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FARR E.L.L A R 'HEARING

KANSAS STATE UNIVERSITY BEFORE THE

SUBCOMMITTEE ON CONSUMER PROTECTION

AND FINANCE

OF THE

COMMITTEE ON

INTERSTATE AND FOREIGN COMMERCE

HOUSE OF REPRESENTATIVES

ru

NINETY-FIFTH CONGRESS

r9 FIRST SESSION

c0

ON

H.R. 3721 AND H.R. 3722

0-

rg BILLS TO INCREASE THE AMOUNT AUTHORIZED TO BE APPROPRIATED FOR THE SECURITIES AND EXCHANGE COM-

<

MISSION FOR FISCAL YEAR 1977 AND SPECIFIED AMOUNTS

FOR FISCAL YEARS 1978-80

MARCH 10, 1977

Serial No. 95-2

Printed for the use of the

Committee on Interstate and Foreign Commerce

U.S. GOVERNMENT PRINTING OFFICE

s7-331 WASHINGTON : 1977
''"641

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE

HARLEY 0. STAGGERS, West Virginia, Chairman

JOHN E. MOSS, California

JOHN D. DIN GELL, Michigan

PAUL G. ROGERS, Florida

LIONEL VAN DEERLIN, California

FRED B. ROONEY, Pennsylvania

JOHN M. MURPHY, New York

DAVID E. SATTERFIELD III, Virginia

BOB ECKHARDT, Texas

RICHARDSON PREYER, North Carolina

CHARLES J. CARNEY, Ohio

RALPH H. METCALFE, Illinois

JAMES H. SCHEUER, New York

RICHARD L. OTTIN GER, New York

HENRY A. 'WAXMAN, California

ROBERT (BOB) KRUEGER, Texas

TIMOTHY E. WIRTH, Colorado

PHILIP R. SHARP, Indiana

JAMES J. FLO RIO, New Jersey

ANTHONY TOBY MOFFETT, Connecticut

JIM SANTINI, Nevada

ANDREW MAGUIRE, New Jersey

MARTY RUSSO, Illinois

EDWARD J. MARKEY, Massachusetts

THOMAS A. LUKEN, Ohio

DOUG WALGREN, Pennsylvania

BOB GAMMA GE, Texas

ALBERT GORE, JR., Tennessee

BARBARA A. MIKULSKI, Maryland

W. E. WILLIAMSON, Chief Clerk and Staff Director

KENNETH J. PAINTER, First Assistant Clerk

ELEANOR A. DiNxiNs, Assistant Clerk

LEE S. HYDE

ELIZABETH HARRISON

JEFFREY H. SCHWARTZ

BRIAN R. MOIR

KAREN NELSON

SAMUEL L. DEVINE, Ohio

JAMES T. BROYHILL, North Carolina

TIM LEE CARTER, Kentucky

CLARENCE J. BROWN, Ohio

JOE SKUBITZ, Kansas

JAMES M. COLLINS, Texas

LOUIS FREY, JR., Florida

NORMAN F. LENT, New York

EDWARD R. MADIGAN, Illinois

CARLOS R. MOO RHEAD, California

MATTHEW J. RINALDO, New Jersey

W. HENSON MOORE, Louisiana

'DAVE STOCKMAN, Michigan

MARC L. MARKS, Pennsylvania

Professional Staff

THOMAS M. RYAN

MARGOT DINNEEN

Ross DAVID AIN

CHRISTOPHER E. DUNNE

WILLIAM M. KITZMILLER

MARK J. RAABE

NANCY A. NORD, Minority Staff Assistant

SUBCOMMITTEE ON CONSUMER PROTECTION AND FINANCE

BOB ECKHARDT, Texas, Chairman

RALPH H. METCALFE, Illinois

ROBERT (BOB) KRUE GE R, Texas

CHARLES J. CARNEY, Ohio

JAMES H. SCHEUER, New York

THOMAS A. LUKEN, Ohio

HARLEY 0. STAGGERS, West Virginia

(ex officio)

JAMES T. BROYHILL, North Carolina

MATTHEW J. RINALDO, New Jersey

SAMUEL L. DEVINE, Ohio (ex officio)

JANIE KINNEY, Counsel/Staff Coordinator

FRANZ F. OPPER, Counsel
CONTENTS

Text of— Page H.R. 3721 3

H.R. 3722 

Statements 4

of SEC witnesses—

Hills, Hon. Roderick M., Chairman 5

Haynes, Lawrence H., Comptroller 5

Additional 

Sporkin, Stanley, Director, Division of Enforcement 5

material submitted for the record by SEC— Exhibit A—Securities and Exchange Commission estimated budget requirements for fiscal years 1977-80 11 Table showing the breakdown of minorities and women employed by SEC 

(m)

SEC AUTHORIZATION OF APPROPRIATIONS

THURSDAY, MARCH 10, 1977

HOUSE OP REPRESENTATIVES,

SMICOMMITTEE ON CONSUMER PROTECTION AND FINANCE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D .0 .

The subcommittee met, pursuant to notice, at 10 a.m., in room

2322, Rayburn House Office Building, Hon. Bob Eckhardt, chairman,

presiding.

Mr. ECKHARDT. The subcommittee will be in order.

Today, the Subcommittee on Consumer Protection and Finance

holds hearings on two bills, H.R. 3721 and H.R. 3722. H.R. 3721 would

provide a supplemental authorization to the Securities and Exchange

Commission of $1.5 million, increasing its total authorization for

fiscal year ending October 31, 1977, to $56.5 million. This additional

amount is necessary to meet the costs of last October's cost-of-living

pay increase, the recent executive salary raise, and to provide funding

for the agency's urgently needed ADP and recordkeeping systems.

H.R. 3722 provides authorizations for each of the succeeding fiscal

years. Beginning in fiscal 1978, these authorizations would be $64

million, $70 million, and $78 million.

I find one thing particularly puzzling and, from,the point of view

of the protection of the public investor, quite disturbing about the

requested future authorizations. That is that the submitted budget

does not provide for any increase in the size of the Commission's

enforcement staff.

The general objective of the Federal securities laws administered

by the Commission is to protect the interests of the public and investors by preventing fraud, deceit, and manipulation in the sale and

trading of securities. It is critical to the achievement of this objective

that the enforcement program be able to effectively carry out its

mission.

In 1972, the report of the Advisory Committee on enforcement

policies and practices—generally referred to as the Wells Committee

report—acknowledged that an effective program of securities industry

regulation was dependent upon an effective enforcement program. It

recommended that the Commission's enforcement staff be doubled.

This objective has never been reached. As a matter of fact, the Commission's Enforcement Division, which is presently undermanned,

has had a number of new demands upon its resources which were never

envisioned by the Wells Committee.

To mention a few of these areas, I think first of all, it is pretty clear

that the market surveillance capability of the staff ought to be greatly

enlarged, particularly in the rapidly growing trading in options.

(1)
2

The options area spans the current trading in call options, to dual

marketmaking in both options and the underlying securities, to future

trading input options. Surveillance of options trading will have to be

closely coordinated with surveillance of trading in the underyling

securities, particularly where the underlying securities are traded on a

different market.

Under the Securities Act Amendments of 1975, the Commission was

given for the first time regulatory responsibility for municipal securities dealers and for some 2,400 transfer agents. As banks move more

aggressively into the retailing of traditional securities, an increasing

number of enforcement problems can be expected to result in that area.

In addition, during the past few years, there has been a remarkable

growth in cases requiring substantial accounting expertise, including

tax shelter frauds, insurance accounting, real estate investment trusts,

and the numerous and far-reaching illegal foreign and domestic

payments.

As a result of the Commission's enforcement efforts, particularly its

organized crime unit, it is estimated that at the beginning of 1978, the

Commission will have some 300 criminal reference reports pending before the Department of Justice, triple the number pending in 1974.

Layered upon the foregoing has been the perceived recent tendency

of respondents to litigate with the Commission, rather than to settle

their cases prior to actually going to court. Because of their complexity,

the resulting trials tend to be lengthy and to require a substantial allocation of the Enforcement Division's time and resources. Finally,

that very important and necessary adjunct to SEC enforcement—the

private right of action under the securities laws—has been severely

restricted by a number of recent Supreme Court cases. Accordingly, a

very substantial additional burden has been placed upon the Commission's facilities to pick up the enforcement slack which had been previously assumed through private litigation.

The Commission's enforcement effort is its backbone. It is the principal vehicle for protecting the small investor and in generating investor confidence in our securities markets. The effectiveness with

which the Commission has carried out its mandate is reflected in the

fact that the U.S. securities markets are the most attractive and highly

regarded in the world. I am concerned that any attempt to diminish

the Commission's enforcement effort will largely eviscerate the effectiveness of the Commission and have a concomitant adverse effect upon

our securities markets.

Today, I am hopeful that in discussing the Commission's authorization request, Chairman Hills will address the issue as to why, in light

of the Wells' recommendations and the increased demands upon the

enforcement staff, the Commission's budget for 1978 provides for virtually the same number of Enforcement Division personnel as in 1975,

and actually reduces the number of enforcement personnel in the reaional enforcement offices from the 1975 level.

