fications for salesmen, or, on the other hand, those supervisors who are principals of broker-dealer firms are often included within the requirements to which the partners, officers, and other principals of broker-dealer firms are subject. Recently, regulatory attention has begun to focus upon the qualifications of supervisors as such.

a. Federal controls

Federal law, requiring registration only of broker-dealers and investment advisers, has no separate standards for supervisors. However, supervisors are included within the general statutory bars relating to past violations of securities laws, since the provisions authorizing the denial or revocation of broker-dealers' registration expressly provide for the imposition of those sanctions where the stated statutory bars apply to "any partner, officer, director, or branch manager," or to any individual "controlled by" a broker-dealer. 179

At one time, the Commission kept records on the branch offices of all registered broker-dealers and their managers, derived from brokerdealer application forms and supplementary forms. At the present time, however, the Commission keeps no such records. Under the Commission's rule 17a-3(12), registered broker-dealers are required to maintain in their files in up-to-date form, the applications for employment for a wide range of persons connected with the firms, containing background information on such matters as previous employment, education, and criminal record. These "associated persons" about whom information is required include partners, officers, and managers, as well as employees handling funds or securities or soliciting transactions or accounts. Thus, this information is available in the firms, though not on file with the Commission, for almost all persons engaged in supervising salesmen. 180

b. The NASD

The term "registered representative" as defined in the NASD bylaws 181 takes in almost every member of a broker-dealer firm who has any connection with transactions in securities. Thus, branch managers and other supervisors are covered by the NASD's regulatory pattern, but until recently they were not dealt with separately. In May 1962, the board of governors authorized the development, with the aid of the Psychological Corp. of a new examination to be given to partners, officers, and sole proprietors entering the securities business for the first time, in place of the examination given registered representatives with less than a year's experience in the industry.182 The examination will be required of all new proprietors, regardless of the particular duties within their firms which they will assume. It will last approximately 3 hours, and will presumably come into use during 1963. Representatives of the association have stated that the new examination will be considerably more difficult than the present registered representative examination. The association's staff also hopes to give another version of the new examination to employees who, in the words of Avery Rockefeller, Jr., the association's chairman in 1962, "are promoted to areas of supervision such as branch office managers, etc."

179 Exchange Act, sec. 15. 180 See also pt. C.3.a, above. 181 Art. XV. sec. 1.

182 See pt. B.2.b., above.

These projected competency requirements represent the NASD's efforts to establish qualification standards peculiarly applicable to supervisors. Although the association keeps current records of the location of branch offices, no complete records are kept of the names of qualifications of the persons in charge of particular offices, and no attempt is made to pass on the integrity of supervisors apart from the minimal controls now applicable to registered representatives generally.

c. The New York Stock Exchange

The New York Stock Exchange, whose members include most of the largest firms in the securities business, with the greatest problems of supervision has for some years required that its consent be obtained before a member firm opens a branch office.183 The rule also states that "each such office must be in charge of a qualified person acceptable to the exchange." Approval of branch managers is required whenever a new man takes over the supervision of an office, as well as upon the initial establishment of the office.

It has only been within the past year, however, that the exchange has given its consent to the formation of branch offices, and to the men who supervise them, in anything other than a perfunctory manner. While no requests for exchange approval of branch offices or managers have been refused, letters granting approval have for the first time contained exhortations, admonitions, and even conditions, along with consent to the opening of the branch office and to the man who would run it. Furthermore, the exchange revealed in a statement submitted on May 25, 1962, at the Special Study's public hearings, that earlier in the year it had established certain standards for the guidance of the NYŠE staff in passing on prospective branch managers. The president of the exchange stated that a person would be approved as a branch manager only if he (a) had been a registered representative with a member firm for at least 3 years, up to a recent date; (b) had been with a member organization in an "operational, supervisory or administrative capacity" for at least 5 years, up to a recent date; (c) had been a principal of a nonmember broker-dealer doing a general securities business for at least 5 years; or (d) had been a general office partner or voting stockholder of a member organization for at least 1 year, up to a recent date. Prior to the adoption of these standards, the exchange had only required that the applicant be qualified as a registered representative.

