74 . / t /

In 8/4

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OVERNMENT

bora ge

H E A R I N G

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON

INTERSTATE AND EOREIGN COMMERCE 

HOUSE OF REPR ESEN TATIVES

EIGH TY -SE VE NT H CONGRESS

SECOND SESSION

ON

H.R. 11670

A BILL TO POSTPONE BY 3 MONTHS THE DATE ON OR B EFORE 

WHICH THE SECU RITIES AND EXCHANGE COMMISSION SHALL 

REPORT TO TH E CONGRESS TH E RESULTS OF ITS STUDY AND 

INVESTIGATION PURSUANT TO SECTION 19(d) OF TH E SECURITIES EXCHANGE ACT OF 1934, AND FOR OTHER PURPOSES

MAY 14, 1962

Printed f or the use of the 

Committee on In te rs ta te an d F oreign Commerce

84088

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 1962
CO MMITTE E ON IN TE RST ATE AN D FO RE IG N CO MM ER CE

ORE N H AR RIS , Arkansas, Ch airm an

JO HN B E L L W IL LI AM S, Mississippi 

P E T E R F. M ACK , Jr., Illinois 

K E N N E T H A. RO BERT S, Alabam a 

M OR G AN M. M OULD ER , Missouri 

H A R L E Y O. ST AG GE RS , West Virg inia 

W A L T E R RO GE RS , Texas 

SA M U EL N. FRIE DEL, Maryland 

T O R B E R T H. M ACD ON ALD , Massa chusetts 

G EO R G E M. RH OD ES} Pennsylvania 

JO HN JA RM AN , Oklahoma 

LE O W. O’ BRI EN , New York 

JO HN E. MO SS, California 

JO HN D. DIN GELL , Michigan 

JO E M. KI LG ORE, Texas

JOHN B. B E N N E T T , Michig an 

W IL LI AM L. SPR IN G ER , Illinois 

PAU L F. SCH E N CK , Ohio 

J. AR T H U R YO U N G E R , California 

H AR OLD R. CO LLIE R , Illinois 

M IL TO N W. G LEN N , New Jersey 

SA M U EL L. D EV IN E, Ohio 

A N CII E R N ELS EN , Minnesota 

H AS TI NGS K E IT H , Massachusetts 

W IL LA RD S, CU R TIN , Penn sylvania 

ABN ER W. SI BAL , Connecticut 

VER NON W. TH OM SO N, Wisconsin 

P E T E R H. D O M IN IC K , Colorado

P A U L G. RO GE RS , Florida

R O B E R T W. HEM PH IL L, South Carolina 

D A N RO ST ENKOW SK I, Illinois 

JA M E S C. H EALEY, New York 

H O R A C E R. KO RN EG AY, North Carolina

W. E. Williamson, Cle rk

K enn eth J. Pain ter, As sist an t Clerk

Andrew Stev enson

K urt Borchardt

Pr ofessio na l St af f

Sam G. Spal

Mart in W. C unnin gham

Subc om m it te e on C om me rc e an d F in an ce

P E T E R F. M A C K , Jr., Illinois, Chairman

JO HN D. D IN O ELL, Michigan M IL TO N W. G LEN N , New Jersey

JO E M. KIL G OR E, Texas , HAS TI NGS KEIT H , Massachusetts

R O B E R T W. HEM PH IL L, South Carolina W IL LA RD 8. CU R TIN , Penn sylvania 

JA M ES C. H E A L E Y , New' Yor k

II
C O N T E N T S

Page

Text of H.R . 11670____ ____ __________. . . _________ ____ . . . . . . . . . . 1

Report of Securities and Exchange Commission______________________ 1

Sta tem ent of—

Cary, Hon. William L., Chairm an, Securities and Exchange Commission___________________________________________________ 4

Cohen, Hon. Manuel F., member, Securities and Exchange Commission______________________________________________________ 4

Cohen, Milton H., Director, Special Study of Securities Markets,

Securities and Exchange Commission_________________________ 4

Conwill, Allan F., Director, Division of Corporate Regulation, Securities and Exchange Comm ission_______________________________

Donaty, Frank J., Comptroller, Securities and Exchange Commission. 

Fleischer, Arthur, Jr., Legal Assistant to the Chairman, Securities

and Exchange Commission__________________________________ 4

Loomis, Phillip A., Director, Division of Trad ing and Exchanges,

Securities and Exchange Commission_________________________ 4

Additional inform ation sub mitted for the record by—

Association of Stock Exchange Firms, letter from Briltin C. Eustis,

pre sident__________________________________________________ 34

Mack, Hon. Pete r F., Jr., Extension of Stock Market Investigation, 

from Congressional Record, May 9, 1962_____________________ 2

National Association of Securities Dealers, Inc., letter from Wallace

H. Fulton, executive director________________________________ 34

Securities and Exchange Commission, statem ent of selected workload 

items and appropriations and authorized stre ngth, fiscal vears 

1953-62, table_____________________________________________ 21

h i

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MONDAY , MAY 14, 19 62

H o u se of R e pr e se n t a t iv e s,

S ubcom m it te e on C om mer ce an d F in a n c e of t h e

C om m it te e on I n ter sta te an d F o r eig n C om m er ce,

Washington, D.C.

The subcommittee met at 10 a.m., pursuant to call, in room 1334, 

New House Office Building, Hon. Peter F. Mack, Jr. (chairman of 

the subcommittee), presiding.

Mr. M ack . The subcommittee will come to order.

This morning the Subcommittee on Commerce and Finance has 

scheduled a hearing on H.R . 11670, a resolution to extend the investigation and study now being conducted by the Securities and Exchange 

Commission for 3 months and to provide for an additional $200,000 

to complete this investigation.

A copy of the bill, plus agency reports, will appear at this point in 

the record.

(A copy of H.R. 11670 and a report from the Securities and Exchange Commission follow herewith:)

[H .R. 11670, 87th Cong., 2d sess.]

A B IL L To postpone by three m ont hs the date on or before which the Securities a nd Exchange Commission shall re port to the Congress th e re sul ts of its study and investigation pu rsu ant to section 19(d) of the 

Securities Exchange Act of 1934, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of

America in Congress assembled, Th at the second sentence of subsection (d) of 

section 19 of th e Securities Exchange Act of 1934 (15 U.S.C. 78s(d)) is amended 

by striking out “Janua ry 3, 1963” and inserting “April 3, 1963” in lieu thereof. 

The last sentence of such subs ection is amended by striking out “$750,000” and 

inserting “$950,000” in lieu there of.

Securities and Exchange Commission,

W ashington, D.C., May 14, 1962.

Hon. Oren Harris,

Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington, D.C.

Dear Mr. Harris: In answ er to your request of May 12 for comments on 

H.R . 11670, I am enclosing three copies of a statem ent which I presented this 

morning to the Subcommittee on Commerce and Finance of yo ur full committee. 

Sincerely yours,

William L. Cary, Chairman.

Mr. M ac k. Last June I introduced a resolution, House Joint 

Resolution 438, which directed the Securities and Exchange Commission to make a study and investigation of the adequacy, for the 

protection of investors, of the rules of the stock exchanges and of the 

National Association of Security Dealers. This resolution provided 

for a study which was to terminate on Jan uary 3.

1
2 EXTEN D DA TE OF SE C REP ORT

The resolution I introduced on last Wednesday simply extends this 

time for 3 months and provides an additional $200,000. I made 

quite an extensive statement on this subject on Wednesday of last 

week on the floor of the House, and it is my intention to include this 

statement at this point in the record.

(The statement which appeared in the Congressional Record of 

May 9. 1962, on pp. 7424 and 7425, follows herewith:)

E x ten sio n of Sto ck M a r k e t I n v estig a tio n

The Speaker pro tempore (Mr. Libo nati). Under previous order of the House, 

the gentleman from Illinois [Mr. Mack] is recognized for 30 minutes.

(Mr. Mack asked and was given permission to revise and extend his remarks.)

Mr. M a c k . Mr. Speaker, I have tod ay introduced a resolution which would 

provide for a 3-month extension of th e stock market investigation.

My resolution would also authorize the Securities and Exchange Commission 

to spend an additional $200,000 on its special study of the Na tion’s security 

exchanges and over-the-counter market.

On June 1, 1961, I introduced House Joint Resolution 438 directing the Securities and Exchange Commission to make a study and investig ation of the adequacy for the protection of investors of the rules of the stock exchanges and of 

the National Association of Securities Dealers, and authorizing the appropriation 

of $750,000 for such study and investigation. Last summer I presided a t hearings 

before the Subcommittee on Commerce and Finance of th e House Committee on 

Inter sta te and Foreign Commerce at which the Chairman of th e Commission and 

represen tatives of the securities industry testified. No one appeared in opposition 

to the resolution.

The resolution was subsequently passed by the House and Senate and approved 

by the President on September 5, 1961. The sum of $412,500 was appropriated for fiscal 1962 and $337,500 has been requested for fiscal 1963. Pursu ant to this 

resolution the Securities and Exchange Commission has initiate d what I believe 

will be the broadest and most penetrating investigation of the securities markets 

since the early 1930’s. Starting with a small nucleus tran sferred from the regular staff, a special staff 

of about 60 attorneys, economists, statisticia ns, and other necessary personnel 

has been organized; study plans have been developed; and various studies and 

investiga tions are now well underway by the study group, which has been desig­ nated by the Commission as the Special Study of Securities Markets. During 

the course of the study, I have been continuously informed by the Chairman of 

the Commission and the direc tor of the special study with regard to the study 

plans and the progress of th e in vestigation. I have been impressed by the manner 

in which the Commission and its staff have exercised the responsibilities entrusted 

to them by the resolution. The Congress has directed the Commission to study 

a complex and intricate segment of our economy where an investiga tion must be 

conducted with extreme care and responsibility so as not to destroy the confidence 

of millions of investors in our securities markets. I have every reason to believe 

th at the Commission is conducting its study and investigation in a very' serious, 

diligent, and responsible manner. Although the study has been underway for only about 6 months, I think 

there are a number of imp orta nt and positive accomplishments th at can already 

be reported to the Congress. One of the factors which pro mpted my introduction 

of th e resolution was the rath er alarming revelations of misconduct on the Ameri­ can Stock Exchange, which—tog ether with a number of oth er conditions— 

indicated an erosion of stan dards in certain segments of the securities business. 

At this time 1 year ago the Commission reported a rising number of enforcement 

actions involving fraud and manipulation. The president of the New York 

Stock Exchange had issued two strong warnings against speculation in the stock 

mark et. There was an increasing tide of so-called hot issues. Since the initiation of the study and investigation pursu ant to the resolution, there have been 

a number of significant developments, directly or indirectly stim ulated by the 

special stu dy, which have helped to c reate a more salu tary climate in the securities 

markets. First, the Commission on Jan uary 6, 1962, authorized the public release of a 

staff report with respect to the organization, management, and regulation of 

the conduct of members on the American Stock Exchange. The report revealed a 

general deficiency of stan dards and a fundame ntal failure of controls on tha t
EXTEND DATE OF SEC REPORT 3

ex ch an ge . The failu re of an im p o rt an t se gm en t of th e fin an cia l co m m un ity to 

exerc ise its sh ar e of re sp on sibi lit y fo r se lf-reg ulation of th e ex ch an ge ; th e re su lting co nc en trat io n of powe r in th e hands of a sm all se lf -p er pet uat in g grou p 

do m in at ed by sp ec ialis ts; th e dis pro port io nate em ph as is by resp on sibl e ex ch an ge 

officials up on purs uit of new list in gs ; th e lac k of m em be r su pe rv isio n by th e 

ex ch an ge—all cont ri bute d to a gen er al br ea kd ow n of th e re gu la to ry mac hi ne ry . 

As a re su lt of th e Com miss ion’s in ves tigat io n of th e Am erican Stoc k Exc ha ng e, 

a thor ou gh go in g reform an d re org an iz at io n of th e ex ch an ge is now un de rw ay . 

The pr ev ious do m in an t gr ou p in th e m an ag em en t of th e ex ch an ge ha s been 

re pl ac ed ; a new pr es id en t ha s be en appoin te d; th e co nst itution is be ing am en de d; 

th e staf f is be ing en larg ed an d st re ngth ened; new co nt ro ls an d su rv eilla nc e 

pr oc ed ur es ar e be ing in st it ute d; an d th e ex ch an ge is proc ee ding w ith va rio us 

di sc iplin ar y ac tion s. The Com m ission ’s ap pr oa ch to th is prob lem ha s be en 

with in th e sta tu to ry fram ew ork of se lf-reg ulation. I t is ho pe d th a t, un de r th e 

ac tive su pe rv isio n of th e Co mmiss ion, th e ex ch an ge will be so re const it ute d th a t 

it will be ca pa bl e of go ve rning its elf in th e m an ne r or ig in al ly en vision ed by th e 

Co ngres s.

