December 22, 1970
Page 43231
SECURITIES INVESTOR PROTECTION ACT OF 1970 – CONFERENCE REPORT
Mr. MUSKIE. Mr. President, I submit a report of the committee of conference on the disagreeing votes of the two Houses on the amendment of the Senate to the bill (H.R. 19333) to provide greater protection for customers of registered brokers and dealers and members of national securities exchanges.
I ask unanimous consent for the present consideration of the report.
The PRESIDING OFFICER. Is there objection to the present consideration of the report?
There being no objection, the Senate proceeded to consider the report.
(For conference report, see House proceedings of December 18, 1970, pages 42580-42588.
CONGRESSIONAL RECORD.)
Mr. MUSKIE. Mr. President, I expect there will be considerable discussion of this conference report because of the special interest of the Senator from Massachusetts (Mr. BROOKE) in some provisions in the report. I wish to ask the Senator from Massachusetts whether we may expect a rollcall vote. I do not know, but I do expect the discussion will last for 45 minutes or longer, to clarify the point in which the Senator from Massachusetts is interested.
Does the Senator from Massachusetts expect to ask for a rollcall vote?
Mr. BROOKE. I have no intention of doing so.
ORDER OF BUSINESS
Mr. WILLIAMS of Delaware. Mr. President, earlier I made a suggestion which I thought would meet with the approval of most Senators. In talking with them I think a majority of the Members on both sides of the aisle are perfectly willing to take this action, which was to recommit the pending bill on social security, welfare, and trade, with instructions to delete those controversial proposals and report it back forthwith, but with nothing included except social security, medicare, and medicaid.
I was hoping we could get that decision tonight so Senators would know what our position will be on Monday. I was trying to get a vote on that proposal tonight.
Mr. CURTIS. Mr. President, will the Senator yield?
Mr. WILLIAMS of Delaware. I yield.
Mr. CURTIS. Mr. President, I hope the distinguished Senator from Delaware will offer his motion to recommit. I think it is very likely to carry, and it is entirely possible we could finish the social security bill Monday.
Mr. WILLIAMS of Delaware. Mr. President, I would be willing to agree to a limitation of time of 5 minutes or 10 minutes to a side. We have discussed the matter adequately, and we could vote in 10 minutes.
Mr. MUSKIE. Mr. President, this is a piece of legislation we can get out of the way. This is important legislation. The Senator from New York (Mr. JAVITS) has spoken several times on the floor of the Senate about its importance, including a colloquy with the distinguished majority leader last evening. We worked it out. It had not been as visible a problem as some of the other problems, but it is a real one. There have been many negotiations today to work out the problem of the Senator from Massachusetts, and we have the bill ready to go. I would like to move ahead with it today. This is a piece of legislation we could enact tonight in the Senate, and I would like to get it done.
Mr. RIBICOFF. Mr. President, in answer to the distinguished Senator from Delaware, I hope we do not act on this problem tonight for several reasons. First, the chairman of our committee is not present in Washington at this time. I do not know when to expect him. He is snowbound in New York. I think in due courtesy to the distinguished chairman no action should be taken until he is here.
The Senate should understand if we take action tonight on this proposal, for all practical purposes it would kill the family assistance plan without giving an opportunity to the Senate to vote on it.
The Senator from Delaware and I tried to work out the matter so that we would have had an opportunity to vote on family assistance and allow the Ribicoff-Bennett amendment to be open to amendment, but there was objection and I know the Senator is trying to bring about an expeditious decision on the basic issue.
I wonder if the Senator from Delaware would agree to put off the vote on the motion to recommit to a time certain on Monday.
Mr. WILLIAMS of Delaware. The only trouble is that we debated another matter from 9 a.m. until 3 p.m. today and at 3 p.m. we started on this matter. I hear so much enthusiasm on the part of Senators to bring this matter to a vote, I do not understand that when we get ready to vote there is a reluctance.
I would be willing to agree to vote at 5:30 p.m. Call the roll on this motion right now. The matter has been fully debated. We know what we are doing. I am ready to vote.
Mr. President, I ask unanimous consent that we vote at 5:30 p.m. on this proposal.
Mr. MUSKIE. Mr. President, I have listened all afternoon to much of the discussion on questions raised by the distinguished Senator from Delaware. I am in full sympathy with his desire to bring several of these issues to a head, but nothing has happened. This is something that can happen. I would like to proceed and get it out of the way.
If the pattern of the early afternoon is a precedent for what would happen now if I yielded, it would be 1 hour or an hour and a half from now and I would still be waiting to get action on this matter which could be disposed of in 45 minutes.
So with all respect to the Senator from Delaware, I would like to proceed with the discussion on this bill, which is the pending business, if I am correct.
The PRESIDING OFFICER. It is the pending business.
Mr. WILLIAMS of Delaware. I understand the Senator's position. I want the RECORD to show that we could vote at 5:30. I have been willing to vote since 3:30. Everybody talks about voting and nobody wants a rollcall. I think we should sit down and call the roll.
Mr. MUSKIE. The Senator has made my argument better than I could. I think we should get on with this legislation, which we can dispose of
Mr. WILLIAMS of Delaware. Perhaps we can have a vote later in the evening.
Mr. MUSKIE. I hope so.
Mr. MILLER. Mr. President, will the Senator yield?
Mr. MUSKIE. I yield.
Mr. MILLER. Did the Senator plan to ask for the yeas and nays?
Mr. MUSKIE. No, I had not planned to do that. One point that we will try to clarify in the debate is of concern to the Senator from Massachusetts. He has indicated he will not request a rollcall vote. I do not intend to, but any Senator who wants to can ask for a rollcall vote.
Mr. President, this bill, which comes back to us from conference, is the so-called broker-dealer insurance bill which I introduced on June 9, 1969. Events which have occurred since that time have made this legislation a matter, I think, of national urgency.
During 1969 and 1970, approximately 110 firms have disappeared from the securities industry because of financial difficulties. The majority of these firms were merged into other firms and their customers did not suffer. However, some are still undergoing liquidation and their customers have not yet received the money or securities due them. It is unlikely that the customers of these firms will ultimately lose because of the responsible action taken by the New York Stock Exchange and its member firms, as well as other exchanges and firms. In 1964, for example, the New York Stock Exchange established a trust fund, made up contributions from all its member firms, to indemnify customers against possible losses through the failure of a broker or dealer.
Until just recently, these trust funds appeared to be adequate protection. But the tremendous acceleration of the difficulties of the industry within the last 2 years has depleted most of these trust funds. Indeed, the trust fund concept itself is no longer adequate in view of the potential losses.
For this reason, it has become necessary to enact the legislation embodied in the conference report now before the Senate. The members of the Senate Banking and Currency Committee and the House Interstate and Foreign Commerce Committee have worked long and hard on this legislation. We spent many hours of troubled contemplation on the matter due to our recognition of one key point: The enactment of this investors protection program is not the answer to the problems now confronting the securities industry. It is not even a partial answer, for the major problems are derived from the structure of the industry itself. And this, I think, gets to the point which concerns the Senator from Massachusetts and so many of the rest of us.
This fact became obvious to all during the hearings held in connection with this legislation prior to its presentation to the Senate and the House. Although we were able to ascertain that the problems of the industry were structural in nature and that positive legislative or regulatory steps must be taken in order to alleviate these problems, we were continually frustrated in our efforts to decide precisely what steps should be taken immediately. This frustration was caused primarily because of a devastating lack of precise information concerning the exact condition of the industry and the causes of the problems it is experiencing. We recognized that to take positive steps to make changes in the industry without knowing the precise effect of these changes could very well bring about the very event we were so arduously working to avoid: a disaster in the stock market of major proportions. Each time we contemplated a specific reform, we learned that the immediate institution of this reform, though it might be needed in the long run, might cause the failure of another large number of brokers or dealers. This in turn, we were told, would accelerate further the deterioration of the industry, might cause more investors to lose money, and might expose the insurance fund being authorized by this legislation to heavy losses.
We decided that it was necessary to go ahead with the insurance program at this time. However, we are all agreed that it is only the first of many steps that are necessary to be taken in order to ultimately solve the problems of the securities industry.
The bill agreed to by the conference committee did not specify what reform steps are to be taken in various areas. But the legislation does specify that the Securities and Exchange Commission shall institute rules and regulations designed to bring about reform in certain crucial areas. This device gives the Securities and Exchange Commission the necessary authority and the necessary mandate to move in an orderly way toward a resolution of the problems of the industry. I shall discuss the specific problem areas in a moment.
I have previously discussed the great frustration experienced by the Members of the House and the Senate while dealing with this legislation. But I am sure that that frustration was shared by the Securities and Exchange Commission and by the officials of the various stock exchanges and of the various brokers and dealers. Obviously, they wished to cooperate with us in the passage of a sound insurance program. And I believe that they agree fully that basic structural changes must be made in order to create a sound securities industry. Neither the Securities and Exchange Commission nor the industry could provide us, however, with the necessary specific information with which we could enact sound reform legislation. This was true simply because this information is not available.
It is for this reason that the House Interstate and Foreign Commerce Committee and the members of the Senate Banking and Currency Committee have undertaken to hold hearings in the near future on the problems now facing the securities industry. The legislation before us today also contains a provision for a study of unsafe and unsound practices in the securities industry to be performed by the Securities and Exchange Commission. I am looking forward to the full cooperation of both the securities industry and the SEC in these undertakings so that we might move rapidly toward the solution of the problems of the industry.
The two bills passed by the House and Senate were identical in many respects. There were, however, certain key differences. I believe it will be helpful at this point to discuss the resolution of those differences.
The bill passed by the House of Representatives provided for a seven-man Board of Directors of the Securities Investor Protection Corporation. Of these seven members, four would have been representatives of the securities industry. Thus, the House provided that the Board of Directors would be controlled by members of the securities industry. This was based upon the premise that the money being utilized initially by the Securities Investor Protection Corporation is paid by the members of the industry. The House bill further provided that if the Treasury borrowing authority authorized by the legislation was ever utilized, the President would have been required to appoint four additional public Directors in order to convert the Board into one with a public majority.
The Senate bill, on the other hand, provided for a five-member Board of Directors. The Board would have been made up of the Chairman of the SEC, the Secretary of the Treasury, the Chairman of the Federal Reserve Board, and two members, appointed by the President with the advice and consent of the Senate, from the securities industry. The Senate believed that the House formula was inadequate to protect the public interest because the action, or inaction, of the corporation, even before Treasury borrowing authority, might very well accelerate the use of the Treasury borrowing authority. Since the purpose of the legislation is to benefit the public as a whole, the Senate decided that the securities industry representation of the Board should be a minority.
