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THE COMMITTEE FOR THE MARTIN REPORT
1700 Pennsylvania Avenue
Washington, D. C. 20006
EXECUTIVE COMMITTEE
Forrester A. Clark,
H. C. Wainwright & Co.
James L. Bayless
Rauscher Pierce Securities Corp
W. Bruce McConnel, Jr.
Singer, Deane & Scribner
Carl W. Timpson, Jr.
Pershing & Co.
Richard A. Westcott
First Mid America, Inc.
COUNSEL
Sr.
Gadsby & Hannah
Pennsylvania Avenue
Washington, D. C. 20006
223-9100
1700
(202)
STATEMENT TO THE SUBCOMMITTEE ON COMMERCE AND FINANCE
HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE.
April 25 and 26, 1972
The Committee for the Martin Report presently comprises
fifty-two registered broker-dealers, all of whom are members of the
Now York Stock Exchange and most of whom have memberships on other
exchanges, including all of the regional exchanges.
Shortly after
the publication of Mr. William McChesney Martin's Report on the
problems of the securities industry* some thirty-one of these firms
determined that the course which Mr. Martin suggested for the securities industry was the one best calculated to maintain the best features of the country's securities distribution system, while at the
same time providing the improvements and reforms which the experience
of the past several years has indicated were necessary.
These hearings have been announced to "consider the questions of (i) commission rates, (ii) institutional membership on exchanges, and (iii) separation of brokerage and money management,"
Mr. Martin's Report and recommendations considered all three of these
topics, but did so in the context of a much broader policy decision.
That decision upon which all of the other recommendations in the
http://fraser.stlouisfed.org/
'The public interest dictates that the primary purpose of a securities market is to raise capital to finance the economy."
Federal Reserve Bank of St. Louis
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Report were based was that:
"The public interest dictates that the
primary purpose of a securities market is to raise capital to finance
the economy," and that the mechanism to insure this must be a central
auction market system nationwide in scope.
We submit that no deci-
sions may be reached on the questions presently before the hearings,
unless this fundamental issue is first resolved.
The Committee for the Martin Report endorses the basic conclusion announced by Mr. Martin.
We believe that the public interest
in the United States demands a continuation of the broadly-based distribution system for securities which has been developed in this
country, and that the system can only be preserved by the continuation
of the present auction market system and its strengthening by additional centralization, uniformity of regulation and universality of
disclosure.
We turn now to a consideration of the specific questions
posed by the Subcommittee on Commerce and Finance in its invitation
to us to appear at the hearings.
COMMISSION RATES
Our answers to the five questions propounded under the
heading "Commission Rates" will be given with the assumption in mind
that a central auction market, very similar to that which has been
provided by the New York Stock Exchange over the years, is the keystone upon which the national securities market system will be based.
Thus, whether or not there should or should not be fixed minimum commissions, and, if so, at what level they should stop, will be approached
with this in mind.
We believe that the consideration of this issue
must be made independently of deliberation on the qualifications of
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individuals or firms to be members of securities exchanges.
We be-
lieve that the joining of these two issues and the treatment of them
as being interdependent has caused nothing but confusion in the consideration of either of them.
In short, whether or not financial
institutions should be permitted to become members of national securities exchanges for the purpose of trading their own accounts has
nothing to do with whether and to what extent the fixed minimum commission is abolished.
As Mr. Martin has observed:
"All of the arguments on both sides of the
question of institutional membership have
been weighed and considered. The public
discussion of the subject has been confused
by the concentration upon the question
whether institutions should be entitled to
access to exchange membership so that they
may benefit by saving commissions. Appropriate commission charges for institutional
orders are a separate question."
In addition, we believe that there is nothing inherently
bad about fixed minimum commissions, and that the outcry against them
as a system is unfounded and unnecessary.
Far from being monopo-
listic, as some of its detractors have accused, it may very well be
the most important single factor in encouraging the competitive system under which our securities markets have grown.