Sin ce th e in it ia ti on of th e spec ial st udy, th er e ha ve be en a num ber of ot her 

de ve lo pm en ts in di ca ting th a t th e se cu rities in dust ry is aw ar e of th e im po rtan ce 

of pu tt in g its ow n house in or de r. C ert ain of th e region al ex ch an ge s ha ve ti g h ten ed t heir lis ting re qu irem en ts; oth er s are r ev am pi ng their s upe rv isor y proc ed ur es 

and co ntro ls. The Ne w York St oc k Exc ha ng e ha s re ce nt ly ad opte d a rul e wh ich 

re qu ires th a t sp ec ialis ts on th a t ex ch an ge re port all tr ansa cti ons m ad e by th ei r 

pu bl ic cu st om er s in stoc ks in wh ich th e sp ec ialis t is regi ster ed . In its re po rt on 

th e American Stoc k Ex ch an ge , th e sp ec ial st udy ha d po in te d to some of th e 

pote nti al ab us es of a sy stem whe rein sp ec ia lists are per m it te d to han dle or de rs on 

be ha lf of pu bl ic cu sto mers.

In th e ov er -t he -c ou nt er m ar ke t, th e N at io na l Asso cia tio n of Se cu ritie s Dea ler s 

ha s st ep pe d up its d iscipl inar y ac tions in vo lv in g vi ol atio ns of it s ru les by m em be rs. 

T he “ ho t issu e” ph en om en on has ver y no tice ab ly coole d off since th is st udy and 

in ve st ig at io n wa s un de rtak en .

The sa lu ta ry eff ect of th e st udy an d in ve stig at io n in ge ne ra ting refo rm fro m 

w ith in th e in dust ry was no te d in a re cent artic le— Ap ril 15, 1962— in th e Ne w 

Yo rk Ti mes:

“ A no th er reas on , for refo rm of th e American Stoc k Ex ch an ge , is th e pre sence 

of t he Se cu ritie s an d Ex ch an ge Com m ission , st ud yi ng all of Wall S tr eet an d par ­

ticu la rl y th e American Ex ch an ge u n d er co ng res sio nal m an dat e. Thi s pre sence 

ha s be en ubiq uitous—fro m th e tr ad in g floor of th e American Exc ha ng e, wh ere 

in ves tiga to rs ha ve stoo d sid e by sid e w ith th e sp ec ialis ts, to th e ov er -t he- co unte r 

ho uses and th e big bo ar d itself .

“ Wall S tr eet fear s re st rict iv e ne w legislation. A clean ho use, it is ho pe d, will 

mak e th e leg islatio n less se vere. N atu ra ll y , th er e is a lso a since re de sir e to c orrect 

ab us es .”

In th e re p o rt to th e Hou se which I su bm it te d on th e re so lutio n, it wa s st ate d 

th a t wh ile th e lang ua ge of th e re so lu tion is specific , th e sco pe of th e reso lutio n 

wa s in te nded to be broa d in as m uc h as th e su bj ec t m att er en co m pa ss ed or no t 

en co mpa ssed by th e rules of se cu ri ties ex ch an ge s an d se cu rities as so ciatio ns is 

ex trem el y wide in bre ad th . C onso nan t w ith th is di re ct iv e of th e Co ng res s, th e 

Com miss ion ha s em ba rk ed up on an in quir y wh ich is im pr es sive in its sco pe an d 

co mpr eh en sive ne ss. I ha ve been ad vis ed th a t th e Co mmiss ion is st udyin g th e 

follo wing su bj ec ts, am on g oth er s:

Fir st . Qua lif ication an d su pe rv isio n of pe rson s in th e se cu rities bu sine ss; th e 

fina nc ial re sp on sibl ity of br ok er -d ea lers .

Second . T he stoc k ex ch an ge s and th eir rules an d pr ac tice s, in cl ud in g th e role 

of sp ec ialis ts, floor trad er s, an d odd -l ot de ale rs.

Thi rd . Pu bl ic off erings of se cu rities : U nd er writing an d dis tr ib uti ng pr ac tice s 

an d th e aft erm ark et.

Fou rt h. T he op er at io n an d str u ctu re of th e over -t he- co unte r m ark et; th e 

quota ti ons sy stem s.

Fifth . C om pa ra tive re gu la tion in th e ex ch an ge an d ove r- th e- co unte r m ar ke ts.

Sixth. Sec uri ty cr ed it an d m ar gin requ irem en ts.

Sev en th. Se lling prac tic es , in vest m ent advic e, an d fin an cial pu bl ic re latio ns .

E ig ht h. In d u str y se lf- regu lat ion.

N in th . Se lected as pe cts of m utu al fu nd s.

The Com miss ion ha s em ba rk ed upon an am bi tiou s an d fa r- re ac hi ng in qu iry 

in to th e se cu rities m ar ke ts. I am in fo rm ed th a t pr ac tica lly all pro je ct s ar e in 

th e in te ri m stag e— data ar e be ing gat here d th ro ug h in te rv ie w s and qu es tion -
4 EXTEND DATE OF SEC REPORT

naires, and are now being reviewed and assembled. Public hearings have been 

scheduled and the first series has commenced this week.

The Chairman of the Commission has informed me th at the stu dy is being 

pursued with vigor and diligence and th at some of the study projects will be 

completed by the reporting date of Jan ua ry 3, 1963. However, complete execution of the study plan and adequate fulfillment of the purpose of the resolution 

will depend to some exten t upon whether or not the reporting date of the study 

is extended and additional funds are authorized. The Chairma n has indicated 

to me t hat an extension of the reporting date to Marc h 31, 1963, with an additional authorization of $200,000 will be sufficient to complete substantially the 

factfinding phase of the inquiry, tog eth er with a report and recom mendations 

to the Congress.

In view of the importance of this inquiry to the investing public, I have today 

introduced a resolution which would extend the date of the report of the Commission from Jan uar y 3, 1963, to March 31, 1963, and would authorize the 

appropriation of an additional $200,000 to continue the stud y and investigation. 

I believe th at the proposal of the Commission is a completely reasonable one. 

Although the resolution was introdu ced by me in June 1961, i t was not adopted 

by the Congress until August 25 an d approved by the President on September 5, 

1961. Subsequently the Commission was engaged for a few months in staffing 

and organizing the study unit. Preliminary inquiries and analyses had to be 

made before final stud y plans could be definitely formed. Moreover, investigator y techniques had to be varied according to the subject matter. These prelimin ary steps indicated the breadth and complexity of such an undertaking. 

Extension of th e study to March 31, 1963, would provide a tota l of 18 months to 

complete the study, the period originally contemplated when the resolution 

was introduced.

A more impor tant consideration in favo r of th e extension is the impo rtance of 

this study and investigation to the investing public. The dramatic increase in 

public participation in the securities markets, particularly among persons having 

slight acquain tanc e with the intricacies of corporate finance and stock market 

operations, requires th at these ma rke ts be fair and orderly. Practices which 

impinge upon the integrity and orderly functioning of the ma rke t cannot be 

tolera ted.

The Commission should be per mitted to complete the und ertaking which the 

Congress has entrusted to it in orde r to maintain full investor confidence in the 

securities markets.

M r. M ac k. M r. Cha irm an , we ar e ve ry ha pp y to ha ve yo u bef ore 

our c om m itt ee a gain an d we ar e quit e anxiou s to ha ve y our testim on y 

co nc erning th e pro gress th a t yo u m ad e an d th e ju stific at io n for th e 

exten sio n of th is in ve stigation.

M r. C hai rm an , you m ay proc eed.

STATEMENT OF HON. WILLIAM L. CARY, CHAIRMAN OF THE

SECURITIES AND EXCHANGE COMMISSION, ACCOMPANIED BY

HON. MANUEL F. COHEN, MEMBER, SECURITIES AND EXCHANGE

COM MISSION; MILTO N H. COHEN, DIRECTOR, SPECIAL STUDY

OF SECURITIES MARKETS; PH ILLIP A. LOOMIS, DIRECTOR, DIV ISION OF TRADING AND EXCHANGES; ALLAN F. CONWILL,

DIRECTOR, DIVISION OF CORPORATE REGULATION; FRANK J.

D0NATY, COMPTROLLER; AND ARTHUR FLEISCHER, JR „ LEGAL

ASSISTANT TO THE CHAIRMAN

M r. C ar y. M r. Cha irm an an d Co ng ressman K ei th , I am William 

L. C ar y, C ha irm an of th e Sec ur itie s an d Ex ch an ge Co mm iss ion.

I ha ve a pr ep ar ed s ta te m en t from wh ich I m ay on occasio n de vi ate, 

b u t which w ill be th e ba sis of m y te stim on y. An d in th e ev en t th at I 

do so de vi at e, I would like to hav e th is pr ep ar ed st ate m ent a part of 

th e reco rd .
EXTEND DATE OF SEC REPORT 5

Mr. Mack. Without objection, your entire statement will be included in the record.

Mr. Cary. My appearance today is to testify on H R. 11670. This 

resolution extends the completion date of the Commission’s special 

study of the securities markets from January 3, 1963, until April 3, 

1963, and as you have indicated already, authorizes an additional 

$200,000 for the 65 positions of th e special study to operate as a unit 

until the lat ter date. The approval of this proposal would increase the authorization of the study from $750,000 to $950,000. The Commission strongly supports this proposal.

The special study is a result of a resolution introduced by Congressman Mack authorizing and directing the Commission to make a study 

and investigation of the adequacy, for the protection of investors, of 

the rules of stock exchanges and of national securities associations. 

It was the firm belief of the Commission then tha t such a study was 

most essential and desirable. There had been no broad study of the securities markets in over 25 

years. During that period, important changes had occurred in the 

structure of the markets, as demonstrated by increases in the number 

of shareholders, in the number of issuers, in the number of brokerdealers, and in the volume of trading. Moreover, changes in the methods of distributing and marketing 

securities had become evident, such as the spread of branch offices, 

the employment of part-time salesmen and door-to-door selling. At 

the same time, and perhaps resulting from this great expansion and 

these changes, there appeared to be an increasing inadequacy, and 

even a breakdown, of controls in certain areas of the securities markets. 

Involved in the daily administration of the securities acts, the Commission had not had an opportunity for a reassessment in the light 

of all these developments. The progress of the study so far confirms 

the Commission’s belief in its importance and necessity.

The Commission believes that enactment of H.R. 11670 is a requisite for it to satisfy the purposes and intent of Public Law 87-196. 

The Commission expects to be able to report to the Congress on 

certain subjects by January 3, 1963, the scheduled termination date.

Virtually all projects are in various interim stages; data are constantly being acquired through interviews and questionnaires, and 

then subjected to distillation and analysis. However, complete 

execution of the study and adequate fulfillment of the broad purposes 

of the resolution will depend upon the extension of the study date 

and the authorization of additional funds.

The Commission most strongly desires to achieve the breadth of 

approach to the study which is clearly the intention of the Congress, 

as expressed when the Mack resolution was adopted. The House 

committee report on the resolution stated:

It should be noted th at while the language of the resolution is specific, the scope of the resolution which is telescoped in this succinct language is very broad inasmuch as the subject matter encompassed or not encompassed by the rules of the securities exchanges and securities associations is extremely wide in breadth. 

Moreover, Senator Williams of New Jersey said on the Senate floor:

It is intended th at the s tudy a nd investigation be wide in scope; otherwise the resulting information will n ot enable Congress to examine the broad spectrum of 

the securities indu stry.

84 08 8—62- -2
6 EXTEN D DATE OF SEC REPORT

The organization of the study group had to await appropriation of 

funds and entailed a certain amount of time for its staffing. The 

extension of the study would provide a total of about 17 working 

months for completion. House Joint Resolution 438 was introduced 

by Congressman Mack in June 1961; it was not adopted by the 

Congress until August 25, 1961, and was approved by the President 

on September 5, 1961.

The initial funds for the study, $412,500, were appropriated on 

September 30, 1961. Subsequently, the Commission required until 

early November to staff and organize the special stu dy unit. Further 

time was necessarily consumed in preliminary analyses before formulating any final study plans. In the same vein, the techniques of 

investigation had to be developed.

At the time of the introduction of the Mack resolution, the Commission could not definitively report to the Congress on the exact time 

required to complete the study. I do not venture to assert that even 

now we can speak with ultimate precision. But we do believe tha t 

the extension will provide the time necessary to complete substantially 

the factfinding phase of the inquiry, together with a report and recommendations to the Congress.

The time and manpower needed to complete an analysis and report 

on all the subjects which the Commission considers basic and vital, 

and which must be studied to satisfy the congressional intent, became 

apparent only after numerous preliminary inquiries. These inquiries 

pointedly demonstrated the breadth and complexity of our undertaking and further led us to the conclusion that, without an additional 

authorization, we shall have to exclude consideration of certain fundamental areas from the scope of the study.

Any attem pt at exclusion raises very difficult issues. Many problems are interrelated. What at first blush might be selected as being 

separate and distinct topics are frequently found to be so intertwined 

with other topics tha t any attem pt at separation would be artificial 

and might well lead to arbitrary conclusions.

I know in connection with this question of our need for additional 

funds and additional time you perhaps would like some concrete 

examples. One of them is in the statement. Another I might allude 

to is not described in this statement.

The first example involves the American Stock Exchange report. 

Although only a limited and interim report on the organization and 

government of tha t exchange, it necessarily touched on certain problem 

areas in relation to specialists and floor traders. But can one draw 

any final conclusions as to these aspects of the exchange without considering similar aspects of the New York Stock Exchange and other 

exchanges?

And even though the New York and American Stock Exchanges 

overshadow all the other exchanges, can we ignore these others either 

in their capacity as dual or even competitive markets for securities 

listed on the two larger exchanges, or in their capacity as primary 

markets for many local issues and many investors?

