D. QUALIFICATIONS OF SUPERVISORS 1. The place of advisers in the industry.. 2. Advisory personnel of broker-dealer firms. a. Broker-dealer research activities. 3. Registered investment advisers and their personnel.. a. The activities and qualifications of registered advisers- 4. Industry attention to qualification standards --- F. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS 1. Experience of principals of broker-dealer firms... 2. NASD disciplinary actions taken against member firms classified by 3. Violations of NASD rules resulting in disciplinary action classified by year of membership of firm involved and type of violation.___. 4. Status on August 1, 1962, of 215 broker-dealers whose applications for registration were filed with the SEC July 1-December 31, 1956, classified by net capital and aggregate indebtedness on date of first 5. Broker-dealers registered with the SEC classified by size of adjusted net capital and ratio of aggregate indebtedness to net capital__ 6. Number of registered representatives of NASD member firms (1956– 7. New NASD registered representatives and NASD qualification examination program (1956–62) - - . 8. Extent and type of prior experience of salesmen hired in 1961 by broker-dealer firms with 15 or more registered representatives.. 9. Percent of broker-dealer firms' sales forces hired in 1961. 10. Percent of broker-dealer firms' sales forces leaving in 1961... 11. The nature and extent of on-the-job training by broker-dealer firms__ 12. The nature and extent of classroom training by broker-dealer firms.. 13. Extent of broker-dealer firms' employment of full-time and part-time Table No. 14. Education and experience of principals of investment adviser firms... 15. Type of investment advice given by experienced and inexperienced investment adviser firms___. Page 173 174 16. General information about experienced and inexperienced investment adviser firms.. 174 AA-1. Number of firms providing data used for tables in each subject category_ 176 APPENDIXES A. Sources for statistical tables.. 175 B. Questionnaire STS-1. Screening, training, and supervision of sales employees by larger registered broker-dealers___ 177 C. Questionnaire STS-2. Screening and training of salesmen and supervisors, and supervision of sales employees by smaller registered broker-dealers__ 205 CHAPTER II QUALIFICATIONS OF PERSONS IN THE SECURITIES INDUSTRY A. INTRODUCTION 1. THE THEORIES OF REGULATION OF QUALIFICATION STANDARDS In recent years the world of securities has attracted many newcomers, some as investors who have enthusiastically discovered corporate securities as a medium of investment or speculation, and others as members of the securities industry who have been drawn by the magnets of prestige and potential earnings. The lack of sophistication of so many in the first group has combined with the lack of qualifications of so many in the second to create problems for the various agencies, governmental and private, that are charged with protecting investors and the public interest with which the securities industry is affected. Few persons associated with the securities business for a number of years would disagree with the comments of Amyas Ames, president of the Investment Bankers Association (IBA) at its November 1962 annual convention, on the influx of new blood into the business which has taken place over the past decade and a half: We have built a fine record in recent years, but mistakes have been made. To name a few: We have grown too fast; we have taken on too many men without training them thoroughly enough; we haven't trained enough managers; some people have come into the business who aren't qualified. * The regulatory problems engendered by the rapid influx of newcomers present a challenge which cannot be met by merely adding to the police force, an approach which is neither desirable nor feasible. It is the belief of the study that the gateway to the industry is the point where government and industry should look first for the solution of some of these problems, and that adequate controls over entry into the industry are an alternative to be preferred over an abundance of regulations and too many policemen. This chapter examines the adequacy of the existing structure of controls, and suggests some means for its improvement. The subject of controls over entry into the securities business-the rules and practices designed to assure that individuals and firms will be properly qualified in character and integrity, knowledge and experience, and financial responsibility-is typical of many covered in this report in at least one important respect: the great contrast that may be found between the best that has been accomplished and the deep deficiencies that still exist. For some segments of the business the controls are strong, for others they are of varying intermediate degrees 1 The growth of the securities industry is described in ch. I.B, above. of effectiveness, and for still others they are virtually absent. From the point of view of the public to be protected, a fence can be no more effective than its lowest section, and it is the low sections that present a continuing danger and challenge to the regulatory agencies. Regardless of the gratifying advances that have been and are being made in some areas, the nagging question remains of how it is still possible for thousands of unqualified persons-many of them heading firms— to engage in the securities business with the public. Some part of the answer to the question lies in the philosophy which underlies the Federal securities laws. The basic approach regarding entry which was taken by the draftsmen of the Securities Exchange Act of 1934 (requiring Federal registration of broker-dealers), the Maloney Act of 1938 (establishing the National Association of Securities Dealers, membership in which is an economic necessity for the great majority of broker-dealers), and the Investment Advisers Act of 1940 (requiring Federal registration of advisers), was to permit free access and unlimited entry into the securities business by anyone against whom the Commission had not previously acted and who had not violated certain securities laws. To be free to engage in the securities business a broker-dealer need only observe the formality of registration with the Commission. Such other restraints and sanctions as are contained in the Commission's arsenal-its rules proscribing fraudulent activities and requiring maintenance of books and records and an appropriate ratio of capital to liabilities-have force and effect only after the newcomer is engaged in business and, often, after the investing public has suffered a certain amount of injury. Essentially the same philosophy of relatively unlimited access to the business has historically determined the admissions procedures of the NASD. The statutory grant of authority to establish economic distinctions between members and nonmembers, on which its existence is posited, has been interpreted by the Commission to be conditioned upon the association's leaving its door open to most broker-dealers who register with the Commission. Since the NASD was founded, the open door has been closed an inch: inexperienced principals and salesmen of new firms are required to pass an examination testing their elementary knowledge of securities and securities markets. But the association may not adopt the exclusionary policies or the philosophy of limited access represented by the exchanges, and it has moved cautiously in exercising what selective powers it may have. The Federal Government and the federally sponsored NASD have the broadest responsibility for determining who may engage in the securities industry. They do not cover quite the entire field. Nevertheless for significant portions of it, where the exchanges lack authority and the States have failed sufficiently to exercise theirs, the only protection afforded is that of the Commission and the NASD. At the same time, the protection that these bodies afford is generally the shallowest, and therefore it is their controls that need greatest strengthening. Instances of stronger controls exercised by other agencies may serve as general points of reference, and the most effective controls may serve as ultimate goals. In the Matter of the National Association of Securities Dealers, Inc., 12 S.E.C. 322 (1942). This decision is discussed in pt. B.3, below. 1 |