I am happy to report that the conference committee agreed to a compromise Board makeup which retains the important concept of a Board of Directors with a public majority. The conferees agreed that there would be a seven-member Board of Directors. One member would be an employee of the Department of the Treasury designated by the Secretary of the Treasury; one member would be an employee of the Federal Reserve Board designated by the Board, five members would be appointed by the President with the advice and consent of the Senate. Of the five members appointed by the President, three are required to be persons associated with and representative of the different aspects of the securities industry. Those three members shall not all be from the same geographical area of the United States. The remaining two members shall be appointed by the President and shall be the Chairman and Vice Chairman of the new corporation.
The legislation specifies that they shall be selected "from the general public from among persons who are not associated with any broker or dealer, within the meaning of paragraph (18) of section 3(a) of the 1934 Act, or similarly associated with a national securities exchange or other securities industry group and who have not had any such association during the 2 years preceding appointment."
The conferees considered specifying that these two individuals be required to have an understanding of the securities industry. However, the conference committee agreed not to so specify, and also to require that these two individuals cannot have been associated with the industry for a 2-year period prior to their appointment in order to assure that these two members are indeed representative of the general public rather than of the interests of the securities industry.
During the debate on the Senate floor, several amendments were adopted. The first would have required that the SIPC set entrance requirements for new brokers or dealers applying for the insurance protection in the future. It also provided that SIPC would make a study and report within 6 months of unsafe and unsound practices in the securities industry and what the SIPC was doing to correct these situations.
The second amendment would have specified certain action to be taken with respect to the custody and use of securities belonging to customers and with respect to the maintenance of cash or free credit balances. It also would have required that reserve requirements for cash and free credit balances be set up.
These amendments were readily agreed to during the debate because I believe we all felt that these are among the necessary steps that must eventually be taken in order to ultimately solve the problems of the industry.
These provisions were discussed long and vigorously during the conference. I believe it is fair to say that a majority of the conferees are greatly concerned about the problems contemplated by these amendments. But it was the view of the majority of the Conferees that to require action at this time, with the specificity contained in the two amendments, might very well cause more problems within the industry than would be solved. This would have in all likelihood resulted in a great drain on the insurance fund and would cause problems concerning not only the stability of the industry but also in public confidence. In addition, the prevailing view of the conferees was that the authority and even the mandate contained in the two amendments was either explicit in the amendment being made by this bill to section 15(c) (3) of the Securities Exchange Act of 1934.
That new language prohibits any broker or dealer from using interstate commerce in an attempt to make a sale if it is in contravention of "such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers including, but not limited to, the acceptance of custody and use of customers' securities, and the carrying and use of customers' deposits or credit balances. Such rules and regulations shall require the maintenance of reserves with respect to customers' deposits or credit balances, as determined by such rules and regulations."
Thus, the language of the statute provides that rules and regulations shall be promulgated in those areas of concern dealt with by the two amendments I have just discussed.
These are the two amendments offered by the distinguished Senator from Massachusetts, which we will discuss later in the colloquy on the floor today.
I think it is helpful to note the discussion contained in the statement of the managers on the part of the House with respect to this provision.
That report says:
It was the clear intent of your committee that the general authority provided in the amendment to section 15(c) (3) contained in the original House bill (and clearly the language of the conference substitute) grants to the Commission authority to set forth in Commission rules the details contained in the Senate amendment. By not embodying that detail in the legislation, the Commission's hand is stronger in that it has the flexibility to meet changing situations and needs. Indeed, a situation may develop in which the Commission determines that it is in the public interest to promulgate rules even more restrictive than the specific provisions contained in the part of the Senate amendment in question. The Commission, under the conference substitute, has broad power, and it is expected that it will use that power in a strong and vigorous manner to protect the interests of investors and the public interest.
With respect to the entrance requirements for future broker-dealers, the conference substitute does not contain the specifics of the Senate amendment. Obviously, this amendment was designed to raise ultimately the standards in this industry, and your conferees strongly share that desire. However, your conferees believe that this, too, can better be handled by the broad grant of rulemaking authority to the Commission in section 15 (c) (3).
I fully subscribe, and I believe the other Senate conferees will agree with me, to the expectation expressed by the House managers that the Securities and Exchange Commission will immediately and vigorously utilize the new authority given in section 15(c) (3) to promulgate regulations covering this subject matter. We are in full accord that these type regulations are needed as part of the necessary reform which must occur within the securities industry.
Another difference contained in the two versions of the bill passed by the respective House was with respect to the maximum possible assessment ceiling. The Senate bill provided that that maximum could not exceed one-half of 1 percent of the gross revenues of the securities industry.
The House bill provided for a 1-percent ceiling. The conference committee agreed to accept the 1 percent ceiling with a specific provision in the bill that the extra one-half of 1 percent can only be used in times when the financial condition of the industry is sufficiently strong to support the increased assessment without compounding any financial difficulties of the industry, with increased danger to investors that that would imply.
One of the floor amendments on the Senate bill which I have just discussed included a provision for a study and report to Congress of unsafe and unsound practices in the securities industry coupled with a report of what is being done to alleviate these problems. The amendment as adopted on the Senate floor would have required this study and report to have been conducted by SIPC. That provision was retained by the conference committee although it was modified to have the Securities and Exchange Commission do the study and report rather than SIPC.
The Senate approved another floor amendment which lowered the maximum insurance protection per customer from $50,000, which was the amount approved by the Senate Banking and Currency Committee, to $20,000. The bill passed by the House provided for maximum coverage in the amount of $50,000.
The conference committee agreed to retain the maximum of $50,000 total insurance coverage, not more than $20,000 of which can be for cash.
Mr. President, these are the major provisions which were worked out in conference. I was impressed throughout the conference with the virtually unanimous agreement in principle of all the conferees as to what was needed in this legislation. The primary differences occurring in the conference were due to varying judgments by the members as to precisely what was the most effective and safe manner of dealing with these particular problems at this time. I believe the resulting bill is a good compromise and, given the accord among the conferees, will result in the provision of this necessary insurance protection to investors and, more importantly, will result in immediate steps being taken by the Securities and Exchange Commission and the industry toward reform in those areas I have discussed, as well as in other areas.
I yield to the Senator from Utah (Mr. BENNETT), who is the ranking minority member in the conference.
Mr. BENNETT. Mr. President, I join with the Senator from Maine, who is chairman of the committee that handled this legislation, in recommending that the Senate approve the conference report on the Securities Investor Protection Act of 1970. I have listened to the statement of the floor manager of this bill, the Senator from Maine, and wish to lend my support to that statement. I do not intend to speak at length. Certainly in the closing days of this Congress we can do without unnecessary repetition and time consuming statements.
Having carefully read the statement of managers on the part of the House, I find that it is in complete accord with my understanding of the decision of the conferees. I would only add that in my opinion our decision on the Board of Directors of the Securities Investor Protection Corporation will result in neither a pro-Government nor pro-industry Board, but will result in a Board which will take into consideration the views of the industry, the views of the public, and the views of the Federal Government. As was so clearly brought out in the statement of managers, this bill does not nor is it intended to solve the basic problems of the securities industry at this time. It does, however, provide additional authority for the Securities and Exchange Commission to promulgate rules and regulations through which these problems can be solved. Furthermore, it directs the Securities and Exchange Commission to promulgate such rules and regulations.
There has been some concern that the conference committee did not accept certain provisions of the Senate bill which were adopted on the Senate floor at the last minute. It has even been reported that the conference report is regarded as a cave-in to the brokerage industry.
I offered one of the amendments which was accepted on the Senate floor at the last minute and which was dropped by the conference committee. I argued for the amendment in the conference, but the final decision of the conferees was to delete it. I do not argue at this time with the decision of the conferees, despite the fact that I believe the bill would have been better if it contained my amendment. Furthermore the action by the conferees to either alter or delete the other last minute floor amendments was not a cave-in to the brokerage industry. Let there be no mistake. No member of the conference committee to my knowledge was interested in continuing improper industry practices. The conferees were very concerned that to accept amendments which had neither the backing of the SEC, the Treasury, or any industry experts, without change would result in bringing about the bankruptcy of marginal firms and untold hardship on their customers, which may very well be avoided if we allow the Securities and Exchange Commission to work out solutions to the major problems in the industry in a more gradual manner. The majority of both the Senate and House conferees were opposed to approving legislation, the consequences of which were uncertain and which could result in an immediate draw on the $1 billion Treasury backup which is provided in this legislation.
We have in the conference report a balanced approach to the problem, I believe. Our major attempt at this time is to bring about investor confidence. Once this has been done, I am sure the SEC will act without delay, as we have directed, to help solve the problems which exist in the industry.
The letter which the Securities and Exchange Commission sent to Senator SPARKMAN, the chairman of our committee should assure any who may have questioned the responsiveness of the SEC to congressional direction, that the Commission will act in accordance with the new legislation and the intent of the conferees.
I ask unanimous consent to have the letter printed at this point in the RECORD.
There being no objection, the letter was ordered to be printed in the RECORD, as follows:
SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C.,
December 22, 1970.
Hon. JOHN J. SPARKMAN,
Chairman,
Banking and Currency Committee,
U.S. Senate,
Washington, D.C.
DEAR MR. CHAIRMAN: We understand that a question has arisen concerning the action which the Commission would take pursuant to the authority granted by H.R. 19333 as reported by the Conference Report appearing in the Congressional Record of December 18. 1970, upon the enactment thereof with respect to such matters as the segregation of customer's securities and the maintenance of reserves with respect to customer's free balances. With respect to the maintenance of reserves, Section 7(d) of the bill is clear that the Commission shall, by rules and regulations require the maintenance of reserves with respect to customer's free balances and the Commission proposes to do so. The exact timing and nature of such regulations will necessarily depend upon conditions existing at the time and we must, of course, follow the requirement of the Administrative Procedure Act concerning notice and opportunity for public comment with respect to such regulations.
With respect to customer's securities in the custody of a broker dealer, the statement of the managers on behalf of the House makes it clear that the Commission has the authority to adopt rules with respect to such segregation which are fully comparable to those suggested in the Senate amendment which was not adopted by the Conference. Existing Section 8(c) of the Securities Exchange Act and Rule 8(c) (1) thereunder, prohibit the commingling of customer's securities with those of persons other than a customer including the broker dealer himself and also prohibit the hypothication of customer's securities for indebtedness which exceeds the aggregate indebtedness of all customers to the broker dealer with respect to securities of customers in the custody of such broker dealer. The bill would contain additional authority for the Commission to adopt rules concerning the segregation of customer's fully-paid and excess margin securities and the conditions under which securities held for the account of customers may be subjected to liens. The report of the managers states that the Commission under the bill would have broad power and it is expected that it will use that power in a strong and vigorous manner to protect the interests of investors and the public interest.