W e believe that
a fair appraisal of the 150 year old minimum commission structure
would lead to the following conclusions:
(a) The minimum commission system has served
effectively to establish a maximum commission system,
and h a s , accordingly, protected investors — particularly small investors — as a result.
(b)
The minimum commission system has been the
single most effective force in developing meaningful
competition in the all-important area of service to
the customer in the fiduciary atmosphere of principal
and agent.
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(c) The minimum commission system has been the
keystone in the development of our present system of
national securities distribution, having been the
single indispensable element in the development of
our regional New York Stock Exchange member firms,
(d) The minimum commission system has made it
possible for the nation's broker-dealers to service
the small investor — not, it must be emphasized, at
the expense of the large investor, but rather as an
outgrowth of the securities market system as a whole.
(e) The evidence is overwhelming that the discontinuance of the minimum commission system would not
only erode but, quite, probably, destroy the overall
profitability of the securities industry.
(f) On the other hand, the discontinuance of the
minimum commission system would result in a geometrically
increased profitability for the very few giant securities
firms which would survive. It would, accordingly, result
in a geometric decrease in the number of broker-dealers
who could compete for the public's business. The resultant decrease in competition is all too painfully obvious.
With this in mind, we answer the Subcommittee's questions
as follows:
A.
No one knows. Not only was there no factual basis
for reducing the maximum limit from $500,000 to
$300,000; there was never any basis in the first
place for abolishing the fixed commission on even
the largest trades. At any rate, before the commission rate system is drastically altered, far
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more preliminary steps should be taken.
Until
a workable central auction market system has been
formed and is in operation, it will continue to
be impossible to determine whether fixed minimum
commissions are necessary at any level.
And the
deleterious results to any auction market system
which may come from any erosion of the profitability
of the members which make it work, are so potentially
destructive that guesswork should not be the basis
for making any decisions.
B.
We do not believe that there are any public policy
reasons "which justify allowing competitively determined rates on institutional size orders, but fixed
rates on smaller orders.11
The only public policy
with which we would be concerned is that which we
believe demands the central public auction market
system as a prerequisite to a system of securities
distribution which permits the raising of capital
to finance the economy.
Whether this demands com-
petitively determined rates or fixed rates or unbundling of rates is the decision which should be
made.
We believe that the system demands a broad
national distribution system, and that the smaller
"regional" broker-dealer is an indispensable element
in the system.
Until it can be affirmatively deter-
mined that a fundamental change in the commission
structure will not serve to weaken or destroy this
public network of broker-dealers, then no steps
should be taken further to reduce present limits.
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C.
If Congress determines that fixed prices are not
in the public interest, it must, we believe, first
have determined that abolishing them will not be
irreparably damaging to the nation's securities
distribution system.
If it has made this deter-
mination, then, presumably, all fixed commissions
should be abolished immediately, and Congress can
do this much more expeditiously and quickly than
the Securities and Exchange Commission. But we do not
believe that either the Congress or the Securities
and Exchange Commission at this date possesses
anywhere near sufficient evidence to warrant the
abrupt termination of the industry's traditional
system of fixing commissions.
It may very well be
that such evidence will be gradually adduced.
In
the meantime, we would suggest, respectfully, that
the Securities and Exchange Commission and the securities exchanges themselves are better able, with their
existing experience and facilities for monitoring the
health of the securities industry, to make at least preliminary determinations and, based thereon, to make
their recommendations to Congress.
D.
If Congress determines that legislation is required to
provide for competitively determined rates on all
transactions, it must first have made the preliminary
determinations referred to in our answer to question
"C".
It should and could, presumably, act immediately.
But, it is to us inconceivable that such an action
could be taken prior to actions which would place
regional securities firms (that is, those located outside of New York City) on an equal competitive basis
with their New York-based competitors in such matters
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as clearance, delivery of securities, central
depositary services, etc.
Our answer to this ques-
tion, therefore, returns us to our original position that the establishment of the central market
place with uniform regulation and paperwork reform
should be considered by Congress to be a prerequisite
to a restructuring of the commission system.