In other words, when you get into one facet, e.g., one major exchange, you are of necessity drawn into an examination and comparison of the other exchanges. By the same token, when we get 

into this question of the distribution of securities, with respect to 

which we have sent out a questionnaire, we find tha t we simply
EXTEND DATE OF SEC REPORT 7

cannot stop with the distribution the day that the stock is sold, in 

effect.

We have to study the afterm arket with respect to securities. As 

you know, in some cases we have found instances in which a security 

is offered and sold on the first day at 10, and then it moves up on the 

maiket to 20 or higher, so that you have to study the process of the 

aftermarket as a part of the distribution process itself.

When \ou get into this question of the afterm arket, you have to 

look into another very complicated issue—“sponsorship,” namely, the 

underwriter who is involved in the original distribution taking the 

responsibility for making a market in the security at a subsequent 

time. The question arises whether the relationship between the 

trading and distribution rules are either too strict, on the one hand, 

or lax, on the other.

The underwriter might go on the board of directors. Should an 

underwriter who is on the board be engaged in trading activities? 

T1 is raises the issue of the applicability of section 16(b) to securities 

wl ich at the present time are not listed on any of the exchanges and 

to which reporting requirements, proxy rules, and section 16(b) dealing 

with short-swing profits are presently not applicable.

And then you get into questions of investment advice, what advice 

is b 'ing given at the time with respect to the security, and also whether 

or not there are any public relations activities involving that security 

or tha t issuer.

As a consequence, we find tha t we start with one area which in 

itself is quite broad; namely, the process of distribution. Then we 

are led into a variety of other areas, all of which have to be explored 

in order to understand the interrelationships and thus the problem as 

a whole rather than as a separate compartment.

And I think tha t illustration, together with the American Stock 

Exchange report, may demonstrate why we find our study as it develops requiring more time, although a very limited amount of additional time, and a relatively limited additional amount of money.

Going back to the statement, the Commission believes tha t the 

importance of the study to the investing public requires its complete 

execution which can only be effected pursuant to an extension of the 

study. There has occurred a dramatic increase in public participation in the securities markets, particularly among persons having but 

slight acquaintance with the intricacies of corporate finance and stock 

market operations. This development demands that the selling of 

securities be conducted in a more professional manner; tha t financial 

information constantly flow’ to investors; and that practices which 

encourage irresponsible speculation be curtailed.

Our economic development depends to a large extent on the orderly 

and fair operation of our capital markets. Practices which impinge 

upon the integrity of these markets can only be harmful to our 

economic growth and to the investors who furnish the funds for tha t 

growth. The Commission believes tha t this study will assist in 

raising standards generally in the securities markets and in maintaining 

full investor confidence in those markets.

At the same time we do not want more than 3 extra months. This 

is not an academic study; it should result in action. Once the study 

is completed, our present regular staff and additional manpower from 

the special study will undoubtedly be assigned to remedy any weaknesses disclosed and execute any recommendations made.
8 EX TEN D DA TE OF SE C REPO RT

I believe tha t the study, although only about 6 months old, has 

already demonstrated its importance and value. The special study 

has apparently stimulated a number of significant developments in the 

form of rule changes, internal control procedures, and disciplinary 

actions. These are reflective of an increased awareness by the 

financial community of their responsibilities and further have assisted 

in establishing a more salutary climate in the securities markets.

The most dramative illustration of this new climate is the reorganization of the American Stock Exchange. The Commission 

authorized an investigation of the exchange on May 12, 1961, immediately after the expulsion of a firm of exchange specialists charged 

with wholesale violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.

After the establishment of the special study, personnel from that 

group joined with the staff of the Division of Trading and Exchanges 

to complete the study and write a report, released by the Commission 

on January 6, 1962. In tha t repo rt the staff concluded tha t, in the 

case of the American Stock Exchange, the statuto ry scheme of selfregulation in the public interest had not worked in the manner 

originally envisioned by the Congress.

This deterioration of self-regulation, first of all, was illustrated by 

detailing the general failure of the exchange to regulate its members 

properly; secondly, the domination of the exchange by a small group, 

predominantly specialists; thirdly, the disproportionate emphasis 

placed on securing new listings; and, fourthly, the inadequacy of the 

administrative structure and staff.

Since the investigation and subsequent report on the American 

Stock Exchange, substantial changes have occurred in its staff, 

organization and constitutional structure. This reorganization has 

been effected by the party with the primary responsibility, the exchange itself. The belief that self-regulation could be revitalized on 

a realistic basis has been a guiding principle in the Commission’s 

relations with the American Stock Exchange.

The view tha t the exchange should rehabilitate itself has not 

contemplated abdication by the Commission of its responsibilities. 

Close coordination between the Commission and the exchange has 

been evident throughout the process of reorganization.

One important area intended to be covered by the study is the 

effectiveness of disciplinary actions by the National Association of 

Securities Dealers and the exchanges. The number of disciplinary 

proceedings instituted by the NASD for the 9-month period commencing on July 1, 1961, is more than twice that for the comparable period 

starting on July 1, I960. Moreover, the recent actions, on successive 

days, by the New York Stock Exchange in suspending partners of two 

member firms for 1 year is apparently unprecedented in recent times.

I do no t mean to imply tha t the presence of the study caused the 

institution of any particular proceeding or generated a particular 

penalty. However, it does appear that the study has created an 

environment generally conducive to raising standards.

The study also seems to have had a beneficial effect on the procedures for training and supervision of salesmen. There have been 

announcements of new, or augmented, training programs established 

by broker-dealers.

Moreover, a recent newspaper report indicated a growing number 

of securities firms are hiring training directors to oversee classroom
EXTEN D DATE OF SEC REPORT 9

instruction on the intricacies of securities trading. Reportedly there 

are now 25 of these directors among New York Stock Exchange firms 

as compared with 6 at the sta rt of 1961. In fact I understand these 

directors have formed an association to meet and discuss common 

problems.

There has been a continuing flow of rule changes since the initiation 

of the study. Here again the American Stock Exchange has been 

active, with amendments to various of its rules affecting floor trading, 

specialists’ functions, and members’ transactions. The New York 

Stock Exchange has recently required that specialists report all transactions made by their public customers in stocks in which the specialist 

is registered. This mirrors the staff report on the American Stock 

Exchange, which had pointed to some of the potential abuses inherent 

in a system in which specialists are permitted to handle orders on 

behalf of public customers.

Moreover, as the staff report stimulated a tightening of listing standards and a revamping of supervisory procedures and controls on the 

American Stock Exchange, the present environment appears to have 

caused similar changes on certain of the regional exchanges.

The Commission welcomes these industry actions. They are demonstrative of a self-reevaluation of procedures and practices, which 

representatives of the financial community have expressed as necessary 

at this time. As I have stated, these various steps indicate the study 

has already had a beneficial effect. But the Commission believes th at 

the study can only achieve its maximum utility if extended so tha t the 

broadest examination of the securities markets is possible.

1 should now like to discuss briefly some of the major topics of the 

study.

As I stated, one important reason for a study was an increasing 

evidence of a general lowering of standards in the securities business. 

The growth of the industry in terms of number of issuers, transactions, 

firms, branch offices and salesmen, with the consequent difficulties 

in maintaining adequate surveillance and supervision, appears to have 

been partly responsible for this decline. Moreover, the relatively 

easy standards of qualification for entrance into the securities business 

do not appear conducive to the maintenance, and elevation, of high 

standards.

There is clearly a need for greater professionalism on all levels of 

the securities industry. All professional groups operate on the assumption tha t professionalism begins at the port of entry. Moreover, 

training and responsible supervision are necessary to maintain standards. The market study, accordingly, is determining the extent to 

which, and the manner in which, present requirements of the securities laws implement the goals of professionalism.

Public hearings on this subject commenced last week. It is anticipated tha t these hearings will develop facts and opinions relating to 

current industry practices and programs and also relating to problem 

areas revealed by preliminary investigations.

Moreover, the special study has sent questionnaires to approximately 300 broker-dealer firms requesting information on the ir 

practices in hiring, training, compensating, and supervising persons 

engaged in selling securities to the public. The resulting information 

should clearly inform the Commission of the extent to which existing 

legislation, rules and practices conflict with the continuing and necessary development of professional standards in the securities business.
10 EXTEN D DA TE OF SE C RE PO RT

The special study has initiated an investigation into the entire 

process by which corporations distribute their securities to the public 

and into the over-the-counter trading in these securities after distribution. This, I might say, is a point to which I earlier adverted.

The continuing growth of so-called “hot issues,” where the first 

trading price of a security represented a substantial premium over its 

offering price, inevitably focused attention on this problem. In connection with this project, the Commission is giving particular a tten ­

tion to the amount and forms of underwriters’ compensation, the use 

of the prospectus, and the effect and propriety of restrictive arrangements concerning the disposition of the security in the after-market.

Fundamental questions m ust be answered here: What is the underwriter’s duty of investigation into the affairs of the issuer? What is 

the relationship between the distribution and trading process? 

What restrictions are reasonably necessary to facilitate an underwriting and yet do not conflict with the basic desire for a free market? 

We hope that our study will provide insight into these problems.

A broad inquiry is also being conducted into the rules and practices 

of the stock exchanges with particular attention to the role of specialists, floor traders, and odd-lot dealers on the New York Stock 

Exchange; the handling of block transactions; and controls over 

members’ activities.

For example, the specialist phase of this inquiry seeks to obtain 

basic information about such matters as the performance of specialists 

in maintaining a fair and orderly market; relations of specialists with 

issuers, customers, and members; and various business practices of 

specialist firms. In general the study is engaged in gathering information which will enable the Commission to evaluate specialist performance in their unique role in the functioning of the auction market.

In the hearings on House Joint Resolution 438, I pointed to the 

lack of fundamental information concerning the over-the-counter 

market with respect to both securities traded in tha t market and the 

issuers of those securities. The special study has launched broad 

inquiries covering each of these areas.

The structure of the over-the-counter market is being analyzed 

through, among oth er things, a questionnaire which the Commission 

has sent to all registered broker-dealers. This questionnaire, and 

other inquiries, should produce basic, and needed, data on the size 

of the over-the-counter market, pricing of securities, the relationship 

between principal and agency transactions and the significance and 

effect of “sponsorship”—the maintenance of a trading market by a

broker-dealer in securities which he has underwritten.

Information is being gathered on issuers having securities traded in 

the over-the-counter market. Under the present law a large number 

of issuers in whose securities there is substantial public interest are not 

subject to any reporting requirements. Thus, the investing public 

is deprived of material financial information with respect to these 

companies.

This absence of data is particularly unfortunate in the over-thecounter market in which are traded a substantial number of companies 

carrying on speculative or unseasoned ventures.

On the basis of this inquiry, the Commission expects to determine 

the appropriateness of existing distinctions in the regulation of issuers 

with listed securities and unlisted securities, particularly with respect
EXTEND DATE OF SEC REPORT 11

to publication of reports, solicitation of proxies and insiders’ transactions. The special study is also examining the techniques and uses of 

financial publicity. In its best form, financial public relations can be 

considered a desirable extension of the disclosure philosophy contemplated by the Federal securities laws. At its worst, it can be a subtle 

manipulative technique intended primarily to affect security prices. 

The study will attem pt to delineate between legitimate and improper 

public relations. Similar analysis will be pursued in our study of research and advisory activities of broker-dealers and investment advisers. Here we 

shall atte mp t to ascertain the differences between proper advisory practices and those involving potential manipulation or conflicts 

of interest. Finally, I should like to comment on the Commission’s study of 

investment companies. At present, the special study and the Division 

of Corporate Regulation are examining various problems in the mutual fund area. Fifty-odd lawsuits involving mutual funds and their 

affiliates inevitably so direct our attention. Moreover, under section 14(b) of the Investment Company Act of 

1940, which generally authorizes the Commission to study investment companies, the Commission 3 years ago requested the Wharton School 

of Finance of the University of Pennsylvania to do a study of the investment company industry. Final disposition of this study can be 

expected in the near future. We expect the market stud y and the Division of Corporate Regula­ tion will analyze and report to the Commission on the following 

problems among others:

(1) Sales practices of mutual funds. (2) Investment company relationships with their investment 

advisers, brokers, and underwriters. Sometimes one group may 

perform all three functions. (3) The participation by underwriters and dealers in investment advisory fees. (4) Joint transactions by the investment companies and 

affiliated persons.

(5) Industry practices, such as “reciprocal business.’’ This 

recitation of only certain of the projects undertaken by the s tudy 

indicated the scope and ambitiousness of out undertaking. I 

have omitted discussion of some very basic projects, such as 

industry self-regulation through the registered exchanges and the 

NASD, which will entail considerable examinationa and analysis.

I am hopeful th at practically all of our projects can be completed 

in a meaningful manner.

Otherwise, I do not believe th at the study will achieve the purpose 

for which it was intended, a thorough reexamination of the securities markets to determine the present adequacy of investor protection. 

This thorough reexamination can only be achieved if the completion 

date of the study is extended and additional funds authorized. Accordingly, we strongly urge tha t the Congress adopt II.R. 11 70.