The Commission fully expects to conform to this direction and to adopt, again in conformance with the Administrative Procedure Act, appropriate regulations requiring the segregation of customer's fully-paid and excess margin securities and respecting the circumstances under which securities may be subject to liens.
Sincerely yours,
HUGH F. OWENS,
Commissioner.
Mr. PROXMIRE. Mr. President, I want to commend the able leadership of Senator MUSKIE on the broker-dealer insurance bill. He saw the need for an insurance program to protect small investors from brokerage firm failures long before the need became generally recognized by the securities industry, by the SEC, and by the Treasury. Indeed, his early sponsorship of the legislation helped to educate the public and the administration on the need to insure the small investor against brokerage house failures. That we now have a general consensus on the need for investor insurance is due in no small part to the efforts of Senator MUSKIE.
Although I believe we need an insurance program to protect investors, I did not sign the conference report on this legislation. It was a difficult decision on my part. We need an insurance program, but we also need substantial reforms in the securities industry. To provide insurance without specific guarantees that the necessary reforms will be enacted would be the height of fiscal irresponsibility. It would be like handing a blank check to Wall Street without insisting that they take steps to upgrade their financial practices.
In fact, one may well argue that an insurance program without reform is worse than no bill at all. The forces of the marketplace may eventually act to force broker-dealers into reforming their financial practices. If the investing public loses confidence in the financial solvency and prudence of brokerage firms, the business will gradually shift to those firms willing and able to conduct themselves with a higher degree of financial responsibility. Indeed, this is the classic way a free enterprise economy weeds out marginal and inefficient firms.
Unfortunately, in the case of brokerage firms, the classic free enterprise solution can be painful.
The customers of failing firms would suffer if the firm was not financially solvent. For this reason, an insurance program has been proposed. But unless long-term reforms are also pushed through, the problems of the securities industry will grow worse and not better. There is even a danger that the temporary relief afforded by an insurance program will make the industry less willing to tackle the tough problems which have brought it to the edge of insolvency. In this sense, an insurance program without reform is counter productive and worse than no legislation at all. It would merely postpone the inevitable day of reckoning and accentuate the resulting financial chaos. Moreover, the Federal taxpayer would be forced to pay a large part of the bill since the Securities Investor Protection Corporation is authorized to borrow up to a billion dollars from the Treasury if it runs out of money. The Secretary of the Treasury is also permitted to reduce the interest rate, presumably to zero, if he found it to be in the national interest.
Mr. President, I am by no means alone in my argument that a weak insurance bill is worse than no bill at all. The president of the Nation's largest brokerage firm testified before our committee last April and made substantially the same point. At that time, Mr. Donald T. Reagan, president of Merrill Lynch said:
I would like to explain to you why I believe that insurance plans, of whatever kind, treat only the symptoms and not the cause of the disease.
Mr. Reagan went on to list three areas of needed reform – additional capital, tighter rules on the definition of capital, and restrictions on the use of customer funds. Mr. Reagan concluded by saying that–
Once such regulations are in effect, the need for a huge insurance fund will be less acute. We would not be worrying about giving each passenger a parachute. Instead, we will be directing our attention to a safe navigation.
Mr. President, Mr. Reagan could not have put the matter more succinctly. We need better navigation, not a parachute. This is not some ivory tower professor speculating about the problems of the industry. It is from the president of the Nation's largest securities firm. His words should be given great weight.
Unfortunately, not all members of the securities industry had quite the same view of the problem as Mr. Reagan. An industry task force developed a proposed insurance bill with Treasury-SEC backing which was notably lacking in financial safeguards. The insurance program would have been run by industry appointed men. The assessment formula was inadequate compared to the Federal Government's financial commitment. Moreover, the bill failed to specify the list of practices the industry would have to modify in order to get insurance. Some of these weaknesses were corrected in committee and on the floor of the Senate under the able leadership of Senator MUSKIE. But in my view, the bill recommended by the conference committee is deficient in two respects.
First of all, it deletes a provision in the Senate bill which I introduced to establish entry requirements with respect to new broker-dealers applying for insurance protection. Second, it deletes a provision offered by Senator BROOKE which would require brokerage firms to segregate securities held for their customers. It was argued in the House managers report that the SEC already had adequate authority under the bill to establish similar requirements. If this is the case, I have a hard time understanding why any one would object to their inclusion in the bill.
The SEC has demonstrated a notable lack of urgency in policing the securities industry to date. It can certainly do no harm and might do some good if Congress prescribed specific guidelines in this area.
Senator BROOKE has described the Senate provision dealing with the segregation of securities, and I support his statements on the need to have these protections spelled out in the bill. I would like to outline for the Senate the need for establishing entry requirements on new brokerage firms before they gain access to the insurance program.
Entry requirements, are of course, nothing new. They have been a prerequisite on all previous insurance programs which have involved a claim upon the Federal Treasury. The FDIC is directed to screen commercial banks before they become eligible for deposit insurance. The FSLIC is directed to screen savings and loan associations before they become eligible for deposit insurance. And the National Credit Union Administration is authorized to screen credit unions before they become eligible for share insurance. Indeed, Senator BENNETT, the author of the credit union share insurance bill insisted on these entry provisions, and properly so, in order to protect the solvency of the insurance fund.
My amendment to the Senate bill would have applied the same entry requirements to new brokerage firms who applied for insurance after the effective date of the legislation. It would have directed that brokerage firms be rejected for insurance if they do not meet the requisite standards of financial responsibility. It was aimed at minimizing the risk to the insurance fund and to the Treasury by preventing the entry of new firms which are likely to present an undue risk to the fund. No private insurance company would agree to issue insurance policies without some type of underwriting examination. The SIPC and the SEC should be no less demanding.
As originally drafted, my amendment would have required the SIPC to screen new brokerage firms. It was pointed out that the SEC should be the agency to perform this task, and I was willing to modify my amendment to this extent. Also, some of the house conferees apparently felt that the specific entry requirements were too detailed and that more general language would have been preferable. Again, I would have been willing to modify my language to this extent.
Unfortunately, before any of these modifications could be formally presented to the House, a motion was made on the Senate side to recede from the entire amendment. This motion carried, and the House conferees thus had no opportunity to vote on accepting the entry provisions subject to the specific modifications which had been suggested. Had the modified provisions been offered by the Senate, I believe, there is a good chance they would have been accepted by the House conferees.
In recounting this history of the conference committee, I want to make it clear that I intend no criticism whatsoever of Senator MUSKIE who strongly supported the Senate position on entry requirements. I am also gratified for the support of Senator SPARKMAN, the chairman of the Banking and Currency Committee.
My refusal to sign the conference report is in no way a reflection upon the leadership of Senator MUSKIE or Senator SPARKMAN. Nor is it a protest that my particular amendment was rejected by the conference committee. Had the Senate conferees formally presented the modified entry proposal to the House and if the House stood adamant in rejecting any entry provision, I would have accepted the decision, although reluctantly. However, it was not the adamance of the House, but the willingness of a majority of Senate conferees to recede which led to the conference dropping the entry provision.
I am sure that those Senate conferees who voted to recede did so on the merits of the issue, and I intend no personal criticism of them either, even though I think they were wrong. In the final analysis, each Senator must act to uphold the public interest as he sees it. However, the experience on this bill once again illustrates the weakness in Senate conference committee procedures where a majority of Senate conferees apparently opposed to the Senate position are appointed.
By dropping the entry requirements and the securities segregation provisions of the Brooke amendment, the bill before us today is considerably less certain in its impact than the bill which passed the Senate.
I have less confidence than others that the SEC will act vigorously to protect the solvency of the insurance fund when it permits new firms to enter the brokerage business. I would hope that the managers of the legislation can assure the Senate that it is the intent of the conference report that the SEC act with vigor in the areas covered by the Brooke and Proxmire amendments. We certainly need to leave the SEC to act with enough flexibility. I only hope the legislative history is clear enough to indicate that Congress expects prompt action from the SEC in these areas.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. PROXMIRE. I yield.
Mr. MUSKIE. I should like to say that I fully supported the Senator's amendment on the Senate floor because I thought it made sense. I was troubled that this legislation might be interpreted to permit new broker-dealers to come into the business not in accordance with new standards but with the old standards, which have resulted in such tremendous problems.
We discussed this question very vigorously in conference. Many conferees were concerned – and this is revealed in the House manager's report – that if we were to apply rigid standards to new entrants into the field, it would result in discrimination between them and those broker-dealers already in the field. So I felt that was something those now in the business could live with, because what we are talking about are standards toward which they should move. But that was the nature of our conference. So I did support the Senator's position in the conference. I regret it was not supported fully, but may I say now, looking upon this side of it, undertaking to build some steam under the effort to move in the direction of the Senator's amendment, that I ask unanimous consent to have printed in the RECORD section 15 (c) (3) of the Securities and Exchange Act of 1934. The House conferees assured us that the SEC will do exactly what the Senator's amendment proposes to do. Second, I ask unanimous consent that the entire House manager's report be printed. This gives only the House interpretation of the authority in that section. I put that in the RECORD in order to support the Senator's position and in order to build a fire under the SEC to move in the direction of the Senator's position.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
COMPROMISE PROPOSAL
Section 15(c) of the Securities Exchange Act of 1934 is amended by adding at the end thereof the following new paragraph:
"(6) (A) Securities received or held by a broker or dealer to which any customer is entitled to immediate possession without the payment of any sum to such broker or dealer shall not be pledged by, or loaned by or to, such broker or dealer, unless a written agreement designating the specific securities to be pledged or loaned is first obtained from such customer with knowledge of the consequences thereof and proper safeguards are provided. No broker or dealer shall lend or pledge securities received or held by such broker or dealer for the accounts of customers not so entitled to immediate possession in an amount that is not fair and reasonable in view of the aggregate indebtedness of such customers to such broker or dealer. The commission shall, by such rules or regulations as it deems necessary or appropriate in the public interest or for the protection of investors, prescribe the amount or amounts that are fair and reasonable in relation to aggregate indebtedness.
