2. INDUSTRY STANDARDS AND PRACTICES

a. Hiring and screening of salemen

Public investors and the broker-dealer firms with which they deal share a considerable identity of interest in high standards of competency and integrity on the part of securities salesmen. Individuals of high character, good educational background, and thorough training are both an asset to a firm and an assurance to investors. However, the identity of interest is not complete, since the firms are selecting and training persons who can sell and not merely those who give good advice. Thus, many of the screening and evaluation procedures and much of the training are devoted to the selection and development of persons who can win the confidence of customers and persuade them to execute securities transactions through the particular firm.

(1) Recruiting practices

The diverse methods used by securities firms to attract salesmen vary with the firm, the securities it sells, and its desire for experienced or inexperienced persons. At a recent conference on "the management function in the investment banking industry," the training director for E. F. Hutton & Co., one of the largest NYSE member firms, outlined the major sources of "worthwhile candidates" for sales positions: Newspaper advertisements (excellent for "trainee-applicants"); employment agencies ("the most used and most misused source of applicants"); college placement offices ("you should not be bashful about asking the alumni placement office to publicize your opportunity"); and referrals ("one of the most productive sources of prospective employees"). These sources are used, to a greater or lesser extent, by almost all firms.

The policies and attitudes of firms soliciting sales employees can best be seen in the recruiting advertisements they use. Since the quickest way to expand a firm is to acquire producing salesmen with established customer followings, a high proportion of such advertising is aimed at experienced salesmen. Advertisements often are intended to appeal to certain groups, such as life insurance salesmen, mutual fund salesmen, persons over 40 or about to retire (one advertisement stated: "Many retired policemen, firemen, letter carriers, etc., are making big money selling high-grade securities"), or persons in specific occupations (such as accounting, advertising, or public relations). Favorite targets of NYSE member firms desiring to improve their mutual fund production are fund salesmen from nonmember firms. They are offered the increased prestige of being NYSE "registered representatives" and the possibility of augmenting their income through handling transactions in a wider variety of securities. Other appeals in recruitment advertising focus on the assistance provided by the employing firm in generating business. Large firms have relatively little difficulty in recruiting. Their compensated training programs constitute an understandable recruiting advantage for inexperienced salesmen, and often they will have several applicants for each opening. Smaller firms needing fewer salesmen naturally tend to use more informal methods of finding them.

A firm which is not overly selective may be able to draw from the ready pool of experienced salesmen described above as "floaters." The head of one firm, who was building up his firm's sales force in late

1959 and early 1960, said he did not have to advertise for salesmen: "[In] those days they were floating around by the thousands * * [T]hey just kept knocking your door down to go to work."

(2) Screening and selection of potential salesmen

The New York Stock Exchange, in its 1962 pamphlet for the guidance of its member firms on "Recruiting and Selecting Registered Representatives," lists the following as characteristics of the most desirable candidate for a sales position: (1) Skill in obtaining and servicing customer accounts; (2) knowledge of rules, regulations, and procedures; (3) analytical ability; (4) specialized investment knowledge; and (5) knowledge in related fields. The most desirable background for the development of these qualities, according to the exchange, is "successful experience as a registered representative with another member firm." Successful experience "with a nonmember firm or mutual fund dealer" or with a "service-type company" is considered next best. Also considered valuable are a notable degree of gregariousness and personal magnetism and an educational record which emphasizes business, law, or finance.

Many firms have similar criteria for persons whom they prefer to hire as sales employees. Overall, however, few firms impose particularly high requirements of education or experience upon persons they hire. About 50 percent of the firms analyzed in the STS survey stated that they had no particular educational standards for would-be securities salesmen. More than 75 percent indicated that they had no requirements of previous experience in the securities industry.

Firms imposing education requirements are principally brokerdealers with a large, general securities business, who can afford to be selective, but their educational standards are generally flexible enough to permit the substitution of experience for education. The usual minimum education requirement is well below the NYSE's ideal; most often, only a high school education or its equivalent is demanded. Few firms make experience in the securities business. one of their prerequisites for employment, though it is generally viewed as an asset, and its nature and quality are usually taken into account. Those which do make experience a prerequisite are usually the ones which have no training facilities.