Finally, 1 should like to bring to this committee’s attention the 

fact that the Commission will subsequently request from the Appropriations Committee $100,000 for approximately 40 positions to be 

transferred from the special study group on April 4 to operating
12 EXTEND DATE OF SEC REPORT

divisions. This will cover the last 3 months of fiscal year 1963, tha t 

is from April 4 to July 1. We believe th at this step will be necessary 

in order to implement the recommendations and findings of the 

special study.

As the Commission has learned from its experience with respect to 

the American Stock Exchange, the publication of a report is not 

necessarily the end of a problem but may be the beginning of one. 

Implementation of such a repo rt requires the services of experienced 

personnel and a tremendous amount of energy and thought to resolve 

all problems.

Tha t, Mr. Chairman, concludes my opening statement and I am 

available for questions.

Mr. Mack. 1 was particularly interested in the $100,000 that you 

will request from the appropriations committee. For 40 positions, 

and this will be for the purpose of assisting you in preparation of 

legislation and justify supporting tha t legislation before congressional 

committees?

Mr. Cary. That is precisely correct, sir. I think there may not 

only be legislative recommendations, but also rulemaking proposals 

which can be exceedingly complex. Therefore, we need the experience 

of some of these people, and the more of them we can persuade to 

stay the better, for the purpose of working through this rulemaking 

and appearing before congressional committees. These people will be 

needed in connection with what should be done in the light of the 

study, and proposing legislation as a result of the report tha t we have 

made.

Mr. Mack. In other words, your plan is to continue the work following the final report. Instead of facing an abrupt termination of 

the investigat on when this report is submitted, it is your plan to 

pick up at tha t point and propose the legislative recommendations 

with the hope that they are implemented and adopted by the 

Congress?

Mr. Cary. That is correct, sir. We feel tha t the study as such, 

the investigation phase, purs uant to this request, will have ended 

and we will have a full repo rt available to this committee and to 

Congress by April 5.

After tha t point, however, we will have to consider the report 

itself, which undoubtedly will be a massive document and cover a 

wide variety of subjects for legislative recommendations and rulemaking proposals. We will need to appear before congressional 

committees and also preparing legislation on the basis of the material 

already available through the study.

Mr. Mack. Would this staff also have the responsibility of making 

recommendations within the Commission for rule changes or would it 

be basically for legislative purposes?

Mr. Cary. It will be for both, and the staff will not remain in that 

form.

In other words, at the moment it is a separate special study group. 

Upon the termination of the study, or shortly thereafter—I don’t 

know exactly at what time you shift over—they would undoubtedly 

become, I would assume, a p art of an operating division. The operating division normally charged with this area of activity is the 

Trading and Exchanges—to some extent the Division of Corporate 

Finance is involved in view of the study touching upon registration
EXTEND DATE OF SEC REPORT 13

problems and the distribution process. In the field of mutual funds, the Division of Corporate Relation is concerned. Therefore there would be some division of the stud y personnel with all their experience in these various areas into operating divisions. The study as a whole would perhaps not, therefore, remain as a separate group after the 

April 3 date.

Mr. Mack. You envision the utilization of your personnel who have been associated with the special study in other areas of the Commission to assist in carrying out the recommendations?

Mr. Cary. Precisely, yes. That is our intention.

Mr. Mack. T think tha t is very good planning, and needless to say, we in Congress are quite anxious to support legislation which will solve the problems in the securities industry. It seems to me that it would be very helpful to us to have people on your staff 

available for that purpose.

Mr. Cary. We hope they will be available.

Mr. Mack. Mr. Keith, do you have some questions?

Mr. Keith. One or two observations and a question, perhaps. I just would like to reassure myself that most of the extenuating circumstances that you pointed out as causing a greater study in depth have been, in effect, realized by you prior to undertaking the study, and that was one of the reasons for the study. It is just that it is really working out to be more of a task than you originally 

anticipated?

Mr. Cary. That is correct, sir. When we came before this com­ mittee in connection with the original authorization, we had a pretty good idea of the areas in which we were going to be engaged. On the other hand, one never knows until you put a group together and until you get down into the concrete details just how much time will be involved. It is really, T suppose, even now hard to give a precise estimate. However, we do believe that to take this group of subjects to go into them with any depth and thoroughness, and also to put 

them together—in view of this interrelationship that I mentioned 

earlier—it would take longer than the date of January 3. Although we are not asking for a very extended and large amount of time, we thought another 3 months would be satisfactory, particularly since we got started later than we originally anticipated. As you recall, the resolution was not passed until September and we didn’t get the funds until the end of tha t month. All of these circumstances together make us come to the conclusion tha t an­ other 3 months would be necessary and a small amount of additional 

funds.

Mr. Keith. I would like to point out, Mr. Cary, that actually you did very well with reference to the timing and implementation of the resolution. For somebody to introduce a resolution in June of 1961 

and have it acted upon by the Congress in August of the same year and approved by the President, is a great tribute to you in the pres­ entation of your case and to the power and prestige of our subcom­ mittee chairman, because that is a remarkably fine record. Many of us file resolutions th at don’t every get a hearing and if they do get a hearing they don’t get acted upon by the subcommittee perhaps, and seldom do we have the success that you have had.

Mr. Cary. I am not complaining, sir. I am intensely grateful. 

I agree with you.

840 88— 62------- 3
14 EXTEND DATE OF SEC REPORT

Mr. K eith . Ina smuch as you hav e no t thu s far subm itted any 

legisla tive rec om menda tion s for this year, and , furth er, th at you 

ha ve n’t highlighted any abuses thu s far in your stu dy , I am led to 

believe th at the re is no rea l urgency in connection wi th any of the 

fac ts th at you hav e thus far uncovered.

Mr. Cary. Sir, I have two answ ers to th at que stio n. First , if y ou 

tak e th e one area in which we have gone int o mo st exh austivel y thus 

far—t he Ame rican Sto ck Ex change, primari ly the practic e of specialists on th at exchange—it w as our belief th at we ou gh t to stic k to the 

philosophy of Congress an d ou r own philoso phy th at there shou ld be 

self -regulatio n and wh at was needed was rev italization.

In th at area, therefo re, we decided th at it was no t a m at te r on 

which we should come to Congress for furth er legislation, for i nstanc e, 

to ask for more powers. I th in k we have a very su bs tant ial numb er 

of pow ers gra nte d by Congress in connection with exchanges. We 

ha ve n’t exercised these pow ers fully because we believe th at our wh ole 

effo rt in th at dire ctio n sho uld be to get the m to rev italiz e them selves, 

to pick new people, and b egin to accep t t he r esp onsib ility which should 

ul tim ately be theirs.

Now , the American Stock Excha nge is really the are a in which I 

sup pose we hav e ha d the mos t concrete analysis ma de and a full 

re po rt out. As I have stat ed , we did no t belie ve th at or required 

leg islative action.

Now , we are beginning to ge t into other area s. Altho ugh we t hin k 

there are very substan tia l pro ble ms in cer tain areas, there are definite 

int err ela tionship s between o thers which we have no t fully in vestiga ted. 

As a conseque nce we j us t do no t feel th at we are ye t in a position respo nsibly to come before this Congress for legislation.

Mr. K eith . The marke t has fallen off in rec ent weeks rath er decisiv ely. Do you see any direct or ind irect relationship between th at 

re tr ea t and your rev elations perta ini ng to yo ur hea rings of last week 

an d this week?

Mr. Cary. Obviously, I am no t a marke t expert and the Commission really is no t a n exp ert in the way the marke t m oves up and down. 

But I would answ er you in gen era l th at I do no t believe there is any 

relationship. I think th at the activities of the SE C, if anyth ing , 

rea lly should establish in th e pub lic mind confidence in the fac t th at 

the re is a free and orderly marke t being ma int ain ed. We are attempting to achieve th at goal as much as possible. Ind eed , I hav e 

noticed th at by and large the pres s has no t at tr ib ut ed any acti on in 

the m ar ke t to the work which we are doing and I would ten d to 

believe th at is true.

Mr. K ei th . In yo ur tes tim on y you tal k ab ou t filing of some suits 

which in effect protest ce rta in phases of the m ut ua l fun d busin ess 

activ ities, and I believe th at Mr. Glenn has filed some legislatio n 

which w ould , in effect, cause tho se who are seeking redres s to f irst of all 

at te m pt to get ad minist rativ e relief thr ough the SE C. Ha s your 

Com mission had an y of the se pro blems th at have take n the form of 

suit s? Ha ve the y been first br ou gh t to the at te nt io n of the Com ­

mission before the s uits ha ve been filed?

Mr. Cary. I ma y ask th e Di rec tor of the Div isio n of Co rpo rate 

Re gulation to amp lify my rem arks , bu t I would like to st ar t off in 

answer to th at. We have not ye t, I believe, replied to the proposal 

of Con gressm an Glenn. I might say, however , th at our basic phi-
EXTEND DATE OF SEC REPORT 15

losophy in all the securities acts, including the Investment Company 

Act of 1940, is th at a p rivate remedy should be available. In other 

words, private individuals should clearly be allowed to assert rights 

which they have and not be required to proceed through the Securities 

and Exchange Commission. I think tha t it has been a general 

philosophy of Congress not to vest all of the total regulatory power in 

us and to provide for private remedies.

Let us move now from the general philosophy that we have with 

respect to the Securities Exchange Act of 1934 and the Securities Act 

on to the Investment Company Act.

We have’taken a specific and concrete position as amicus curiae in 

2 of the 50 (cases which you have referred to involving an alleged excessive advisory fees and other collateral matters. The extent to 

which we have participated at this time concretely in those cases is 

tha t we took a position at the appellate level in strong support of the 

proposition that I have’jus t mentioned—tha t private individuals as 

well as the Commission have the right to bring lawsuits under various 

provisions of the’Investmen t Company Act, just as we believe they 

have the right to bring them under various provisions of the other 

securities acts. We believe the philosophy of Congress is to provide 

an individual remedy as well as action by the Securities and Exchange 

Commission in those instances in which a gross abuse of trus t or other 

dereliction may exist.

Mr. Keith. I still do not know whether or not these individuals 

who filed suit did seek relief through the SEC.

Mr. Cary. In my opinion, they did not and should not have to, 

but I would like to ask the Director of the Division of Corporate 

Regulation to check m y views. Mr. Con will.

Mr. Conwill. The answer to that is “ No,” sir.

Mr. Keith. Thank you. That is all, Mr. Chairman.

Mr. Mack. Mr. Dingell.

Mr. Dingell. Tha nk you, Mr. Chairman.

Mr. Cary, I want to commend you for the fine job you are doing 

and also commend you for the visible fruits of the investigation which 

you have conducted, I think in a very careful and very scholarly way. 

It has been a pleasure for me to observe the SEC as being one of the 

Federal regulatory agencies which has been really vigorous in protecting the public interest.

I have a number of questions I would like to ask you about the 

conduct of this investigation and the first of which is this: You indicate that you will have some tentative recommendations a t a relatively 

immediate future time to the Congress but tha t these are in a sense 

preliminary and tentative in nature. Am I correct in this?

Mr. Caiiy. I have said in previous appearances, Congressman 

Dingell, that as we go along in this study we will furnish reports to 

Congress whenever they are concluded. So far as I know, I haven’t 

indicated tha t we would have anything in the immediate future, and 

I do not have any proposal in the offing at this moment. I do hope, 

however, tha t we will have some certainly even before the January 3 

date and clearly before the April 3 date which is the extended period 

tha t we ask for.

Mr. Dingell. I was referring to the January 3 date in my question. You in a way answered the next question I proposed to ask 

and tha t was this: You do propose to send up legislative recom-
16 EXTEND DATE OF SEC REPORT

inendations to the Congress as soon as you are able to finalize those 

recommendations and when you determine conclusively that they 

are in the public interest as to form and content and as to objective 

need. Am I correct?

Mr. Cary. Tha t is correct, sir; yes.

Mr. Dingell. I am particularly concerned with this because it 

appears to me it would be useful to have the recommendations as 

fast as possible because, as you are aware, the securities market is a 

living organism which requires constant scrutiny and supervision. 

You indicated here that you were making a whole, broad study of 

the market. As you recall, when you were before this committee, 

I believe at the time we were first considering the investigation by 

your agency, 1 expressed considerable interest in the problem of 

mutual funds and in the problem of loads, and so forth, on mutual 

funds, and you indicated at that time tha t you intended to go into 

this area of the market. Am I correct?

Mr. Cary. That is correct, sir.

Mr. Dingell. Have you done so?

Mr. Cary. Yes, sir. As 1 indicated in the statement, we are 

approaching the problems of the mutual fund industry in two directions. One part of it is being done by the special study group and 

another is being done as sort of a consistent responsibility of the 

Division of Corporate Regulation.

A part of our mutual fund study has been taken up in public 

hearings which have been conducted in the last week and which will 

be continued this week. The area that we are concentrating upon in 

this first series of public hearings relates to the training, supervision, 

and activities of salesmen and of selling practices generally.

Mr. Dingell. You mean with regard to these door-to-door salesmen that operate in the mutual fund field and the people who have 

been specializing in sales to the military and things of this sort?

Mr. Cary. That is part of the problem, and of course we are looking 

into the whole area of salesmen, not only of mutual funds, but of all 

types of securities. Mutual funds are one of the major areas in view 

of their phenomenal growth. There has been a substantial amount of 

testimony taken during the past week with respect to mutual fund 

selling activities.