E.
The suggestion that a system of "competitively determined commission rates" will require "institutions
and others" to seek out the lowest execution price
without consideration of other services which may be
offered by competing brokers is one with which we
have little sympathy.
It is true that the investment
company industry has been undergoing a round of litigation encompassing the fiduciary obligations of
managers in the brokerage commission field.
But so
far there seems little basis for proposing as a rule
of law that fiduciaries cannot consider all of the
circumstances of a given securities transaction and
choose an executing broker on the basis of the overall
benefit to his beneficiaries to be derived from his
choice.
Obviously, the compensation of the fiduciary
for the performance of his management function would
be expected to show to some degree the amount to which
the use of his managed fund's brokerage commissions
have contributed to a saving of his expenses of management.
We believe that this has always been the rule,
and we observe that at least in the case of investment
companies, it has been recently partially codified.
We believe further that a certain amount of investment
advice is an integral part of the function of a brokerdealer, and that a certain amount of "research" is assumed before advice is given.
We respectfully refer to
—8 —
the statement and testimony of Mitchell, Hutchins
& Co., Inc. provided to your Subcommittee at its
hearings on April 14 and April 17. We believe this
to be as comprehensive and erudite a description of
the meaning and significance of research as we might
possibly provide, and we concur in its conclusions.
INSTITUTIONAL MEMBERSHIP
We cannot state too emphatically our unanimous opinion that
membership on a securities exchange which is acquired solely for the
purpose of reducing or recapturing commissions otherwise payable to
members of the exchange prostitutes the entire concept which was adopted
by Congress in 1934 and has never been changed or abrogated.
This is
so regardless of the size of the individual or firm seeking membership.
In fact, the size is really not the issue.
Why should your
Subcommittee be considering with such care the issue of whether large
financial institutions should be permitted to save brokerage commissions
by joining securities exchanges?
If they are to be so permitted, should
not all investors be entitled to join an exchange to save commissions?
If the price of membership reached a low enough level or even a nominal
level, would not all fiduciaries automatically be required to join exchanges?
What would the results then be on the nation's securities
distribution system?
The issue before your Subcommittee is not that
of the saving of brokerage commissions by the life insurance industry
or the settlement of litigation by the investment company industry.
The issue is what duties and obligations should be imposed upon members
of national securities exchanges as a price for the enjoyment of the
economic benefits which may be conferred upon members by virtue of
their membership.
It is certainly appropriate to consider in some detail the
legislative history of the Securities Exchange Act of 1934 as it
applies to membership on national securities exchanges.
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Discussion of Legislative History
"Manipulators who have in the past had
a comparatively free hand to befuddle
and fool the public and to extract from
the public millions of dollars through
stock-exchange operations are to be
curbed and deprived of the opportunity
to grow fat on the savings of the average man and woman of America."
* * * *
"The purpose of the Bill is to insure to
the public that the securities exchanges
will be fair and open markets. The Bill
seeks to protect the American people by
requiring membership of these exchanges
to be wholly disinterested in performing
their service for their clients and for
the American people trading on the exchange."
The foregoing statements are those of Senator Duncan U.
Fletcher made to the Senate of the United States on February 9, 1934,
in introducing to the Senate a Bill then known as S.2693, which was
to become later known as the Securities Exchange Act of 1934.
S.2693
was followed on February 10, 1934, by a companion Bill introduced to
the House of Representatives by Congressman Sam Rayburn as H.R.7852.
These Bills were referred, respectively, to the Committee on Banking
and Currency of the Senate and the Committee on Interstate and Foreign
Commerce of the House of Representatives, and in the ensuing months
public hearings were held on both Bills.
Later, Senator Fletcher
and Congressman Rayburn introduced identical Bills (S.3420 and
H.R.8720) , upon which further hearings were held.