A factor in the exchange's new program for approving branch offices. was the publicity given in January 1962 to the testimony at a Commission hearing concerning the background of Russell Siebach, a former branch manager for Sutro Bros. & Co.184 Siebach had been appointed manager of the Huntington, Long Island, branch office of Sutro Bros. & Co. in September 1960, and exchange approval of the appointment had become effective on September 30. Siebach's experience was limited to the 6-month NYSE compulsory training period and 5 months as a fully registered representative. Before entering the securities business, he had been a used-car salesman, pro

183 NYSE rule 342.

184 The Commission instituted proceedings against Sutro Bros. & Co. involving alleged riolations of regulation T of the Federal Reserve, in the reference of customers to known factoring firms, and named Siebach, who had been discharged by Sutro Bros., as a possible cause. The decision on this matter has not yet been rendered.

prietor of a cocktail lounge, and most recently, the manager of a Vic Tanny health studio. The standards of experience for branch managers which the NYSE adopted shortly thereafter contrast sharply with those which were applied at that time.

The exchange places much emphasis on educational, hortatory, and directory passages which have become "boilerplate" in the letters of approval sent to the applicant firms. It "suggests" that a newly appointed manager "review exchange, NASD, and SEC rules in the light of his new responsibilities." A firm opening a one-man branch office to be operated by a man with only 6 months' experience as a fully registered representative was told the NYSE's approval was "with the proviso that he visit your main office at frequent intervals for personal contact with the partner supervising his accounts." A firm merging with a nonmember firm with several branch offices of its own was warned that "as your firm will be doubling the number of offices falling under the supervisory responsibility of your management, you will doubtless find problems of supervision and control not previously experienced." The exchange's letter then went on to offer suggestions and assistance for the prevention of supervisory difficulties.

As of January 18, 1963, those new members and new allied members who plan to confine their activities to their offices are required to take the "Office Member and Allied Member" examination, which has a section on proprietors' responsibilities and another on supervision. A similar examination will be given to all new managers and comanagers of branch offices and will have to be passed before they may assume their duties. The exchange staff has indicated that any examination of other superivsors, such as regional managers or assistant managers, will have to await the development of a recordkeeping "method for keeping track of them."

d. The other exchanges

The American and the Midwest Exchanges are the only ones apart from the NYSE which impose special requirements upon persons wishing to become supervisors. The American Exchange, whose rules are, in this regard, substantially the same as those of the NYSE, has indicated that it is thinking about following the NYSE's lead in giving examinations to members and allied members. The Midwest Exchange requires that branch managers are to be registered "on application in such form as the exchange may require." The form actually required by the exchange is identical to that used by salesmen-applicants. The applications, many of which are for managers of sales outlets in shopping centers and other locations close to home offices, are evaluated through the use of flexible and "subjective" standards. Under this approach, the MSE staff's knowledge of the operations of the local firms and their offices and personnel is utilized in determining whether a particular individual is qualified to run a particular branch office.

The MSE imposes no particular training or experience requirements and conducts no investigation of the applicants' backgrounds other than that used in processing salesmen's applications. Whatever the effectiveness of that screening, few if any applications of the 12 to 15 submitted every year are rejected.185

185 John Weithers, secretary of the MSE, stated that he could not recall the exchange's having "turned anyone down."

e. The States

State laws concerning qualifications of persons in the securities industry are generally directed toward broker-dealers or principals of broker-dealer firms and salesmen. Since the great bulk of all supervisors are principals in their firms or engage in their own selling activities, or both, they will be required to meet the minimum State requirements of one category or the other, though a much smaller number of nonselling supervisors are not subject to any State registration requirements, and none are subject to qualification standards for supervisors as such. The effect of such a qualification scheme is to impose standards of competence and integrity upon salesmen, but to require nothing more or different of those who supervise them.

