large number of inexperienced salesmen it has attempted to absorb, and the reservoir of "boiler-room floaters" who circulate from firm to firm.

The growth of the securities industry has forced it to recruit inexperienced sales personnel in large numbers. About 25 percent of all registered representatives employed by NASD member firms as of the end of 1960 had less than a year's experience; for 1961 the percentage was 29, and for 1962 it was about 15 percent. Among firms specializing in mutual fund sales, inexperience is often preferred. This mass of inexperienced salesmen encompasses the broadest range of educational achievement, from those with graduate degrees to those without high school diplomas, and the greatest diversity of backgrounds, from a number with business, supervisory, selling, or professional histories to persons with such occupations as machinist, chef, or baseball player. While approximately half of the incoming salesmen have chosen to work part time, the Special Study has found no evidence which shows a causal link between part-time work as such and a peculiarly high degree of insufficient training or inexperience.

The "floater" represents a problem of an entirely different kind. Because of the brief lifespan of most "boiler rooms" and the large numbers of salesmen they typically use, there exists a fairly sizable group of alumni of these organizations, forming a reservoir of highpressure salesmen available for employment. While not every salesman who has been employed by a firm involved in disciplinary proceedings with the Commission or the NASD should be barred from future employment as a securities salesman, many floaters actively and willingly participated in the unethical selling practices of their prior employers and are still available for employment in the industry only because administrative considerations, such as limitations of time, budget, or manpower, prevented the Commission or the NASD from naming them as causes in the proceedings.209 These floaters carry the virus of high-pressure salesmanship from firm to firm, and find inexperienced proprietors and salesmen-often well intentioned-particularly vulnerable to infection with their irresponsible selling practices. It would be comforting to believe that qualification deficiencies are limited to floaters, and that no other securities salesmen are turned loose to sell their intricate merchandise to the investing public until the firms concerned have checked carefully into their backgrounds and also trained them properly to carry out their functions. The findings of the study indicate that, for many salesmen, the employing firm has not discharged these responsibilities.

The ultimate responsibility for the quality of salesmen must lie in the firms which employ them and which share with the public an interest in having salesmen of good character and thorough training. An unhappily large segment of the broker-dealer community scores poorly in this respect. Some firms do conduct considerable investigation of the backgrounds of prospective sales employees, and carry on extensive and generally effective training programs, sometimes including their own classroom programs. Far more firms, however, take a more casual view of their responsibility. The more typical firm does little to investigate the background of a prospective salesman

200 See ch. III.B.6.b (1) and (2), below, concerning Commission and NASD controls over selling practices.

other than writing or telephoning to his previous employer or employers, which it regards as the only step necessary to comply with the NASD requirement of certification of good character. For any further investigation, it merely relies on an exchange, if it is a member, or on its bonding company, if through choice or regulatory requirement it uses one.

As to training, there is a wide range of practices between the best, exemplified by the few firms referred to above, and the worst, or no training at all. For the most part the best training is found among the larger, more prosperous New York Stock Exchange firms, whose programs to some extent reflect the influence of the exchange requirement that inexperienced prospective salesmen (other than limited. registrants) receive 6 months of training before being permitted to sell. Much of the industry relies upon on-the-job training, which may mean that trainees perform tasks reasonably calculated to give them useful experience in the firm's operations, or may on the other hand mean no more than that new men sit around watching the old hands sell. Encouraging developments are the increased reliance of many firms, whose own resources are too limited for successful training, upon courses given by outside institutions and the training materials which the NYSE has recently published. All too frequently, however, a firm regards its training program as a stepchild, made necessary by exchange training requirements or the importance of having trainees pass an examination, and to be supplied on a minimal basis.

The self-regulatory agencies for the most part take a neutral attitude toward training programs. Apart from the Philadelphia-Baltimore-Washington Exchange, which uses a review of firm training programs rather than an examination to determine the qualifications of new salesmen, the usual approach is to encourage the use of organized training programs, and even, in the case of the NYSE, to provide advice concerning them, but to set no minimum standards for them (other than the NYSE and Amex requirements of 6 months' duration), and neither to approve nor disapprove any particular programs.