Following these hearings Mr. Rayburn introduced H.R.9323,
which was eventually enacted by both Houses as "The Fletcher-Rayburn
Bill," and this Bill was signed by the President on June 6, 1934, as
Public Law No. 291-73rd. Cong. 2d Session.
We now know the Fletcher-
Rayburn Bill as "The Securities Exchange Act of 1934" ("the
Act") .
1934
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At no time during future debate on the floor or in any
of the Committees' Reports was there any indication of a departure
by Congress from the concept enounced by Senator Fletcher of "performing their service for their clients and for the American people
trading on the
exchange."
Quite to the contrary, the Report of the
Committee on Interstate and Foreign Commerce of the House of Representatives, which reported out H.R.9323, stated clearly that:
"The Bill proceeds on the theory that
the Exchanges are public institutions
which the public is invited to use for
the purchase and sale of securities
listed thereon, and not private clubs
to be conducted only in accordance with
the interests of their members." (H.R.
1384, p.15, emphasis added)
And as though to fortify this policy statement, Senator
Fletcher stated on the floor of the Senate:
"Under this Bill the securities exchanges
will not only have the appearance of an
open market place for investors but will
be truly open to them, free from the hectic
operations and dangerous practices which
in the past have enabled a handful of men
to operate with stacked cards against the
general body of the outside investors."
(78 Cong. Rec. 2271)
It is not surprising that so little debate was conducted
on the floor of the Senate or that such little mention was made in
the Senate and House Reports on this matter of membership on Exchanges. It is quite clear that the concern of the Congress was not
whether membership should be restricted to those brokers or dealers
doing business with the public, but rather, whether it should be restricted to brokers only, to the exclusion of dealers, whether or not
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they were doing business with the public.
In fact, the Bill as
originally introduced included a provision prohibiting a member
of an Exchange from acting in any way as a dealer in securities:
"Sec. 10. It shall be unlawful for any
member of a national securities exchange
. . . to act as a dealer or underwriter
of securities, whether or not registered
on any national securities exchange . . . ."
But during the hearings in the Senate and House Committees, it was
urged that segregation of the two functions —
that is, broker and
dealer —- might seriously inhibit the conduct of the securities industry as it had developed in this country, and that such far-reaching
legislation should not be passed without a full and complete study of
the problem.
Accordingly, the provision for complete segregation of
broker and dealer functions was removed from the original Bill (it
appeared as Section 10 of S.2693), and what became Section 11 (e) of
the 1934 Act was substituted for this harsh provision, and finally
enacted into law:
"Sec. 11 (e). The Commission is directed
to make a study of the feasibility and
advisability of the complete segregation
of the functions of dealer and broker,
and to report the results of its study
and its recommendations to the Congress
on or before January 3, 1936."
The study thus ordered by Section 11(e) of the 1934 Act was
subsequently undertaken by the Securities and Exchange Commission
under the Chairmanship of James M. Landis, and the results were submitted to the President of the Senate and the Speaker of the House
of Representatives (somewhat late) on June 20, 1936.
-12-
This study, entitled "Report on the Feasibility and Advisability of the Complete Segregation of the Functions of Dealer
and Broker" ("the 1936 Report"), contained a classification of the
then members of the New York Stock Exchange.
(The "New York Curb
Exchange" was included by the simple statement that the discussion
of the New York Stock Exchange was "applicable" to the Curb Exchange,
and then-existing regional exchanges were not discussed for the reason that "the functional classification of members is more sharply
defined" on the New York Stock and Curb Exchanges.)
It would serve no immediate purpose to discuss this 1936
study of the Commission, other than to point out that it included a
careful assessment of the problems and competing arguments in favor
of and against the activities of eight classifications of members.
These were (1) the commission broker, (2) the floor broker, (3) the
floor trader, (4) the odd-lot dealer, (5) the odd-lot broker, (6)
the bond broker and dealer, (7) the specialist, and (8) the inactive
member.
Significantly, the inactive member, whether trading on or
off the floor, seemed to present the most serious problem to the
operation of the market place, even in those days when this type of
trading for the member's own account represented a relatively minor
volume.