"(B) Except for securities to be transferred or delivered or otherwise removed from custody or segregation in connection with any transaction effected by or for the account of such customer or in accordance with any instruction by or on behalf of such customer when a broker or dealer receives or holds securities for a customer that, pursuant to subparagraph (A) above cannot be loaned or pledged and that are in excess of all loan value or margin requirements imposed by law, by any national securities exchange or registered national securities association or by such broker or dealer,
"(a) such broker or dealer shall maintain such securities (i) in the custody of a bank (including a bank acting as transfer agent or registrar) which has an aggregate capital surplus and undivided profits of such specified minimum amount as may from time to time be prescribed by the Commission by rule or regulation, or of a central certificate service of any clearing corporation or any similar depositary, (ii) in any manner which conforms with a determination by the Commission that such property is held for the account of customers of the debtor in such other manner as the Commission, by rule or regulation, for the protection of customers and other creditors on a fair and equitable basis, shall have determined to be sufficiently identifiable as the property of such customers, or (iii) in accordance with such rules as the Commission shall prescribe in the public interest and for protection of investors, or
"(b) if such customer is entitled to immediate possession of such securities without payment of any sum to such broker or dealer and requests in writing delivery of such securities, subject to the terms of any pledge or loan made in conformity with subparagraph (A) above, such broker or dealer shall promptly deliver such securities to such customer or to the transfer agent or registrar for such securities for registration of such securities in the name of, and delivery to, such customer. Such request may be given at any time with respect to particular securities or may be a standing request for all securities.
"(C) For the purpose of this paragraph (6), the term "customer" shall not include a broker or dealer except as the Commission may otherwise provide and shall not include any person to the extent that such person has an interest in or claim for cash or securities which by contract, agreement, or understanding, or by operation of law, are part of the capital of a broker or dealer or has an interest or claim for cash or securities that is subordinated to the claims of creditors of such broker or dealer.
"(D) This subsection shall become effective pursuant to regulations promulgated by the Commission. In no event, however, shall the effective date of this subsection be later than one year from the date of enactment of the Securities Investor Protection Act of 1970.
"(E) The foregoing provisions shall not limit the authority otherwise granted to the Commission by any other provision of law."
STATEMENT OF THE MANAGERS ON THE PART OF THE HOUSE
The managers on the part of the House at the conference on the disagreeing votes of the two Houses on the amendment of the Senate to the bill (H.R. 19333) to provide greater protection for customers of registered brokers and dealers and members of national securities exchanges, submit the following statement in explanation of the effect of the action agreed upon by the conferees and recommended in the accompanying conference report:
The Senate amendment struck all after the enacting clause of the House bill and inserted a substitute text. The conference agreed to a substitute for both the text of the Senate amendment and the text of the House bill.
The conference substitute uses the structure and format of the House bill. Aside from technical, clerical, and minor drafting changes, the substantive differences between the bill as passed by the House and the substitute agreed to in conference are noted below.
1. Board of Directors. – The House bill provided for a convertible Board of Directors. The board would have had seven members – a majority of whom would have been industry representatives – until there was an application for funds from the United States Treasury. At that time the President would have been required to appoint four additional public directors so as to convert the Board into one that had a majority of public members. Under the House bill the Board of Directors would have had 4-year, staggered terms, and the Chairman would have been elected by the Board.
The conference substitute provides for a seven member Board of Directors composed as follows:
One member, designated by the Secretary of the Treasury, from the Department of the Treasury;
One member designated by the Federal Reserve Board from the Federal Reserve Board; and
Five members appointed by the President with the advice and consent of the Senate. Of these five members, three are to be persons associated with and representative of the securities industry and two are to be from the general public. The term for each director is three years, and the terms are staggered. The chairman and vice chairman are to be designated by the President from the two members selected by him from the general public.
2. Ceiling on assessments. – The House bill, as amended by the Interstate and Foreign Commerce Committee (the "committee") amendment on the House floor, provided for a ceiling on assessments of 1 percent of gross revenues from the securities business.
The conference substitute includes this 1 percent ceiling, but it specifies that assessments above ½ of 1 percent should only be used in times when the financial condition of the industry is sufficiently strong to support such an increased assessment without compounding any financial difficulties of the industry (with the increased danger to investors that that would imply). This is totally inconsistent with the debate on this amendment on the House floor. At that time it was stated that the committee did not intend that the Board of Directors impose an assessment above ½ of 1 percent without regard to what the industry could properly afford. It was clearly recognized that this increased assessment should be imposed only when the conditions in the industry could economically accept an assessment above ½ of 1 percent and if it is needed for the proper buildup and maintenance of the SIPC fund. When good times occur, the interests of the securities industry, as well as the public interest, may be well served by a higher than ½ of 1 percent assessment.
3. Gross revenues from the securities business. – The House bill, in effect, exempted revenues from the sale of mutual funds, variable annuities and investment advice to registered open-end investment companies, as well as revenues from the business of insurance. In addition, it exempted commissions earned in connection with the distribution of bonds, bills and notes of the U.S. Treasury when the broker was acting as agent for the Federal Reserve Board.
The conference substitute continues the exemption for commissions on the sale of mutual funds and variable annuities; revenues for the business of insurance; and revenues derived from the rendering of investment advice, but the exemption would include advice to both open-end and closed-end registered investment companies.
The conference substitute does not include an exemption for commissions earned in the sale of U.S. Treasury securities. In initially providing for such an exemption, your committee sought to protect reporting dealers for the Federal Reserve Board from suffering competitive disadvantages with certain commercial banks which are also recognized as reporting dealers. However, it became apparent to the conferees that such relief could not be formulated without other unintended effects – notably competitive disadvantages between broker-dealers who are recognized as reporting dealers and broker-dealers who are not so recognized. The conference substitute, therefore, does not include an exemption on this subject.
The conferees attention was also directed to the section of the bill which provides that
gross revenue of a broker-dealer shall be computed on a consolidated basis with the broker-dealer's subsidiaries. This is desirable in order to avoid the possibility of evasion of assessments by the use of subsidiaries. It should be clear, however, that in the case of subsidiaries, as in the case of the parent broker-dealer, gross revenues from the securities business shall include only such revenues as are defined in the bill.
In addition, both the Securities and Exchange Commission (the "Commission") and SIPC are given certain exemptive powers in view of the possibility that certain revenues will be subject to assessments when this is not equitable nor in accordance with the purposes of the Act. For example, the Commission or SIPC well might determine that it would be inequitable and not in accordance with the intended purposes of this legislation to include in the assessments levied on a parent company income that a subsidiary which is a registered investment company receives from investments which are really investments for the benefit of its (the subsidiary's) public investors (and the income from which insures to the benefit of its public investors).
4. Extent of customer protection. – The House bill provided that SIPC should advance monies necessary to satisfy claims of each customer of a member-broker dealer in liquidation, but that such advances should not exceed $50,000 for any one customer.
The conference substitute continues the $50,000 limitation, but provides further that, insofar as all or any portion of a customer's claim is for cash (as distinct from securities), the amount advanced for such claim to cash shall not exceed $20,000.
5. Financial responsibility of broker-dealers. – The House bill would have amended section 15 (c) (3) of the Securities Exchange Act of 1934 so as to graft broad rule making authority to the Commission to promulgate rules to provide Safeguards with respect to the financial responsibility and related practices of broker-dealers.
The conference substitute also provides for such broad rule making authority but strengthens it by requiring that the Commission promulgate such rules and by specifying that such authority includes authority to make rules relating to the acceptance of custody and use of customers' securities and the carrying and use of customers' deposits or credit balances. In addition, it specifies that such rules shall require the maintenance of reserves with respect to customers' deposits or credit balances.
The intent of the House provision has always been that the general authority granted to the Commission by the original House language includes the specific language now contained in the conference substitute. Your committee has been concerned about the need for a general upgrading of financial responsibility requirements of broker-dealers, and it recognized this when it stated in its report: "It is clear that the protections provided by the proposed SIPC fund are really only an interim step. The long-range solution to these problems is going to be found in the ultimate raising of the financial responsibility of the brokerage community." Your committee has always intended that the provisions of the House bill would give the Commission broad authority to deal effectively with this matter.
Two parts of the Senate amendment were extensively and thoughtfully discussed in the conference, but are not included, in their specifics, in the conference substitute. One of these parts sets forth, in detail, certain requirements for a broker-dealer with respect to the custody and use of customers' securities. The other would have, in effect, required entrance requirements for future broker-dealers before they would have been admitted into SIPC membership.
With respect to the detailed provisions on custody and use of customers' securities, it was the clear intent of your committee that the general authority provided in the amendment to section 15(c) (3) contained in the original House bill (and clearly the language of the conference substitute) grants to the Commission authority to set forth in Commission rules the details contained in the Senate amendment. By not embodying that detail in the legislation, the Commission's hand is stronger in that it has the flexibility to meet changing situations and needs.
Indeed, a situation may develop in which the Commission determines that it is in the public interest to promulgate rules even more restrictive than the specific provisions contained in the part of the Senate amendment in question. The Commission, under the conference substitute, has broad power, and it is expected that it will use that power in a strong and vigorous manner to protect the interests of investors and the public interest.
With respect to the entrance requirements for future broker-dealers, the conference substitute does not contain the specifics of the Senate amendment. Obviously, this amendment was designed to raise ultimately the standards in this industry, and your conferees strongly share that desire. However, your conferees believe that this, too, can better be handled by the broad grant of rulemaking authority to the Commission in section 15 (c) (3). In addition to having the advantage of flexibility, this also avoids the disadvantages which your conferees found in the Senate amendment – namely, the discriminatory features of having different standards for existing broker-dealers as opposed to broker-dealers registering in the future; and the situation in which the customers of some broker-dealers would be protected by the SIPC fund and the customers of other broker-dealers would not have such protection.
Your committee shares completely the concerns which are indicated by these parts of the Senate amendment. However, your conferees believe strongly that the concerns will be better and more flexibly handled by giving the Commission a broad delegation of authority to deal with financial responsibility and related practices of broker-dealers. Your conferees, as your committee, expect and direct the Commission to be vigorous in this area. As was stated in the debate on this bill on the floor of the House and in your committee's report: ". . [Y]our committee directs and expects the Commission to be alert and strong in this area. This will, of course, require similar alertness and strength from the self-regulatory organizations, and if that is not forthcoming, the Commission and, if necessary, the Congress, will have to insure it."
5. Study of industry practices. – The conference substitute adds a provision which did not appear in any form in the original House bill. This provision requires that the Commission make a study of unsafe and unsound practices of broker-dealers, and that the Commission report to the Congress, within twelve months, the steps being taken to eliminate these practices and its recommendations for additional legislation which may be necessary to eliminate such practices.