Mr. Dingell. Do you expect to go into load charge fees and other 

charges that are placed by the managers and the financial advisers of 

these funds against the funds?

Mr. Cary. One of the areas covered in the public hearings last 

week involves the so-called front-end load. This involves contractual 

plans in respect of which persons undertake to purchase, in effect on 

a downpayment basis, shares in mutual funds. This area has been 

growing immensely. Of course it is particularly attractive in tha t a 

very substantial amount of the first year’s commission—a maximum 

of 50 percent—is taken down by the salesman. This poses problems 

and we are analyzing this question at the present time.

Mr. Dingell. It always struck me that this was a highly improper 

way to finance a sale of any security and tha t it was particularly 

against the interest of the small investor with both limited means and 

limited knowledge of the market and limited understanding of what 

he was getting into. I was wondering if the Commission and yourself 

had any additional feelings on tha t tha t you would care to comment 

on at this time.
EXTEND DATE OF SEC REPORT 17

Mr. C ary. It is premature for us to really arrive at any conclusions in this area. We simply believe, as is demonstrated by the public hearings that we are holding at the present time, this is something tha t should be analyzed and invesitgated. We are looking into it.

Mr. Dingell. Are you looking into the possibility ol action by the SEC and also possible legislative recommendations to the Congress?

Mr. Cary. If the testimony and the facts demonstrate this need we would definitely be coming to Congress. This is an area which we could not resolve simply under our rulemaking power, but would have 

to come back to Congress.

Mr. Dingell. With regard to the management ol the fees ol the managers and financial advisers to the fund, are you scrutinizing those, because those are also substan tial charges against the investors?

Mr. Cary. As you have indicated in the earlier questioning, when I was before this committee on the House Joint Resolution 438, there were and are 50 lawsuits involving primarily this question of excessive advisory fees. This is a continuing area of our study. We have not specifically got into the particular lawsuits which are involved, but we believe th at this is an area which deserves study and is being studied. It is not a matter which is sub ject to public hearings at the moment, for example, unlike the selling practices that I have jus t referred to.

Mr. Dingell. I am not concerned so much with whether you are having public hearings a t this time, bu t as to whether or not you are scrutinizing and intend to go into it.

Mr. Cary. This is a problem tha t we think we must study and 

we are going into it, yes, sir.

Mr. Dingell. Have you also been scrutinizing the matter of 

attorney s’ fees in the stockholder suits? I have had the feeling that not infrequently these attorneys were excessive and also were unfair and an undue burden on the investor and on the corpus of the fund. Are you scrutinizing them?

Mr. Cary. We are aware of the fact tha t some of those suits have been settled and th at there have been a ttorney fees paid. Whether or not we get specifically into the question of those attorneys’ fees as a basic problem in the mutual fund industry is a question. I might say, Congressman Dingell, I tried to think through the question tha t I assumed that your committee would ask with respect to this litigation generally and I would like to make a general stateme nt on this problem 

if I may.

Mr. Dingell. I would be happy to have it. Mr. Chairman, 1 have to remember tha t I have other colleagues and I think perhaps maybe at this point I ought to yield to one of my other colleagues and perhaps renew my questioning later if I may, and I will discuss this next, because I want to respect the rights ol my 

colleagues and also the chairman.

Mr. Mack. Mr. Curtin.

Mr. Curtin. Yes, Mr. Chairman. I have one or two questions, Mr. Cary. I have read your statement with much interest, and I think it is very well done. I note, however, in the latter part of the statem ent that you say you are seeking an additional $100,000 from the appropriations committee. Is tha t money over and above the $200,000 that is provided for in H.R. 11670?

Mr. Cary. The answer to you is “Yes,” but may I explain it 

further?
18 EXTEND DATE OF SEC REPORT

Th e $200,000, Congres sman Cu rtin, th at we are ask ing for at the 

present tim e will be wi th res pect to the extension of stud y and work 

upo n it from Ja nu ary un til A pril 3. There will be a gap of the following 3 mo nth s until the ne xt fiscal yea r. In th at con nection we feel, 

as I have ind icated earlie r in my testim ony, th at we will need to take 

some of the m anp ower th a t we h ave happily g athe red tog eth er on this 

special p rojec t for the purpose of considering rulem aking , appeara nce s 

befo re Congress to exp lain it, and also leg isla tive rec ommenda tion s. 

Therefore, this req uest for $100,000 will be utilized after the stud y as 

suc h is form ally com ple ted , but because there will be fu rth er work, 

fu rthe r discussion, an d rulem aking and legisla tion possibilities, we 

feel th at we n eed the ad ditio na l fun ds in ord er to re ta in some of th at 

valua ble personnel an d som e of t hat v alu able experience that has been 

accumula ted during the stu

M r. C urtin . I tak e it,• th en , however , th at it is a dir ecCresu lt of 

this stu dy.

M r. Cary. It is a di rect res ult; th at is correc t. Addition al m an ­

pow er in our opinion will be useful, indeed n ecessary, in ord er to carry 

ou t, to imp lem ent, the stud y as we have developed it and finished it, 

we hop e, by April 3.

M r. C ur tin . Do n’t you think then th at it wou ld be be tte r if this 

$100,000 was ad ded to t he $200,000 asked for in this piec e of legislation 

so you could wrap it all up in one pack age?

M r. Cary. I do n’t claim to b e a b ud ge tar y exp ert. As I und ers tan d 

it, we ask this comm itte e for a con tinued au thorization with respec t 

to the stu dy . Th e stud y as such, sir, will befinished on April 3. 

From the n on the person nel will be assig ned to the wor king divisions 

of the Com mission. Th e stud y as such will no longer be in existence. 

Th ese p eople will be div ide d and go in to the o pe ratin g divisions in the 

areas in which the stu dy ha s developed conclusions.

Fo r in sta nce, some will go into the D ivision of Corpo rate Regu lation 

and some into the Div isio n of Tr ad ing an d Excha nges. The refo re, 

in the $100,000 req uest we are basically ask ing for mo ney to pay for 

th at m anpowe r ra th er tha n for au tho riz ation w ith respe ct to the st ud y 

which this resolution inv olv es.

As a consequence, alt ho ug h, as I say, I d on ’t claim to be a budgeta ry 

ex pe rt and my comp tro ller is here and might go into this furth er if 

you wish, we felt th at we wa nted to tell the Congress now wh at we 

intend to do. But the fu rthe r r equest for $100,000 will no t be p ar t of 

the stud y itself. It will ta ke the form of a supplem ental before the 

Ap propriations Comm ittee.

Mr. C urtin . One othe r thing, Mr. Chairma n. I see th at this 

stud y is going down sev eral avenues, which I think is very fine, bu t 

I am wondering if they have a ll actual ly been lau nched— or are ma ny 

of the m still in the discussion sta te?

Mr. Cary. Ev ery one of the se to my knowledge has been launched 

throu gh discussions with ind ividuals, que stio nnaires alr eady sen t out, 

or tak ing of testimo ny.

Mr. Curtin. Have you ac tually conc luded an y po rtion of your 

stu dy ?

Mr. Cary. The only one which we hav e form ally con clud ed is the 

first phase of the analysis of the Ame rican Stock Exchange, prima rily 

the work of the specialists. T hat came out, sir, in th e form of a staff 

repo rt which I would like to ma ke ava ilab le to each of you .
EXTEND DATE OF SEC REPORT 19

Mr. Curtin. Are you convinced that this additional 3 months 

will give you a sufficient time to complete this work?

Mr. Cary. Ideally, if we wanted to do an academic type of study, 

I suppose it wouldn’t be. But I feel tha t times change, markets 

change, and the like, and as a practical matter we can get i t done by 

April 3. We do need that little extra time in order to do the thorough 

job that we plan.

Mr. Curtin. And you presently have no intention of asking for a 

further extension of time?

Mr. Cary. We have no intention of asking for a longer time and 

I would have trouble prevailing upon some of the very excellent 

people I have persuaded to come on a year’s commitment to stay 

much longer than that. So I can assure you tha t the whole motivation will be to complete the study by April 3.

Mr. Curtin. Thank you.

Thank you, Mr. Chairman.

Mr. Mack. Mr. Dingell, you may proceed. I do think tha t we 

should permit the chairman to make his general statement.

Mr. Dingell. I would be happy to have it at this time, Mr. 

Chairman. I just don’t want to interfere with Mr. Curtin.

Mr. Mack. If you desire, Mr. Chairman.

Mr. Cary. I did not plan to make this statement unless I was 

asked these questions. I know tha t several of you have asked questions in this area of fee litigation. I wanted to present an integrated 

statement of what positions we have thus far taken.

As I stated earlier, we have not taken a position on the merits in 

any of the approximately 50 lawsuits alleging excessive advisory fees 

and other collateral matters. We have, however, appeared amicus 

curiae in two of the cases which reached the appellate level—and this I 

have mentioned already in answer to Congressman K eith ’s question— 

strong support of the proposition that private individuals as well as 

the Commission have the right to bring lawsuits under various 

provisions of the investment company act. We have not got into 

the factual merits of these cases for several reasons:

Firs t of all, the focus of these suits is in large part upon the question 

of the fee scale, which is a subject of a broad study of the industry 

tha t we have been undertaking, as I mentioned before. The thrust 

of these suits goes to the structure and organization of mutual funds 

and the related responsibilities and duties of directors and other 

affiliated persons. These matters warrant and are receiving careful 

stud y by the Commission in a far more comprehensive way than would 

be possible to develop from the evidence in individual lawsuits. In 

other words, if we got in one lawsuit we would get into the individual 

problems there rather tha n looking at it as a whole.

Secondly, the act with exceptions not relevant to the existing lawsuits, confers no specific auth ority upon the Commission to regulate 

directly the size of advisory fees or to superimpose the Commission’s 

judgment upon tha t of management. We do not really have tha t 

direct power. Thirdly, as to intervening on the factual issues, the Commission 

cannot possibly participa te effectively in 50 more lawsuits. There 

are obvious limitations on our available legal personnal. If we 

attem pted to get into them, our own direct litigation and our general 

endorsement program would be seriously unpaired. This is not to
20 EXTEN D DA TE OF SEC REP ORT

say tha t we are ignoring the fee litigation. To the contrary, we are actively and carefully watching the progress of each case. In recent weeks we have been concerned with and studied the terms of settlement of three of the lawsuits prior to trial of factual issues. Particu­ larly arresting our attention is the fact tha t several have already 

resulted in modification of future fee schedules but counsel’s fees for 

plaintiffs attorneys are to be paid by the mutual fund rather than by 

the active defendants. Finally, it is clear to us th at the prevailing contractual investment 

advisory arrangements and the payment of fees based upon a percentage of assets are an inherent part of the investment company structure contemplated at the time of the adoption of the act. It is 

possible that this and other elements of the industry structure, which 

may have been reasonable in the context of conditions 20 years ago, 

require reexamination. Consequently, we are conducting a thorough 

study of the entire structure to determine what is realistic and reason­ able in the light of present conditions. The Wharton School study, 

soon to be available, will afford a general picture of mutual funds and 

further case study will supplement tha t by concrete example. I think 

tha t states generally the posture of our work and the general approach 

which we are taking to this as a problem—arrested to our attention, 

in substantial part by the existence of these 50-odd lawsuits.

Mr. Dingell. I think that is a very wholesome thing and very 

wholesome statement. There are two other questions I would like 

to pursue with you, Mr. Chairman. The first has to do with the general condition and appropriations 

staffwise of the Commission over the past years and with regard to caseload. I believe it would be fair to say tha t the caseload has increased enormously since the Commission was originally established 

by any yardstick we would care to use. Am I correct?

Mr. Cary. That is correct, sir.

Mr. Dingell. With regard to the volume of work, with regard to 

the number of staff people you have, and with regard to the dollars 

of appropriations which you receive from the Congress. Am I correct?

Mr. Cary. That is correct.

Mr. Dingell. Rather than questioning to any substantial length, 

I wonder if you would mind submitting to this committee a brief 

analysis of the workload with regard to the amount of appropriations 

and with regard to the amount of staff over the years, because I think 

tha t a summary of this kind will reveal a rather substantial deterioration of the Commission’s position and also of its ability to protect the 

consuming public. T think this would be a very helplul thing if you 

could give it to us.

Mr. Cary. I would be very happy to.

(The information requested follows:)
Securit ie s and E xc ha ng e C ommissi on

State ment of selected tvorkload items and appropr iatio ns and authorized strength, fiscal years 1953—62

A p p ro p ri ati o n , a c tu a l---------------------------------------------

A uth ori zed s tr e n g th ----------------------------------------------- 1. E x am in ati o n o f r eg is tr ati o n s ta te m en ts :

P en d in g , beg in nin g o f y ea r.................................

F il e d ............................................................................

S u b to ta l........................ ................... .....................

E x a m in e d ............................................................ ..

P en d in g , en d o f y e a r ..._____ _______ ____

2. E x am in ati o n o f o th er fil ings a n d a p p li cati o n s__

3. R egula ti on A filings ------------------------------------------

4. A n n u al an d per io dic re port s (fo rm s 10 -K , 9-K ,

a n d 8-K ): P endin g, beg in nin g o f y ear........ ...........................