The basic instrument for assuring the public that a salesman has a reasonable minimum of competence has been, and must continue to be, the examination. The examination instituted by the NASD in January 1962 represents a considerable advance over its old memory test, which had proved almost completely ineffective in accomplishing its screening purpose. The new NYSE examination also represents an improvement over its predecessor, which had imposed but a minor obstacle to the neophyte salesman's entry into the exchange_community. On the whole, the self-regulatory agencies have shown. increasing concern for salesmen's competence. They should amplify their efforts to encourage the spread of the best practices already employed by some of the firms, and should insure that no firm uses practices falling below the minimum necessary to protect investors.

Assuring the public of the integrity of salesmen presents a problem as important as that of competence, but far more difficult. The NYSE, and to a lesser extent some of the other exchanges, conduct independent investigations of the backgrounds of prospective salesmen for member firms. For the most part their system appears well geared

to eliminating salesmen with undesirable prior activities and associations, though occasional employment of salesmen with extensive "boiler-room" backgrounds still occurs. The NASD is faced with a far more formidable task in terms of numbers alone: almost 30,000 inexperienced salesmen joined NASD member firms in 1961, while new registered representatives were being trained by NYSE member firms at the rate of 5,000 a year in the spring of 1962. The NASD has considered that responsibility for the integrity of its members' salesmen is a matter for determination and certification by its members, and its members have frequently viewed that responsibility as requiring no more than a contact with the salesman's last employer. While improper certification by a member may constitute cause for disciplinary action, the delegation of responsibility to member firm principals who themselves are subject to little control in this respect means that for the salesmen of many NASD members, character controls are no more than a fiction or a facade. Yet if the goal of qualifying salesmen in the area of character and integrity is to have any chance of realization it should be brought about through an organization like the NASD, which is national in jurisdiction but local in its activities and personnel.

The principal external controls over the qualifications of salesmen imposed by the Commission and the NASD operate indirectly through the unit of the broker-dealer firm which employs them. The result is an irregular pattern of standards unevenly imposed and awkward in their administration. The Commission, charged with the duty of excluding from the industry all broker-dealer firms employing salesmen subject to statutory bars, does not even have a record of the salesmen employed by the firms which it registers. Furthermore, its administrative procedures for eliminating undesirable salesmen, either before or after they have been hired, must be directed not at the objectionable salesman himself, but at the employing firm, regardless of its involvement or noninvolvement in the objectionable activities of the salesman in question, and regardless of its general record. This can place the Commission in the unfortunate dilemma of having to bring a proceeding against the employing firm in order to discipline a salesman who has been guilty of improper practices, or else ignoring the improprieties altogether. Even though the NASD does maintain records of salesmen employed by its members, it is in a similarly awkward position when it comes to excluding or eliminating undesirable salesmen. In addition, the fact that the economic inducements to NASD membership have not drawn all broker-dealers into that association means that salesmen of some employers are not even subject to NASD controls over salesmen's qualifications.

The establishment of a national system of direct licensing of securities salesmen would eliminate the present lack of uniformity in qualification standards and would allow disciplinary proceedings to be brought against individual salesmen. It would have the additional advantages of eliminating some of the present duplication and of imposing on each salesman a direct individual responsibility for his activities. Such a uniform national system must contemplate the coverage of salesmen for all elements of the securities industry through the NASD and other industry self-regulatory institutions. In any such system, a determination of qualifications of both competence and

character should be made by the self-regulatory industry organizations, which can administer industrywide standards of competence and make individual determinations in the difficult matter of salesmen's integrity. After being issued a license, a salesman would be eligible for employment by any broker-dealer firm without any need for reregistration. His competence would be determined through an appropriate examination, and his good character through investigation, and in doubtful cases, through personal interviews by local committees or boards. The individual firm would be permitted to employ only licensed personnel but would of course be free to apply its own additional criteria or those of any exchange of which it was a member.