6. Minimum initial assessments. – The House bill provided for an initial assessment of one-eighth of 1 percent of gross revenues from the Securities business for 1969, with a minimum assessment of $250.
The conference substitute also provides for an initial assessment of one-eighth of 1 percent but reduces the minimum assessment to $150.
7. Required size of SIPC fund. – The House bill provided that the Securities and Exchange Commission could increase the ultimate size of the SIPC fund.
The conference substitute provides that the Commission may increase or decrease the ultimate size of the fund.
8. Public access to information. – The House bill provided that the public would have access to information about the affairs of SIPC unless SIPC or the Commission determined that disclosure would not be in the public interest. The conference substitute contains this same provision. The conferees' attention was focused on this provision, and they clearly intend that any documents or information shall be provided under conditions and in a manner which will assure that customers of SIPC members and the public interest in confidence in the securities markets will be protected.
HARVEY C. STAGGERS, JOHN E. MOSS, JOHN M. MURPHY, JAMES HARVEY, HASTINGS KEITH,
Managers on the Part of the House.
Mr. PROXMIRE. I want to ask the Senator from Maine, as to his interpretation of the intent of the legislation, that the SEC should provide financial standards and give assurance that the firms which will be admitted to the insurance program will follow the practices that will provide security and safety for investors, and that they have safeguards that will protect the investor.
Mr. MUSKIE. That is what I understand to be the House managers' intention. I reassure the Senator on that point. I am glad that I can make that clear on the floor of the Senate today.
Mr. PROXMIRE. That is the same kind of attempt to insure safety as we have in the FDIC for people who make deposits in banks.
Mr. MUSKIE. That is right.
This is not to detail the specificity of the kinds of things, but what we should make sure of, and what the Senator is concerned with, is that as new people come into the field, they will meet the standards of performance and safeguards for investors that the current condition in the securities market dictates to be in the public interest. That is what should be the standard. That is what the FDIC does. That is what the agency does. This is what is specifically stated to be done under, of course, the supervision of the SEC.
Mr. BROOKE. Mr. President, I rise today to discuss issues of utmost importance regarding the conference report on the Securities Investor Protection Act of 1970, H.R. 19333. I am deeply concerned about the condition of the securities industry, both from the standpoint of investor and taxpayer protection, but also because of the economic implications involved.
While this bill may protect certain investors up to specified limits, it does not address the underlying problems which have contributed to the precarious position of the securities industry.
At a time when the Federal Government stands ready to back up an industry-funded corporation with $1 billion in Treasury borrowing authority, I believe Congress must give serious consideration to the question of whether this bill provides those reforms which are necessary to eliminate future crises. The Senate-passed measure provided necessary safeguards; however, these safeguards were rejected in the conference committee without House consideration of the provisions.
In objecting to certain aspects of this conference report, I recognize the fine effort which the Senator from Maine (Mr. MUSKIE) has made to achieve a sound and responsible piece of legislation which protects both investors and the Public Treasury, while at the same time contributing to the stability of the securities industry. Mr. MUSKIE introduced legislation which the industry opposed strenuously from the beginning; however, as conditions became more serious, representatives of the industry modified their earlier stance while nevertheless opposing vital reforms.
The primary issue at stake is whether brokerage houses will be able to use investors' cash and securities for whatever needs they deem fit. The magnitude of the problem becomes evident when one realizes that New York Stock Exchange members alone now hold approximately $2.2 billion of investors' cash, commonly referred to as "free credit balances," in addition to approximately $47 billion of customers' securities. There are presently no restrictions on the use of free credit balances and, although it is contended that the SEC has authority, there is no evidence that strict segregation of customers' securities from those of broker-dealers is being attained.
Inasmuch as the threat of customer losses in recent months has stemmed from the failure of brokerage houses to adequately segregate cash and securities belonging to investors, there is some reason to believe that proper attention to these issues might, in fact, obviate the need for an insurance program. While I believe that insurance is useful under certain circumstances, I also believe we must address the issue of proper segregation if responsible legislation is to be enacted.
The conference committee adopted the Senate provision requiring the establishment of reserves against cash which is a step in the right direction. While the SEC will be charged with the responsibility of developing reserve requirements in an amount and according to a time table which it deems appropriate, the ultimate goal is indisputable. We must attain a level of reserves which will adequately protect the funds of American investors.
When this issue was discussed on the Senate floor, the Senator from New Hampshire (Mr. MCINTYRE) and I engaged in a colloquy concerning the proper amount and timetable for these reserves. At that time, I did not specify any figures, but rather expressed my feeling that the SEC should move with deliberate speed, taking into account the ability of the industry to respond.
I believe these reserves may ultimately approximate 90 or 100 percent of free credit balances; however, the exact requirement must be settled upon by the SEC. I would also like to see initial reserve requirements pegged at 25 percent of free credit balances, with the level of reserves increased over a period of approximately 2 years to the levels previously mentioned; however, I will await SEC judgment on this matter.
I am pleased to note that the conferees rejected any assertion that the SEC should take into account or be bound by reserve requirements promulgated by the Federal Reserve Board with respect to commercial banks. I believe reserves against free credit balances have no relation to those required of commercial banks and, in fact, I believe they should be considerably higher than commercial bank reserve requirements when the initial regulations are promulgated.
Even though section 15(c) (3) of the conference version does not specify how these reserves are to be kept, it is clear that a failure to adequately segregate reserves from brokerage house funds would not carry out congressional intent. Therefore, it is contemplated that reserves will be maintained in the form of Government securities or other similar obligations of a nature and in a manner which will carry out the brokerage industry's fiduciary obligation to its customers.
While the conference committee dealt with the issue of free credit balances, it failed to deal with the issue of proper segregation of customers' securities. As previously stated, the magnitude of concern is reflected in the fact that approximately $47 billion of customers' securities are held by New York Stock Exchange members alone. The statement of managers on the part of the House refers to section 15(c) (3) as vesting sufficient authority in the SEC over this matter. It should be noted, however, that the Commission has presumably possessed power to act in this area for some time but has failed to do so.
It has been argued that the insurance program adopted by the conferees adequately protects investors; however, while the program might protect them in their capacity as investors up to the statutory limits specified, it most assuredly will not protect them in their capacity as taxpayers.
The Treasury and, in turn, the American taxpayer could be "on the hook" for $1 billion if customer losses occur. There have been no specific steps taken to insure that brokerage houses will properly segregate customer securities and hence reduce the incidence of risk.
Despite stock exchange rules which prohibit the pledging of customers' securities against bank loans, many large brokerage houses engage in this practice. Under existing law, banks would be able to seize these securities in the event of bankruptcy although their right to do so might be stayed for a limited period of time pursuant to requirements adopted by the conferees. The fact that brokerage firms are able to pledge fully paid for customers' securities against bank loans certainly justifies the need for stricter provisions.
The need for proper segregation of customers' securities is also evident in the fact that one large New York stock exchange firm physically lost $15.5 million in securities last year. While the "back offices" of many brokerage firms have been in a state of chaos in recent months, losses of this nature can hardly be tolerated.
Few investors who trade through brokerage houses and entrust their cash and securities to broker-dealers for safekeeping are aware of the consequences of doing so. While they will now be protected as investors up to specified limits under the SIPC bill, they will not be protected in their role as taxpayers in the event that losses occur and the Treasury borrowing authority is used.
Furthermore, if such authority is used, a "transaction charge" or an additional levy may be made on their purchases and sales of securities which will cost them additional money. Thus, they will ultimately pay dearly for industry shortcomings in one form or another unless steps are taken to institute reforms.
The industry wants this legislation for many reasons. First, it will presumably reduce the present outflows of cash, as customers are reassured that their funds are secure. In doing so, brokerage houses will have the use of customers' funds exceeding $4 billion, thus enabling them to earn several hundred million dollars which otherwise would not be available to them. This legislation – as embodied in the conference report – also permits broker-dealers to continue using customers' securities at will and provides little incentive for future reforms since Treasury borrowing authority will be available to cover losses. Finally, I fear that the industry will be able to dispose of a series of political issues which have plagued it for years and thereafter be tempted to withstand congressional pressures for reform.
In summary, if we do not impose reasonable reforms on the industry now as a quid pro quo for this legislation, industry resistance in the years to come will frustrate congressional efforts in this area. I do not believe that the bill under consideration without more will adequately address these serious problems. When one realizes that in excess of $50 billion of the public's funds are involved, the gravity of the problem is appreciated.
I introduced stringent measures on the Senate floor which were adopted by my colleagues to regulate the handling of securities. I am pleased to say that these measures were adopted unanimously by the Senate. I am sorry to note, however, that the Senate position was not upheld in conference.
If this bill is adopted in the form urged upon this body by the conferees, it will not correct the basic causes of brokerage house problems and will potentially subject the public treasury to unprecedented drains. I do not believe we can tolerate this result.
The Senate-passed bill contained sufficient safeguards and, at the same time, flexibility to enable the industry to function responsibly; however, further compromises were reached before the issue was addressed in the conference. While neither the Commission nor the Treasury Department officially supported this compromise, the staffs of both governmental entities agreed that it was "technically acceptable."
Mr. President, I ask unanimous consent to have printed at this point in the RECORD the text of this compromise proposal.
There being no objection, the compromise proposal was ordered to be printed in the RECORD, as follows:
Section 15 (c) of the Securities Exchange Act of 1934 is amended by adding at the end thereof the following new paragraph:
"(6) (A) Securities received or held by a broker or dealer to which any customer is entitled to immediate possession without the payment of any sum to such broker or dealer shall not be pledged by, or loaned by or to, such broker or dealer, unless a written agreement designating the specific securities to be pledged or loaned is first obtained from such customer with knowledge of the consequences thereof and proper safeguards are provided. No broker or dealer shall lend or pledge securities received or held by such broker or dealer for the accounts of customers not so entitled to immediate possession in an amount that is not fair and reasonable in view of the aggregate indebtedness of such customers to such broker or dealer. The Commission shall, by such rules or regulations as it deems necessary or appropriate in the public interest or for the protection of investors, prescribe the amount or amounts that are fair and reasonable in relation to aggregate indebtedness.
"(B) Except for securities to be transferred or delivered or otherwise removed from custody or segregation in connection with any transaction effected by or for the account of such customer or in accordance with any instruction by or on behalf of such customer when a broker or dealer receives or holds securities for a customer that, pursuant to subparagraph (A) above cannot be loaned or pledged and that are in excess of all loan value or margin requirements imposed by law, by any national securities exchange or registered national securities association or by such broker or dealer.
