The Birmingham age-herald., 1924-10-08
FORBES URGES
 STOCK EXCHANGE
 LOSS INSURANCE
Suggests Pool By Mem bers To Raise Nec-
 essary Funds
By B. c, FORBES


 Why cannot the New Work Stock ex- change insure the public against losses suffered in dealing with members who fail? It should be done and so far as can reason 1t ought, it should be done One reform now under confederation subject members to speriodtcal tnde- pendent audits. Such a safeguard would accomplish something, perhaps . good deal.
 But could the money which would thus have to be spent not be used to greater advantage, from the viewpoint both of members and investors! How much do you think one audit cost a large stock exchange house? No I less than $65,000. Even though few con- cerns would have to spend nearly as much as this, nevertheless the total cost of half yearly audits of the books of all stock exchange members doing business with the public would reach very, very large sum per annum. In addition to being costly. the audit ing of a concern carrying scores of mill lions of securities entails more or less dislocation to business and much over time work on the part of the employees, for the most careful concerns check up every item after everything is handed
 back by the auditors.
 Why would it not be, feasible for the stock exchange, instead of insisting upon periodical outside audits, to as- sess the members,~- according to. the amount of the business each passes through the clearing house. a certain sum and set aside this money as an in- surance fund against losses sustained I by the public through the dishonesty
 or the bankruptcy of members? The amount thus collected for the first year might not be regarded as af- fording sufficient coverage for this pur- pose, and 1t therefore might be advis- able to insure the risk with Lloyds or one of our large bonding companies. But in two or three years the money thus accumulated should prove ample,
 after year should no extraordinary losses occur.
 By carrying It's own insurance, so to speak, the stock exchange would be following the example Of some of our 2 largest and most successful industrial
 enterprises. They do not take out out
 side insurance policies but set aside
 certain sums every year as reserve against loss by fire and other causes. Money paid out by stock exchange
 firms for audits ordered by the stock exchange, would, of course, be gone beyond recovery. But the money paid . by members into such a fund as here outlined would stand to the credit of the membership, and as 1t increased year by year the stock exchange ssats naturally would become more and more valuable.
 It is the proud boast-and presumably
 tho justified boast of the stock ex-
 change-that the losses sustained by the public through the dishonesty or failure
 of members are astoundingly small.
 Therefore, it should oe possible after a few years to red 1Ce very greatly the as- sessment levied for the insurance fund.
 Think of the confidence such an ar- re ngement would inspire in investors. Would 1t not go far to drive bucke.- shops out of business. Wouldn't you have a feeling of absolnte safety in dealing with a stock exchange house
 were you safeguarded against all pos siblc dishonesty or financial embarrass-
 ment on the part of the house? Is it not reasonable to figure that the increase in the volume of business
 flowing into stock exchange houses, in preference to non-member houses, would ! go far to make up for the annual con- tribution to the guarantee fund?
 The time would probably come, in- deed, when the interest earned on the fund would almost, if not quite, meet
 the amount to be raised annually.
 Frankly, never favored guarantee ing bank deposits, as felt that the re- suits were likely to be-well, about what they have been where the experi- ment has been tried.
 But I have yet to be convinced that Ithe proposal rmado here would not be { feasible and that it would not be worth
 adopting from the point of view both
 for the members of the stock exchange
 and the public doing business with them.
 This suggestion will be submitted to
 the stock exchange authorities for their
 decision.