phases of the investment banking business and the over-the-counter securities business on a preferential basis, to distribute new issues which have been underwritten by NASD members, and to join in distributing shares of investment companies which are sponsored by NASD members. While association membership carries with it this privilege of receiving preferential prices from other members, it is also the economic power that makes meaningful NASD disciplinary sanctions involving, in some cases, fines ranging up to several hundred thousands of dollars or suspension or expulsion. The association has a rule approved by the Congress—which, incidentally, gives us the antitrust exemption that we presently enjoy— which states that members cannot deal with nonmembers except at the same prices at which they deal with the public, thus making NASD membership mandatory for practically all firms wishing to engage in the general securities business.

THE MEANING OF SELF REGULATION

The term "self-regulation," like most others, means different things to different individuals. Those who are regulated think of it in one way, perhaps as generally constructive, but often as inhibiting or petty. Those doing the regulating like to think, and by-and-large have a right to think, that their efforts advance the public interest as well as that of their members, the built-in conflict notwithstanding. The public probably has a still different reaction to the meaning of the term. They are led to believe from the word "self" that the regulation is by industry alone; and before the age of Roosevelt, they would have been right, as the stock exchanges did then perform truly self-regulatory functions. But for reasons that have become history, Congress, in 1934, passed the Securities Exchange Act and in 1938, the Maloney amendment, designed to provide for the regulation of securities exchanges and the over-the-counter markets operating in interstate commerce, in foreign commerce, and through the mails, to prevent inequitable and unfair practice on such exchanges and markets, and for other

purposes.

This law meant that self-regulation would continue but that henceforth, the government would have certain powers over the exchanges as well as over broker-dealers directly. The direct or residual powers of the commission over the exchanges differs somewhat from those over our association; but, stated generally, both types of industry regulation are subject to oversight and supervision by the commission.

Last year, the Securities Exchange Commission celebrated its 30th anniversary, and the relationship between the commission and the self-regulatory organizations has been constantly evolving over these three decades-close at times, distant at other times, depending on people, policies, and politics. But the changes which are constantly occurring in our society and the segment of it called "the market place" demand a close working relationship and joint efforts of the industry and the commission to insure proper performance by broker-dealers. It was this same thinking which motivated Congress in passing the Maloney Act of 1938. Congress decided to permit businessmen, in the first instance, to regulate themselves and, importantly, at their own cost with the necessary commission oversight and review to insure that the job being done was consistent with the public interest.

Government-Industry Conferences

One of the significant contributions of cooperative self-regulation is that it makes available a body of men who otherwise would not be available as a group to work on industry problems. This group also constitutes a ready pool of experts and opinion-makers available for consultation with the government. Should the organizations of which these individuals are the officers fail to take the necessary initiative, then the commission is obligated to urge them into activity or to proceed independently of them.

In a section of his treatise on securities regulation, Professor Louis Loss of the Harvard Law School asks the reasonable question of whether the Maloney Act has improved the ethical standards of the over-the-counter industry or has served only to organize the "opposition," as he calls it. He concludes that there is evidence that it has done some of both. But it should be remembered that organ

izing over-the-counter securities dealers into an association permits the government to deal with a representative body, to learn what their views are, and to persuade or to dissuade it, depending on the positions taken. Hence the organization of various groups within the securities industry is probably as helpful to the government in its dealings with the industry and Congress as it is to the industry in its day to day dealings with the government.

In the many years of the commission there have been SEC proposals from time to time which, after discussion with the business and more reflection by the commission, are tabled as impractical or not timely. But every proposal of the government should not be rejected, nor has it been, merely because the industry grumbles about ever increasing regulation. Over the years the checks and balances in the relationship between the government and business have contributed to effective industry regulation which in turn has produced, by and large, a healthy market place for securities.