Without objection, the text of H.R. 3721 and H.R. 3722 will be placed

in the record at this point.

[The texts of H.R. 3721 and H.R. 3722 follow:]
3

)5TH CONGRESS

H

1ST SESSION

• R. 3721

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 21, 1977

Mr. .STAGGERS (for himself and Mr. DEvixE) introduced the following bill;. which was referred to the Committee on Interstate and Foreign Commerce

A BILL

To amend the Securities Exchange Act of 1934 to increase the

amount authorized to be appropriated for the Securities 'and

Exchange Commission for fiscal 1q77.

Be it enacted by the Senate and House of 1?epresenta2 tives of the United States of America in Congress assembled,

3 That section 35 of the Securities Exchange Act of 1934

4 (15 U.S.C. 78a et seq.) is amended by striking the 'amount

5 "$55,000,000" before the words "for the fiscal year ending

6 September 30, 1977" and inserting in lieu thereof the

7 amount "$50,500,000".
05m 

1ST 

CONGRESS 

SESSION

H

4

. R. 3722

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 21, 1977

Mr. STAGGERS (for himself and Mr. DEvixE) introduced the following bill;

which was referred to the Committee on Interstate and Foreign Commerce

A BILL

To amend the Securities Exchange Act of 1934 to authorize

specified amounts to be appropriated for the Securities and

Exchange Commission for fiscal years 1978-1980.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 That section 35 of the Securities Exchange Act of 1934 (15

4 U.S.C. 78a et seq.) is amended by striking the words "and

5 not to exceed $56,500,000 for the fiscal year ending Septem6 her 30, 1977. For fiscal years succeeding the 1977 fiscal.

7 year, there may be appropriated such sums as the Congress

8 may hereafter authorize by law" and inserting in their place

9 the following: ", 5,500,000 for the fiscal year ending

10 September 30, 1977, $04,000,000 for the fiscal year ending
5

2

1 September 30, 1978, $70,000,000 for the fiscal year ending

2 September 30, 1979 and 875,000,000 for the fiscal year

3 ending September 30, 1980. For fiscal years succeeding the

4 1980 fiscal year, there may be appropriated such sums as

5 the Congress may hereafter authorize by law".

Mr. ECKHARDT. Today we are pleased to have you, Mr. Hills, the

Chairman of the Securities and Exchange Commission. I understand

you are accompanied by Mr. Haynes and Mr. Shipman.

Are they both here?

Mr. HILLS. That may be my mistake Mr. Chairman. Mr. Shipman

has left the Commission as Executive Director. It was my understanding that it would not be necessary for him to fly down from New York

for the hearing.

Mr. ECKHARDT. That is perfectly all right. Mr. Lawrence Haynes

is with you today.

Mr. HILLS. Yes.

Mr. ECKHARDT. You may proceed, Mr. Chairman, as you desire.

STATEMENT OF HON. RODERICK M. HILLS, CHAIRMAN, SECURITIES

AND EXCHANGE COMMISSION, ACCOMPANIED BY LAWRENCE H.

HAYNES, COMPTROLLER; AND STANLEY SPORKIN, DIRECTOR,

DIVISION OF ENFORCEMENT

Mr. HILLS. If I may, I would dispense with reading the prepared

statement we have provided your staff. Of course I would be glad to

answer any questions about it.

As an overview, I think it is important to note that during the past

17 months we have engaged in as detailed and careful and thorough

an overhaul of our procedures as possible to make the Commission

more modem. In fact, to answer the questions you have raised, I have

to put in this background.

There were a number of things about the Commission that were

quite out of date. It has been said that if we had found any Wall Street

houses to have back offices performing the way our back offices perform, we would have shut them down. We simply did not have easy

access to material in our files.

There are some 11 million pages a year filed with us, 150,000 individual filings. We had nothing but a manual system to get those back into

our hands, and we had no method of accumulating material from them.

We had no real system for using them for statistical work. So we

decided 17 months ago to begin a modernization program within the

Commission.
6 ,

I think the principal answer I have as to why we have not requested

additional personnel is that in order for the Commission to function

properly and effectively to take advantage of the information and expertise that we have, we must be able to communicate with ourselves

better and to make better use of our materials.

We will, by 1978, have an efficient computer system that will give us

random access to our files. It will give us at least an embryonic early

warning system so that we can best use our assets and our people. It

will allow all of our regional offices to have access to our files. It will

make it possible for the Commission to integrate its own work in a

better fashion.

More important, it will make it possible for us to divert our present

budget from clerical people, from people who do not directly affect the

enforcement activities of the Commission, into the frontline activities

of the Commission. It will reduce substantially the number of people

in our records section freeing up those resources.

We have begun and are about 75 percent completed with a divisionby-division, region-by-region personnel analysis, looking at whether

our people are being used effectively, making recommendations to each

of the division directors, and each of the division administrators to,

again, make the Commission more efficient in how we use our time.

I think that there are two tests that are important here in judging

whether we have the capacity to do the job given us by the Congress.

One, of course, is are we doing it? What does our work product look

like?

I am proud of that product. I think that without question there is

no other agency able to do a better job to enforce with vigor the laws

that are entrusted to it to enforce.

In other words, I believe that the statement that the Securities and

Exchange Commission does a better job of maintaining compliance

with the laws that are its responsibility than any other governmental

agency is a fully accurate statement.

So I think that on the objective test we are doing our job. The second

test relates to our size. It is terribly important for an agency like the

SEC to stay small. It is terribly important that it b: efficient. An

agency like the SEC is only as good as its people. We can maintain the

quality of people that we have at our agency at about our current size.

We can do a very good job of attracting the very best people in

Government.

Again, I know of no other Government agency that consistently has

as high a calibre of people applying for jobs and being hired.

Now to the specifics. It is, of course, not only the enforcement division that deals with such matters as puts and call options and market

regulation. We have another division, the Division of Market Regulation that is primarily responsible for designing rules for creating the

surveillance systems within the Commission. It is the Market Regulation Division that has to put the rules in place that must be followed.

The enforcement division primarily looks after the violations of the

rules.

We have been busy indeed this past 18 months in creating the rules

and dealing with the structure of the market. The market structure

in itself is in a state of flux. The chairman knows, as well as anyone,
7

not only are we moving toward a national market system, that not only

have we changed the rules in respect to offboard restrictions on trading

in New York exchanges, and not only do we have dual trading in op- tions and stocks; but we also have all kinds of other changes underway.

As recently as yesterday, the voluntary organization called the Na- tional Market Association came up with an outline of a new information system that would connect all of these exchanges and which will

be terribly material, among other things, in detecting violations of our

laws.

During this past year we have created a Directorate of Economic

and Policy Research to give us the capacity to engage in economic

analysis of how the market works, to make a decision as to what kind

of conceptual framework our regulations should apply, to know best

how to do it.

We are in a very difficult information-gathering stage, full of pit- falls in our examination of stock trading, new marketmaking, overthe-counter marketmaking, all of those things that the chairman so accurately points out have come upon us with an unusual ferocity dur- ing this past year or two.

I believe we have moved in every area with a great deal of vigor. A

few weeks ago, as we moved in the options area, it became apparent to

me and Mr. Sporkin that we did indeed need more people. We made_ the money available to hire more people.

I must say that the present freeze that has been imposed by the Ad-- ministration may interfere a little bit with putting people into thesurveillance and options areas. But my judgment right now is that wecan go ahead there without additional manpower.

I think the test, Mr. Chairman, is do we have the resources and reserves to meet the problems that we have? The answer to that ques- tion, I can say to you, is "yes," although we have some problems. The principal problem is that we do not know enough about what we are doing and for that reason we have a rather sophisticated tracking sys- tem which Mr. Sporkin has just recently put into effect at our Wash- ington regional office and our Seattle regional office. This system will give us far more information about what our people are doing and where they are doing it. It will give Mr. Sporkin a far better capacity to know what his people are doing.

In terms of litigation, which the chairman also accurately points out is increasing, we have just engaged in a contract with the Columbia law school to create a very• sophisticated training technique for our trial lawyers that will be fashioned after, and, indeed, run by the peo- ple at Harvard Law School who have done this for years at Boulder, Colo., and I think I am right in saying we are going to send 40 law- yers to that training session for 3 weeks and it will cost us, what? $8.000.

Mr. HAYNES. Yes.

Mr. Mils. Stan's people are also involved in a sophisticated com- puter program to develop better trial techniques to retrieve informa- tion to improve our capability of dealing with the larger cases. We have recently initiated a rejuvenated attorney-fellows pro- gram, in which we are bringing sophisticated corporate lawyers from private industry into the Commission for a 2-year period. These will be people of the very highest quality. One of the people we will hire is
8

a former law clerk of Justice Douglas on the Supreme Court who has

had 5 or 6 years of intensive experience.