In this regard, the following observations are significant
insofar as they may relate to the legislative and regulatory history
of the 1934 Act:
"It is evident, therefore, that a member
trading for his own account is in a position to trade with greater frequency to
assure commitments at smaller costs, to
profit from smaller price changes, and
to incur less risk of loss, than a non
member."
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This comment was addressed to members who were trading their own
accounts on the floor of the Exchange.
Turning then to "the prob-
lem of trading by members off the floor," the Commission observed:
"The apparent abuses in the handling of
brokerage orders in conjunction with the
various dealer activities which commission houses may carry on have already
been described. At this point attention
will be focused upon dealer transactions
on the exchange, but not initiated on the
floor, and the effect thereof."
* * * *
"A member who trades from his office does
not, of course, have the advantages which
a member on the floor derives from his
physical proximity to the center of trading. He does not enjoy the same instant
access to information regarding the springing up of activity or the direction of
prices. Nevertheless he usually maintains
direct wires and other facilities by means
of which he is kept currently posted with
respect to developments on the floor. In
this regard the member off the floor and
all other professional traders, whether
members or non-members, are in a position
superior to that of the non-professional
public."
(1936 Report, p.48, emphasis added)
The 1936 Report of the Securities and Exchange Commission
obviously was not concerned with the problem —
arise for two decades —
which was not to
of membership on securities exchanges by
large financial institutions whose sole motive was to "pay commissions
for the execution of their transactions at rates substantially below
those fixed for the public."
(See 1936 Report, p.46)
It is being
cited rather to point up what is consistently obvious in the legislative history of the 1934 Act —
and that is, the concern of Congress
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at that time was not whether it was desirable to throw open the
doors of membership in the future to persons whose intent was only
to trade for their own accounts, but rather, whether to exclude
from membership in the future those not intending to conduct a
brokerage function (as distinguished from a dealer function) with
the public.
Thus, the debate of 1934 in the halls of Congress was
not that of whether a "primary purpose test" should be applied, but
rather, whether the functions of a broker and dealer, both of which
would satisfy the primary purpose test, should be segregated and the
latter barred from membership.
The very definition of "dealer" in
the 1934 Act illustrates that the primary purpose test was simply
assumed:
"The term 'dealer' means any person engaged in the business of buying and selling securities for his own account • . .
but does not include a bank, or any person
insofar as he buys or sells securities for
his own account, whether individually or
in some fiduciary capacity, but not as a
part of a regular business." (Sec. 3 (a)
(5), emphasis added)
We observe parenthetically that the definition of the term
"member" appearing in Section 3(a)(3) of the 1934 Act does not qualify
the terms "broker" and "dealer" insofar as discerning the intent of
Congress is concerned.
There were, of course, at the time of the
passage of the Act "members" who were neither brokers nor dealers,
and to the extent that the Act applied to those persons, the breadth
of the definition of "member" was necessary.
We submit that the importance of this legislative history
in the context in which we cite it is that nowhere was consideration
given or concern expressed over the future admission to Exchange
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membership of anyone not doing business with the public.
And we
submit that the action of Congress in not dealing specifically
with the expulsion from the Exchanges of persons not so qualified
was motivated purely by a reluctance to divest these individuals
of valuable inchoate rights.
Indeed, their number has been steadily
dwindling, their function has been carefully proscribed and, in the
case of floor traders, their responsibility to the public specifically
increased and delineated.
In short, the existence of the floor
trader and other members trading for their own accounts prior to
1934 and the "grandfathering" of their existence can hardly be cited
as precedent for the contention that the doors of the Exchanges
should now be open to all comers.
Perhaps no single statement in the development of the
1934 Act so clearly describes the atmosphere in which it was drafted
and from which it was born than the statement of one of its original
draftsmen, Thomas G. Corcoran, Esquire, of the District of Columbia
Bar.