"(a) Such broker or dealer shall maintain such securities (i) in the custody of a bank (including a bank acting as transfer agent or registrar) which has an aggregate capital surplus and undivided profits of such specified minimum amount as may from time to time be prescribed by the Commission by rule or regulation, or of a central certificate service of any clearing corporation or any similar depositary, (ii) in any manner which conforms with a determination by the Commission that such property is held for the account of customers of the debtor in such other manner as the Commission, by rule or regulation, for the protection of customers and other creditors on a fair and equitable basis, shall have determined to be sufficiently identifiable as the property of such customers, or (iii) in accordance with such rules as the Commission shall prescribe in the public interest and for protection of investors, or
"(b) if such customer is entitled to immediate possession of such securities without payment of any sum to such broker or dealer and requests in writing delivery of such securities, subject to the terms of any pledge or loan made in conformity with subparagraph (A) above, such broker or dealer shall promptly deliver such securities to such customer or to the transfer agent or registrar for such securities for registration of such securities in the name of, and delivery to, such customer. Such request may be given at any time with respect to particular securities or may be a standing request for all securities.
"(C) For the purpose of this paragraph (6), the term "customer" shall not include a broker or dealer except as the Commission may otherwise provide and shall not include any person to the extent that such person has an interest in or claim for cash or securities which by contract, agreement, or understanding, or by operation of law, are part of the capital of a broker or dealer or has an interest or claim for cash or securities that is subordinated to the claims of creditors of such broker or dealer.
"(D) This subsection shall become effective pursuant to regulations promulgated by the Commission. In no event, however, shall the effective date of this subsection be later than one year from the date of enactment of the Securities Investor Protection Act of 1970.
"(E) The foregoing provisions shall not limit the authority otherwise granted to the Commission by any other provision of law."
Mr. BROOKE. Mr. President, the Senate conferees voted however to recede on this provision and thus deleted essential reforms from legislation which the industry deems vital to investor confidence and to the health of their business.
As stated earlier, it is doubtful that the securities industry will be receptive to future reforms in light of the fact that it resisted enactment of this legislation and offered support only after industry conditions deteriorated substantially and investor confidence waned. These factors must also be seen in light of the fact that enactment of this bill will reassure American investors that all is well in the securities industry when, in fact, reforms are vitally needed.
I believe we must think not only of investors but of the impact on taxpayers generally if losses occur in the industry. Brokers and dealers must be thought of as fiduciaries in regard to the handling of customers' cash and securities. To require less would be to abrogate our responsibilities.
Mr. President, this is a very serious matter. I am aware that the investment industry knows of the gravity of this problem. Most of the securities men that I have talked to in recent months have indicated that they are aware that this practice is not morally right and should not be condoned.
I refer the industry to a case which was reported in 92 Northeastern Reporter at page 128, People against Meadows.
Mr. President, I will paraphrase very briefly from this case. It involved a principal who instructed a broker to purchase stock. The broker, in turn, notified the principal that he had made the purchase at the specified price and the principal then transmitted to him a certain sum of money. He placed these funds on deposit in his private bank account and never delivered the stock.
He was found guilty of embezzlement. I think this is an important case which I call to the attention of the securities industry and their counsel, because I think that case on its facts is on point with regard to practices which have been engaged in for a long period of time by the securities industry.
Mr. President, I also call the attention of the securities industry to a Harvard Law Review article on the subject, entitled "Federal Regulation of Over-theCounter Brokers and Dealers in Securities."
It is in the Harvard Law Review, volume 59, 1945 to 1946, beginning at page 1237. I refer to the footnotes on page 1272.
They read:
There are authorities tending to show that the use by a securities firm in its own business of funds in its possession belonging to customers is unauthorized under the law of agents. "Restatement, Agency 33."
It also refers, among other cases to People v. Meadows, 199 New York, 92 Northeastern, the 1910 case to which I have previously referred.
Mr. President, in an attempt to compromise this matter, I have had consultations with the distinguished manager of the bill, the Senator from Maine (Mr. MUSKIE), the distinguished chairman of the Banking and Currency Committee, the Senator from Alabama (Mr. SPARKMAN), the distinguished ranking minority member of the committee, the Senator from Utah (Mr. BENNETT), and with the distinguished chairman of the Securities Subcommittee, the Senator from New Jersey (Mr. WILLIAMS), and the distinguished ranking majority member of the committee, the Senator from Wisconsin (Mr. PROXMIRE).
We have attempted to work out a compromise, because all of us feel that the stability of the securities industry is paramount at this time. In an effort to compromise, we have also talked with the Securities and Exchange Commission. The Securities and Exchange Commission, in turn, sent a letter dated December 22, 1970, addressed to Hon. JOHN J. SPARKMAN, chairman of the Banking and Currency Committee, which I wish to read into the RECORD.
It reads as follows:
DEAR MR. CHAIRMAN: We understood that a question has arisen concerning the action which the Commission would take pursuant to the authority granted by H.R. 19333 as reported by the Conference Report appearing in the CONGRESSIONAL RECORD of December 18, 1970 upon the enactment thereof with respect to such matters as the segregation of customer's securities and the maintenance of reserves with respect to customer's free balances. With respect to the maintenance of reserves, Section 7(d) of the bill is clear that the Commission shall, by rules and regulations require the maintenance of reserves with respect to customer's free balances and the Commission proposes to do so. The exact timing and nature of such regulations will necessarily depend upon conditions existing at the time and we must, of course, follow the requirements of the Administrative Procedure Act concerning notice and opportunity for public comment with respect to such regulations.
With respect to customer's securities in the custody of a broker dealer, the statement of the managers on behalf of the House makes it clear that the Commission has the authority to adopt rules with respect to such segregation which are fully comparable to those suggested in the Senate Amendment which was not adopted by the Conference. Existing Section 8(c) of the Securities Exchange Act and Rule 8(c) (1) thereunder, prohibit the commingling of customer's securities with those of persons other than a customer including the broker dealer himself and also prohibit the hypothication of customer's securities for indebtedness which exceeds the aggregate indebtedness of all customers to the broker dealer with respect to securities of customers in the custody of such broker dealer. The bill would contain additional authority for the Commission to adopt rules concerning the segregation of customer's fully-paid and excess margin securities and the conditions under which securities held for the account of customers may be subjected to liens. The report of the managers states that the Commission under the bill would have broad power and it is expected that it will use that power in a strong and vigorous manner to protect the interests of investors and the public interest.
The Commission fully expects to conform to this direction and to adopt, again in conformance with the Administrative Procedure Act, appropriate regulations requiring the segregation of customer's fully-paid and excess margin securities and respecting the circumstances under which securities may be subject to liens.
Sincerely yours,
HUGH F. OWENS,
Commissioner.
Mr. President, I have been very critical of the failure of the Securities and Exchange Commission in the past to use its authority to bring about reforms in this area. I am satisfied, however, that the Commission – pursuant to this letter addressed to our distinguished chairman – is not only aware of its authority but intends to exercise that authority fully in keeping with the intent of the Senate and House conferees as set forth in this bill. And further that they will also draw upon that authority which has been granted to them under prior legislation to carry out their responsibilities. I feel this is a giant step in the right direction. I commend them for their cooperation in this regard.
Mr. President, with the assistance of all those I have named before – and I would add the senior Senator from New York (Mr. JAVITS) – I have been in touch with the New York Stock Exchange and I have received from them the following telegram. The telegram reads as follows:
We are pleased that the Senate will shortly be considering the conference report relating to the Securities Investor Protection Act of 1970, HR 19333. In doing so, we feel it is appropriate to express our understanding that our members will adhere to the rules and regulations promulgated by the SEC pursuant to Section 15(c) (3) of the Securities Exchange Act of 1934. It is our understanding that this section would require the adoption of rules and regulations establishing reserves against free credit balances of customers, as determined by such rules and regulations, and would also authorize the SEC to require segregation of securities owned by customers from those owned by brokerage houses. We assure you and your colleagues of our cooperation in a spirit of constructive reform, as we believe this provision represents a suitable objective of the regulatory structure governing our industry.
I have been very critical also of the New York Stock Exchange and broker-dealer firms across the country because of these practices which I deem to be both immoral and illegal. I feel that in sending this telegram they have indicated not only an awareness of this serious problem, but also their commitment to curtail these practices and to cooperate with the Securities and Exchange Commission in doing so.
I am very hopeful that in addition thereto our distinguished chairman, the Senator from Alabama (Mr. SPARKMAN) and the distinguished chairman of the Securities Subcommittee, the Senator from New Jersey (Mr. WILLIAMS) early in 1971, and hopefully on or before March 1, if possible, will have hearings so that we can delve further into these practices and develop as much evidence as we possibly can in moving toward reform in this general area.
Mr. SPARKMAN. Mr. President, will the Senator yield?
Mr. BROOKE. I am pleased to yield.
Mr. SPARKMAN. I am very glad the distinguished Senator from Massachusetts has brought out that point. I supported the amendment of the Senator from Wisconsin, which has been discussed heretofore. I supported it in conference. I supported the amendment of the Senator from Massachusetts in the conference. Unfortunately, we lost by a single vote, as the Senator is aware.
I remember a long time ago when I first read in a broker's statement that they could use as part of their own operations the funds and the securities left with them, I was shocked. I did not know that was true, but I never paid too much attention to it until we got into this matter and we saw there was considerable trouble in the securities industry.
The distinguished Senator from Massachusetts offered his amendment to the bill, it was agreed to, and went to conference.
I am pleased the Securities and Exchange Commission has given us this assurance and I know they will do what they say they will do. Certainly, we shall be watching. We have oversight over the Securities and Exchange Commission but I am confident they will do what they say. I am pleased with the telegram from the New York Stock Exchange because that seems to give every indication of full cooperation.
I will say for the RECORD, as I have said to the Senator from Massachusetts personally, that I shall be very glad just as soon as we conveniently can do so after convening the new Congress to arrange hearings to give us an opportunity to go fully into this matter. I do not mean casual hearings; I mean hearings in depth.
I have talked to the Senator from New Jersey, who is the chairman of the subcommittee, and I am sure he will cooperate fully to that end. I know the Senator from Maine who initiated this legislation will do likewise.
Mr. WILLIAMS of New Jersey. Mr. President, will the Senator yield?
Mr. BROOKE. I yield.
Mr. WILLIAMS of New Jersey. Mr. President, this subject matter has not been heard by our subcommittee. It should be heard, and as far as I am concerned, as chairman of the subcommittee it will be heard as soon as possible in the next session.
Mr. BROOKE. I thank the distinguished chairman of the Committee on Banking and Currency, and also the Chairman of the Securities Subcommittee, the Senator from New Jersey (Mr. WILLIAMS), for their assurances of early hearings.
