fications and business history of any employee. Some of the States with controls authorize their administrators to give a written or oral examination, as provided in the Uniform Act.206 The limitations of State coverage and staffs, however, suggest that these statutes provide but little effective protection to the public.

4. INDUSTRY ATTENTION TO QUALIFICATION STANDARDS

The qualification of persons engaged in investment advisory work or financial analysis has concerned at least two industry groups-the Institute of Chartered Financial Analysts (the institute) and the Investment Counsel Association of America (the ICAA). Interesting though the activities of these organizations may be in this area, they are of but limited public benefit because of the limited objectives and powers of the organizations themselves. On the other hand, they serve as indications of the standards which some industry members and leaders view as desirable.

The institute was formed in 1959 by the Financial Analysts Federation. Included on its board of trustees are representatives of one mutual fund, three banks, two broker-dealer firms, and one insurance company. Its stated objectives include fostering higher education standards in the field of financial analysis, conducting examinations designed to test individual competence and skill, and recognizing "with the professional designation 'chartered financial analyst' persons who have met the standards established by the institute for the professional practice of financial analysis." To qualify as a chartered financial analyst, a candidate must be a member of a constituent society, be of good moral character, have a bachelor's degree from an accredited institution (or its equivalent in training or work experience), and pass three 4-hour examinations, only one of which may be taken in any year. The first examination, which cannot be taken by a candidate less than 24 years old, is expected to "test the candidate's knowledge of basic investment principles and analytic techniques." The second, for which one must be 26 or more, tests "ability to apply skills and information to financial analysis and to analyze the nature and functioning of the economic system." The third, for candidates who are over 30, "will test the candidate's ability to organize and administer research activities and to formulate and implement investment policies." Exemptions from the requirement of taking the first and second examinations-but not the third-are made for analysts of stipulated age and experience under a "grandfather" clause. The determination of good moral character will be made by the institute on the basis of confidential reports, and the professional designation can be rescinded upon a determination of the board of trustees, after a hearing, that "professional ethical standards have been violated." A somewhat similar plan has been adopted on an experimental basis by the ICAA, an organization of 54 firms "primarily engaged in the giving of continuous advice as to the investment of funds of clients on the basis of the individual needs of each client." 207 In recent years

206 Uniform Securities Act, sec. 204 (b) (6); see sec. 2.b, above.

207 ICAA bylaws, art. II, sec. 1. The requirement for membership is based upon the definition of the term "investment counsel" in the Investment Advisers Act as it existed prior to the 1960 amendments to the act. See sec. 208 (c). For a description of the purposes of the ICAA, see ch. III.C.5, below.

a committee of qualifications of the ICAA has developed an accreditation program under which it will confer the designation "qualified associate" upon certain associates of its member firms. In recognition of experience and education as the two standards required for qualified investment counseling services, the program requires an associate of a member firm to earn 10 credits before accreditation, 4 of which may be earned through formal education, 3 by passing an examination, and the balance at the rate of 1 credit for each year in the investment advisory field or a related field. In a letter of June 11, 1962, to the study the ICAA noted:

The association *** expects to be able to start conferring the designation "qualified associate" *** within the next few months. The program is frankly experimental and is not being made mandatory at this time. It is anticipated, however, that after some experience the program will be reexamined with a view to making such qualification mandatory for two-thirds or three-fourths of the individuals in each member firm who deal directly with clients.

Both the institute and the ICAA seem to have embarked on a course aimed at ultimately achieving professional recognition, much in the manner of accountants, whose drive for professional recognition started at the end of the 19th century. To whatever extent this may indirectly lead to a general raising of industry standards, it appears that the immediate result of these programs will be to confer an industry "cachet" upon certain analysts. So long as these organizations lack the power and determination to exclude unqualified persons from engaging in analytic activities without supervision, the program would seem to point to only limited benefits for the public.

F. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

The large numbers of new investors and new broker-dealer firms and salesmen attracted to the securities industry in recent years have combined to create a problem of major dimensions. Among the new investors have been the naive, the unsophisticated, and those with slender resources, while the new broker-dealers and salesmen have included persons who were inept, ignorant, or rapacious. The protection of the former from the errors and depredations of the latter has imposed a heavy burden on the governmental and self-regulatory agencies charged with the protection of the public interest in the area of securities and securities markets.

More than a generation of experience with the Federal securities laws has demonstrated, moreover, that it is impossible to regulate effectively the conduct of those in the securities industry, unless would-be members are adequately screened at the point of entry. Neither the industry nor the Government nor the investing public can afford the burden of a policeman on every corner. The steady growth in the very numbers of investors and participants has made obsolete the concept that entry into the industry should be the right of anyone, regardless of fitness or capability, except those guilty of recent securities violations. The right to carry on those functions of the industry which involve the public investor should be available only to those who shall have demonstrated their ability to meet at least minimal standards of integrity, competence, and financial responsibility.

1. THE REGULATORY STRUCTURE

The agencies with jurisdiction over members of the securities industry, and which are therefore in a position to determine who may enter, include the Commission, the National Association of Securities Dealers, Inc., the various stock exchanges, and the securities administrators of the several States. The present restrictions upon entry into the business that are established by this polycentric system of controls form, as might be expected, an unfortunately irregular and erratic pattern, involving both considerable overlapping of effort and serious deficiencies in total result. No national securities exchange that may wish to set higher standards for its membership should be discouraged from doing so, but there should be a rise in the minimum level of standards applicable to all firms and persons in the securities business.

