(d) Service activities of the exchange in the area of qualifications. Much of the work done by the exchange's department of member firms liaison, which handles most of the details relating to the regitstration of salesmen, is concerned not with regulation but with educational and other service efforts directed to member firms. In the last 2 years this department assisted member firms considerably in developing their training programs. As already noted,162 a pamphlet describing a model low-cost training program, together with a training handbook for use by salesmen, was sent in 1962 to all persons in charge of training for member firms. The exchange also published booklets for use by salesmen in their training, such as "The NYSE Constitution and Rules" and "Ethical Conduct" and a study guide to elementary accounting, as well as a booklet for member firm personnel departments entitled "Recruiting and Selecting Registered Representatives."

In addition the exchange sponsored a conference of member firms' training supervisors, attended by about 200 persons in New York City in May 1962, on "Selection and Training of Registered Representatives," and has set up monthly 8-hour "trainee conferences" in which prospective registrants hear lectures by the exchange staff and are shown the operation of the exchange floor. Similar conferences lasting half a day are held every month for already registered salesmen, most of whom come from outside New York City. The exchange has announced that it expects to make available to member firms an aptitude test "based on experimental testing of actual registered representatives at different points in their careers, correlated with their production," to assist in selecting salesmen. The test will be designed, according to the exchange, to "establish whether the candidate is likely to survive the training period and qualifying examination, and having qualified, whether he is likely to become a successful producer."

Finally, as is noted below,163 the exchange has had considerable impact on the examinations given salesmen by various State adminis

trators.

d. The other exchanges

The registered national securities exchanges, apart from the New York Stock Exchange, play a minor role in connection with qualifications for salesmen. Although most of them impose some restrictions on salesmen hired by member firms, they generally also provide some form of blanket exemptions for salesmen already registered with the New York Stock Exchange, and occasionally for other salesmen. Since the preponderance of firms which are members of the American and most regional stock exchanges and which employ substantial numbers of salesmen are also NYSE members, the broad exemptions leave these other exchanges with little scope for regulatory activities affecting salesmen and with few salesmen's applications to process. The Boston Stock Exchange, for example, with 67 member firms of which approximately 32 are also members of the NYSE, processes

162 Secs. 2.b (1) and 3.c(2) (b), above.

163 See sec. 3.e, below.

164 Because of the limited number of salesmen involved in some of the minor exchanges, this section concentrates on the rules and practices of the American Stock Exchange, the Midwest Stock Exchange, the Boston Stock Exchange, the Pacific Coast Stock Exchange, and the Philadelphia-Baltimore-Washington Stock Exchange.

about 2 applications a week. The Midwest Exchange, the largest of the regional exchanges in terms of dollar volume of shares traded, had 2,013 salesmen 165 registered as of March 27, 1963, and processed applications for 509 new registrations in 1962. In sum, fewer than 1,000 new salesmen are registered by all exchanges other than the NYSE in a given year, whereas the New York Stock Exchange registered approximately 8,400 in 1962 and the NASD handled some 30,000 applications.

For registered representatives not also registered with the NYSE, many of the exchanges emulate the NYSE and make some independent investigation of the backgrounds of candidates for registration. The American Stock Exchange has an outside agency do a background investigation report on every prospective registered representative who has not been approved by the NYSE, and the Midwest Exchange occasionally requires an individual report from an outside agency for candidates whose applications contain information which raises questions. On the other hand, the Boston and Pacific Coast Stock Exchanges make no efforts to go beyond a sponsoring firm's assurance that to the best of its knowledge and belief the candidate is fully qualified and (for Pacific Coast Exchange firms) that it has made a check to verify the statements made in the application form. Most of the country's exchanges other than the NYSE make wide use of examinations for checking the competency of their registered representatives, but few require minimum training periods or give approval to training courses. The American Stock Exchange's competency requirements are a slightly fuzzy carbon copy of the New York Stock Exchange's standards. As does the New York, the American Exchange requires 6 months' experience before its examination can be taken. It has used a short-answer test, taken at a time convenient to the candidate in the offices of his sponsoring member firm, but has a new examination, similar in format to the new NYSE and NASD exams, going into use on July 1, 1963. Other exchanges such as the Boston and the Pacific Coast employ their own short-answer examinations, given by member firms to their salesmen-trainees and then mailed back to the exchanges for grading. Since 1962, the Midwest Exchange has required all new non-NYSE salesmen to pass a 90-minute, multiple-choice examination patterned on the new NASD and NYSE examinations, administered in the offices of member firms and taken by the trainee whenever he is ready. The exchange provides a "study guide" which outlines "material which the exchange considers each registered representative applicant should cover prior to taking the *** examination." "As soon as economically and administratively feasible," however, probably by the end of 1963, the exchange staff hopes to introduce a new examination, of the same type as that given by the NYSE and the NASD.