These people will come into the General Counsel's office to make

•our place more efficient. Most of all, we will rely more than we have,

even in the past, upon the the self-regulatory organizations which

are so important to our system. The genius of the securities system

in this country is its reliance on the efficacy, integrity, and capacity of

the self-regulatory organizations, not only the stock exchanges but

also organizations like the organized bar, the AICPA, the Financial

Accounting Standards Board. It is our capacity to make those people

understand their responsibilities and do their jobs that makes it

possible for the Commission to fulfill its mandate.

Just yesterday, the Commission approved an enormous initiative

by the New York Stock Exchange. It perhaps is not as complete as

we would all like, but it is an enormous first step. As a requirement to

be listed in the New York Stock Exchange, members will be required

to create audit committees of outside directors that have no conflicts of

interest. This will give an independent character to every listed company on the New York Stock Exchange.

Now as you go back over the sad history of questionable payments

that have occupied the headlines and occupied so much of our time,

you will see, first of all, that the Commission has been able to do an

enormous job, far beyond its own resources, by entering into consent

decrees whereby the corporations utilize outside counsel approved by

us and outside directors approved by us to study and report on what

payments problems they may have had.

Most of you have seen Gulf Oil and some of the other reports coming

in. The Lockheed report is being carried on by a very competent,

retired Federal juge, guided by independent directors who are new to

Lockheed.

As I recall, the Gulf Oil report cost Gulf Oil about $2 million.

Mr. SPORKIN. $3 million.

Mr. HILLS. I was told that the Firestone outside audit report is

going to be of the same character. In a sense we spent as much as $20

or $30 million more than our budget last year in the questionable payments area, using the technique of a federaly mandated outside audit

committee, which is essentially doing work directly for the benefit of

the stockholders.

We have recently proposed to change our rules to require that companies have adequate systems of internal control. Here, too, recognizing that we are putting a burden on business, we are indeed increasing the capacity of the Securities and Exchange Commission to

enforce the securities laws.

Finally, Mr. Chairman, I have to tell you that I cannot answer the

question completely. I do not know whether we have enough resources.

I cannot tell whether we have enough resources until we have finished

the zero-based budgeting analysis that we had begun some time ago.

I can't tell you whether we can do it until we have completed the

early warning systems and until the tracking systems are in place and

fully developed.

I do not know what the surplus resources of the Commission will

be one year from today because I do not know precisely how the modernization program will develop.
9

Conceivably, at this time next year we will have as many as 30 or 40

extra slots at the Commission which can be diverted to enforcement,

general counsel, or market regulation, as we modernize the Commission.

Today, I can tell you that if anybody in the Commission, including

Mr. Sporkin, comes to me and says he needs another lawyer for some- thing, we can provide that lawyer. If market regulation comes to us and says, "We need some more money for Lexitron gear," or something

else, we have some extra money for doing that. We have developed the capacity to respond to these problems.

However, I thing it is fair to say that our effectiveness depends largely upon the willingness of our Enforcement Division, and of all of the people in the Commission, to work overtime. We are able to do

our job well primarily because we have more, I think, than any other

agency, dedicated people of high capacity who care willing to do a job beyond the average job that is done in Government.

Thank you.

[Chairman Hills' prepared statement follows:]

STATEMENT OF RODERICK M. HILLS, CHAIRMAN, SECURLELLS AND EXCHANGE

COMMISSION

Mr. Chairman and members of the Subcommittee, I want to thank you for this opportunity to testify in support of H.R. 3721, and H.R. 3722, both of which in- volve authorizations for the Commission's budget. I also want to express our ap- preciation for the Subcommittee's consideration in scheduling this legislation for hearings so promptly. Both bills are, as you may well appreciate, of great impor- tance to the continued efficient functioning of the Commission.

The first of these bills, H.R. 3721, would increase the Commission's budget authorization for the current fiscal year from the existing level of $55 million, to

a new ceiling of $56.5 million. This increase is needed in order to accommodate. additional appropriations that have become necessary since our fiscal 1977 budget authorization was established, nearly two years ago.

Mr. Chairman, Exhibit A attached to my statement tabulates the figures that comprise our increased budgetary rquirements, and I submit it for inclusion in the hearing record.

The Commission was originally appropriated $53 million for the current fiscal'

year. However, the mandatory, governmentwide pay increase of last October added approximately $2.4 million to our fiscal year 1977 payroll costs and that amount will be added to our appropriation through legislation submitted by the Office of Management and Budget in behalf of all Federal agencies. This amount alone would place our appropriation some $400,000 over our authorized ceiling. Added to that is the cost of the recent executive pay increase, which is also mandatory, and which will add some $230,000 to our payroll costs for fiscal year 1977.

And finally, the Commission is seeking a supplemental appropriation for fiscal

year 1977 in the amount of $880,000 in order to meet expenses which could not have been anticipated, and which cannot be delayed without serious, adverse repercussions.

These three items total $3.5 million and would bring our total appropriation for 'fiscal 1977 to $56.5 million. That is, of course, $1.5 million more than our current authorized ceiling, and the reason we are seeking enactment of H.R. 3721.

Mr. Chairman, at this point I would like to explain more fully the need for the $880,00 supplemental appropriation which I previously mentioned. I want to stress again that this is the absolutely rock-bottom amount needed for con- tinued, efficient operation. The bulk of it, $676,000, will go to assuring continued

progress of the Commission's program to modernize our automatic data process- ing (ADP) and records system. Of that amount, $400,000 is for the records sys- tems, and $276,000 is for ADP.

This modernization began last year after the Commission sought, with the'

concurrence of the Office of Management and Budget, $900,000 in order to initiate the program. That amount was appropriated as part of our fiscal year 1977 budget, and since then we have made substantial progress in planning both the• conversion of official public files to micro-fiche and high-reduction film and pro-
10

viding support and improvement in record handling, storage and retrieval. In

the ADP area, we hope to soon complete an analysis of the Commission's information systems requirements, to replace our present antiquated system with a

modern high capacity computer facility, and to further train ADP staff in advanced computer applications.

Mr. Chairman, when we originally sought $900,000 to begin this program, we

felt that the Commission could efficiently continue to carry out its responsibilities

under the Federal securities laws only if its systems were upgraded, internal procedures were streamlined, and its analytical capabilities were improved. Today,

more firmly convinced than ever of this need, we have produced a five-year plan

designed to accomplish those goals, and are urgently in need of this supplemental

appropriation in order to continue the progress we have begun. I will discuss

this program in greater detail later in my testimony when I deal with the Commission's authorization request for fiscal years 1978, 1979, and 1980.

The balance of the $880,000 supplemental we are seeking for the current fiscal

year is comprised of the following: $120,000 to pay utility charges incurred outside regular operating hours; $47,000 to pay increased charges for the Federal

Telecommunications System; and $37,000 for travel expenses of the National

.Market Advisory Board. Of these items, I would point out that the first two—

additional utility and telephone charges—were imposed by the General Services

Administration well after our original appropriation for fiscal year 1977 was enacted. The third item, travel for members of the National Market Advisory

-Board, was incurred as a result of the Securities Acts Amendments of 1975,

which mandated establishment of the Board. However, no funds were made available to pay attendant costs, and we were unable to anticipate the travel expense

-until after Board members had actually filed for reimbursement.

Mr. Chairman, that concludes the portion of my testimony devoted to H.R.

'3721. With the Subcommittee's permission, I would like to turn now to the second

bill before you today.

H.R. 3722 would authorize the Commission's budgets for the next three fiscal

years—fiscal year 1978, 1979, and 1980. It would establish ceilings of $64 million

for fiscal year 1978; $70 million for fiscal year 1979; and $75 million for fiscal

year 1980. Our estimated budget requirements for those years are tabulated in

Exhibit A attached to my statement.

These authorization figures represent our best estimates of the Commission's

maximum operating expenses during the next three fiscal years. They do not

anticipate any growth in the number of personnel above our current, permanent

level of 2,117 positions. The only real growth reflected in these figures is for continuation of our modernization program. The balance of the annual increases is

necessary to allow for the effect of inflation, and for anticipated, mandatory pay

increases.

Our authorization request encompasses a proposed $1 million program increase

for Automatic Data Processing in each of fiscal ycarl 1978, and fiscal year 1979.

As I have stated, the Commission feels that this modernization program is absolutely essential to the continued effective dicharge of our responsibilities

under the securties laws. We believe it will result in improved service to the

public, and ultimately in cost savings as a result of efficiencies in operations.

Once our records handling system has been converted to micro-graphics, the

Commission will eliminate backlogs, missing files, and incomplete records; file

retrieval time will be reduced from several hours or days to no more than 15

minutes; file storage space will be compacted to 1/40th of today's requirement;

manpower will be reduced and staff utility and efficiency will be increased.

Further, the dollar savings per year, when the system has been implemented,

will be over $700,000.

By modernizing our ADP systems, the Commission can realize an overall savings and cost avoidance that approaches $1.0 million on an annual basis, as well

as improving staff support and moving into new areas of support and information services which are precluded by current equipment limitations.