F il e d ______________________________________

S u b to ta l____ ____________________________

E x am in ed ..................................................................

P en d in g , en d o f y ea r...................... ...................

5. In v esti g ati o n s re la ti ng to po ss ib le ad m in is tr ati v e, ci vil, an d c ri m in al pr oc ee di ng s: P en d in g , beg in nin g o f y ear________________

O pen ed ____________________________________

S u b to ta l.......................................... .......................

C lo se d.........................................................................

P en d in g , en d of y ear.................... .....................

A ct ual

E st im ate ,

1962

1961 1960 1959 1958 1957 1956 1955 1954 1953

i $11,412, 500 2 $9, 517,500 $8,100 ,000 2 $7, 705,000 2 $6, 935,000 $5, 749,000 2 $5,27 8,000 2 $4,843,180 $5, 000,000 $5, 245,080

1 1,320 1,095 1,000 953 886 810 739 713 756 828

515 335 252 145 105 115 103 68 73 72

2,400 1,830 1,62 8 1,226 913 943 981 849 649 621

2,91 5 2,165 1,880 1,371 1,018 1,058 1,084 917 722 693

2,100 1,650 1,545 1,119 873 953 969 814 654 620

815 515 335 252 145 105 115 103 68 73

770 670 564 475 501 525 461 410 324 940

1,150 1,057 1,049 854 732 919 1,463 1, 628 1,175 1, 528

9,94 7 8,865 7, 154 5,83 3 5,338 4,001 3, 427 1,866 9,260 13,375

12,975 12,404 11,698 11,094 10,810 9,93 7 9,323 6,71 2 ’ 7,097 ’ 15, 537

22,9 22 21,2 69 18,852 16,927 16,148 13,938 12. 750 8,578 16.357 28,912

14,422 11,322 9,987 9, 773 10,315 8,60 0 8,749 5,151 14, 491 11,090

8,500 9,947 8,865 7,154 5, 833 5,338 4,001 3, 427 1,866 17,822

1,126 960 977 937 978 813 644 725 968 1,072

575 567 519 523 447 512 362 392 343 462

1,701 1,527 1,496 1,460 1,425 1,325 1,006 1,117 1,311 1,534

561 401 536 483 488 347 193 473 586 566

1,140 1,126 960 977 937 978 813 644 725 968

W

2

O

o

>

W

OF SEC REPORT

1In clu d es 65 po si tions an d an al lo ca tion of $412,500 for th e sp ec ia l stu d y of se cu ri ties

larkets.

2 In clu d es a su p p le m en ta l ap p ro p ri ati o n for sta tu to ry p ay inc re as es . ’ T h e C om m is si on a d o p te d f or m 9 -K eff ec tiv e J a n . 1,1950 . F o rm 9-K re pla ce d ite m 11

of fo rm 8 -K for re p o rt in g gross sa les an d o pera ti ng re ven ues on a q u art erl y bas is . T h is fo rm 9 -K w as re sc in de d in O ct ob er 1953. A new fo rm 9 -K , sem ia nnual earn in gs re p o rt , 

w as a do p te d on Ju n e 23, 1955.
Statement of selected workload items and appropr iatio ns and authorize d strength, fiscal years 1953 -62— Co ntinued

E sti m ate , A ct ual

1962

1961 1960 1959 1958 1957 1956 1955 1954 1953

6. C ri m in al cases re fe rred to th e D ep art m en t of J u s t ic e .... ........................... 45 42

61

1,065

53

87

1,077

45

60

944

15

69

704

26

53

776

17

49

764

8

47

715

19

57

584

18

35

532

7. A pplicat io ns for br oke r- de al er r egis tr ati on: 

Pe nd in '.’ , b eg in ni ng of y ea r_____ . . . . . . 126 Re cei re d ................. .............................. 1,150

w S u b to ta l............................................ 1,276 1,126 

1,000

1,164

1,103

1,004

917

773

713

829

760

813

760

762

713

641

594

567

510 Pro ce ss ed .. . ........ __............................ .. E2 00

W

g

O

P en d in g , en d o f y ea r................................ 76 126 61 87 60 69 53 49 47 57

8. N u m b er of re gi st er ed bro ker -d ea le rs . 5,750 

1,67 0

5,3 00

2,0 00

5,500

1,627

5,060

1,855

5,288

1,499

4,569

1,867

4,907

1,471

4,560

1,671

4, 752 

1,452

4, 473

1,562

4,771 

1,214

4,32 8

1,431

4, 591 

952

3,968

1,309

4,33 4

822

3,945

1,203

4,132 

788

3,950

1,134

4,053

686

3,9 36

1,093

9. P ro ke r- dea le r ins; ec tions m a d e ............ ........ o

> 10. A nn u al fina nc ia l re p o rt of bro ker s an d de al er s (fo rm X -1 7A -5 )________ __________

11. N u m b er of in v e stm en t advis ers re gis te re d at th e clo se of th e fiscal y ear_____

H

o

12. A pplicat io ns for re g is tr ati o n of in v e stm en t ad vis er s:

P endin g, beg in ni ng of y ea r....................... 24 26

313

30

305

22

278

19

212

20

217

14

207

11

199

9

124

16

122

co

R ec ei ved __________ _________________ _ 340

H

O

S u b to ta l....................... ............... ............. 364 339

315

335

309

300

270

231

209

237

218

221

201

210

196

133

122

138

129

W P ro ce ss ed ........ ............... ............. 325

M

P en din g, en d of y ear............................................. 39 24 26 30 22 19 20 14 11 9 O

w1-3 13. Reg iste re d in v e stm en t co m pan ie s: N u m b er at be in n in g o f y ea r_________ ____ 663 570

118

512

67

453

70

432

42

399

49

387

46

384

37

369

20

367

17 N u m b er of re gis tr at io ns d u ri n g y e a r .. 120

S u b to ta l.................. ............... 783

48

688

25

579

9

523

11

474

21

448

16

433

34

421

34

389

5

384

15

N u m b er of reg is tr at io ns te rm in a te d d u ii n g 

y e a r ................................................... . . . .

N u m b er of re gis tr at io ns, en d of y ear_______ 735 663 570 512 453 432 399 387 384 369

14. M ark et va lu e of as se ts of in v e stm en t co m ­

pan ie s (b illions) ....................... ..................... . ........... $32

91

$29

56

$23.5

27

$20

14

$17

7

$15

6

$14 $12 $8 $7 15. In v estm en t co m p an y in sp ecti o n s............. . ..............
EXTEND DATE OF SEC REPORT 23

Mr. Cary. I would not say tha t we have deteriorated in quality. 

I would like to believe th at we are improving. But I would say that, as Mr. Loomis said in testimony last week, we are having to run a 

lot harder just to keep up, you might say—to keep up with the old 

types of cases rathe r than grasping for all these new problems tha t we have been faced with. The net result is that I am increasingly con­ vinced tha t we will have to ask for a larger percentage increase in appropriations in the coming year than we have in the past years. It is hard to retain excellent men. Industry itself is extremely anxious to take them away from us, good young lawyers after about a year and a half or a year and eight months. We have that problem; although it is very difficult to hire excellent people swiftly, we nevertheless feel tha t we ought to have the authority to do so and will need it in the 

future in order to meet the problems as I see them.

Mr. Mack. May I interrupt there at this point?

Mr. Dingell. Yes, be happy to yield.

Mr. Mack. Mr. Chairman, you have a program for hiring young 

attorneys or young law students, I believe, for summer work. Is that 

program still being carried out?

Mr. Cary. Tha t is being carried out, Mr. Chairman. I do not 

know the exact number we bring in each summer. I think Mr. Donaty, our Comptroller, will be able to give you that figure. It has been working out. Through this method we hope to interest excellent young men in coming to the Commission after they finish law school. I know several young men I have personally interviewed of the highest quality who are coming this summer and I believe, if we can get them 

to come on a long-term basis, it will be most beneficial.

Mr. Mack. Is this a new program, or has this been under way for 

several years?

Mr. Cary. I think it is several years, but 1 cannot tell how long. 

I would like to ask Mr. Donaty, our comptroller, to speak to those 

to those two points.

Mr. Donaty. The program has been in effect approximately the 

last 5 years, sir, and this coming summer we are taking on approxi­ mately 10 to 15 of these students who are in their junior or senior 

level of college.

Mr. Cary. And in some cases in law school.

Mr. Mack. The reason I was interested was I was wondering has 

your experience been that many of these young attorneys do come back and go to work for the Commission after they graduate from 

law school?

Mr. Cary. I know tha t some of them do. We don’t have 100 percent effective rate, but I know it has been an inducement and has interested them enough so tha t they do come. As to whether or not 

we can give a percentage on that, 1 do not know.

Mr. Donaty. I don’t have an exact percentage, but I know tha t 

generally there are several that come back.

Mr. Mack. Thank you.

Mr. Dingell. I would like to pursue another point with you, if I 

may, Mr. Chairman, and tha t is this: As you recall, I supported the initial resolution we were discussing for the investigation of the market and I also support the resolution which is before us in the committee today. J feel that it is very wholesome, but 1 have the feeling 

tha t a large part of the need for this special investigation is occasioned
24 EX TEN D DATE OF SE C REP ORT

by the fact that the Commission over the past years has not been 

able to keep up with the changing conditions in the market which, 

because of diminished appropriations, and diminished staff in relation 

to responsibilities, th at the Commission was not able to keep up with 

and actually keep ahead of this. Am I correct in this?

Mr. Cary. I think that every regulatory commission really ought 

to be having every few years a special study. In other words, it is 

a way of reexamining where you are and what has happened to the 

industry in relationship to what you are doing. Normally, we have 

not had the personnel for this type of study and at the same time meet 

all these ad hoc problems that are coming up. Therefore, the type 

of special study or, in other words, long-range planning, gets secondary 

treatment. For tha t reason, I would suppose our basic answer to 

you is in the affirmative that a study is overdue. The industry has 

stated a reexamination ought to be done. We welcome the study 

as a vehicle to perform t ha t role when in fact we have had so many 

day-to-day problems that we really haven’t had the manpower to 

thin k things through independently of day-to-day administration.

Mr. Dingell. That leads to the next question I want to examine 

with you, and that is this: Under these circumstances, doesn’t it appear 

that there needs to be a general reexamination of your staffing structure, your appropriations structure, with regard to their adequacy 

for the SEC to carry out its assigned chore anti its responsibility under 

the statutes?

Mr. Cary. We believe that with the growth in the markets and 

with the growth of our problems, in part due to tha t growth in the 

markets, we will have to ask for additional support.

Mr. Dingell. The next thing is this: I would like to mention 

briefly the theory of the basic statutes under which the SEC operates. 

As I recall, back when the statutes were initially enacted, and 1 was 

a very young boy then, there was a decision which was made by the 

Congress with regard to regulation of the market. As I recall it, the 

Congress contemplated that the market would be left to self-regulation under expert supervision by the SEC, largely limited to a guarantee by the SEC tha t there would be full and complete and correct 

disclosure. Am I correct in this regard?

Mr. Cary. Tha t is correct, sir.

Mr. Dingell. The market has operated under this, I would say, 

for something approximating 30 years now. As I note what I have 

seen in the papers with regard to your scrutiny of the market, it has 

appeared to me t hat perhaps this self-regulation has not been working as well as we might have liked it. Am I correct in tha t regard?

Mr. Cary. We have already had one demonstration of that, a 

breakdown in controls in the American Stock Exchange, particularly 

in relation to the activities of the specialists. In tha t one area at 

least we have some evidence of it.

Mr. Dingell. As a ma tter of fact, on page 7 of your very excellent 

statement, you say:

In that report the staff concluded that, in the case of the American Stock Exchange, the statutory scheme of self-regulation in the public interest had not 

worked in the manner originally envisioned by the Congress.

This refers to a report made by the special study group operating 

with the staff of the Division of Trading and Exchanges. Do you 

endorse t hat statement as being your statement today, sir?
EXTEND DATE OF SEC REPORT 25

Mr. Cary. Tha t is correct. I made it and I will stand by it.

Mr. Dingell. You referred specifically to the American Stock 

Exchange. Have you found this to be true with regard to other 

exchanges, either national or local?

Mr. Cary. We are at the present time looking over the other exchanges and I would say that as of this moment we are no t in a position to comment so precisely as we have with respect to the American 

Stock Exchange. I do not want to give an impression one way or 

the other with respect to all the exchanges. As you know, there are 

a variety of them, regional types as well as of course the leader in the 

field, the New York Stock Exchange.

Mr. Dingell. On the following page you go so far as to indicate 

that the number of disciplinary proceedings instituted by the National 

Association of Securities Dealers for the 9-month period ending 

July 1, 1961 is more than twice that for the comparable period starting 

July 1, 1960. You go on to say in following sentences:

M or eo ve r, th e re ce nt an sw ers— on successiv e da ys—by th e New Yo rk Sto ck 

Exc ha ng e in su sp en ding p art n ers of tw o m em be r fir ms for 1 year is appare ntl y 

un pre ce den te d in re ce nt tim es.

On page 9 you go on to indicate tha t the New York Stock Exchange 

has recently required specialists to report all transactions made by 

their public customers in stocks in which the specialists are registered.