Some mutual fund sales organizations, however, have indicated that they prefer not to hire experienced securities salesmen. Walter Benedick, president of Investors Planning Corp. of America, stated that his firm prefers persons who have had no prior experience in the securities business because, in his view, "the securities business generally is as different from the mutual fund business as day differs from night." The firm emphasizes in its frequent recruiting advertisements that no selling experience is needed. The firm also eschews salesmen for other mutual fund firms "for the *** reason that we do not try to take men away from other organizations." Hamilton Management Corp., another large mutual fund distributor, does not hire as salesmen either persons who have sold mutual funds for other organizations or individuals who are registered representatives in the general securities business. Some mutual fund sales firms have found it desirable to establish policies forbidding the hiring of part-time sales personnel with certain occupational backgrounds which they regard as unsuitable. A Hamilton Management Corp. policy bulletin,

"Hiring Representatives," prohibits the employment of any person who is

a bartender, barber, waiter, mechanic, cook, counterman, bellhop, busdriver, truckdriver, taxi driver, used-car salesman, parking-lot attendant, elevator operator, janitor, or who has a similar occupation. No person will be hired who is in any way engaged in manual labor.

Anthony Tyrone, the director of sales for Hamilton, explained the policy on the ground that he had been "haunted" by stories of elevator men and cabdrivers who turn out to be part-time mutual fund salesmen.

As is exemplified by the case of Albion Securities, Inc.,109 certain firms have not been averse to knowingly hiring salesmen previously employed by firms which have been put out of business as a result of Commission or NASD action. Another small over-the-counter firm with a tolerant attitude toward the employment of former "boilerroom" salesmen is Street & Co., a New York City over-the-counter house. The firm hired salesmen with records of association with revoked or expelled firms, including one man who had been enjoined and also named a cause in a Commission revocation order and who was thus ineligible for employment by a registered broker-dealer. The firm's president explained his relaxed attitude toward his salesmen's pasts as an effort to rehabilitate them-to give them "another chance" if they fell in line with the way he "started to feel about the busiDess." His investigation of the background of a new salesman was the essence of simplicity. He testified that he was able to certify to a man's good character by talking to him for awhile and "seeing what makes him tick ***"

In contrast, broker-dealers who are more selective in their hiring practices use many techniques and devices to assure themselves that the backgrounds of persons they intend to hire are free of any evidence of relevant character defects. The NYSE recruiting and selection manual recommends procedures for screening, testing, evaluating, and investigating, involving several defined stages. First, candidates are required to fill out application forms, undergo preliminary interviews, and sometimes take aptitude tests,110 to eliminate those persons whom the firms would consider clearly unsuitable. The second stage consists of a searching interview with the applicant. The final decision to hire is, in some firms, dependent on the outcome of a background investigation by an outside investigating agency.

Many firms place considerable emphasis on aptitude and other tests as screening devices. The battery of tests used by Shearson, Hammill & Co. includes the Strong vocational interest test, the California test of mental maturity, the Guilford-Zimmerman temperament survey, and the Psychological Services of Los Angeles examination. Bache & Co., on the other hand, limits its testing to the 12-minute Wonderlic test, which measures verbal and numerical facility. King Merritt & Co., Inc., measures the personality traits of its candidates through the "AVA test," which is administered in the field by managers. The test, according to King Merritt officials, is commonly used by life insurance companies to assess aptitude for selling intangibles. Some

100 See pt. B.1.a(4), above.

110 A selection test being developed by the NYSE will provide member firms with a relatively inexpensive examination oriented to the particular needs of securities firms.

firms, such as W. H. Babbitt & Co., Inc., of Pittsburgh, subject persons in whom they have a serious interest to psychological interviews conducted by outside consultants. In contrast, Hodgdon & Co., Inc., a small firm dealing in a variety of "investment securities" in the Washington, D.C., area, employs what its principal partner describes as a "deep psychological interview" conducted by one of its partners:

Q. What do you mean by "deep psychological interview," Mr. Hodgdon? A. I ask him about his relationships with his parents and his brothers and sisters, previous employers; an amateur psychiatric approach.

*

Q. How long does this last?

A. I would say between half an hour or an hour.

For further investigation the firm communicates with the individual's last employer, as required by the NASD, and relies on character reference letters required by the State of Virginia and any check the State may make with his previous employers, and on the "credit investigation" conducted by the firm's bonding company.