Areas of growth and support as well as benefits are more fully detailed in our

comprehensive five-year plan.

As yon know, there have been tremendous technological advances in the ten

years since the Commission first began using computer capability and automation. Since that time, the Commission's management has had a growing concern

with the limitations of our equipment and with the ever-increasing demands

being placed on an already over burdened and obsolete system. If this concern

is not translated into support, however, problems will only multiply and delays

in paper flow will increase.
11

plan 

We 

we 

have monitored our initial efforts carefully, and in creating our five-year

vided with 

have accomplished two important goats. The Commission has been prothe-board 

the framework for ADP and records systems which will provide acrossfuture 

support without becoming so inflexible as to be unable to incorporate

productive 

new applications, and we have avoided haphazard and "stop-gap" counter- solutions.

again 

Mr. 

thank 

Chairman, this completes my prepared statement. I would like to once

this 

the Subcommittee for this opportunity to testify, and for scheduling

questions 

hearing 

you 

in a most timely fashion. I would be most pleased to answer any may have.

EXHIBIT A

Securities and Exchange Commission estimated budget requirements for fiscal

years 1977-80

Fiscal year: Estimated

requirement 1977 appropriations 

1977 program $53.00 supplemental 

1977 pay increase .88 (Oct. 10, 1976) supplemental 

1977 executive 2.39 pay increase .23

Revised 1977 

Estimated program 56.50 increase (ADP) 1978 Inflationary 1.00

Pay increase 

increase-3/12percent 12.00 Oct. 1, 1977 3.00

Estimated—fiscal 1978 

Estimated 262.50 program increase—ADP 

Inflationary 1.00

Pay 

increase-3 percent 12.00 increase—Oct. 1, 1977 3.00

Estimate—fiscal 1979 2 

Pay increase—Oct. 68.50 1, 1979 

Inflationary 3.00 increase-3 percent 1 2.00

Estimate—fiscal 1980 2 73. 50

2 Re

Includes 

quested mandatory authorization within-grades increases of about $500,000 per year.

pated expenses. ceilings are somewhat higher in order to allow for unanticiMr. ECKHARDT. Mr. Broyhill?

Mr. BROYHILL. I don't have any questions, Mr. Chairman. MT. ECKHARDT. Mr. Metcalfe ?

Mr. METCALFE. Thank you, Mr. Chairman. Chairman Hills, I would like to know whether or not you have made

women, 

a breakdown on the minorities that are employed, including the by the Securities and Exchange Commission at all levels') Do you have such a breakdown? Is it available now? Mr. HILLS. We can make that available to you. If I may speak to that subject a minute, I feel very strongly about that myself. We have the 

believe 

first woman division director in the history of the Commission. I

in 

we had the first black legal assistant in the Chairman's office

Director 

the history of the Commission, and we have the first full-time EEO in the history of the Commission. Mr. Savage an experienced

the 

person, 

EEO 

has come in with a strong mandate from me to do the job in

ad 

area that should be done. He created a few months ago an hoc committee comprised of leaders from throughout the securities

exchanges 

industry to deal with such problems. On that are the chairmen of all the and the managing partners of all the major investment banking firms. Our charter for that committee is to emphatically come to grips with the fact that there are not enough minorities and there
12

are not enough women in the securities field in the capital formation

process itself.

So the point you raise is one about which I feel deeply. We have

historically not done the job in this area we should have done. We have

made, however, I think a very major step forward, and if I may. I

would have Mr. Savage provide you with the information you are

seeking. I would like to make sure it is accurate.

We have recognized the problem and we have moved to deal with

it. My own feeling is very deep on this subject and it is that when you

go to investment banking firms, when you go to banks, when you go

to securities firms, you don't see very many black people and you see

precious few women.

It is frustrating to me that the President is having trouble finding

experienced securities lawyers who are women or black.

Just recently, we have interviewed a very fine professor from North

Carolina, Jim Bauer who is black. He is a commercial lawyer. He was

a student of mine the year I taught at the Harvard Law School. I

think very well of him. He is not trained in securities law but he is a

very competent lawyer. We are bringing him in as an attorney-fellow,

and we are going to let him spend 6 months in the General Counsel's

office, 6 months in Corporation Finance and 6 months in Enforcement,

and then we will have a very senior, capable lawyer of very good

judgment who will be a great help to the Commission.

Those are things we are trying to do. We also had a special recruiting program last year in which we made another effort to go through

the law schools and find women and blacks, and in particular, to find

Chicanos. -We have had a very poor record with respect to Spanishspeakinc,people in the Commission, even in our southern California

office an in our Southwestern offices down in Texas. We have had

'very few people of Spanish background.

Mr. ECKHARDT. Without objection, the record will be kept open for

Chairman Hills' reply to your question.

[The following material was received for the record:]
Total employees Total white Total minority Total female

Grade

as

Male Female Total Male Female Total Male Female Total Minority Nonminority Total

c..,

I GS-1 6 2 8 1 1 5 2 7 2 2

Percent of total 75.0 25.0 100.0 12.5 12.5 62. 5 25. 0 87. 5 25.0 25. 0 --1 Temporary 1 7 8 1 7 8 7 7

Percent of total 12. 5 87. 5 105 12. 5 87. 5 100 87. 5 87. 5

Wage rate 18 5 23 4 3 7 14 2 16 2 3 5

t•D Percent of total 

GS-2 

78.3

1

21.7

12

100

13 

17. 4 13.0

5

30. 4

5

60. 8

1

8.7

7

69. 6

8

8. 7

7

13. 0

5

21.7

12

Percent of total 7.7 92. 3 100 38.5 38. 5 7.7 53. 9 61. 5 53.9 38. 5 92. 3

GS-3 34 59 93 14 25 39 20 34 54 34 25 59

Percent of total 30.6 63. 4 100 15. 1 26.9 41.9 21.5 36.6 58. 1 36.6 26.9 63.4

GS-4 25 97 124 4 50 54 21 49 70 49 50 99

Percent of total 20. 2 79. 8 100 3. 2 40. 3 43.6 16. 9 39. 5 56. 5 39. 5 40. 3 79. 8

GS-5 37 147 186 13 94 107 24 55 79 55 94 149

Percent of total 17.7 80. 1 100 7. 1 50. 5 57. 5 12. 9 29.6 42. 5 29.6 50. 5 80. 1

GS-6 17 125 142 4 78 82 13 47 60 47 78 125

Percent of total 12. 1 88.0 100 2.8 54.9 57. 8 9. 2 33. 1 42. 3 33. 1 54. 9 88.0

GS -7 30 81 111 18 50 68 12 31 43 31 50 81

Percent of total

GS-8 

Percent of total. 

27.0

6

21.4

73.1

22

78.6

100

28

100

16.2

4

14.3

45. 1

13

46. 4

61.3

17

60. 7

10.8

2

7. 1

27.9

9

32. 1

38.7

11

39. 3

27.9

9

32. 1

45.1

13

46.4

73.1

22

78.6

1-...

CA,

GS-9 51 18 69 42 13 55 9 5 14 5 13 18

Percent of total 73.9 26. 1 100 60.9 18.8 79. 7 13. 0 7. 3 20. 3 7. 3 18. 8 26. 1

GS-10 3 4 7 2 3 5 1 1 2 1 3 4

Percent of total 42.9 57. 1 100 28.6 42.9 71.4 14. 3 14. 3 28. 6 14.3 42.9 57. 1

GS-11 147 40 187 132 31 163 15 9 24 9 31 40

Percent of total 78.6 21.4 100 70.6 16.6 87.2 8.2 4. 8 12. 8 4.8 16.6 21.4

GS-12 233 43 276 209 34 243 24 9 33 9 34 43

Percent of total 84.4 15.6 100 75.7 12. 3 88. 0 8.7 3. 3 12. 1 3.3 12. 3 15.6

GS-13 324 27 351 309 26 335 15 1 16 1 26 27

Percent of total 92. 3 7. 7 100 88. 0 7. 4 95. 4 4. 3 . 3 4. 6 . 3 7. 4 7. 7

GS-14 184 10 194 177 9 188 5 1 6 1 9 10

Percent of total 94. 9 5. 2 100 92. 3 4. 6 96. 9 2. 6 . 5 3. 1 . 5 4. 6 5. 2

GS-15 108 4 112 104 4 108 4 4 4 4

Percent of total 96. 4 3. 6 100 92. 9 3. 6 96. 4 3. 6 3. 6 3. 6 3. 6

GS-16 30 1 31 30 1 31 1 1

Percent of total 76. 8 3. 2 100 96. 8 3. 2 100. 0 3.2 3. 2

GS-17 7 1 8 7 1 8 1 1

Percent of total 87. 5 12. 5 100 87. 5 12. 5 100.0 

GS-18 

Percent of total 

5 

100. 0 

5

100 100. 05 

5 

100. 0 

Total 1, 267 709 1,976 1, 081 440 1, 521 186 269 455 269 440 709

Percent of total _ 64. 1 35.9 100 54.7 22.3 77. 1 9.4 13.6 23.0 13.6 22.3 35.9
Grade