Testifying before the Senate Committee on Banking and Currency
on the original version of the 1934 Act (S.2693), Mr. Corcoran
stated:
"As this section is drawn it says the
exchange has no justification in the
economic system except as a market
place in which the orders of the investing public can be executed. Therefore, no one can be a member of the exchange except a broker." (Emphasis added)
As we have seen, it was decided at a later date provisionally to
admit "dealers" as members —
the public.
but clearly those doing business with
At no time is there any indication that further com-
promise of the original provisions of the Bill were proposed by or
would have been countenanced by Congress.
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To summarize then, the purpose of a national securities
exchange is to provide the public with a market place where investors,
large and small, can purchase and sell securities in a regulated
atmosphere.
Membership on these exchanges carries certain economic
benefits, among them the right to receive commissions for the execution of transactions for others, presumably at some profit.
But the
protection of investors and the public interest demands that membership carry concomitant obligations and duties.
The most important of
these is the duty to devote time, talent and capital to providing the
public with its Congressionally-sanctioned market place.
is what the primary purpose test is all about.
And that
With this in mind,
we provide the following answers to the five questions under the
heading "Institutional Membership."
A.
Yes, institutions should be prohibited from joining
national securities exchanges, directly or indirectly,
to effect savings in commission costs.
This is so
whether or not fixed commission rates are required.
B.
No, institutions should not be permitted a qualified
form of access to national securities exchanges,
nor should any other customers of member firms.
(We assume that by the term "access" is meant some
form of commission sharing or rebate or recapture.)
C.
There are basic policy reasons for prohibiting institutional membership at any time.
We refer to our
discussion of the public nature of securities exchanges.
"Institutional membership" means in the final analysis
the abolition of the primary purpose test.
This coupled
with a major reduction in the cost of membership (an
inevitable result, in our opinion, of the abolition
of the primary purpose test) would totally destroy the
public auction market.
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D.
Our logical answer to this question is that regardless of when exchange memberships have been
acquired, the primary purpose test must be observed
in all instances, irrespective of financial hardship.
A "grandfather clause" is simply inconsistent
with the provisions of the law and with the intent
of Congress in enacting the provisions.
Congress does, on the other hand, have the latitude
to consider the substantial inequities which might
obtain in specific instances of acquisitions of membership, particularly during the 1960's when the staff
of the Securities and Exchange Commission quite openly
encouraged the acquisition of memberships on exchanges
for the purpose of recapturing commissions.
We believe
this was a totally unjustified approach, that it was
violative of both the letter and the intent of the
Securities Exchange Act and the Investment Company Act,
and that there resulted a temporary lapse in the enforcement of existing laws.
But, we would agree that
Congress should make every effort to temper the loss
which might be incurred by unconditional enforcement
of the primary purpose rule, whether by grandfather
clause or income tax credit or outright subsidy of
repurchase of memberships.
E.
We believe that the Securities and Exchange Commission has authority under the Securities Exchange Act
of 1934 to deal with the problem of enforcement of
the Securities Exchange Act viewed in the context of
the legislative history of the Act.
That is, if
Congress intended membership on securities exchanges
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to be limited to those persons performing a public
function, then the Securities and Exchange^ Commission must enforce the Act.
But recent public state-
ments and published correspondence from members of
Congress and of the Senate have cast doubt upon the
enforcement powers of the Commission, and it would
appear that the existing confusion might best be
removed by some overt act of Congress.
We respect-
fully call attention to a Bill presently pending
before the Senate, which was originally introduced
by Senator Sparkman and Senator Bennett, the chairman
and ranking minority member, respectively, of the
Senate Committee on Banking, Housing and Urban Affairs.
This Bill, now known as S.1164, would restrict membership on securities exchange to those doing business
primarily with the public, and we would wholeheartedly
support the passage of this Bill at any time.
SEPARATION OF BROKERAGE AND MONEY MANAGEMENT
Page after page of testimony was adduced at the hearings
on the Structure, Operation and Regulation of the Securities Markets
before the Securities and Exchange Commission.
