost completely ineffective in accomplishing its screening purpose. The new NYSE examination also represents an improvement over its predecessor, which had imposed but a minor obstacle to the neophyte salesman's entry into the exchange community. On the whole, the self-regulatory agencies have shown increasing concern for salesmen's competence. They should amplify their efforts to encourage the spread of the best practices already employed by some of the firms, and should insure that no firm uses practices falling below the minimum necessary to protect investors. Assuring the public of the integrity of salesmen presents a problem as important as that of competence, but far more difficult. The NYSE, and to a lesser extent some of the other exchanges, conduct independent investigations of the backgrounds of prospective salesmen for member firms. For the most part their system appears well geared to eliminating salesmen with undesirable prior activities and associations, though occasional employment of salesmen with extensive "boiler-room" backgrounds still occurs. The NASD is faced with a far more formidable task in terms of numbers alone: almost 30,000 inexperienced salesmen joined NASD member firms in 1961, while new registered representatives were being trained by NYSE member firms at the rate of 5,000 a year in the spring of 1962. The NASD has considered that responsibility for the integrity of its members' salesmen is a matter for determination and certification by its members, and its members have frequently viewed that responsibility as requiring no more than a contact with the salesman's last employer. While improper certification by a member may constitute cause for disciplinary action, the delegation of responsibility to member firm principals who themselves are subject to little control in this respect means that for the salesmen of many NASD members, character controls are no more than a fiction or a facade. Yet if the goal of qualifying salesmen in the area of character and integrity is to have any chance of realization it should be brought about through an organization like the NASD, which is national in jurisdiction but local in its activities and personnel. The principal external controls over the qualifications of salesmen imposed by the Commission and the NASD operate indirectly through the unit of the broker-dealer firm which employs them. The result is an irregular pattern of standards unevenly imposed and awkward in their administration. The Commission, charged with the duty of excluding from the industry all broker-dealer firms employing salesmen subject to statutory bars, does not even have a record of the salesmen employed by the firms which it registers. Furthermore, its administrative procedures for eliminating undesirable salesmen, either before or after they have been hired, must be directed not at the objectionable salesman himself, but at the employing firm-regardless of its involvement or noninvolvement in the objectionable activities of the salesman in question, and regardless of its general record. This can place the Commission in the unfortunate dilemma of having to bring a proceeding against the employing firm in order to discipline a salesman who has been guilty of improper practices, or else ignoring the improprieties_altogether. Even though the NASD does maintain records of salesmen employed by its members, it is in a similarly awkward position when it comes to excluding or eliminating undesirable salesmen. In addition, the fact that the economic inducements to NASD membership have not drawn all broker-dealers into that association means that salesmen of some employers are not even subject to NASD controls over salesmen's qualifications. The establishment of a national system of direct licensing of securities salesmen would eliminate the present lack of uniformity in qualification standards and would allow disciplinary proceedings to be brought against individual salesmen. It would have the additional advantages of eliminating some of the present duplication and of imposing on each salesman a direct individual responsibility for his activities. Such a uniform national system must contemplate the coverage of salesmen for all elements of the securities industry through the NASD and other industry self-regulatory institutions. In any such system, a determination of qualifications of both competence and character should be made by the self-regulatory industry organizations, which can administer industrywide standards of competence and make individual determinations in the difficult matter of salesmen's integrity. After being issued a license, a salesman would be eligible for employment by any broker-dealer firm without any need for reregistration. His competence would be determined through an appropriate examination, and his good character through investigation, and in doubtful cases, through personal interviews by local committees or boards. The individual firm would be permitted to employ only licensed personnel but would of course be free to apply its own additional criteria or those of any exchange of which it was a member. Any licensing program should recognize, to an extent not found at present, the different competence needs of salesmen of different kinds of securities. Mutual fund industry representatives assert that much of the knowledge of the operations of the securities markets which is essential for the registered representative who sells listed and most over-the-counter securities is unnecessary for the mutual fund salesman, who may, on the other hand, need greater training in areas relatively unimportant to the general securities salesman. Some of the exchanges appear essentially to agree, and have established various programs leading to a status of limited registration mainly for those who sell mutual funds. Other selling specialties, such as the sale of real estate syndication interests, present the same situation. It should be possible to establish a licensing system permitting a person to sell a particular type of security upon demonstration of his competence to sell it, but at the same time limiting his activities to that type of security. Under such a system a salesman trained, for example, in the mutual fund field could take an examination appropriate to that field, but would not be free to sell securities of any other kind. 4. SUPERVISORS The growth of the securities industry and the number of securities salesmen and branch offices has compounded the problems involved in the supervision of salesmen's activities and has magnified the importance of the person engaged in such supervision, whether he be a principal or employee of his firm. Industry members have increasingly recognized the significance of supervisors and the importance of their responsibilities, and the NYSE notes that "the branch office manager undoubtedly holds one of the most important jobs in the securities business." Nevertheless, many instances have come to the attention of the study of persons acting as supervisors or managers who were unqualified for their responsibilities. There is almost universal industry emphasis on supervisors' production but much less emphasis upon such factors as their experience or their knowledge of the securities business, the applicable laws and rules, and supervisory or other office procedures. At the heart of the problem of supervisors' qualifications lies the industry's reluctance to recognize that persons in this capacity serve functions distinct and different from the roles played by those whom they supervise. Awareness of this fact has, however, recently been expressed by the principal self-regulatory organizations. Since the study began its work, both the NASD and the NYSE have instituted or taken steps to institute separate examinations for those who, because of their proprietary interests in their firms, will have supervisory responsibilities. While these examination programs do not at present cover employee-supervisors, both the NYSE and the NASD have indicated that they are contemplating such a step. The NYSE has also announced that it is applying substantially higher experience requirements than it heretofore used in granting approval of branch managers. Separate qualification standards and separate licensing of supervisors on an industrywide basis is of first importance in raising industry standards generally. Furthermore, in order that the Commission may determine the extent of compliance with such standards, it should receive, as part of a broker-dealer's registration, information concerning the names and histories of all persons having supervisory responsibilities, and not just proprietors as at present. There should also be clear identification of the individual in the home office of each firm who is responsible for regulatory and self-regulatory |