of this affirmative obligation. On the basis of my own 25 years in the business, I think, first of all, that it is impossible to define suitability. The most suitable investment is that which never goes down in price, which pays three times as much as the local savings and loan company, and which trebles in price every 18 months; and any security that declines an eighth of a point is obviously and per se unsuitable. The association (and it was my lot to plead this) strongly resisted it; and the report, which some of you remember was some 6 thousand pages long, included specific instances and schedules of what was deemed as unsuitable recommendation for a customer. And further, it recommended that recommendations to a customer should be made only on the basis of the facts that the salesman knew or should have known about a customer. In this context, as I say, almost any security that went down in price instead of up after a sale could be described as unsuitable. While we were sympathetic with the idea that a customer sale should be made on some reasonable basis, it was believed that to impose such an obligation on the investment banking fraternity would interject the possibility of hindsight judgment in determining any reasonable basis for a purchase or sale. It was felt that the NASD's present suitability rule was broad enough in language to allow the judgment of alleged infractions in this area to be based solely on the facts involved in each individual instance. THE LIMITATIONS OF SELF REGULATION We have considered the advantages of industry self-regulation and the contribution it makes. We should also consider its limitations and what it cannot do. There are those who would argue that the first interest of a business, which is to operate profitably, stands somehow in direct opposition to a continuous concern with the public interest. Such an argument would attempt to equate a successful, profitable business with overreaching or unfair dealing with the public. Someone once said that "bad morals or unethical conduct are bad economics," and I believe that industry leadership has recognized this and that each regulatory advance should be viewed in the light of this truism. The industry has been operating under the securities laws for 30 years, with ever-increasing regulation by its own representative organizations; yet it has prospered and remained sound. This prosperity is due in large measure to the fact that the securities business has developed one of the more sophisticated and extensive codes of business ethics. It is not the rule or responsibility of the security dealer to seek to abolish risk, for risk attends every investment in some degree, even the purchase of property. Rather, it is the responsibility of the security dealer to minimize or evaluate risk and to insure that his customer clearly appreciates all of the possible risks inherent in a particular investment. In addition, responsibility demands that the broker-dealer attempt to apply the appropriate risk in an investment to the appropriate customer financially able to assume that particular risk. In this regard, the public is not at a disadvantage in a purely negotiated situation such as exists in the over-the-counter market because the long-term interests of the customer and dealer parallel each other. One of the ever-present problems between government and business in the area of regulation derives from differing conclusions by each, based upon examination of the various factors in the market place. Apparent abuses which the commission finds may, in its opinion, dictate the need for a new rule about a matter which is, at the same time, of great concern to the industry; but agreement as to the proposed solution is often difficult. The suggestion of a new rule to cure one evil will raise problems of application to broker-dealers in comparable situations where there is no question of the honesty or ethics of the firms. In the application of any rule, the viewpoints of administrators in the government or in the regulatory organization are of crucial importance, as they may in large measure determine the future course of the application of a rule; and the application can run far ahead of the original intent. Differences are bound to exist between the industry and any self-regulating body which oversees it. However, such differences are neither long lived nor serious, provided that each respects the obligations and authority of the other. The results of such respect or objectivity should not be nonperformance or an impasse, which should mean that any rules or programs be adopted to meet real needs and not be merely for regulatory convenience. Unfortunately, the general scheme of cooperative regulation is only imperfectly understood by the public which naturally seeks counsel or correc one of the most interesting comments I saw in the study report is contained in the transmittal letter of April 3, of which I quote: "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 market 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 as 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 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." CONCLUSIONS It may be that the public understands more than we are willing to admit. This is especially true when it is considered that a small percentage of the population is in the market as such. But in responding to the ever increasing demand for greater protection of the public, the government and industry should not adopt rules which are so onerous that the industry is weakened, that compliance is possible only for the few who can afford teams of lawyers and accountants, or where the total effect of such rules is to reduce dramatically the number of those in the business who desire to operate honestly and at a legitimate profit. To foster realistic public understanding, perhaps the better part of wisdom would be to educate the public that there are no easy solutions to all problems in any area of activity, that no system of rules can be designed to provide for every contingency or crisis, that neither the government nor the industry can police the securities business to eliminate every abuse, and that neither the government nor industry can protect absolutely against fraud and certainly cannot protect against poor judgment, poor advice, or individual avarice. Particularly in the area of investment advice, many philosophical critics of the securities business would deem it proper for analysts and broker-dealers, in commenting on the general economy and its future prospects, always to take a pessimistic view lest they encourage customers to speculate by creating a falsely supported impression of market activity. This belief completely disregards the principle that lasting success in any business venture depends on the successs and satisfaction of one's customers. At the same time, the public should be assured that, consistent with the objectives of a strong economy, government and industry will work in good faith toward the goals of better protection for all investors. That the economy remain strong and flexible is not the private concern of the exchanges, of the NASD, of the securities industry, of investors in securities, or even of the Securities and Exchange Commission. But rather, it is the concern of all peoples. |