Although the American Stock Exchange is the only exchange other than the NYSE to have established a minimum training period, President James E. Day, of the Midwest Stock Exchange, testified that his exchange as a general rule "likes to see" salesmen receive 6 months' training. The Philadelphia-Baltimore-Washington Stock Exchange has a totally different approach to controls over salesmen's

165 This figure does not include salesmen for Midwest member firms which are also members of the NYSE.

competence. Rather than using an examination, this exchange concentrates on its member firms' training programs, although it does not set a fixed minimum period. The exchange requests a letter outlining the training programs which its member firms intend to use, and treats these letters as applications, looking into such aspects as the text materials used and the supervision provided. The exchange's field examiner is expected to see whether the firms are conducting their training properly when he makes his periodic inspections.

All of the exchanges studied now prohibit the employment of parttime salesmen, although for some of the exchanges the prohibition is fairly recent. The Philadelphia-Baltimore-Washington Stock Exchange's rule dates from February 1, 1962, and the Midwest Stock Exchange in October 1961 abandoned a program which it had set up 9 years earlier for qualifying persons as part-time salesmen under a "limited registration" period of a maximum of 2 years. The American Stock Exchange, while prohibiting part-time salesmen, allows limited registration of mutual fund salesmen after 1 month's training (in contrast to the NYSE's recently imposed 3-month requirement) and a special examination, but allows limited registrants to continue selling for 6 months, almost the same length as the NYSE's maximum period of 7 months."

As they lack any substantial number of salesmen not subject to NYSE qualification standards, the various other exchanges pay relatively little attention to the qualifications of salesmen; insofar as they do, they follow the NYSE's lead on qualification standards. The small number of securities salesmen who are registered only on an exchange other than the NYSE does not warrant tremendous concern on the part of the public. Indeed, if the strengthening of standards referred to in paragraph 4 of the conclusions and recommendations at the end of this chapter is effected, much of the registration work now done by these exchanges may come to be regarded as supererogatory. e. The States

As is the case with controls over new broker-dealers, State controls over salesmen entering the securities industry range from strict to nonexistent. Two States and the District of Columbia have no securities laws.166 The other 48 all require separate registration of persons who desire to act as salesmen, but the registration requirements vary. At the minimum, registration consists of the submission of certain basic background facts to the securities administrator; in its most elaborate form, it involves investigations and evaluations of salesmen's character, examinations of competence, and bonding. All State statutes make the effectiveness of an agent's registration dependent on his employment by a registered broker-dealer or issuer. In some States, the salesmen's registration expires when such employment ceases; in most, his registration becomes ineffective upon severance until such time as he is hired by another broked-dealer. Most salesmen registrations must be renewed every year.

New York, which instituted its registration of salesmen in 1959, is an example of a State with minimum standards. Its Martin Act requires only that every salesman file a "salesman's statement" containing information on his business history over the preceding 5 years,

100 See pt. B.2.e, above.

any criminal record he might have, and his educational background.167 Aside from supplemental filings required to keep this information up to date, there are no other registration or qualification provisions under New York law. As in the case of broker-dealers, is there is not even authority to deny, revoke, or suspend registration.

168

Most States require a fuller description of salesmen-applicants' past associations and activities, and provide bases upon which applications may be denied. For example, Texas requires that salesmen registered under its securities acts provide considerable background data on their previous employment (specifying exact dates, nature of work done. and reasons for leaving), any prior involvements with securities violations and other crimes, and answers to such questions as whether the applicant has any unsatisfied judgments outstanding against him or whether he has ever been discharged by or had other difficulties with a former employer. The employing broker-dealer must certify to the salesman's honesty, good character, and qualifications, and to having made an investigation of the applicant. The Texas statute provides for denial of registration upon finding of previous conviction of a felony, "any misdemeanor of which fraud is an essential element," or a violation of any provision of the statute itself. Registration may also be denied if the applicant "has engaged in any inequitable practice in the sale of securities or in any fraudulent business practice.

