cial advantage does not benefit a firm in a way detrimental to the public or the market.

a. Trading advantages. A member firm is not permitted to engage in transactions of the floor in listed securities without special permission. Therefore, it enjoys no significant trading advantage over a non-member except those advantages based on differences between the markets. If those differences were eminated, as many have recommended, the advantages and disadvantages would be eliminated.

b. Floor Partner acting for the Firm or for Institutions. If a firm is prohibited from using its own floor partner for trading for the firm account or for the account of principals, only two alternatives are available: the firm and its principais must use a separate broker or the firm and its principals must be prohibited from securities transactions in the market. Neither of these approaches is feasible; and neither approach eliminates all the problems posed by institutional affiliation, e.g., the institution could still receive favored commission treatment over the individual investor and would not be assuming a role beneficial to market place. If the institution could not recapture commissions, its basic argument in favor of direct or indirect membership would be eliminated.

c. Regulatory Problems. Because the problems posed by institutional affiliation with brokers relate to regulation, self-regulation, various conflicts of interest, auties to the market place, and fair treatment of public customers, the presence or absence of a direct representative on the floor of an exchange does not solve the problems of institutional membership. Exchange membership which precluded representation on the floor would require the exchange member to compensate another firm for the performance of the floor function (thus not eliminating the cost of floor transactions), would not solve the problems posed by conflicts between maintenance of a fair and orderly market and the duties of the institutional investor to its shareholders, and would deprive the securities industry in general of the income which it currently obtains from its activities on behalf of institutional investors.

Question 13. Does the Potential Conflict of Interest Created by (i) the Combination of Brokerage and Money Management or (ii) the Combination of Brokerage and Market-Making Justify the Separation of These Functions?

Brokerage and money management activities should be separated on precisely the same basis as institutional investors and brokers: the broker should not be permitted to manage money for institutions or other entities with which it has a control relationship. If the broker is selected by independent persons to manage money for a group which pays for services and which has both the legal and practical power to replace the manager-broker, the relationship would be proper.

The criteria for preventing unhealthy relationships between brokers and the sources of funds they manage, i.e., ownership or control, ought to be like those which should govern the separation of institutional investors and brokers. However, this similarity is accidental because the causes of the problems and the beneficial results to be obtained by separation are entirely different for the two areas. Hence, these issues should be decided separately on their individual merits.

a. Specific Examples. See the answers to questions 2 and 8.

b. Separation or Disclosure. The combination of brokerage and marketmaking may make possible wrongful conduct by a firm against its customer, but this problem is no different than many of the other activities which could, but need not, be conducted against the interests of a client. Relationships arising from money management can be specifically regulated to protect the customer and the market through adequate disclosure. For example, in the over-the-counter market a firm is generally required to disclose to his customer that he makes a market in the particular security involved in the transaction. For transactions on national securities exchanges, the American Stock Exchange permits its members to act on behalf of the public and also to act as a market-maker in securities designated for that firm by the Exchange. The interests of the customer are adequately protected by the Exchange's rules governing the conduct of this dual function, Rule 190. Disclosure of money management relationships to regulatory agencies and, where appropriate, to customers would protect the fund, the customer, and the market.

b. Institutional Affiliates Effect on Relationship. The performance of money management functions by a broker controlled by an institutional affiliate would pose all of the problems of ownership or control in both the money management and the institution-broker relationships. It would increase the broker's

difficulty in performing its functions in the best interests of all its customers and the market. Institutional affiliation combined with money management would provide the broker with the capacity and a great incentive to regulate the market price of securities in the institution's portfolio. Separation of market-making activities from brokerage activities would alleviate the problems but would not eliminate the unfair advantage which the institutional investor had over the affiliate's public customers or the adverse impact on the market place.

RESPONSE OF SINGER, DEANE & SCRIBNER

INTRODUCTORY STATEMENT

As a member of the Committee for the Martin Report our firm of Singer, Deane & Scribner has been requested to submit answers to a series of questions on "the complex and interrelated issues surrounding the question of institutional membership." Accordingly, the answers herein represent the views of our firm. Singer, Deane & Scribner, members of principal exchanges and an investment banking firm with offices in Pittsburgh, Butler, Erie, Johnstown, Beaver Falls, Warren and Bradford, Pennsylvania; Cleveland, Youngstown and Marietta, Ohio; Huntington, West Virginia and New York City.

The answers provided herein substantiate in nearly all cases our firm's general agreement with William McChesney Martin's conclusion that "the public interest dictates that the primary purpose of a securities market is to raise capital to finance the economy," and that in our opinion this primary purpose of our industry must have a public auction market in order that the industry can obtain its objective as defined by Mr. Martin. Our answers to the questions of the Subcommittee are as follows:

PART I

1. Brokers should not be allowed to be members of the stock exchanges for the sole purpose of handling transactions for institutional affiliates.

a. The Exchange Act clearly indicates that the primary purpose of exchange memberships is to perform public functions, rather than to transact business for their own affiliate accounts. Further, it also indicates that the securities exchanges were intended to be public market places and membership contingent upon the servicing of the public.

b. One of the most detrimental impacts of such membership arrangements would be an erosion of the general public's confidence due to its disadvantageous position relative to the institutions. The loss of confidence would be due to the advantages of the institutions on commission rates and also the access to timely market information.

c. It is difficult to project the regulatory problems which would arise, however, it would seem that the fiduciary relationships would not be as strong a deterrent as it is under the present circumstances of broker and customer relationships.

d. We would make no distinction among the various affiliate relationships outlined in the questionnaire.

e. The elimination of fixed commission rates on that portion of an order over $100,000, or for that matter, at any level, has no relevance to our answer. In this connection, many people, both inside and outside of the industry, are being deceived as to the profitability of institutional business due to the many problems inherit in the settlement of delivery against payment.