Under the Uniform Securities Act, the broker-dealer application form may, in the administrator's discretion, ask for information on the qualifications and business history of "any partner, officer, or director, [or] any person occupying a similar status or performing similar functions," including supervisors within the scope of the last phrase. Information obtained from the application form and elsewhere may be used to deny registration to a firm employing supervisors with records of past securities violations or other enumerated evidences of bad character.186 However, if a nonselling supervisor lacks training, experience, and knowledge, the firm cannot be disqualified, since only "agents" must satisfy competency standards, and an "agent" is defined as a person who "represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities," thus excluding supervisors unless they act also as salesmen.187 States other than the 15 which have adopted the Uniform Securities Act similarly treat supervisors or branch managers as a category of individuals whose qualifications are of little significance.

E. QUALIFICATIONS OF PERSONS PROVIDING INVESTMENT ADVICE

1. THE PLACE OF ADVISERS IN THE INDUSTRY

If the supervisor of salesmen occupies a critical position from the point of view of the broker-dealer firm, for the investor the most significant figure in the securities industry may well be the person responsible for selecting the stocks to be recommended for purchase or sale. In many cases this person is the salesman with whom the investor deals, whose qualifications have been discussed in part C, above. In many other cases, however, the salesman may merely act as a conduit for recommendations formulated by someone else who, in firms with a research department, is usually known as an analyst. In still other situations the customer may prefer to seek guidance from a registered investment adviser outside of his brokerage firm. In the larger investment adviser firms the advice is also formulated by analysts, while in the one-man and other small firms this may be done by the adviser. Entry standards-or, more accurately, the lack of entry standards-for persons acting as analysts of all types are discussed in this part. An extensive discussion of the research and advisory practices of broker-dealers and investment advisers is found in

188 The specific offenses and facts which bring about denial of registration to brokerdealers are discussed in pt. B.2.e, above. 197 Uniform Securities Act, sec. 401(b).

chapter III.C, and a number of statements made here are considered more fully there.

The essential function of persons evaluating securities and security prices, whether employed by a broker-dealer or a registered investment adviser, is to formulate opinions as to the intrinsic merits of a security or its desirability as an investment at a particular time. However, the actual duties of the analysts employed by broker-dealers are in some respects distinguishable from those of the analysts employed by registered investment advisers, and the statutes, regulations, and agencies affecting the two groups are sufficiently distinct to warrant their separate consideration.

There are no complete statistics on the number of persons engaged in analysis and research, but the information gathered by the study indicates that the growth in their number has generally kept pace with the growth of the industry. For the most part, their increase has paralleled that in the number of sales personnel, according to the information supplied to the study by the group of broker-dealer firms responding as to the activities, education, experience, and compensation of their research personnel.188 For example, between 1955 and 1961 Eastman Dillon, Union Securities Co., increased its research and advisory personnel from 5 to 19; at Shields & Co. the number rose from 4 to 11; at Ira Haupt & Co., from 5 to 12; and at Dominick & Dominick, from 5 to 14. An analysis of investment adviser registrations and applications filed with the Commission shows substantial growth in the number of investment advisers and in their rate of entry into the business. From July 1, 1950, to July 1, 1955, while the number of effective registrations rose slowly from 1,043 to 1,203, or less than 200, the number of applications filed increased from 119 in 1950 to 199 in 1955.189 By June 30, 1962, there were 1,836 effective registrations, and 315 applications were filed during the preceding fiscal year. Another index of the increasing importance of the role of the analyst in the industry has been the rapid growth in membership of various analysts' organizations. The New York Society of Securities Analysts, which was founded as recently as 1937, had a membership of over 2,945 as of March 1963, while the Financial Analysts Federation, of which the New York Society is a member group, was founded in 1947 with 1,637 members, and as of March 1963, had some 7,775 members in 29 analysts' societies located in the larger cities of the United States and Canada.

2. ADVISORY PERSONNEL OF BROKER-DEALER FIRMS

a. Broker-dealer research activities

Generally, insofar as their advisory activities are concerned, brokerdealer firms fall into one of three categories: (a) Those which do not claim to have any research department, and in which any research and advisory service is carried on by salesmen or outside sources; (b) those whose research departments consists of a small number of partners and registered representatives who spend part of their time in

188 A representative group of 66 firms were requested to submit such information on research activities and to submit copies of all advisory material published by them over a 3-month period. For factors considered in selecting the group see ch. III.C, below. 180 See table I-15.