Total employees Total white Total minority Total female

Male Female Total Male Female Total Male Female Total Minority Nonminority Total

Attorney 552 73 625 525 63 588 27 10 37 10 63 73 Percent of total 87.3 11.7 100 84.0 10.1 94.1 4.3 1.6 5.9 1.6 10.1 11.7 Analyst 92 15 107 90 12 102 2 3 5 3 12 15 Percent of total 86.8 14.0 100 84.9 11.2 95.3 1.9 2.8 4.7 2.8 11.2 14.0 icci 113 3 116 106 3 109 7 7 3 3 Percent of total 97.4 2.6 100 91.4 2.6 94.1 6.0 6.0 2.6 2.6 Exam/Inv. 198 8 206 190 8 198 8 8 8 8 Percent of total 96.1 3.9 100 92.2 3.9 96.1 3.9 3.9 3.9 3.9 Technical 35 19 54 25 11 36 10 8 18 8 11 19 ••-, Percent of total 64.8 35.2 100 46.3 20.4 66.7 18.5 14.8 33.3 14.8 20.4 35.2 i4=.- Cler. 1 Sr 141 530 671 55 303 358 86 227 313 227 303 530 Percent of total 21.0 79.0 100 8.2 45.2 53.4 12.8 33.8 46.7 33.8 45.2 79.0 Administrative 66 36 102 50 26 76 16 10 26 10 26 36 Percent of total 64.7 353 100 49.0 25.5 74.5 15.7 9.8 25.5 9.8 25.5 35.3 Miscellaneous 47 17 66 34 9 43 15 8 23 8 9 17 Percent of total 74.2 25.8 100 51.5 13.6 65.2 22.7 12.1 34.9 12.1 13.6 25.8 No title 4 3 7 2 2 4 2 1 3 1 2 3 Percent of total 66.7 42.9 100 33.3 33.3 66.7 33.3 14.3 42.9 14.3 333 42.9 Service 17 5 22 4 3 7 13 2 15 2 3 5 Percent of total 77.3 22.7 100 18.2 13.6 31.8 59. 1 9. 1 68.2 9. 1 13.6 22.7

Total 1, 267 709 1, 976 1,081 440 1,521 186 269 455 269 440 709

Percent of total .. 64. 1 35. 9 100 54.7 22.3 77.1 9.4 13.6 23.0 13.6 22.3 35.9
Minorities

Black Spanish speaking Native American Orientals Authorized

Grade Male Female Total Male Female Total Male Female Total Male Female Total ceiling

GS-1 

Percent of Total 

Temporary 

Percent of Total 

Wage rate 

Percent of Total 

GS-2 

Percent of Total 

GS-3 

Percent of Total 

GS-4 

Percent of Total

GS-5 

Percent of Total 

GS-6 

Percent of Total 

GS-7 

Percent of Total 

GS-8 

Percent of Total 

GS-9 

Percent of Total 

GS 10 

Percent of Total 

GS 11 

Percent of Total 

GS-12 

Percent of Total

GS 13 

Percent of Total 

GS-14.... 

Percent of Total 

GS-15 

Percent of Total _.

GS-16 

Percent of Total 

GS-17 

Percent of Total 

GS-18 

Percent of Total 

5 2 7 

62.5 25.0 87.5 

1 6 7 1 1 

12.5 75.0 87.5 12.5 12.5 

14 2 16 

60.8 8.7 69.6 

1 7 .8 

7.7 53.7 61.5 

20 33 53 1 1 

21.5 35.5 57. 1 1. 1 1. 1 

18 48 66 1 1 2 2 2 

14.5 38.7 53.2 0.8 0.8 1.6 1.6 1.6 

22 50 72 2 2 4 3 3 

11.8 26.9 38.7 1.1 1.1 2.2 1.6 1.6 

13 44 57 1 1 1 1 1 1 

9.2 31.1 40.1 0.7 0.7 0.7 0.7 0.7 0.7 

11 30 41 1 1 2 

9.9 27.0 36.9 0.9 09 1.8 )--,

2 7 9 2 2 C.Ft

7.1 25.0 32.1 7.1 7.1 

9 5 14 

13.0 7.3 20.3 

1 1 2 

14.3 14.3 28.6 

11 9 20 1 1 1 1 2 2 

5.9 48 10. 7 . 5 0. 5 0.5 0. 5 1. 1 1. 1 

19 9 28 3 3 2 2 

6.9 3.3 10.1 1.1 1.1 0.7 0.7 

10 1 11 4 4 1 1 

2.9 .3 3.1 1.1 1.1 0.3 0.3 

3 1 4 2 2 

1.6 .5 2.1 1.0 1.0 

3 3 I 1 

2.7 2.7 0.9 0.9 

Total 16.3 25.5 41.8 11 7 18 2 2 4 10 5 15 

Percent of Total_ 8.3 12. 9 21. 1 0. 6 0.4 0. 9 O. 1 O. 1 0.2 0. 5 0.3 0.8 
Minorities

Black Spanish speaking Native American Orientals

Authorized

ceiling Grade Male Female Total Male Female Total Male Female Total Male Female Total

Attorney . 20 10 30 3 3 2 2 2 2

Percent of Total 3.2 1.1 4.9 0.5 .5 0.3 0.3 0.3 0.3

Analyst 1 3 4 1 1 

Percent of Total 0.9 2.8 3.8 0.9 0.9 

Acci 4 4 3 3 

Percent of Total 3. 5 3. 5 2. 6 2. 6 

Exam/Inv 5 5 1 1 2 2

Percent of Total 2.4 2.4 0. 5 0.5 1.1 1.1 1--a

Technical 10 8 13 C7)

Percent of Total 18. 5 14. 8 33.3 

Cler. 1 Sr 82 21.3 29.5 2 7 9 2 2 2 5 7

Percent of Total 12.2 31.7 44.1 .3 1.0 1.3 0.3 0.3 0.3 0.8 1.0

Administrative 15 10 25 1 1

Percent of Total 14.7 9. 8 24. 5 1. 1 1. 1

Miscellaneous 11 8 19 1 1 3 3

Percent of Total 16.7 12. 1 28.8 1.5 1.5 4.6 4.6

No title 2 1 3 

Percent of Total 33.3 14.3 42.7 

Service 13 2 15 

Percent of Total 59. 1 9. 1 68.2 

Total 16.3 21.5 41.8 11 7 18 2 2 4 10 5 15 2,060

Percent of Total_ 8. 3 12.9 21. 1 0.6 0.4 0.9 O. 1 O. 1 0.2 O. 5 0.3 0.8
17

Mr. METcALFE. Thank you very much for your very encouraging

statement on the program you are pursuing.

Mr. Hrus. Thank you.

Mr. ECKHARDT. Mr. Chairman, you have about 200 people in the Enforcement Division.

Mr. Illus. Sometimes it looks like we have 2,000, Mr. Chairman.

That is roughly correct, yes.

Mr. ECKHARDT. About how many of these are lawyers?

Mr. Ilium I believe it is slightly over half.

Mr. SPORKIN. We have right now only about 180 staff members, including approximately 105 lawyers.

Mr. ECKHARDT. Do you have economists?

Mr. SPORKIN. We have financial analysts and accountants.

Mr. Hum. Mr. Chairman, you are taking a position I am very fond

of. It is my hope that before long we will have a senior economist in the

capacity of the dissertation level or above to be with each division. Mr.

Zecher, of the Office of Economic Research, is developing that capacity.

He was chairman of the Department of Economics at Tulane. His

present deputy was the chief economist of the Federal Reserve Board

in St. Louis.

We are hiring four economic fellows who are to come into the Commission at a very high level. We are trying to create a capacity to put

economic analysis at the hands of each one of the divisions, and I believe that the principal benefit of our modernization program would

be to permit us to have random access to our files, to give an early

warning system to the enforcement division and to develop the software programs that enforcement can use so as to most efficiently employ their resources.

That is precisely what we are working on now.

Mr. ECKHARDT. How many of the 180 are economists presently?

Mr. Hum. There are only financial analysts in the division at

present. Of course the Office of Economic Research is available to them.

A fr. ECKHARDT. How many financial analysts?

Mr. SPORKIN. We have approximately 15 to 20 financial analysts.

Mr. ECKHARDT. What is their scholastic or training background?

Are they professionals?

Mr. SPORKIN. Normally, we try to obtain the highest caliber we can.

They will normally have a bachelor's degree at the minimum and

usually will have a good amount of work experience, some with

master's degrees. But we would usually like to have some experience in

the marketplace, either having worked with a self-regulatory body or

a member firm so they will have some background.

Mr. ECKHARDT. Are there any accountants that are not so listed as

financial?

Mr. SPORKIN. Sure.

Mr. ECKHARDT. How many accountants?

Mr. SPORKIN. We have approximately 12 CPA's.