Thi s mirr or s th e staf f re port on th e American Stoc k Exc ha ng e, wh ich had 

po in te d to some of th e p ote nti al ab us es in her en t in a sy st em in wh ich sp ec ialis ts 

ar e perm it te d to ha nd le ord er s on be ha lf of pu blic cu stom ers.

Then:

M or eo ve r, as the staf f re p o rt st im ula te d a tigh te ni ng of lis tin g st andar ds an d a 

re va m pi ng of su pe rv isor y pr oc ed ur es an d co ntro ls on th e American Stoc k Exch an ge , th e pr es en t en vir onm ent ap pe ar s to h av e ca us ed sim ilar c ha ng es on ce rt ain 

of th e region al exchanges.

I am sure you are aware of the fact tha t the newspapers have 

periodically reported actions which have taken place in the exchanges, 

in the NASD, as a result of the scrutiny which is going on now by your 

agency. The question is this: Would I be fair in inferring t hat this 

indicates tha t as a result of your scrutiny there has been a tremendous 

Hurry of activity on the part of the various self-regulating instruments 

in the securities market?

Mr. Cary. I do not want to say tha t we have been totally responsible for this increase because the m arket itself has been more active; 

there are more and more salesmen; and there are more and more 

persons in effect to discipline.

Mr. Dingell. I was rather curious tha t these things should coincide 

with the scrutiny of the SEC.

Mr. Cary. I would say, and I do believe tha t this Congress itself, 

and this committee, and the study by the SEC have all had a very 

definite effect on raising standards.

Mr. Dingell. And also a definite effect on the increasing of the 

self-policing activity?

Mr. Cary. Precisely, through th at m edium; that is correct, through 

self-regulation.

Mr. Dingell. This would indicate that there has been a period 

of somewhat inactivity in the exchanges and self-regulatory mediums 

previous to this investigation. Am I correct?
26 EXTE ND DATE OF SEC REPORT

Mr. C ary. Th at has c ertainly been tru e with res pec t to the Am erican Sto ck Exch ange. We can demo nstra te th at . I th in k th at it is 

prem atu re for us to spe ak with res pect to the oth ers at this time. 

We ha ve n’t mad e a respon sible stud y ye t and therefore are not in a 

position to generalize beyond th e sta temen ts we have ma de at this 

time.

Mr. D ing ell. The n would it be fair to say at le ast in the case of th e 

one exch ange , the Ame rican Stock Excha nge previous to this inv est igation there ha d been a dem on str ab le br eakdow n in the self-regu latory 

process. Am I correct?

Mr. C ary. The re was very defi nite evidence of som e breakd own 

which I think at the presen t tim e they are definitely atte m pt in g to 

imp rove and regulate. In ot he r words, responsible ind ividuals the re 

hav e brou gh t very su bs tantial changes alread y. The presi dent has 

resig ned. The Old Gu ard resign ed. There were a sma ll gro up of 

persons who were sort of pe rp etua tin g themse lves in pow er as a committee. Those are no longer at the helm. There has bee n ap po int ­

ment of new officers and a co ns tit ut ion is cu rre ntly being proposed 

which will vest respon sibility no t in c ommittee s a ny more, bu t prim arily in a paid staff. There is d isc iplin ary ac tion b eing tak en on a broad 

scale by the American Sto ck Excha nge with res pec t to th e persons 

refe rred to in o ur report. Th ere have been a very su bs tant ial numb er 

of rule changes and a tig hten ing of the list ing req uir em ents. So I 

think th at on a variety of leve ls we find now th at respon sible persons 

are recognizing the needs to rei nv igorate them selv es an d to carry out 

self-regu lation in the form it should be carried out.

Mr. D ing ell. This would ne xt ind icate to us th at it is inc um ben t 

upo n th e Com mission to act wi th great vigor to protec t the public 

inter est in this area. Am I corre ct?

Mr. C ary. We believe th at to be tru e, ves, sir.

Mr. D ing ell. And th at th at action had not been forthcomin g 

previous to this special inv est iga tio n. Am I correct?

Mr. C ary. I do not wa nt to thr ow ev ery thing on this special stu dy 

in this sense, Congres sman Ding ell. In respec t of the American 

Stock Ex cha nge, that problem ha d been buildin g up over a period of 

time. Abo ut a yea r and a half ago it cu lminated in the Re case, which 

involve d two specialists, as you ma y recall. Tha t had been care fully 

pur sue d and deve loped by the SE C over a subs tantial period of time 

and it was a tough case to dev elop. The fac ts in th at case clearly 

pointed to evidences of some breakd own.

As a consequ ence then we pursued the special stu dy . But I do n’t 

wa nt to say th at it was all due to one thing. It had been building up 

and it culmina ted in the staff repo rt.

Mr. D ing ell. Bu t one of th e bits of inform ation th at we derive 

from this is th at the self-regula torv process had no t been working 

during th at period of time.

Mr. C ary. Tha t is corr ect. Th ere has been a bre akdown of it.

Mr. D ing ell. And if it is now wor king it has tak en extra ordinary 

outsid e pres sures to mak e it do so because this special stu dy is 

ex tra ordina ry o utside pre ssu re; is it not?

M r. Cary. It is in one wav. Th e answer is th at , even if the special 

stu dy ha d not been cre ate d, we un do ub tedly w ith our limited personnel 

would have worked tow ard a rep ort with respec t to the American 

Stock Exc han ge.
EXTEND DATE OF SEC REPORT 2 7

Mr. Dingell. There would have been some delay.

Mr. Cary. It would probably have been delayed just because of 

the manpower, but undoubtedly we would have worked toward this 

same conclusion.

Mr. Dingell. The point I am leading up to has been this: It is 

my feeling that this self-regulatory process has not been working and 

I would like to ask you now whether you don’t feel that perhaps some 

change in this basic concept of the securities law be changed so tha t 

we go to additional external regulation by the Commission as opposed 

to ju st internal self-regulation within the market itself?

Mr. Cary. I cannot speak to the whole spectrum of problems with 

which we deal until the study itself is completed. Speaking explicitly 

to that one which we have worked upon already, we felt that it was 

possible to preserve the theory of self-regulation by invigoration of 

that exchange. Responsible members of the American Stock Exchange have worked on the problems raised by our report . A special 

committee was appointed known as the Levy committee, and issued 

a series of reports with respect to this. We believe tha t we should 

adhere to the basic principle of self-regulation. Tha t, however, 

doesn’t mean that we can abdicate our responsibilities; we have to 

take the role of seeing tha t persons self-regulate themselves properly, 

ami in this case I think we will see very definite evidences of revitalization on a self-regulatory basis.

Mr. Dingell. You say this even though you have told us previously 

in your testimony t hat you don’t feel th at the self-regulatory process 

has worked in the case of one of the major exchanges?

Mr. Cary. It wasn’t working at that time. It doesn’t mean that 

necessarily this doesn’t have hope of revitalization.

Mr. Dingell. Are you scrutinizing the possibility of changes tha t 

would result in what, in my opinion, would be a more wholesome 

climate, tha t is, some external regulation to make sure that this 

self-regulatory process does work?

Mr. Cary. We have, Congressman Dingell, power under section 19 

of the Securities Exchange Act to take vigorous action with respect 

to an exchange itself. Though we have this power, if we feel tha t 

self-regulation can be revitalized, we feel that is the best way to 

approach it.

Mr. Dingell. But it might be useful for the Commission to have 

some lesser tool rather than the remedies they have to take action 

against the whole exchange. Am I correct?

M r. Cary. We have a very substantial number of powers with 

respect to exchanges and persons on the exchange. I think before 

we are done we may want to reexamine whether any of those powers 

should be altered, but at the moment I would say tha t we are not 

lacking in power under the Securities Exchange Act of 1934.

Mr. Dingell. Thank you very much, Mr. Chairman.

Mr. Mack. Any other questions?

Mr. Keith. No further questions.

Mr. M ack. Mr. Chairman, your study has been underway now, 

would you say, in full swing for approximately 6 months?

Mr. Cary. That is correct, sir.

Mr. Mack. You indicated that you thought you should not have 

more than 3 additional months to complete your study. Do you feel 

that you could do justice to the study and investigate this in less time 

than the additional 3 months?
28 EXTEND DATE OF SEC REPORT

Mr. Cary. We do not feel so, sir. We must examine major problems, many of which are interrelated, so as to give breadth to the study; 

our examination must also have depth so tha t we may arrive at responsible conclusions. This task will take more than the Janu ary 

deadline and as a consequence we think tha t an additional 3 months— 

obviously we could use more—as a practical matter is really all tha t 

we wish and would expect to have.

Mr. Mack. I would like to point out tha t the January 3 deadline 

could be extended. There is no problem and it is not a massive feat, 

but I selected the January 3 date originally because th at would have 

been the date that the Congress would have been required to make a 

report if the Congress were undertaking this investigation itself. 

Therefore, we could certainly extend it to January 31 or, as you have 

suggested, April 3. I would also like to inquire about the additional 

funds. Would it be possible for you to complete your study for less 

than the additional $200,000?

Mr. Cary. To do the kind of study we contemplate, the depth of 

study, and to cover all these subjects, we feel we do need these additional funds. Otherwise, we would have to cut out an area, or maybe 

two or more. If we didn’t cut any one of them, we would have to 

simply make a much more superficial study of the kind tha t I don’t 

think we would like to stand behind nor send to Congress as a basis for 

legislative action.

Mr. Mack. In other words, if you had less than 3 months and less 

than the $200,000 additional you would have to, perhaps, exclude 

some phase of your study; is tha t correct?

Mr. Cary. Th at is correct, sir.

Mr. Mack. However, with the 3 months and the $200,000 you feel 

tha t you can do a complete job?

Mr. Cary. We will do our best; yes, sir.

Mr. Mack. And come to the Congress with certain recommendations a t tha t time?

I would like to ask, What plans you have for making reports to 

the Congress? It is my understanding tha t you feel it would be 

premature to make legislative recommendations this year in time 

to enact legislation before the Congress adjourns.

Mr. Cary. That is correct; yes, sir.

Mr. Mack. Then may I ask if you have in mind making a report 

prior to the Jan uary report tha t you referred to today?

Mr. Cary. We have two things in mind. Or course we would 

anticipate reporting to you as a committee on a periodic basis just to 

advise you as to where we are going. Secondly, I don’t have any concrete single project in mind, but I do hope tha t even between now and 

Janu ary we will have a report on one phase which we could make 

available to this committee in order to advise them tha t we are tha t 

far along with respect to one phase of th e study.

Mr. Mack. Is that prior to the Jan uary date?

Mr. Cary. We would hope to have one or several prior to tha t time. 

I won’t guarantee it because we may find that it is intertwined with 

another problem and therefore we should not come out with t ha t until 

we have examined all other implications.

Mr. Mack. Do you think tha t you could arrange to make a report 

to the Congress prior to the adjournment of Congress this year with 

regard to the progress th at you have made up to that time?
EXTEND DATE OF SEC REPORT 29

Mr. Cary. If you wish us to do so, we certainly shall. It depends on the date of adjournment of Congress, but this being May it would be somewhat along the lines of the statements I have made today, plus those things that have transpired between now and the date of 

adjournment.

Mr. Mack. You think you would be in a position to make such a 

program report to us, say, about July 15 or the first of August?

Mr. Cary. We shall do so if you wish; yes, sir.

Mr. Mack. One of the problems tha t was discussed at the time that the original resolution was introduced was the problem of manipu­ lation. I presume that by this time your group has had an opportunity to look into the problem of manipulation. I understand you have also had an opportunity to do some work with regard to the public relations activity which you referred to in your state ment this morning. Would it be lair to ask at this time whether or not your study had revealed tha t some of the public relations activity has had the effect of manipulating the price of stock?

Mr. Cary. I would like to sta rt off that question and then ask the director of our special study, Milton Cohen, to speak further. We did in respect to public relations, Mr. Chairman, send a letter to selected issuers regarding the extent of their public relations activities. It was to obtain more or less a complete picture of financial public relations performed on behalf of selected issuers during the period of the last 2 or 3 years. The letter requested certain information as to the purpose for which the public relations firm was retained, whether any of the company’s securities were sold to any public relations firm, and inquired about certain types of public relations activities by the employees. We asked for sample copies of annual reports, and press releases, and also speeches that are made by management. As I indicated earlier, public relations, if it is handled properly, can be a very useful device really to carry out the very disclosure philos­ ophy which the securities acts are intended for. But in some cases it can also be a tool for touting a security. I think I can only speak as far as saying what l etter has been sent out and the kind of inquiry we are making. I think if there is anything furth er tha t can be added 

to that, perhaps it could be done by Mr. Cohen.

Mr. Mack. Then this is in its very elementary stages?

Mr. Cary. I would believe so; yes, sir.

Mr. Mack. Mr. Cohen, would you have anything further to add?

Mr. Cohen. I think it is beyond the elementary stages, sir, but not at the stage where 1 want to express my conclusions. We have in this and many other areas been working on a sampling basis, but a very broad sampling basis. We have brought in a great deal of material which is in the process of examination, analysis, and so on. I think we are going to have some interesting conclusions in all of the areas we are working on, but at this time I would not want to talk about any conclusions either on the subject of public relations or the other one you mentioned, manipulation. You say the over-the- counter market. I think it has been mentioned frequently tha t the scope of that market has certainly increased, but the extent of its increase has been somewhat mysterious, and there was an article in the Wall Street Journal a couple of weeks ago pointing out that one firm, a major firm, had increased its over-the-counter volume about 33 times in 12 years. I have another example I just looked at last
30 EXTEND DATE OF SEC REPORT

week of a firm tha t had $5 million of volume 12 years ago and $266 

million last year. This means there is a big area to look at, and 

while we are attempting to study the problem broadly and thoroughly, 

we just haven’t gotten far enough tha t I would want to express my 

conclusions at this time, sir.