Any licensing program should recognize, to an extent not found at present, the different competence needs of salesmen of different kinds. of securities. Mutual fund industry representatives assert that much of the knowledge of the operations of the securities markets which is essential for the registered representative who sells listed and most over-the-counter securities is unnecessary for the mutual fund salesman, who may, on the other hand, need greater training in areas relatively unimportant to the general securities salesman. Some of the exchanges appear essentially to agree, and have established various programs leading to a status of limited registration mainly for those who sell mutual funds. Other selling specialities, such as the sale of real estate syndication interests, present the same situation. It should be possible to establish a licensing system permitting a person to sell a particular type of security upon demonstration of his competence to sell it, but at the same time limiting his activities to that type of security. Under such a system a salesman trained, for example, in the mutual fund field could take an examination appropriate to that field, but would not be free to sell securities of any other kind.

4. SUPERVISORS

The growth of the securities industry and the number of securities salesmen and branch offices has compounded the problems involved in the supervision of salesmen's activities and has magnified the importance of the person engaged in such supervision, whether he be a principal or employee of his firm. Industry members have increasingly recognized the significance of supervisors and the importance of their responsibilities, and the NYSE notes that "the branch office manager undoubtedly holds one of the most important jobs in the securities business." Nevertheless, many instances have come to the attention of the study of persons acting as supervisors or managers who were unqualified for their responsibilities. There is almost universal industry emphasis on supervisors' production but much less emphasis upon such factors as their experience or their knowledge of the securities business, the applicable laws and rules, and supervisory or other office procedures.

At the heart of the problem of supervisors' qualifications lies the industry's reluctance to recognize that persons in this capacity serve functions distinct and different from the roles played by those whom they supervise. Awareness of this fact has, however, recently been expressed by the principal self-regulatory organizations. Since the study began its work, both the NASD and the NYSE have instituted

or taken steps to institute separate examinations for those who, because of their proprietary interests in their firms, will have supervisory responsibilities. While these examination programs do not at present cover employee-supervisors, both the NYSE and the NASD have indicated that they are contemplating such a step. The NYSE has also announced that it is applying substantially higher experience requirements than it heretofore used in granting approval of branch

managers.

Separate qualification standards and separate licensing of supervisors on an industrywide basis is of first importance in raising industry standards generally. Furthermore, in order that the Commission may determine the extent of compliance with such standards, it should receive, as part of a broker-dealer's registration, information concerning the names and histories of all persons having supervisory responsibilities, and not just proprietors as at present. There should also be clear identification of the individual in the home office of each firm who is responsible for regulatory and self-regulatory matters, so that responsibility for activities affecting the public interest will be lodged in a single individual.

5. PERSONS PROVIDING INVESTMENT ADVICE

Qualification standards for persons, other than salesmen as such, who are responsible for disseminating investment advice, whether through broker-dealers or through registered investment advisory or investment counsel firms, are nonexistent beyond the negative standard of the disqualifying statutory bars. Neither the Federal Government nor any self-regulatory body exercises any controls over the competence of these persons for the performance of their advisory work. This lack of controls results in an anomalous situation. An individual in a broker-dealer's research department, charged with the responsibility of selecting the securities for his firm to recommend to its customers, is required to meet no qualification standards. The salesman, on the other hand, whose role may be limited to transmitting such research recommendations to the customers, must pass examinations which test, among various subjects, his ability to analyze securities. Furthermore, the proprietors of registered investment advisers who confine their activities to the giving of investment advice need not pass any examination at all, except in a few States, even though they may be responsible for advising individual clients or subscribers to their publications to engage in particular securities transactions. While there is no need to impose qualification standards on every person employed by a registered broker-dealer or investment adviser to perform services as a researcher or analyst or statistician, minimal standards of competence or experience should be applied to each person who is responsible for actually transmitting unsupervised investment recommendations to the public, whether directly or through registered representatives.

The self-regulatory organizations should assume the responsibility for determining and imposing such standards for persons employed by broker-dealer firms subject to their jurisdiction. Membership in an effective self-regulatory agency should be required for all investment advisers now or hereafter registered with the Commission, and