Mr. HILLS. How many do we have in the regions, Stan?

Mr. SPORKIN. Certified public accountants?

Mr. HILLS. Yes.

Mr. SPORKIN. In the regions I would say there might be another 10.

Mr. ECKHARDT. Are you including in the 180 regions or not?

Mr. SPORKIN. No, no. Absolutely not.
18

1\ Fr. ECKHARDT. I am just talking now about your officers here.

Mr. SPORKIN. That is correct.

Mr. ECKHARDT. Twelve CPA's?

Mr. SPORKIN. Yes.

Mr. ECKHARDT. And some others at a lesser level of training.

Mr. SPORKIN. We have a number of investigators who have accounting experience and we would have about 7 or 8 of those in the home

office.

Mr. HILLS. We have precisely 10 more accountants in the field.

Mr. ECKHARDT. Then how many other persons of generally professional competence or are there any others?

Mr. SPORKIN. Well, we are trying to develop a paralegal program

right now and we are at an infancy stage there. Those are people who

do routine legal work but are not lawyers. So you get more work at

less cost from our attorneys.

Mr. ECKHARDT. How many of them?

Mr. 'SPORKIN. Right now we have two or three in the division and

we are trying to obtain some more. We also have an administrative

assistant who is not included in any of those figures whom I would

consider to be a professional who, in effect, is concerned with the entire

management of the division, from budget, typewriters, clerical, and

things of that sort.

W17. Huffs. I have had formal discussions over the past 6 or 7 months

with a number of the larger investment banking houses. The Commission very much needs to have a better understanding of the trading

markets. We are not traders. The trouble is a good trader is making a

couple hundred thousand dollars a year and it is hard to get a person

that really understands the problems of the trading market.

So I am hopeful that our general counsel will permit us to take on

someone who has confidential obligations who would come and be a

consultant for us for a period of about 6 months at a time, maybe a

year at a time, and would be in the enforcement division or market

regulation. While such a person might have some conflicts of interest

as to some aspects of our work, we could use him to help our people

understand what is happening.

I would hope to develop that capacity both in New York and in

Washington. Trading technique is obviously an abstruse specialty and

sometimes one can spend hours looking at it and not knowing what

they are seeing.

So we are trying hard to develop these other skills to which you are

referring.

Mr. ECKHARDT. As I calculate rapidly, then, you have approximately

82 percent of your personnel at some type of professional or just below

professional level, and about 18 percent would be, I assume, clerical,

doing more or less routine work.

Mr. SPORKIN. Those are our estimates.

Mr. ECKHARDT. I understand but I am just trying to get a general

figure here. I would say about 80 percent are professional and maybe

paraprofessional, if you can put it that way, and about 20 percent are

more or less routine clerical.

Mr. HILLS. I think the chairman is quite close. We had that personal

services data sheet in the record, do we not?

Mr. HAYNES. Yes in the budget.
Mr. ECKHARDT. I can understand. Mr. Chairman, that by increasing

the efficiency by better routines that you can do with a relatively

smaller force, and I also understand what you say that where you have

developed more efficiency in other areas of your operation it may give

you some room to expand with respect to enforcement.

But the thing that still concerns me somewhat is that amongst pro--

fessionals, these more or less mechanical means of achieving greaterefficiency are not so terribly meaningful. I was always somewhat concerned about Mr. Kleindienst's ideas of having lawyers make an ac--

counting of every 15-minute segment of their work. Of course, that.

is utterly impossible.

Mr. HILLS. It is even when you bill the time.

Mr. ECKHARDT. That is right. And when you don't bill it, I imagine

it's even harder and perhaps more fictional.

Mr. HILLS. We do not do that.

Mr. ECKHARDT. However, I do not know. There is also a large inclination to make some of the bill times up perhaps. But it does seem

to me there is an enormous problem here of doing the kind of job that

you envision in your budget justifications, particularly in the enforcement division with a staff which is now, even under your normal projected level 

Mr. HILLS. I can only repeat what I feel very strongly about, and

that is we should not add people until we know how to use them, and

until we have the capacity to use them well, until we have the capacity

to train them well. The most glaring deficiency, frankly, I saw at the

Commission when I got there was the regional offices. There wasn't a

single decent library in any of the regional offices, with perhaps theexception of New York. Just making those tools available to a lawyer

so he doesn't have to spend an hour or two going back and forth to a

library increases the capacity of a regional office by 20 to 30 percent..

We had some unhappiness in the regions not with our people but

with their capacity to work. We had little idea, at least contemporaneously, of what was going on in the regions. So we began with Stan's

people what we call a Notice of Inquiry, and that means every week

we get a computer run of every inquiry that was started any place in

the country. We also now meet frequently with regional people. In

fact, Stan and I are going to Atlanta tomorrow to meet with all of theregional administrators . We meet outside of Washington twice a year

and once in Washington with the regional administrators to see how

we can strengthen the role of the regional offices.

Again, the most obvious fact was that they could not be terribly helpful to us in many areas because they did not have access to our records.

It took too long to get records back and forth.

So we are developing a remote display by cathode ray tube. In 1978

all of our files will be available to them in their regions by having these

remote cathode ray tubes, which will have printout capacities thereby, our files will be their files.

Again, it is not just the enforcement division; it is the enforcement

division aided by the General Counsel's office which handles appeals in

enforcement matters. It means making that office better capable of

handling the work. It meant a special recruiting effort for senior attorneys. It meant a special training program for lawyers so they can

become better senior trial lawyers.
20

It is amazing how much you can do with even one person. We attracted a very competent trial lawyer from Oakland who had 6 months

on his hands and he came in and spent 6 months with Stan sitting in

the middle of the enforcement division, helping Stan, giving Stan advice of how big cases should be tried and how he could better help

train his younger people. And I think probably one of the most dramatic things that the Division has been able to develop is this training

program with Columbia University, to give our people this added

professionalism. The multiplier effect is terribly important.

I have no way of quantifying the impact of having an outside audit

committee on every listed company's board. But I can tell you, going;

back to 1970 when, by accident, I became embroiled in a large corporation that lost $90 million before I was able to read the budget, that

the lack of an independent quality in the board in that Fortune 500

company, in my judgment, was the reason I lost the money. It wasn't

corruption it wasn't stealing. It was just plain foolishness. At that

time use of an outside audit committee composed of independent directors, was rare. Now—the majority of listed companies have outside

audit committee. Use of such committee is going to have a substantial

beneficial effect on our work. We tell the outside auditors that they

have the responsibility, when they see something questionable, and

they have a legal liability, to bring that matter to the attention of

somebody who has the capacity to deal with it.

If you don't have an audit committee with outside directors, you

have no place to go. The auditor's only alternative is to resign the

account if something looks funny. All the economic incentives,

obviously, are directed toward keeping the account.

So those kinds of things, the mulitplier effect, if you will, is terribly

important. The multiplier effect can be seen in the 22 audit committee

reports now mandated by the Federal court to look in to questionable

payments. Is it 22, Stan?

Mr. SPORKIN. There are about 25 companies.

Mr. Hums. Yes; and you take those 25 independent audit committees mandated by the Federal courts studying those corporations,

you have more money being spent than our entire annual budget during the next year just from that effort by independent, competent

lawyers that have done this.

That is how this Commission can enforce the securities laws. But

T must candidly say to you I cannot really answer the question as to

whether we should have 10 or 20 more lawyers. We have to create our

priorities. My successor may be back here next year saying, we have

finished our management program; we have got our computer system

in reasonably good shape; we have taken 25 people out of the office

of records and put them in enforcement; we have taken 30 people out

of other places and put them in the General Counsel's and we still need

50 more people.

But I cannot tell you that is what we need right now.

Mr. ECKHARDT. Your agency, I think, enjoys the highest reputation

among lawyers who have practiced before, it, from objective reports

that I have seen, than any Federal agency. And I suspect that one of

the reasons for that is that you deal with relative equals. The persons

whom you regulate are articulate and are themselves well represented,

and are of somewhat equal force in the market place. And I think

that I just hope that you continue to enjoy that reputation.
21

The only thing that worries me somewhat is that, of course, there

could be a divide, at which point the SEC, with the growing responsibility as the national market place develops, might be simply overwhelmed, and it might turn out at some time in the future that matters

of significance should have been identified, though perhaps they did

not involve intentional wrongdoing—after all, you are dealing with

an area in which the question of honorable and desirable conduct can

not be precisely defined.

And I feel that the enforcement division is a very key part of this

operation. I merely suggest this, not as a criticism, but as an added

caveat.

Mr. HILLS. I appreciate, accept, and agree. No one has more respect

than I for the capacity of the enforcement division. But I think the

chairman should understand that all of the resources of the Commission, in one way or another, are devoted to enforcement-type activities.

I will give you just one example and one request.

We have a very large division of corporation finance. Almost all of

their time historically has been spent reviewing documents before

they are filed to tell and advise people as to whether the document is

sufficient.