We have reviewed all
of this testimony, and can only say that no generalization of any conclusion is possible on the issue of separation of brokers' functions.
One thing is certain, and that is that it is not possible
to divorce the function of handling brokerage transactions for customers from the giving of advice to these customers on the wisdom of
their investment decisions.
The Securities and Exchange Commission
-19-
and the National Association of Securities Dealers have found good
reason not to do so; we see this in its most rudimentary aspect in
the so-called suitability rule of the Commission and the N.A.S.D.
Participating in the underwriting of a new issue of necessity involves the giving of investment advice by a broker to his
customer.
So does the receipt of a warrant by an existing customer
of a broker —
that is, should he exercise the warrant or sell it?
So does the year-end tax planning of a customer —
that is, should
he sell to realize gains or losses, and if so what should he sell?
If money management is to be divorced from brokerage, when does the
function of the broker become money management?
There are many suggested solutions to the problem, and they
would all seem to require the definition of money management to require
the receipt of stated compensation for the advisory function separate
and apart from any commissions which may be received for the transaction of securities orders.
Mr. Martin found that to an extent this
function should be permitted a broker-dealer, but he limited the extent to the point of excluding the management of a registered open
or closed end investment company pursuant to a written contract.
He
did not defend this on the basis of anything but a "value judgment."
On the other hand, it is not without a valid rationale.
That is,
that the relationship between a registered investment company and its
investment adviser is unique in the law in that it is carefully delineated in the Investment Company Act of 1940, and now also in the
Investment Advisers Act of 1940.
There are prohibitions in the Act
against certain joint dealings, and there are restrictions in the
Act governing the composition of the board of directors of the investment company and the degree of affiliation between the investment
-20-
company and its adviser.
There are specific requirements governing
the duties of the directors of the investment company, vis-a-vis the
advisory contract.
There is a whole body of federal case law
governing these relationships.
In short, there is every reason to
distinguish between a relationship so carefully singled out by Congress and the judiciary and the ordinary relationship between a
broker-dealer and a managed account which is subject to no such
statutory definition.
Based upon this introductory comment, we now provide you
with our answers to the three questions under the heading "Separation
of Brokerage and Money Management."
A.
There is no necessity for Congressional action
to require the separation of the functions of
money management and brokerage.
We reject the
allegation that there is a conflict of interest
in the exercise of both functions by the same
entity.
If anything, the performance of both
functions by the same person for the same customer
indicates a far higher degree of care than would
even normally be the case.
We also reject the
argument that an unfair competitive advantage is
presented to those entities performing both functions over those entities performing only one of
the two functions.
We observe briefly that the
existence of this advantage would seem to be demonstrably refuted by the predominance in the money
management field of banks and insurance companies
having no broker-dealer affiliate.
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We do concur in the recommendations of the Martin
Report that there should be an elimination of any
offset against advisory fees on account of brokerage commissions.
This has traditionally caused
more problems than it has solved, and the hearings
before the Securities and Exchange Commission revealed
a tendency on the part of money managers of all categories, including banks and brokerage firms, to purify
their investment advisory and money management functions and the fees charged for these services.
B.
As we have stated, we do not believe that any action
is needed by Congress at this time.
C.
The Martin Report determined that so long as the
primary purpose test is complied with it should be
permissible for broker-dealers who are members of
exchanges to manage pooled investment accounts, but
not registered investment companies.
The members of
the Committee for the Martin Report are not unanimous
in the matter of the prohibition against the management of investment companies.
With this exception,
our answer is that it certainly would be equitable
to permit broker-dealers who currently are members of
exchanges to continue to manage mutual funds and other
pooled investments, so long as this remains incidental
to the performance of their public brokerage business.
We observe that our rejection of the conflict of interest and. unfair competition allegations requires
this logical conclusion.
And, finally, we again ob-
serve that the true test should be whether the membership on the exchange is being used to provide the
public with its market place.
@FedFRASER