2. No, it should not be possible to use an exchange membership for "private" purposes. However, in differentiating between "public" and "private" we would consider market making and related functions such as arbitrage and blockpositioning as public functions.

a. We would consider all the examples given in subsections (I) through (V) as "private" uses of exchange memberships.

b. As indicated in answer to question (1), the advantages which would accrue to the institutional members would have an effect of a diminishing lack of confidence by the remaining public. The remaining public of course would at that point exclude any really significant customers of broker-dealers since they would necessarily become exchange members.

b. We feel that the resulting loss of confidence would adversely affect the present system of securities distribution and the nation's present ability to raise capital.

c. We feel that there is a considerable difference if the membership is to be used occasionally as opposed to solely for "private" purposes. Certain "private" uses are necessary for the functioning and liquidity of the market and also from a practical standpoint it should not be necessary for a member to execute an occasional "private" transaction through another member.

3. Yes, exchange membership arrangement which permit the rebate or recapture of commissions should be eliminated.

a. A rebate is an arrangement which permits a rate lower than an established rate to certain individuals by means of a kick-back or pay-back. Based on the information given, examples (i), (ii), (iii) and (vi) we would consider as not being rebative practices. Examples (iv) and (v) we would consider as rebative practices.

b. If a fixed commission schedule is to remain in effect, then necessarily all rebates should be prohibited. This is, of course, necessary to prevent the practices which are presently undermining the pricing structure.

c. If memberships on exchanges or exchanges themselves are to service the public then the purchase of a membership in order to obtain a rebate would be defeating the primary purpose as outlined in question (1).

d. We see no justification for making a discount available to certain customers and not others. Of course, the present discount policy in effect does discriminate, if not in form, at least in practice.

e. Rebates, as defined earlier, we feel should be eliminated in all cases since they tend to undermine the commission structure and, of necessity, discriminate against certain of the public.

4. Exchange membership should be limited to firms which either perform a market-making function or do a specified percentage of their brokerage business for non-affiliated customers.

a. The purpose of such a limitation would be to assure the continuation of the Exchange Act's primary purpose of memberships use for performing a public function.

b. The abuses that this limitation is intended to curb are outlined in answer to question (1).

c. We feel that the absence of such a limitation could affect the public's confidence that the exchange markets are operated openly and fairly. It is rather apparent that there has already been a considerable decline in the public's confidence when relating their position in the market against institutions.

d. Of course any percentage of commission business that should be required to come from non-affiliated customers would have to be an arbitrary figure. We feel that the 80% limitation which the SEC has suggested would assure that a predominant position of the member's business would be for non-affiliated customers. This would not be in opposition to the primary purpose of an exchange membership of performing public functions.

e. We see no connection between the commission structure and the necessity for such a limitation.

f. We see no connection between the number of exchange memberships and the necessity for such a limitation.

g. It would seem that a two or three year adjustment period would be reasonable.

h. We feel that all persons and firms holding exchange memberships should be required to make active use of their memberships in market-making or related functions of a public brokerage house. With or without a restricted number of memberships we do not favor the practice of using a membership strictly for the purpose of trading for ones own account.

i. It is our understanding that the SEC was referring to institutions having subsidiaries for the purpose of obtaining discounts on commissions.

5. One of the effects of permitting markets to have institutions as affiliates would be an increase of concentration of economic power in a number of institutions and a corresponding increase of advantages over the public of such institutions. Consequently, such a situation would, of course, have a significant potential for concentration of economic power. Of course it is difficult to conjecture as to when and if such concentration would be considered as dangerous, however, the question of such potential would not be in doubt.

a. We feel that the primary danger would be the possible weakening of the market's liquidity and also a continuing diminishing participation of a disadvantaged public. Further, the resulting increased participation by large institutions would probably force many of the regional brokerage houses to either merger or liquidate. This would in turn impair the distribution capabilities of the present system and and also hinder many companies in their efforts to secure public financing.

b. Withstanding the regulatory controls existing over member firms, we see no real difference between an institution controlling a member firm and a member firm controlling an institution.

c. It would appear that the anti-trust laws would be adequate in dealing with certain of the potential dangers such as concentration of power, however, many of the dangers would be outside of their control.