My own judgment is that that is a broad waste of time and that we

should make those forms simpler, more obvious, and not spent as much

•time with that, and those people with the capacity that our computer

system and micrographics will give them should be spending their time

reviewing industries. They should be looking at comparable statistics.

They should have a 5-year program of going through the shipping industry, the automotive industry, the insurance industry, and they

should be doing analysis which would be, then, capable of being used

by the enforcement division.

It would not only make it a more interesting job, but be far more

productive to create the kind of early warning system that the chairman speaks of. And if we do not equip the Commission to do that, we

will be, indeed, overwhelmed because there is no way that you could

quadruple the size of the Commission. We cannot, as an original proposition, investigate 11,000 companies that are listed and try to find out

which of them are committing faults. We have to have better access to

information and better surveillance standards.

We do have problems, Mr. Chairman. Probably the single, greatest

problem affecting the efficiency of the Enforcement Division is space.

We have gone through the battle of Buzzard's Point and we are going

through the battle of GSA.

We are frustrated by a form of bureaucracy that I think is totally

unacceptable and wasteful. The Commission needs about 40,000 square

feet. Anyone who has seen the halls of the Enforcement Division or the

halls of the General Counsel knows that we are in an incredible crunch.

We have senior investigators and attorneys sharing office space. We

have no conference rooms. We don't have rooms in which to put files.

We have just shipped 350 files out of the Commission to make a little

more room available.

There is space directly across the street in a building that could be

leased for 2, 3, or 4 years, and there is some land behind the Commission that is taken up by parking lots and is an eyesore. And this Congress and the GSA and the Government can figure out a way to buy

that land, and build additional space for us and to give us space for a
22

couple of years across the street while this is being done. This would

save money in the long run because we are not efficient in our present

overcrowded state, and it's costing us money and is frustrating. It not

only frustrates the Enforcement Division in terms of just finding

things and moving around, but it is obviously discouraging to people

who come to the Commission and find themselves in such an Incredibly

obsolete working environment.

We have a turnover far greater than we ought to have, which we

would not have if we could make better living arrangements available

for the Commission.

The number one, first priority for this Commission is to get more

space. I have fought for it for one and one-half years with a total lack

of success. I have suggested to people who have been named as possible

successors to me they ought not to take the job unless the President

looks them in the eye and says he will get the space for them. It is

critical.

Mr. ECKHARDT. I understand that problem. Do I understand correctly that you have certain limitations with respect to getting space

across the streets because of some constraints such as maximum rental

charge?

Mr. HILLS. GSA has a maximum rental charge which makes alot of

sense in terms of administering all of government. But it would be

sensible in this case to waive that specification for 3 or 4 years to meet

an emergency that came about because of the foolishness of trying to

put this agency somewhere else.

To allow this agency to spend for 3 or 4 years a dollar per foot above

the usual GSA limit strikes me as not destroying the bargaining power

of the Federal Government in other leases.

Mr. ECKHARDT. That limitation is not statutory. It is administrative, is it not?

Mr. HILLs. It is totally administrative. To do the job of building

additional space for the building, you would need about 100,000 square

feet more for the Agency. That would allow us to consolidate all of our

efforts in the building. I do think that would take a one-time statutory

initiative to permit us to do that and to let the Government negotiate

space for us at a fair price. But we could alleviate our problem in 60

days administratively.

Mr. ECKHARDT. Mr. Broyhill, do you have any questions?

Mr. BROYHILL. No questions.

Mr. ECKHARDT. Mr. Opper, do you have any questions?

Mr. OPPER. Yes. I have a question on the budget for the Division on

Investment Management.

According to the budget request, the Commission's goal is for 2-year

inspection cycles for investment companies and investment advisers.

The budget does not increase the size of the investment management

division staff, nor of the regional offices which most often conduct these

inspections.

Presently, inspections of investment companies are carried out once

every 5 years. It is anticipated that in 1978, they will be performed

every 5.1 years. In 1978, investment advisers will be inspected once

every 9.4 years.

How does the Commission anticipate reaching the goal of an inspection once every 2 years, based upon no increase in staff?
23

Mr. Illus. Let me answer generally, and then I will have Miss

Jones, who is Director of the Division, perhaps respond.

The regional administrators and others in the Commission have

questioned in the past, and I think Miss Jones more than anybody else

has questioned, the need to investigate some people who fall in these

categories. Some are so small and simple in their operations that a

simple sworn statement mailed in as to the extent of their activities can

suffice. Also, we believe that we can organize the investigations and inspections, if you will, in a more rational fashion, and thus speed them

up.

I am not sure that we can accomplish our goal here. I fully share

your concern. Again, we must equip our regions to be more useful in

this area, and we are hopefully making that step. And Ann, perhaps

you can answer that better.

Ms. JONES. With regard to investment advisers, specifically, we are

working on a questionnaire which we hope to have cleared through

GAO to mail to advisers, which will give us an awful lot more nformation than we now have in-house. This was designed as a first

step which will aim us at the kinds of questions we should be looking

for in inspections and hopefully will make them more efficient.

With regard to working with the regions, we have in the last year,

and have continued to do so this year, conducted several regional office

seminars where we have sent some of our top people out in an attempt,

again, to make the inspectors in the field more able to do an efficient

job.

Unfortunately, we often do have to take the people off the sort of

routine inspection to send them out on for-cause inspections. But with

that in mind, we have also devoted some of our home office staff to the

inspection function, which is something we had not done before but we

had budgeted for specifically. So some of the people who work most

intimately with inspections are available to assist the regional offices

in big inspections. In fact, in the last 3 months, we have sent three different people for 3-week periods to California and Texas to do some of

the larger inspections.

When will we get to a 2-year cycle? I don't know. It is very difficult to predict, especially—not so much because of daily problems but

because of the for-cause inspections that take you away from a systematic approach.

Mr. HILLS. Mr. Opper, I might add one word.

I have some of Miss Jones's frustration about this area. All I can

say is we have to depend upon our staff to come up with ways in which

we can do things. What more can we do?

We do have resources. If a man came to me this afternoon and said,

"All right, I had an idea and I need two people to do something," we

would find money for that. I had a surplus budget in my 

office, 

in the

Chairman's office. The money is there. For anyone in a position to manage any business enterprise or any organization the first rule is don't

ever tell somebody you can't do it because you don't have the money.

I regard that as an impossible ducking of your responsibility. I have

not had to say it. Sometimes I say it is not a good idea, let's not do it.

But I have not had to say, we don't have the money to do something.

Mr. ECKHARDT. Aren't there occasions, though, when you say we

have to select between priorities and isn't that somewhat saying the

same thing?
24

Mr. Hums. I don't think so, Mr. Chairman because I have not had

to do that with respect to a matter. I have sometimes argued, sometimes

successfully and sometimes I have been outvoted, that we need not

investigate something because some other agency is doing it already

and we are just coming in later on.

When that happens sometimes, it is not because I feel we can't afford it. It is because I see no particular benefit to the investor in us adding our weight to it. I argue that quite often. But the majority of the

time the Enforcement Division talks me out of it. Once in a while my

fellow commissioners talk me out of it. But that is not choosing between priorities.

The priorities we are choosing from are in the modernization program. Once in a while we may consider that we have an awful lot of

money invested in a particular enforcement matter. We may have spent

a lot of money on it. And we may determine that we'd better settle the

case because we don't have the resources in the regional office to try it

immediately.

But the way to deal with that is to find more trained people and you

don't do that in an afternoon. It's not solved just by a budget increase ;

it's solved by long range planning to get more people with that skill.

In the 17 months I have been in the Commission I have not seen

something come before me and had to say no, we won't do this because

we don't have the money we have to do this instead. We have simply

not had to do that.

Where I have had to say we cannot do that, it has been because it is

not right for doing.

For example just a few months ago the Investment Management

Division said that they proposed to us an advisory committee with respect to investment advisers. And I was looking at a bank study that

was overdue to the Senate, and I said, no, let's put that off for 6 months

because we don't have the supervisory personnel in investment management right now who can devote the kind of time to this study that

a competent group of outside advisors would want. So that was a case

of a priority item put off because it could be managed better at a later

date.

Not so long ago in the Division of Market Regulation we said to the

industry, we are not ready to approve puts. This was last fall. We

caused a great deal of anguish because people said we have a program

for a pilot project on puts and we want puts to be traded. But we said,

I am sorry, we are going to have to wait several months on that. We

waited 6 months because we had so much going on in market regulation, that we were not capable of doing it earlier.

And I must say to you in that case that even if we had 400 more people at work at the Commission, the four of us Commissioners weren't

capable of absorbing the question of puts at that time. I was not capable

of making a thoughtful decision as to whether put trading should be

permitathen.

So we have those kinds of priorities put upon us by the 1975 amendments, and we are trying to work our way through it but it is hard.

Mr. ECKHARDT. How many economists do you have in the whole

operation, not just Enforcement?

Mr. HILLS. Approximately 30. We have 27 in the Office of Economic

Research, and we have a few others scattered around. We also. Mr.