The Commission's controls which affect the largest number of persons in the industry-though even its jurisdiction does not embrace all elements constitute the lowest barrier, excluding only those individuals whose previous unreliability in matters of securities has been evidenced by judicial or Commission decision. All other persons are admitted upon their firm's registration, without regard to their character, competence, or original capital commitment. The NASD also has jurisdiction over a wide segment of the securities industry. It has until recently required little more than the Commission. While banning from membership or employment by members roughly the same categories for which the Commission denies registration, the NASD delegates questions of prospective registered representatives' character to the discretion of member firm employers and until 1962 gave a spurious accreditation of competence through a now-discarded examination. The examination which it adopted, and a more recent extension of its examination program to include proprietors, reveals an effort to raise standards in the area of competence. Yet it remains true that the authorities exerting controls over the broadest range of the diverse activities of the securities business-the Commission and the NASD-accomplish little toward excluding undesirable and unqualified persons. Higher standards of character, competence, and capital requirements are imposed by the major exchanges, and particularly the New York Stock Exchange, but the selective nature of exchange membership limits the number of industry members under their control. The States vary widely in the scope of their statutes and regulations and in the vigor with which these provisions are enforced; at best they are handicapped by geographic limitations in dealing with what is essentially a national problem.

Since NASD membership is based on specific economic inducements, there are gaps in its coverage which leave important categories of securities firms certain mutual fund distributors, and real estate syndication broker-dealers, put-and-call dealers, and registered investment advisers, for example-subject only to Commission controls over the qualifications of their principals and employees. In a qualification system which envisages the complementary efforts of governmental and industry regulatory agencies, all groups subject to governmental controls ought also to be subject to industry controls, either

through the existing NASD or through other self-regulatory organizations with similar functions and status.

Customers of any firm subject to Federal jurisdiction should be able to assume that the firm's principals, the salesmen with whom they deal, the salesmen's supervisors, and the persons responsible for the investment advice upon which they rely, have met at least minimal standards of competence and integrity and have at least a minimal commitment to their business. In the light of the findings of the Special Study, such an assumption has less validity than should be the case. National securities exchanges should not be discouraged from erecting higher standards for any categories of persons they deem appropriate, but it is up to the concerted efforts of the Commission and the NASD to determine, establish, and administer the minimum standards for all firms and persons.

In establishing minimum standards, the various lists of so-called statutory disqualifications, which now apply only to misbehaviour relating to securities, should be expanded and made uniformly applicable to all categories of principals and employees. Not every activity which results in the imposition of penal sanctions should disqualify a person from the securities business, but the public is no less concerned with records of theft, fraud, embezzlement, or similar crimes on the part of the salesmen or broker-dealers with whom they deal simply because they involve property other than securities. Particularly important in implementing the establishment of minimum standards, as well as for other regulatory purposes, is the revision of broker-dealer registration forms to require the filing of further information concerning the nature and scope of a firm's business and concerning some categories of its personnel for whom minimum standards must be established, but about whom the regulatory agencies now have no readily accessible information.

2. BROKER-DEALERS

The ease with which almost anyone can start his own securities firm and deal with the public has permitted many an amateur to embark on the deep waters of broker-dealer entrepreneurship. The statistics and cases reviewed in this chapter indicate a surprisingly high incidence of inexperience in the securities business on the part of principals of new firms, and concurrently a lack of awareness of and respect for a broker-dealer's obligations to the investing public. They suggest also that the initial capital commitment of a large number of the new firms is nominal or at best unduly modest. Many of these firms quickly become sources of concern to the Commission and the NASD; the Special Study's analyses and observations revealed a distinct tendency on the part of newcomers to become involved in the more serious securities violations more often than experienced firms. New firms often have particular difficulty in maintaining adequate records and complying with the Commission's net capital ratio requirement. Many new firms include among their salesmen "boiler-room" veterans or totally inexperienced newcomers, or both. The training which such firms give their inexperienced salesmen rarely goes beyond a modicum of orientation to the firm and a brief introduction to its merchandise. The potential of harm to the public from a firm whose principals are

unqualified is intensified when, as so often happens, the firm engages in underwriting. This activity generally calls for skills and involves responsibilities beyond those required for an ordinary brokerage business. The study's review of underwriting practices 208 reveals a disquieting tendency for firms with the least experience and least capital to engage in underwriting the most speculative and questionable new

issues.

A minimum net capital requirement for broker-dealers, with appropriate flexibility to meet the variety of functions-from the underwriter to the very small mutual fund distributor-although not foolproof or sufficient in itself, would substantially add to both responsibility and commitment without imposing an incommensurate burden. The securities business involves dealing in other people's funds and liquid assets; the regulatory scheme is based to a significant extent on the sanction of legal liability to customers for improper conduct; the smooth and speedy functioning of market mechanisms depends on mutual confidence among members of the financial community 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 toward 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 background 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

208 In addition to the discussion in pt. B, above, see ch. IV.B.

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