Mr. M ack. Mr. Cohen, I have one other question: Your study has 

concentrated, I think, to a certain extent on the highly speculative 

stocks, so-called hot issues. Is tha t true? That you have concentrated in th at area?

Mr. Cohen. I would not say so, sir. We certainly are studying 

the new issues, including some speculative ones, but we are trying to 

do a broad study of all aspects of the market and all the markets, all 

types of issuers, all types of firms, so I would not want to say we are 

concentrating on those heavily.

Mr. Cary. 1 think one of the first questionnaires we sent out was 

on new issues and therefore it received a very substantial amount of 

publicity. But Mr. Cohen has later sent other questionnaires out 

covering the whole over-the-counter market.

Mr. Mack. As I understand it, you are trying to cover the entire 

field rather than specialize in certain areas during certain periods of 

the study. Is that correct?

Mr. Cohen. As you pointed out when this legislation was first 

introduced and subsequently, the task you have given us is a very 

broad one and we are try ing to cover the whole broad area. We have, 

by and large, not planned it on a basis of concentrating our whole staff 

on one or two subjects, finishing that and going on to another. We 

have tried to plan the whole thing and then allocate our manpower so 

that we can reasonably cover the whole area within the allotted time 

and money.

Mr. Mack. In other words, you are not following the same procedure tha t was employed in the case of the American Stock Exchange, which, of course, was started prior to the time your group 

was organized, whereby you make an investigation of the American 

Stock Exchange and file that report? At the present time you don’t 

envision making an investigation of the New York Stock Exchange 

and making a report on th at subject?

Mr. Cohen. The American Stock Exchange, sir, was a somewhat 

special case because it had started earlier, as you pointed out. We 

are studying the whole self-regulatory process for the other exchanges, 

the NASD, and so on. Naturally some things are a little further 

advanced in our work than others, either because we got moving on 

them a little faster or because they don’t take quite as long to complete. 

Hopefully we will bring some subjects to a conclusion earlier than 

others and can report on them earlier than others.

On the other hand, because of the interrelationship of many of these 

topics—and they are very closely and deeply interrelated in many 

instances—even though we have brought one particula r study to a 

tentative conclusion, it may be permature to put out a report simply 

because we have to bring up to that level of completion some other 

related subject before we can responsibly talk on the first one.

Mr. Mack. Then as an example, referring to the New York Stock 

Exchange, rather than have an investigation of the New York Stock 

Exchange as such, you might investigate the role of the specialist 

in the New York Stock Exchange as well as other stock exchanges 

rather than to go on into any particular exchange.
EXTEND DATE OF SEC REPORT 31

Mr. Cohex. We may be doing both, sir. That is, a good many of 

these things we look at in some kind of horizontal pattern and seme kind of vertical pattern and at the points of intersection. We will be looking at such things as the handling of specialist transactions, and so on, not just on one exchange, but on a good many. However, on the other hand, we will take each separate exchange as an institution, including its role as a self-regulatorv or disciplinary institution and examine it vertically as an institution. Those studies are all under­ way and each will lead to some discussion of each separate exchange 

as an institution.

Mr. M ack. And the same would be true with regard to the overthe-counter market, is tha t correct?

Mr. Cohen. Yes, sir. The over-the-counter market is the subject 

of two major questionnaires that I think are going to provide some data not only about the scope but also about the functioning of the over-the-counter market, of a kind that has never been available, certainly not available in relation to the modern conditions in that market. The over-the-counter market by its nature is extremely heterogeneous, extremely broad. We are trying to get the full picture of tha t market plus a picture of many of its specific functions and 

activities.

Mr. Mack. I know you have mailed thousands of questionnaires 

since the investigation has gotten underway and I presume that you are in the process of analyzing those questionnaires at the present time. In addition to this, do you have investigators who check the questionnaires at the source to determine whether or not the information is accurate?

Mr. Cohen. We don’t do the latter in full scope, sir. By the nature 

of the problems we can’t check every answer. But there are verious internal checks available and in many, many instances we are taking the data from a questionnaire and following tha t up through inter­ views, and private hearings, and so on to get the explanatory material 

necessary.

Mr. Mack. Thank you very much.

Are there any further questions?

Mr. Keith.

Mr. Keith. Just one brief question. It would appear to me tha t 

in view of the nature and scope of your study it will not result in any legislation next year being enacted by the Congress if we don’t get it until April 3. Because of the schedule of hearings which would have to follow your report and then the consideration of proposals by the committee it is very unlikely that we would have any legislation next year and that therefore there is, as 1 stated earlier, no outstanding abuse that needs immediate attention because perhaps of the nature 

of the problem.

Mr. Cary. 1 would not want to say, Congressman Keith, tha t 

next year we would not have proposals of legislation because of the fact that even before April 3 we may have some reports available to this Congress. Furthermore, Congress itself probably would not be in a position to want to act on it, let us say, in the first month or two of a new session. 1 really don’t think we are in a position yet to say one way or another with respect to legislation next year. I think we can say that this year we are not contemplating asking for 

any immediate legislation.
32 EXTEND DATE OF SEC REPORT

Mr. Keith. The very thing th at makes it difficult for you to come 

up with an isolated proposal this year will make it similarly difficult 

for us to take action on any single recommendation tha t you might 

file earlier in the session next year. We would have to wait and 

consider the whole picture which would be revealed when you furnish 

your report on April 3.

Mr. Cary. This might be. Although I hope tha t any report will 

be thorough enough so tha t Congress would be satisfied th at we have 

achieved a responsible coverage and therefore placed a particular proposal in context.

Mr. Keith. Thank you, Mr. Chairman.

Mr. Mack. I would like to say tha t this problem has bothered me 

as well to a degree. Shortly afte r this Congress convened 1 made a 

statement tha t this subcommittee on Commerce and Finance would 

give top priority to problems of the securities field, which we have 

done. I did hope that legislative recommendations would be made 

this year in time for congressional action prior to the adjournment of 

Congress. Obviously, it cannot be done and I am of the opinion that 

it would be unwise for us to proceed to legislate without having the 

benefit of the study and investigation, and for tha t reason I would 

want to wait until the proper time so th at we can do the right kind of a 

job. I would also like to say th at there are other corrective actions 

tha t m ight be taken other than legislative to solve some of our problems through the rules of the exchanges and associations, and of the 

commission itself, so tha t the legislation is only one part of the overall 

problem. I would like to inquire as to whether or not you feel tha t 

you would be in a position to make some legislative recommendations 

as early as January of next year.

Mr. Cary. It is hard to speak to tha t and be sure tha t I am correct. 

I would hope t hat in some areas we would have thought through the 

problem enough to have legislative proposals early in the year 1963. 

Whether or not January I cannot speak to that point.

We are at this time making every effort in trying to do something 

about a problem once it has been uncovered. Indeed, I think tha t the 

American Stock Exchange is an example. Also, we have begun thinking of rulemr’dng changes already. So I think tha t you will find 

tha t we are not going to delay everything and then have a large 

amount of material on your desk at one time on April 3. You will 

find tha t we will attem pt to make available both statuto ry suggestions, recommendations, if we have them, as well as reports even 

before the date of extension if th at is granted.

Mr. Mack. I would like to point out tha t the original resolution 

required the report to be made on or before January 3 and if the extension autho rity is granted, then it would be on or before April 3.

Mr. Cary. Precisely. We so understand.

Mr. Mack. Just to mention the problem of legislating, I would be 

the first to concede tha t the m achinery wheel turns slowly up here in 

Congress. On the other hand, I would not go along with any idea that 

the Congress could not legislate on recommendations which are made 

on April 3 because it would seem to me tha t that would be ample time 

for the Congress to hold hearings and to legislate before the end of 

the session of Congress, and as evidence of tha t I would like to point 

out, as my colleague mentioned a few minutes ago, tha t House Resolution 438 was introduced in June and hearings were held on June 21,
EXTEND DATE OF SEC REPORT 33

and it was enacted into law on September 5. T feel certain tha t if we have proper legislation prepared and it could be introduced some time in April, we ought to be able to enact it before the adjournm ent of 

Congress.

Mr. Dingell.

Mr. Dingell. Mr. Chairman, you have given us the figure of $200,000. That is a very nice figure, but how do you expect this 

committee to justify that? We went to Congress once before with a $750,000 figure and said this is what is needed for the scrutiny of the market by the SEC. We now are told tha t an additional $200,000 is required. Can you give us some justification we can take before our completion on this 

matter?

Mr. Cary. Yes, sir; I can. If you wish I could divide it up and show where the primary expenditure will be made. Obviously the bulk of it will be the salaries of those 65-odd people tha t we have on 

the special study.

Mr. Dingell. How much is the salary in total of 65 people?

Mr. Cary. If you include both personnel compensation and per­ sonnel benefits, Congressman Dingell, you would have a total of 

$142,000 out of $200,000.

Mr. Dingell. $142,000 is for personnel compensation and salary 

benefits?

Mr. Cary. Tha t is correct. The travel item is $12,000. The rental and communications, primarily telephone and telegraph, rental of tabulating equipment, which is very vital in this, is $5,000. Printing and reproduction will be $5,000. There will be a stenographic reporting, which is a very large item, sir, in the magnitude of $20,000, taking of testimony. We have also supplies and materials of $1,000, equipment of $5,000, and we are engaging in an additional project by the Wharton School dealing with motivation of investors which 

would cover $10,000 of t ha t $200,000.

Mr. Dingell. How much are you giving Wharton School now?

Mr. Cary. If you refer to our past study with respect to the investment company area, I would have to ask Mr. Donaty to speak 

to the total cost of tha t.

Mr. Donaty. Over the past 4 years it has run approximately 

$90,000.

Mr. Dingell. I have often wondered how the SEC could delegate its responsibility to make studies of this sort to some private financial institution or some private learning institution. Where it is done I have always been somewhat critical. What is the justification of that last $10,000 given to the Wharton School rather than having it 

done within the SEC?

Mr. Cary. Actually, Congressman Dingell, I believe as to tha t $10,000, perhaps I misstated myself. That relates to a special study of investor motivation. If I am not mistaken, that $10,000 will go to the Bureau of the Census. The investor motivation study will be done in part through interviewing a variety of people and youlmve to use the Census Bureau as a mode of getting to a sample of individuals. If I am not mistaken, tha t $10,000 goes to the Census Bureau. The Wharton School will be taking the Bureau of Census data and correlating the study with respect to investor motivation.
34 EXTE ND DATE OF SEC REPORT

Mr. Dingell. I see.

Mr. ChairmaN, thank you very much.

Mr. Mack. Any fur ther questions?

I think that the record should show tha t Commissioner Manuel 

Cohen is also present this morning.

Mr. Cary. I should say he is.

Mr. Manuel Cohen. Thank you.

Mr. Mack. I think that is all from the Commission.

Is tha t correct?

Mr. Cary. Tha t is correct, sir.

Mr. Mack. I want to thank you very much, Mr. Chairman, for 

your testimony. I also would like to include in the record at this 

point a letter from the National Association of Securities Dealers 

and a telegram from Mr. Briltin C. Eustis, president, Association of 

Stock Exchange Firms.

(The letter and telegram mentioned above follow herewith:)

National Association of Securities Dealers, I nc.,

Washington, D.C., May 14, 1962.

Hon. Peter Mack,

House of Representatives,

House Office Building,

Washington, D.C.

Dear Mr. Mack: In respect to H.R. 11670 (Mack, Ill.), I wish to sta te th at 

the N ation al Association of Securities Dealers, Inc., favors the additional app ropria tion of $200,000 recommended for use by the SEC Study Group and the 

extension of the date on which the final report should be filed with the Congress.

Sincerely,

Wallace H. Fulton, Executive Director.

Dearborn, Mich., May 14, 1962.

Hon. P eter F. Mack, Jr.,

House of Representatives, Washington, D.C.

Dear Mr. Mack: You will be intereste d to know t ha t the board of governors 

of the Association of Stock Exchange Firms assembled in Detroit for its spring 

meeting, today adopted a resolution in support of H.R. 11670 to provide for a 

3-inonth extension of the stock market investigation by the Securities and 

Exchange Commission.

This action, in supp ort of your resolution of May 9, was taken in recognition 

of the magnitude of the Commissioners’ task and the importance of the study 

both to the investing public and the securities industry.

The board feels that completion of the study in a thorough and responsible 

manner is essential to the main tena nce of investors’ confidence in our securities 

markets and that the Commission must be given ample time and funds to perm it 

it to carry out the heavy responsibilities entrusted to it by Congress.

Sincerely yours,

Briltin C. E ustis, President, A SE F.

Mr. Mack. Are there any other witnesses to be heard this morning?

This will conclude our hearings on this subject. The committee 

stands adjourned.

(Whereupon, at 12:20 p.m., the committee was adjourned.)

o