Chairman, have a number of very substantial subcontracts with uni-
25

versities that are doing work for the - Office of Economic Research- in

our attempt to get a conceptual framework for the market percent in

option training and doing a number of studies.

So we have greatly multiplied the economic capacity of the Commission in that way. We have signed a study agreement with the Department of Commerce quite recently which I am really quite pleased

with. It will involve about $400,000 from the Department of Commerce that will help us monitor the impact of the regulations we have

with respect to capital and we are creating econometric models for

doing this kind of monitoring, which would hopefully be usable in

many other areas.

So we have had a very large capacity which we are trying to define,

as I say.

Mr. ECKHARDT. I would like to explore a little bit these persons in

Enforcement. Maybe Mr. Sporkin can answer on this.

As I was calculating here, there are about 18 percent other than professional—who does the typing of the professionals? Do you have some

kind of a pool or something?

Assume a firm of 105 lawyers. A law firm of that size would have an

enormous supporting staff for that group, certainly more than 32.

How do you handle that?

Mr. Huts. If I may, Stan feels very strongly about this and I feel

just as strongly.

We do not 'have sufficient support. Again, 17 months ago, we had

awful equipment, we had unmatched typewriters, we had no Lexitron

7 months ago.

How many do we have now?

Mr. Sroinurr. We now have eight.

Mr. HILLS. There is a device that costs, what? $600 a month?

Mr. HAYNES. Yes.

Mr. 1-lims. There is $7,200 times 8. A Lexitron can do an enormous

amount of work in the Enforcement Division. We do not have enough

sophisticated dictating equipment, we do not have all kinds of things.

We• don't have good file cabinets. We don't have enough room, of

course. But it is this kind of modernization that we need support on.

I have no doubt that we should be developing more paraprofessionals, more secretaries, more support for our people so they can spend

their time working to their capacity.

I can tell you we are lacking in this area.

Mr. ECKHARDT. I don't see how you do it. You don't borrow secretaries from other departments or have some kind of a pool?

A highly trained lawyer, particularly one who has also taken special

training in the security field, who types his own briefs in rough draft

and then lets somebody else copy them, is a pretty high paid secretary.

Mr. thus. The General Counsel some time ago made a rough survey

and found that in his office lawyers were spending a significant percentage of their time typing, which is monstrous. And again, we used

Lexitrons and other devices to speed that up.

We haven't done enough of this modernization. In fact, we are still

doing it, as you can see from our supplemental budget from our request.

We have put about as much new equipment and people in as we can

in the period we have been there. I believe it will continue to be increased. There is no lack of budget right now to get secretaries and

more support. There is a considerable lack of space.
26

Mr. ECKHARDT. If you had a law firm of 105 lawyers and you had a

supporting staff of one secretary per lawyer, and a number of file clerks,

which I suppose a large law firm would ordinarily have, you would

then have 105 man-days of legal activity. But if you have the situation

you have, you don't have 105 lawyers, in terms of 105 lawyer-days, do

you?

Mr. HILLS,. That is correct.

Mr. SPORKIN. You have put your finger on quite a serious problem..

As the chairman mentioned, the key problem right now is adequate,

space. Obviously, I believe we are going to need more people.

Mr. ECKHARDT. Some are in the basement, aren't they?

Mr. SPORKIN. Some are in the basement. Last Monday morning I

came in and I have an old couch I brought in and somebody was resting

there, and I said, what are you doing? And he said, well, we worked

all night Iong and we had three or four people working all night long,

and my heart went out for them.

We have always lived under a tradition whatever the work is we're,

going to get it done. No matter how many people you give us we're.

going to get it done whether it means we're going to have to get the out--

side people to do it or if we do it by having inside people, the job's going to be done as best we can.

Now what we really need, the first priority is we have to get adequate housing. We could not, in good conscience, bring in 50, 60, or 100-

more people in the quarters we have. First of all, they wouldn't stay..

We are trying to attract very competent people. We are able to do it.

For example, we have one senior trial lawyer who happened to run his

own firm here in town. He got fed up with it. I talked him into coming

with the Commission. I am now in the process of probably convincinc,

two or three other people just like that. They are fed up with private

practice, even though they are making three or four times as much as

they would in the Government. They have seen what we can do and

they like the idea. And I think we are going to be able to attract those.

people.

The problem that we are going to have is that if we do attract those

people, if we don't have an office to give them, if we don't have a secretary to give them, if we don't have the equipment that the chairman

mentioned, it is going to be very difficult to keep them.

And I think that is the real problem. But I think the first priority,

and I tell you, it is going to be a crisis, if we do not have a place where.

we can give every professional his own office and appropriate secretarial help. But if a lawyer doesn't have his own office where he can

think, where he can write, without having somebody else on the telephone that's going to impede his productivity, he has to be able to

concentrate. And that is really the difficulty right now.

Mr. ECKHARDT. I happen to be one who believes that a person in a

profession should not be occupied in all of his working hours in definable work. That is, conferring with clients, reading books, dictating.

I think he ought to have some time to think.

Mr. SPORKIN. We don't have that capacity.

Mr. ECKHARDT. I think that if there is not that leeway with respect

to those in governmental practice, and there is that leeway for imagination and intuitiveness among those who may have, to a certain

extent, an antagonistic position to government, they are going to win

out.
27

I don't know what your view of that is.

Mr. SPORKIN. I think that is the point of giving someone an office,

so that he can have a place where he can think for a few hours.

Mr. ECKHARDT. You have apparently a normal staff of around 200,

as I understand it.

Mr. SPORKIN. We have never really reached that number. That is what we are projecting. But you have to realize it is the same thing.

You get it on Monday and then on Tuesday the President puts a freeze

on. You get it Monday and the Congress says, absorb your pay raises

or absorb something else.

So we have never really been up to 200 people onboard.

Mr. ECKHARDT. What have been your numbers?

Mr. SPORKIN. Onboard we haven't had more than 180 at any one time.

Is that correct, Larry?

Mr. HAYNES. Yes.

Mr. ECKHARDT. IS that enough?

Mr. Hams. It is not enough. It is not a budgetary problem that is stopping us. It is the turnover problem, the space problem, and equipment problem.

We don't have a centralized file room. We don't have a sufficient secretarial pool.

Mr. ECKHARDT. Now you say it's not a budgetary problem now. May- be you have other constraints that prevent you from occupying enough people on the job. But we are talking here about an authorization that will cover a certain period of time. And I hope we do not necessarily

have to envisage the present situation that exists. I hope that we can take into account improvements that will more adequately permit you

to do the very enormous job that you have got to do.

Mr. HILLS. My best judgment is, and it is one that I have thought a

lot about, that we will have under these budget authorizations capacity

to strengthen the Enforcement Division—and let me say we concentrate on enforcement, but believe me, the General Counsel's Office, Market Regulation, and others are all in this together and seeking

the same objectives. We all have these constraints. We will be able to make the lawyers function as lawyers full time with this budget. We will develop that support mechanism.

We don't really know what the capacity of the force that Stan now has can be if properly supported and properly housed. Just putting a

central filing system in and file clerks, that will efficiently get files back and forth, that will track them so that they know where a case is so that he knows what he has, means that a given lawyer is going to greatly improve is efficiency.

We do not have an efficient system, but we have Superb people. We

are probably getting 53 man-years just from overtime out of the Enforcement Division, and I wouldn't be surprised if it's more. We work

enormous hours.

All I can tell you is that I worked, I thought, as hard as a man should work when I spent time at the White House. But I worked, and everybody around me worked at a higher level at the Commission

than we did in the White House.

It is an enormous personal sacrifice for some of these people who

stay far longer than Chairmen stay with this agency.
28

Turnover is a considerable problem. What we lose from turnover

can never be made up. Because when Stan may have the same manpower, if he loses three people who have been on the case for some time,

it is not just a matter of replacing bodies. Even if they are replaced,

he has lost probably another man an a half just in getting the new

people up to speed..

Those are the kinds of problems that we have. That is where our

priorities lie, I suppose, in trying to become more efficient, lower our

turnover, and to make the place work better. And within the time

limits, I think our staff, I think Larry and Pete Shipman, who has

left, have done an incredible job in 17 months. And if we can maintain

the supplemental budget to continue the process and if we can get

that space, we can design a superb operation.

It hurts me. We started, the chairman may recall, a law firm of our

own some 15 years ago. I was proud of the fact that that was probably

the most efficient law firm in the country. It did everything in a most

efficient fashion. And it brings tears to your eyes to see how we do

things at the Commission. It is not the staff's fault there is simply

not enough organized support.

Mr. ECKHARDT. Ms. Nord, do you have any questions?

Ms. NORD. No questions, Mr. Chairman.

Mr. ECKHARDT. Well, Mr. Hills, we very much appreciate your testimony. We recognize the excellent work that your Commission has

done and we thank you very much.

Mr. HILLS. Thank you, sir.

Mr. ECKHARDT. The meeting is adjourned.

[Whereupon, at 11:50 a.m., the subcommittee adjourned.]

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