Another contribution of cooperative self regulation is one relied on fairly extensively by the Securities and Exchange Commission in its statement to Congress explaining the contemplated disposition of many recommendations in the Special Study Report. The commission accepted the report's conclusion that there was strong justification for continued reliance on the self-regulatory bodies within the industry and left for resolution by these groups a considerable number of recommendations which do not lend themselves to rule making or statutory changes. For example, one of the recommendations of the study report and one of the aims of the SEC is to improve the caliber of individuals in the business. While reasonable people could argue about the proper description of a business or a profession whose principle thrust is merchandising, no one could quarrel that, generally speaking, better-trained people should do a better job. So it was left that the industry, by additional examination or training requirements, should endeavor to make certain that people are better prepared to deal with the public in this merchandising function.

History seems to indicate that perhaps only once a decade, or even once every two decades, is enough impetus generated to make major changes in the securities laws. Indeed, the changes in disclosure requirements which were signed into law last August have been the subject of proposed legislation going back to a commission

whose securities are sold over the counter. The NASD, along with other industry groups, strongly supported this legislation. I might insert parenthetically that there were some of our members who felt that we should not support this legislation. But, notwithstanding this, it seemed to me completely untenable that an association like ours, with its purposes and goals, could be so oblivious to public interest as not to support any effort which would make more investor information available.

As I say, we strongly supported this legislation to require those over-the-counter companies with 750 stock holders and 1 million dollars in assets to make similar financial disclosures to the public as are required of listed companies. However, our support was not based on the rather idealistic view that the availability of more complete information would naturally reduce the incidence of unethical practices in the market place. The fact that one knows the complete genealogy, track record, and strong and weak points of a particular race horse does not prevent an unethical individual from fixing the race. Of course it is almost axiomatic to say that the more one knows about a situation the better able he is to judge the reliability of any additional information supplied by another source. And this is just the point. The disclosure requirements of the 1964 Securities Acts Amendments are designed to enable investors to evaluate a company's stock and to make a more informed judgment. However, this legislation will not deter those bent on operating their businesses in an unethical manner.

Rules of Practice

In this area, the codification of ethics into the Association's rules of fair practice and supplying adequate enforcement powers are more effective deterrents to immoral business activities. The passage of the 1964 Act Amendments stems principally from the fact that Congress spent approximately a million dollars to have a study made of the securities market. The difficulty in obtaining new legislation means that other ways of making changes become desirable as new standards of ethical conduct evolve, and the industry regulatory groups provide a vehicle to meet some of these needs.

Another contribution by industry to cooperative self-regulation is the relatively uncomplicated and, therefore, expeditious disciplinary procedures of the industry organizations. Except for the SEC's injunctive powers, there is no counterpart to this within the National Association of Securities Dealers procedures. The filing of charges by industry groups, the hearing on these charges by businessmen after the receipt of answers, and the rendering of decisions by businessmen are all done in a shorter period of time and with fewer procedural complications than cases processed by the government. However, perhaps the most significant result from industry regulation is the regard it instills in most of its members for ethical standards. Many of these standards are codified, as I said, in rules.

But the concept of adherence to just and equitable principles of trade goes beyond stated rules to a self-discipline dictated by the concept. As a result, members will generally examine any new firm practice or policy in the light of existing laws and rules but, in addition to this self-protection, will often ask itself: "Is it the ethical thing to do? What will other people in the industry think? Is it within the broad outlines of ethical conduct?" It is in this realm beyond the law that industry regulation is most effective and yet the hardest to measure. But those who observe closely the therapeutic effect of association policies such as the mark-up policy, the suitability rule, the interpretation on free-riding and withholding, or the Securities and Exchange Commission's statement of policy relating to investment company literature, which is administered by our association, can say with some impartiality that the brokerdealers operating in this climate of self-discipline are conscious of the daily requirement of standards above mere compliance with law.

The question has been raised as to why the association resisted strongly the recommendation of the Special Study which would have imposed an affirmative obligation to determine suitability of a recommendation to a customer. The NASD has a Section 2 now which involves suitability, and it reads that

"in recommending to a customer the purchase, sale, or exchange of any security, a member shall have reasonable grounds for believing that a recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and to his financial situations and needs."