I think the statement made by our distinguished chairman that he was shocked when he found out such practices existed is certainly not uncommon in the Nation.
I just cannot believe that most investors would knowingly permit their money or securities to be used by broker-dealers for their own purposes. I have brought this question up with several of our colleagues in the Senate, who were unaware of these practices – men of business background, men of legal background – who just did not realize that these practices existed.
I think we have a simple rule involved here. It involves the fundamental difference between "mine" and "thine." If I hold your money in safekeeping for you and use that money for my own personal uses, I think it is quite clear that I have been guilty of embezzlement and that I would be chargeable for the use of that money. There should be no difference because the securities industry is involved.
The securities industry says this has been the practice. Of course, the mere fact that they have been doing it for a number of years does not make it right, nor does it make it right that circumstances are such that to do otherwise would be injurious to them financially. That is very unfortunate. We regret that. We want to maintain stability in the securities business. We want to maintain, and increase, public confidence in the securities industry.
I think what we have done to now, with the agreement on the part of the SEC and the spirit of cooperation on the part of the New York Stock Exchange; however, this is only a modest beginning. But I think we ought to warn them, as our chairman has said, that we will be giving this matter careful attention. We will be watching them. We will be expecting them to restructure and eliminate these practices which are really not fully understood and accepted by the American investing public.
So I thank the distinguished chairman and the distinguished Senator from New Jersey for their comments and for their reassurance of an in-depth hearing on this very important matter.
Mr. PROXMIRE. Mr. President, will the Senator yield?
Mr. BROOKE. I yield to the distinguished Senator from Wisconsin.
Mr. PROXMIRE. I warmly commend the Senator from Massachusetts for his efforts in this respect. As the Senator from Alabama (Mr. SPARKMAN) and other Senators have said, very few people understand what is going on with investors' money. As a matter of fact, the amount of money involved is tremendous – $3 billion in cash. I talked to one of the leaders in the industry, a very fine and honest man, and he told me that if we did not permit them to use that cash to get a return on it, they would be deprived of $3 billion a year. In other words, the brokers now earn about a 10-percent return on other peoples' money.
In addition to that, one firm alone, Merrill Lynch has $18 billion in customers'securities available to them. Merrill Lynch has an excellent reputation for thorough honesty but this gives some impression of the huge funds available.
It is my understanding that in other countries, in England; for example, this availability of cash to be used by brokers just is not done. It is not permitted. What happens is that the investors' money is deposited. We could argue that the American investor's money should be escrowed and put in complete safekeeping and any return on it should go to the investor, and not the broker.
This is a clear conflict of interest involved. After all, if the investor has an account with the broker, the broker has every reason not to make a prompt investment. Why should he, when he gets a return on the investor's money?
What the Senator from Massachusetts is doing is vitally important to tens of millions of investors. It is particularly important to have this protection now, while we have some bargaining power. The industry wants this insurance bill. It wants it now and in the worst way. We think they should have it, but now would have been the time to insist on the Brooke provision.
It is very unfortunate that the amendment of the Senator from Massachusetts, which Chairman SPARKMAN and Senator MUSKIE supported vigorously, was not accepted by the House. If that had been the case, it would have been a substantial reform.
It is well that we have been assured that this Senate will provide oversight of this new insurance program but we will not have the bargaining power in the future we have this year. Now is the time to drive the bargain. Unfortunately, we are not going to do it. But the Senator from Massachusetts has done a superb job of making the record for protecting the investors in the future as they have not been in the past.
Mr. BROOKE. I thank the Senator. He has been very ably discussing reform in this industry. I know he had some problems also that he had hoped would have been resolved along with the granting of insurance, which we all agree is essential if the industry is to maintain its stability.
But I have great faith and confidence in the Securities and Exchange Commission. I know they are honorable men. I know that they will abide by the letter to the Senator from Alabama (Mr. SPARKMAN). I also have confidence and faith in the president of the New York Stock Exchange.
I am well aware that we will have voted borrowing $1 billion in Treasury borrowing authority for them and that next year, when we begin hearings, the bill will have been passed and they will have had that available to them. However, we will still have oversight. We must insure that the investing public has complete protection, because that is what we are striving for in this legislation.
So I think while this legislation may not be all we would like, circumstances today are such that we cannot go all the way. But we are serving notice and puting them on guard as to congressional intent. That congressional intent, as I interpret it, is to give maximum protection to the investing public which will in turn inure to their benefit and to the stability of our economy.
Mr. JAVITS. Mr. President, will the Senator yield?
Mr. BROOKE. I yield to the distinguished Senator from New York,
Mr. JAVITS. Mr. President, in the first place. I wish to confirm the telegram which the Senator received from the New York Stock Exchange, signed by the president of the exchange, Bob Haack, and by the chairman of the board, Bernard Lasker.
I have personally talked twice today with Mr. Haack about the draft of the telegram, so I can assure the Senator that Mr. Haack authored the final version which the Senator has received. The form in which the Senator has it is almost the same form in which Mr. Haack, his lawyer, and I agreed over the telephone would be satisfactory.
I think all the encomiums which have been paid to the Senator are richly deserved. It is a fact that the stock exchange practice which he has described is, generally speaking, not vividly known to those who have brokerage accounts, but the fact is that they do sign a customer's agreement, or the broker will not take their accounts. That is one of the rules of the exchange.
I have maintained brokerage accounts for family trusts, et cetera, and I have always insisted on receiving checks for cash received, and I have always asked that securities be delivered to me.
That is what every investor should do. There is no reason why every investor cannot protect himself and make sure that the firm is a good one.
One reason why the brokerage houses have the cash and securities is that the customers do not draw them down. Margin accounts are a different story. In that case the account is such that the client is speculating; he must run certain risks in borrowing money, and the broker must borrow money in his name. But with respect to cash accounts, there is one thing that every investor in the United States should understand and that is there is no reason in the world why he should not draw his cash when he has a cash account. When he buys securities, he ought to take delivery on them, and when he has cash, he ought to draw it down. Brokerage houses do not pay interest; therefore there is no reason why the investor should not draw the money down.
Also I think it is only fair to say that agreement is required, as I say, to these customers' accounts. We would not revoke SEC legislation because of the doctrine of caveat emptor. That is what was argued once against the SEC: You buy securities, and if anyone misrepresents them, they go to jail. But that is long after you have lost your money.
It is the same here. If a broker becomes insolvent, and your securities and cash, even though you are entitled to them, are mixed up with those of every other customer, after that broker becomes insolvent, either you get them after a long time or you get a percentage of your money. Obviously this is no longer an acceptable procedure, when the hard-earned savings of millions of investors are in question.
I think the Senator has performed a great service. He has put his finger on one of the real ills of this business, and one of the real reasons for having insurance.
The Senator is certainly not a man who decides these things lightly or can be easily influenced, but he finally decided what I hoped and prayed he would decide, that the jeopardy to the whole economy of the Nation – and perhaps of the world, because we are the center of international finance here in the United States, and especially New York City – if one or more houses went bad, or even if there was a serious threat that they would, was so great that it for the present outweighs the problem which he very properly pointed out.
So he has obtained what I think are very solid and solemn assurances of three kinds. I would like to recapitulate them, because I think it is important that our colleagues understand them. First, from the committee members, that they will dig into this problem; second, from the SEC, that it is going to use the regulatory powers in this bill and its other powers that it has always had; that was one of the Senator's big points – and third, a commitment which I think is a commitment of honor from the New York Stock Exchange.
To me, the most important sentence in the wire from the stock exchange is the last one. Senator from Wisconsin (Mr. PROXMIRE) says, "Well, right now they want this." They certainly do want it; they need it; that is why they want it. They need this bill urgently.
Senator PROXMIRE says, "You have got them right now." I might tell my colleague, "You have always got them.” There is such a body of legislation on the books with respect to securities and their regulation, that the members of this industry had better be in right with the Banking and Currency Committee, or they will be in even more trouble than they are now.
So I emphasize the importance of the last sentence, which says:
We assure you and your colleagues of our cooperation in a spirit of constructive reform, as we believe this provision represents a suitable objective of the regulatory structure governing our industry.
That is the commitment which I think the Senator wanted, and has got.
One final point, and then I shall be through. I know the purpose of the Senator's comments today.
None of this was designed to injure the securities business. That would be the worst thing we could do. Hence, we had to temporize with reality. The fact is that these practices – failure to segregate accounts – have persisted for so long, and become so ingrained in this business, that we need time and some practical means for the phasing out of them; and that is what the Senator expects the SEC will do; and I would like to tell him I join with him in his expectation. After all, it is my State and my city which are most intimately involved here, and I am very conscious of the problems of the securities market as well as its great advantages to our country. But I assure the Senator I will join with him to see that measures are taken promptly to deal with the problems.
Again I congratulate my colleague for performing what I think is a highly statesmanlike act in letting this legislation pass, because it is urgently needed right now.
Mr. BROOKE. Mr. President, I assure the distinguished Senator from New York that I welcome his assurance and am very grateful for his rich contribution.
I call the distinguished Senator's attention to the CONGRESSIONAL RECORD of December 10 of this year, at page 40905, where the distinguished Senator from New York (Mr. JAVITS) read a telegram which he had received from Bernard J. Lasker, chairman of the board of the New York Stock Exchange.
It reads as follows:
Assuming the SIPC legislation presently pending in Congress becomes law, I will recommend to the board of governors that the exchange provide assistance, if necessary, to the customers of the First Devonshire Corp., Charles Plohn & Co. and Robinson & Co. I am confident that the board of governors would follow my recommendation.
I call that to the distinguished Senator's attention because it would appear now that this bill is going to pass – and I, for one, have some personal knowledge of First Devonshire Corp; that is a company in my own State which is in bankruptcy at the present time, and many investors are having great difficulty and spending large sums of money getting legal counsel to try to identify their cash and securities held by that company in bankruptcy.
I think this is one of the problems that we are trying to resolve. So it would be most helpful if the distinguished Senator from New York would remind the chairman of the New York Stock Exchange that where this bill is finally passed and signed by the President he has a commitment to fulfill. These companies are in very serious trouble, and the investors involved are in very serious trouble. This situation must be rectified.