The large mutual fund sales firms, which have great numbers of salesmen, uniformly devote far less effort to their selection than do the large NYSE member firms. King Merritt & Co., Inc., which employs 2,200 salesmen, uses a combination recruiting, screening, and selection technique which concentrates on contractual plan purchasers as a likely source of recruits for salesmen. According to the firm's president, H. L. Jamieson, the local manager who attempts to sell a prospective customer a contractual plan "has a chance to decide whether he would be the type of person he [the manager] would like working with him." The manager also visits the candidate's home and meets his wife to determine whether she will object to the evening calls which are so much a part of the contractual plan salesman's life. Otherwise, the firm does little to investigate the prospective salesman's background beyond compliance with the minimal state and NASD requirements.

Many firms, particularly those not affiliated with one of the larger exchanges, rely, at least in part, on their bonding companies to assume the responsibility of investigating a prospective employee's background. Under a standard policy in widespread use throughout the securities industry, known as the fidelity bond or brokers blanket bond, the broker-dealer is protected against losses incurred as a result of the wrongdoing of employees. Firms relying upon thir bonding companies to look into the backgrounds of their sales employees usually do no more than have their salesmen fill out whatever forms the bonding companies require. For example, Investors Planning Corp., with 4,700 salesmen, forwards a candidate's application form to its bonding company and to the NASD. In accordance with NASD requirements, the firm contacts the applicant's last employer and also writes to his prior business contacts. IPC's president stated that the bonding company conducts "a very extensive investigation." Unfortunately, statements of officials of insurance companies writing blanket bonds are not such as give comfort to members of firms which rely on their investigations, but rather indicate that broker's blanket bond coverage seldom entails more than a cursory check-often on a spot-check basis-of references provided by the salesman-applicant.

111 See sec. 3.b (1), below.

The Aetna Casualty & Surety Co. has stated that it makes no investigation of individual employees before writing a bond (other than a check on the firm and its principals), and that its later investigation is limited to a "reference check of new employees who are to occupy key positions." The company added: "Where experience on a given broker-dealer has been unsatisfactory, or the insured requests it, we secure individual applications on all employees, review and make reference checks accordingly." Another company, the Insurance Co. of North America, has each new employee of the insured firm fill out an individual application form covering references and the employee's business history for the previous 10 years, after which it sends out reference blanks to "certain of the former employers and personal references."

An official of one of the main insurance firms dealing in stockbrokers' bonds has indicated that the reference-check method of investigation as practiced by most bonding companies has definite limiations. He stated that "the great majority" of reference blanks are ignored and that this type of investigation has "seldom caught a crook" since "a real crook will phony up" his references and the candor of the replies received is limited by a fear of defamation suits. Thus, it appears that the investigations conducted by bonding companies cannot be considered a substitute for the broker-dealers' expending the effort or expense necessary to investigate the backgrounds of their sales employees.

b. Training of salesmen

Whatever degree of integrity, intelligence, and selling aptitude may be present in persons hired by a particular firm, new recruits need training before they can assume duties as salesmen. In the complex business of merchandising securities, a salesman cannot function without some familiarity with the merchandise he sells and also with the mechanics of the market. Securities salesmen usually enter the field with little or no prior training, relying on their employers to provide them with the technical knowledge necessary for the work they will do. Although broker-dealer firms may not, in some instances, do the actual training of their salesmen, preferring instead to provide outside courses, the economic burden and responsibility for the competency of salesmen they employ remain theirs.

Industry expansion and rapid turnover of personnel have combined to increase the burden of preparing inexperienced recruits for their sales jobs. As noted above, over half of the salesmen hired by all NASD firms in 1962 and roughly the same proportion of those hired by New York Stock Exchange firms had, at most, less than 1 year's experience as securities salesmen.12 According to a recent estimate, New York Stock Exchange member firms are currently training about 5,000 prospective registered representatives each year. Thousands inore are being taught the business by nonmember firms.

The training given by most firms uses one or more of the following methods: Classroom instruction by the employing firm; lectures and correspondence courses by universities and other educational institutions; on-the-job training; and what the New York Stock Exchange refers to as "self-study," or the reading of pertinent literature on one's

113 See sec. 1.b., above.