*** 169

The licensing staff of the Texas Securities Board, with occasional help from the board's investigators, conducts whatever additional investigation is needed in addition to routine processing. The usual approach involves a check of the office's own records, information on out-of-State violations circulated by the SEC, FBI records, and the records of other States where the applicant has been registered. Texas also requires letters of recommendation, although, according to William M. King, the State's securities commissioner, they "do not produce very much."

A State's effectiveness in maintaining high standards of integrity among its salesmen-registrants depends, in large part, on the size of its investigative and enforcement staff. Ohio, whose controls over salesmen's character are perhaps more stringent than those of Texas, has had a few former "boilerroom" salesmen attempt to register because of the State's reputation for the close scrutiny it gives applicants, according to its supervisor of securities. Its division of securities has 10 of its approximately 30 employees policing the qualifications of the 575 broker-dealers and some 3,500 salesmen registered in the State. Texas' staff has 18 employees for 360 dealers and approximately 4,000 salesmen. Washington State, on the other hand, has a staff of only 4 persons besides the administrator, with an industry population of 2,400 salesmen-some 500 of whom enter and leave each year-and 235 dealers.

Although examinations were seldom given salesmen by the States until fairly recently, their use as a qualification device has become increasingly widespread in the last few years, despite doubts expressed in the past by some administrators as to their authority to give ex

aminations and as to the adequacy of their staffs to handle the additional work.170 A September 1962 count revealed that some 27 State administrators gave examinations, 11 of them acting in accordance with authority granted under the Uniform Securities Act, which gives the administrator discretion in the use of examinations.1 The increased popularity of examinations reflects both the wider acceptance of the Uniform Securities Act and the NYSE's development of an examination on general securities matters expressly for use by the States. Since the exchange offered the examination to the States in August 1961, 18 States had either used the examination or begun preparations for its use as of November 1962.

Those States which do not use examinations are likely to be in the position of Texas, whose securities commissioner stated: "We have no way of determining the qualifications of the applicant with regard to his skills in the sales and presentation of the securities." 172 On the other hand, Ohio, which requires no examination, secures a commitment from the sponsoring broker-dealer that the proposed salesman will be given adequate training.

Another requirement which must be met in a few States is the securing of surety bonds for all of a firm's salesmen. These bonds, like those for broker-dealers which are described above,173 provide a sum ranging from $500 to $2,000 for the benefit of persons suffering losses as a result of violations of the State's securities law by the individual salesman for whom the bond is written. States which require such bonds invariably provide that appropriate deposit of cash or securities will be accepted in lieu of any bond required. Oklahoma, which adopted the Uniform Act in 1959, initially had difficulty in finding insurance companies willing to write the bonds for which the act makes provision. Apparently Oklahoma's experience is not unique, and the few insurance companies writing these bonds are, because of plaintiffs' usual success in suits on the bonds, reluctant to write them except for persons who are also insured under brokers' blanket bond (fidelity) coverage.174

D. QUALIFICATIONS OF SUPERVISORS

1. THE PLACE OF SUPERVISORS IN THE SECURITIES INDUSTRY

Traditionally, the responsibility for overseeing salesmen in the conduct of their customers' accounts was entrusted to partners or other principals of the salesmen's firms. In recent years the extensive growth in the number of securities salesmen and branch offices has added another category-that of employee-supervisors. groups, both considered as "supervisors," exercise the industry's most direct controls over the methods of handling the firms' relations with the public. The following section examines the qualifications of per

These

170 Draftsmen's commentary to sec. 204 (b), clause 6, Uniform Securities Act, in Loss & Cowett, "Blue Sky Law." p. 279 (1958). 171 Uniform Securities Act, sec. 204 (b).

172 The commissioner stated in May 1962 that an amendment adding a dealer-salesman examination to the Texas statute had been drafted and would be presented to the session of the legislature which was to convene in January 1963.

173 See pt. B.3.a (5), above.

174 Brokers blanket bonds, as they affect firms' background investigations of salesmen, are discussed above in sec. 2.a (2).