6. As indicated in response to certain prior questions including question (1) we definitely feel that the permitting of institutions to trade througn controlled members will lead to securities markets which are less orderly or fair to individual investors.

a. Again reasons for such developments have been given throughout the answers to this questionnaire including question (1). Such a development, short of pronibiting institutional control, would be the requirement that a predominant portion of every member's public brokerage business be done for nonattiliated accounts.

b. As indicated above there are possibly greater problems in allowing institutions to trade through controlled members than by allowing members to trade through controlled institutions.

c. In terms of the fairness and orderliness of the markets the difference lies in the possible increase in economic concentration and its potential dangers, and increasing advantages over the remaining public.

PART II

7. We feel that certain limitation should be imposed on the types of, or sources of business of members but not to the extent that they would hinder a broker in affording customers a full range of financial investment services.

a. The primary purpose of member firms must be to continue to act as a broker or dealer in securities.

b. We feel that there should be a limitation on the percentage of the portfolio business of an affiliate of a member firm that may be handled by that firm. This would prevent the possibility of institutions acquiring member firms for the sole purpose of recapturing substantially all commissions on its portfolio transactions. Of course, such situations would be entirely possible even with a 80% predominately non-affiliated role as proposed by the SEC.

c. In light of the overriding question concerned with institutional membership and the purpose of the members of the exchanges, we, at this time, would only concern ourselves with the question of brokerage commission business. d. With respect to a limitation on the types of business in which member firms may engage, we feel that it should be limited to securities related busi

ness.

8. We believe that through the cooperative efforts of the exchanges and the SEC that workable rules could be designed and policed which would prevent arrangements intended to circumvent membership requirements.

a. There would be a necessity for additional disclosures on a continuing basis in the nature of commission business and portions, thereof, done for affiliated institutions. Further, reporting would be necessary from institutions and affiliates with member firms concerning the placement of their portfolio busi

ness.

b. Due to their limited overall jurisdiction we do not feel that the individual exchanges could establish and operate an extensive monitoring system, acting independently.

9. (including 9a and 9b) We feel that in the situation of institutions controlling member firms the regulatory authority must be exercised as it presently is over the member firm itself and its partners or officers.

10. We do not feel that the number of exchange memberships should be limited. However, we do feel that the qualification, training, capital and other requisites for memberships be continued to be strengthened.

a. We do not feel that the present policies of the Exchange Act justify any such limitations on the number of memberships.

b. We do not feel that there are any interests of the public presently being served by maintaining numerical limitations. Regarding the reduction in the use of capital of member firms resulting from the limitation, we feel that it actually supplies a stability to the industry in the form of initial capital requirements necessary for membership firms.

c. As you know the American Stock Exchange presently has an associate membership which has no rights to representation on the floor. We see no necessity for such a restrictive type of membership, however, should the primary purpose test be abolished then such a membership would become feasible.

d. In the event the limitation of the number of memberships should be removed, we believe that it should be done in such a way that would preclude the necessity of compensating existing seat holders, or if such a route is not possible, a fair method of compensation be effected.

11. It would seem that in respect to off-floor transactions exchange members enjoy certain advantages over non-members. The primary advantages are the ability to more easily take advantage of short term trading profits since such trades would be without commission payment. Secondly, with more timely access to market information they would also be advantageous over the general public.

a. We know of no policy justification allowing members to trade for their own accounts, however, there are numerous regulation designed to eliminate advantages which a member may have over a non-member in off-floor transactions.

b. Although present restrictions applicable to member trading has prevented such trading from being injurious to public confidence they have not prevented a diminution of public confidence. Consequently, trading by a member other than for stabilization purposes should be considered as "private" for the purpose of the predominance test.

c. We can see no policy justification for permitting members to trade for their own accounts and prohibiting members from trading for an affiliate.

d. We are not aware of any significantly different advantage in being able to trade directly with a primary market specialist and not being able to trade with a third market dealer. Of course, non-members do have access to deal directly with a specialist through a member firm.

12. Under the primary purpose test of doing a predominant portion of one's business with the public, we see no reason for a member firm with institutional affiliates to be prohibited from having their own man on the floor of the exchange.

a. We see no significant advantage for a firm with it's own man on the floor in respect to off-floor transactions.

b. We see no reason why a firm should not be allowed to use its own floor man in trading for its own account and for the accounts of its partners or stockholders, or for the accounts of an institutional affiliate.

c. We are not aware of the problems that exist, but we see no justification or reason to permit firms with institutional affiliates to be exchange members but not allow them to have a man on the floor.

13. We do believe that there is a potential conflict of interest through the combination of brokerage and money management. In our opinion if the brokerage industry is to be compensated for money management functions then it would appear that an undue advantage is afforded for such activities if institutions responsible for managing money cannot become members.

In regard to a conflict of interest for brokerage and market-making, it is our opinion that these functions should be separated in that the market-making function requires the investment of capital as a commitment and that brokerage transactions on an agency basis which would be made by a market-maker would give that particular brokerage firm an advantage in selecting the manner in which the individual securities in question might be distributed, i.e. a principal basis or an agency basis.

a. We know of no specific evidence that such conflicts have caused serious harm to investors.

b. Perhaps stricter enforcement of fiduciary obligations and/or disclosure obligations could resolve the problem of conflict of interest between money management and brokerage.