Mr. JAVITS. If the Senator will yield, I will follow up on this matter promptly. The Senator's concern is entirely warranted, because the customers of those firms will not be covered by this bill. I promise the Senator I will follow it up. This is a matter which concerns me as much as it does the distinguished Senator from Massachusetts (Mr. BROOKE). Many of these customers are residents of my own State, and I have been following closely the developments affecting their interests. I might have been reluctant to give my full, unqualified support to this bill had I not been assured by Messrs. Lasker and Haack that the stock exchange will treat these individuals and their difficulties fairly and expeditiously. We now have a commitment, in the strongest form possible given the democratic structure of the exchange; I will remind Mr. Lasker of it, and I have not the slightest doubt that it will be honored.
Mr. BROOKE. That will be very kind. Mr. President, again I thank the distinguished Senator from Maine (Mr. MUSKIE) for his leadership regarding this legislation and for his assistance in trying to work out the difficulties. I am satisfied that they have been resolved in the best manner possible under existing circumstances, and I want him to know that many, many investors across the country are very grateful for his leadership.
Mr. MUSKIE. I thank the distinguished Senator from Massachusetts, and compliment him on the superb record he has made in support of his presentation.
Mr. McINTYRE. Mr. President, I shall vote for the adoption of the conference report on the broker-dealer insurance bill. Before doing so, however, I want the record to be clear regarding my feeling that the bill, while perhaps the best that could be arrived at in the closing days of the Congress, still requires more amendments which will have to be added in future years.
To begin with, although I can understand the reasons for the action of the conferees in retaining the $50,000 insurance limit per account for securities, I am disappointed that they did so. I am, however, pleased that the conferees were persuaded of the merits of my suggestion that the limits be reduced to $20,000, so far as cash is concerned, but I wish that they had come to the same conclusion regarding securities.
The investors who will be receiving the benefits of the $50,000 insurance represent the wealthiest segment of our society. Fifty thousand dollars is a great deal of money. According to the most recent census, less than 1 percent of all American households earn that much money in any year of their existence.
Now by saying all this, I do not mean to detract from the importance or the urgency of this legislation. It is clearly needed as an essential first step toward averting panic in our financial markets, panic which could result in adversely affecting the well-being of all Americans, whether they have investments or not. I can understand how the House conferees might wish to insist on a $50,000 figure, and certainly the Senate debate last week showed how strongly some Senators feel about that limit, but I for one cannot agree with it.
I particularly regret that the conferees were unable to agree with the full proposal of the junior Senator from Massachusetts, as modified, which would have been, in my opinion, a very basic first legislative step toward requiring full segregation of client's and broker's assets. This is a step which must be taken, and if the industry does not move promptly on its own to do so I am hopeful that we may face the issue on the Senate floor in the next Congress.
I cannot finish my comments on this bill, Mr. President, without adding one further word on its origins. This is a good example of congressional initiation of solutions to our Nation's problems.
At a time when the securities industry itself was unwilling to take the action which was necessary to put its own house in order, when the Securities and Exchange Commission was too paralyzed by its own inertia to act for the protection of investors, when the administration failed to perceive the public interest as requiring basic investor safeguards, the Senator from Maine (Mr. MUSKIE) not only saw the problem but was able to propose a solution which has proven to be a workable one. He deserves a great deal of credit for this, and the Congress as an institution deserves credit for acting upon his suggestion and passing this bill.
Mr. President, the Monday edition of the Washington Post carries a good analysis by Philip Greer of the difficulties in the Stock Exchange and the SEC which permitted the present situation to arise. I ask unanimous consent that it be printed at this point in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
WALL STREET IGNORES WARNINGS TO CURB INTERNAL ILLS
(By Philip Greer)
NEW YORK, December 20: Early in 1967, the 33 governors of the New York Stock Exchange attended an unusual screening of a motion picture produced by an accounting firm just for their viewing. The 30-minute film illustrated the bottlenecks which the firm had found in the back offices of its brokerage clients. The governors watched politely, thanked the accountants – and did nothing.
Late in 1969, top officials of the NYSE were briefed by outside investigators who, in the course of probing another matter, found that one of the exchange's largest members was in severe financial trouble. The NYSE people ordered the broker to make up a plan to secure more capital and, until the crunch became almost lethal this year, did nothing else.
That in a nutshell, typifies Wall Street's "self-regulatory" response to the procedural and financial foul-ups that very nearly wrecked the securities industry in 1969 and 1970. It has been slow-moving, unwilling – or unable – to recognize emergencies, incapable of taking the definitive action called for, steadily postpones the inevitable.
If there is one conspicuous truth to emerge from the crisis it is the failure of industry self-regulation and the absence of aggressive governmental oversight.
Broker after broker interviewed for this series – some whose firms were in trouble and some who were not – charged that neither the NYSE, which has primary responsibility for policing its members, nor the Securities and Exchange Commission, whose actual power extends far beyond its mandated "oversight" stance, fully grasped the extent of Wall Street's erosion until very late. Even then, they add, while the exchange thrashed around in frantic efforts to hold faltering firms together, the SEC provided virtually no leadership at all.
It would be unfair to place all the blame on any individual, either at the big board or at the SEC.
The crisis began when the commission was chaired by Manuel F. Cohen and reached its peak with Hamer H. Budge at the helm. The big board's first warning came when Keith Funston held the presidency and the most damaging effects were felt under Robert W. Haack.
Neither can Wall Street's institutions be fully faulted for the inaction that led to the crisis. While the organization of the NYSE, for example, does not lend itself to prompt action, it has been hampered by the attitudes of the membership and the governors.
For the most of the crisis period, the NYSE placed its heaviest reliance on the special trust fund and its guarantee – mostly implied – that public investors would be protected if brokerage firms were forced into liquidation. The trust fund, which started at $25 million (and rose to $55 million when the exchange was forced to forego plans for a new headquarters building) proved to be as much a hindrance to effective regulation as it was a help in sending mortally wounded firms to a quiet grave.
The trust fund was begun in 1964, following the bankruptcy of Ira Haupt & Co. after the "salad oil scandal." Realizing that their business was just beginning to blossom and fearing a body blow to investor confidence from the $12 million bankruptcy, the governors assessed members for $10 million and established lines of bank credit for an additional $15 million.
The very fact that the exchange had the trust fund and could make payments to the public – neither the SEC nor the American Stock Exchange had funds for that purpose – made it the top dog in any matter involving liquidation of firms. One condition attached to the fund is that the NYSE must appoint the liquidator for the firm. If the exchange did not want to close a firm, it simply did not appoint the liquidator. Both the SEC and the Amex could close firms, but both ran the risk of causing losses to the investing public.
Irving Pollack, director of the division of trading and markets at the SEC, agrees that the trust fund gave the NYSE the upper hand in dealing with faltering firms. "We were lulled by the trust fund," Pollack says.
"They (exchange officials) used to come down here and say, 'look, SEC, this is a businessman's problem, not something the government should get into."'
Pollack also notes that, in late 1967, analysis of complaints coming to the SEC indicated that paperwork processing in back offices – ultimately the chief cause of Wall Street's financial crisis – was becoming bogged down. "We wrote to ten of the largest firms," he says. "Nine of them said you can't help us, it's temporary due to the high volume. The tenth listed the steps it had taken."
It was not until the spring of 1968, when complaints increased, that the SEC gave priority to back-office operations. Historically, complaints from the public about undelivered securities have rung a bell at the commission, because they were a sign of illegal "bucket shop" operators.
Checking the complaints, however, the commission found the developing back-office snarl and started a broad probe, eventually inspecting the back offices of about 800 brokerage firms, according to Pollack.
By that time, the exchange also knew its members were in trouble. Early in June, the NYSE ordered all trading halted one day a week to allow back offices to catch up on their paperwork. At that time, the value of undelivered securities stood at $2.67 billion.
The closings – usually on Wednesdays – hardly served their purpose. With the market shut down, many salesmen, who were needed to help unsnarl records, simply took the day off. Those who came in spent their time drumming up business for the following day and Thursdays were often tumultuous in all the markets. By the end of 1968, the value of "fails" had risen to $4.1 billion and the exchange decided on a new tack – open five days a week but only four hours a day instead of the normal five and a half.
Such palliatives were popular at the exchange. Later on, as the crisis deepened, the governors established a "crisis committee" to monitor the more afflicted firms. Though the problem was centered in large, multi-branch retail firms, none of the four members came from that segment of the business. It's chairman was Felix G. Rohatyn, from the investment banking firm of Lazard Freres & Co. The other members were the exchange's chairman, who is a floor trader and specialist, the vice-chairman – from an investment banking firm – and a partner from a bond-trading firm.
A partner in one of the firms that was monitored by the crisis committee, who requested anonymity, remembers it this way. "When the governors found out, they were petrified, worried about their own personnel liability. So they created the Rohatyn Committee, which didn't have a single soul who knew what a firm like this was all about."
There were other "corrective" steps that didn't work. For example, the exchange ordered that all "fails" over 30 days be balanced out by buying and selling stock in the market. While that cut the total of fails, it also created more trades and more confusion in back offices.
There is also some question about the effectiveness of the Rohatyn Committee. When Goodbody & Co. was headed for the rocks last September, the exchange was told by the committee that the firm had to set up a reserve of $2.1 million because of unsettled differences in its records. When the auditors finished, they found the reserve should have been $10.1 million. That was the beginning of the Goodbody crisis.
While the trust fund existed the exchange was able to gloss over many problems. Theoretically, the fund should regenerate itself. The money is used only to facilitate the movement of stocks, so that the books can be closed. In practice, it doesn't work that way. By the summer of 1970, with ten firms being liquidated under the fund and one more – Hayden, Stone, Inc – being kept alive with it, the fund ran out of money and the exchange's luck almost went with it.
First, three smaller firms were shut down for violating exchange capital requirements. With no money left in the fund, the customers of those firms were left to care for themselves and some have brought suit against the exchange.
The heaviest blow, however, was the near collapse of Hayden, Stone and Goodbody, two of the five largest member firms in the business. Exchange officials, including Chairman Bernard J. Lasker, president Haack and Rohatyn searched for – and finally found – rescuers for both firms. Hayden, Stone was split up and merged with Cogan, Berlind, Weill & Levitt, Inc., and Walston & Co. Goodbody was taken over by Merrill-Lynch, Pierce, Fenner & Smith, Inc., with the exchange membership insuring Merrill for up to $30 million in possible losses. A third firm, F. I. du Pont, Glore Forgan & Co., almost went over the brink, but was saved by its virtual sale to a group headed by Texan H. Ross Perot.
And where was the SEC through all of this? Retiring Chairman Budge told the convention of the Investment Bankers Association earlier this month: "Personally, I think there are very few things wrong with this industry."
The ACTING PRESIDENT pro tempore (Mr. ALLEN). The question is on agreeing to the conference report.
The report was agreed to.