(The following material was provided to further supplement the record :) STATEMENT OF THE AMERICAN BANKERS ASSOCIATION The American Bankers Association has carefully reviewed the question of institutional membership on stock exchanges and does not believe such membership is necessary for banks provided the break point between competitive brokerage fees and fixed minimum fees continues to move downward in an orderly manner so that brokerage fee levels on institutional size transactions are determined by free market forces. A major concern of our member banks and trust companies is to obtain in the securities market place the best net price for their trust accounts. Another major concern of our member banks and trust companies is a market structure in which they can compete with other money managers. This, of course, in turn, means lower costs for customers of all institutional investors. In our opinion institutional membership is not necessary to achieve either of these goals. Banks owe undivided loyalty to their trust customers. It would be difficult, though not impossible, for a bank to reconcile that obligation with the potential conflicts which might arise from serving as a broker to a trust account. The hazard of choosing between themselves or an affiliated broker and an independent broker who may arguably possess special competence for a transaction would be considerable. A review of recent civil suits against institutional investors makes it clear that this problem is not limited to banks. "Churning" is by no means an unfamiliar allegation. Bank membership on exchanges would probably strengthen securities markets by adding capital and liquidity but this new capital and the added managerial and systems resources which would be devoted to this effort by banks would largely duplicate already existing facilities. The legislative adjustments and new regulatory machinery which would be required if banks were to enjoy effective membership on exchanges would be of significant proportion. Present exchange rules would make it impossible for a bank to use the third and fourth markets for the benefit of customers. Present law would prevent a bank from taking a position in a stock which would, of course, limit the bank's flexibility in handling transactions. Loan customers of banks might be adversely affected because a bank on becoming a member of an exchange would automatically fall under Regulation "T" of the Board of Governors of the Federal Reserve System which governs credit extended by brokers. This Regulation is more restrictive than Regulation "U" which regulates bank margin credit. Given skillful staffing a bank under certain circumstances might achieve superior execution over a broker but it would be extremely difficult starting from scratch, to find a competent staff to run a brokerage unit and it would take time to develop the necessary expertise. The costs of exchange seats are substantial and to the extent memberships are not expanded competition for available seats could force prices even higher. Small banks who could not afford a seat and their trust customers might be placed at a disadvantage. All relevant factors, of course, are not negative. As indicated above securities markets would tend to be strengthened and on occasion superior execution might be achieved. Also the mere fact that banks and other institutional investors were eligible to join exchanges would tend to reduce brokerage fees and to add incentive to brokers to do a better job in handling transactions. After carefully evaluating all these factors the Association is convinced that the extension of competitive brokerage fees is a better approach to serving the public interest and trust customers than institutional membership. Should, however, competitive brokerage fees not be further extended or should the extension not provide an opportunity for banks to compete with other money managers on an equal basis than we would want to review our position. THE AMERICAN BANKERS ASSOCIATION, Hon. HARRISON A. WILLIAMS, Jr., DEAR MR. CHAIRMAN: The American Bankers Association on May 31, 1972, responded to your questionnaire on institutional membership. Our response might be construed as supporting the approach of the Securities and Exchange Commission on this issue, and perhaps it does support the initial position taken by the Commission. However, in its May 26 letter to the securities exchanges, the Commission made one significant change in its position which we vigorously oppose. In defining private business, the Commission said that the right of a member to exercise investment discretion over an account would not, by itself, constitute control. Thus brokers could count pension fund accounts where they have sole discretion as public business. This in effect would extend the present discriminatory situation wherein money managers (banks, insurance companies, and mutual funds) cannot be members of the major exchanges, but members can be money managers. Until competitive fees are applicable to all institutional-sized securities transactions, the rule proposed by the Commission prevents other money managers from competing with brokers on an even basis. The proposal of the Commission is completely arbitrary and capricious and does nothing more than serve the status quo. Beyond this, the Association has frequently pointed out the potential conflict of interest which is inherent in one organization being a money manager and a broker serving these accounts either directly or through an affiliate. Supreme Court Justice Harlan Stone stated in 1934 that “A man cannot serve two masters." The role of the money manager in the eyes of the public and in practice should be one of complete disinterest in any matter related to the funds under his care except for the professional management of these funds. There should be the avoidance of any appearance or possibility that his administration is not in the sole interest of the beneficiaries of the funds. The simplest and best method for achieving complete independence is to prohibit securities transactions between money managers and themselves as broker-dealers either directly or through affiliates. Sincerely, JOHN M. COOKENBACH. CITY OF PHILADELPHIA, April 13, 1972. Hon. HARRISON A. WILLIAMS, Jr., DEAR SENATOR WILLIAMS: The Philadelphia-Baltimore-Washington Stock Exchange serves as the focal point for a very important part of our metropolitan Philadelphia business community. The Exchange did a dollar volume of approximately $7-billion in 1971, and it is estimated that this amount will exceed $10-billion in 1972. The Exchange provides a service for a network of small broker-dealers throughout our region and throughout the country. The business generated by these firms, and also the collateral services such as banking, contribute significantly to our local economy. The brokerage activities in listed securities of these firms help to support their other services vital to our economy -for example, raising capital for local firms and local municipalities whose financial needs are too small to attract major interest from Wall Street. This Administration would be strongly opposed to any action that might impair the viability of this organization which we consider a vital part of our local business community. Sincerely, FRANK L. RIZZO, Mayor. COLONEY, CANNON, MAIN & PURSELL, INC., Hon. HARRISON A. WILLIAMS, Jr., DEAR SENATOR WILLIAMS: Wednesday, I read of your request that the Securities and Exchange Commission delay implementation of its new regulations governing institutional membership on stock exchanges. I am writing to draw your attention to some recent research conducted by my firm which I believe supports your view that additional study of this matter is required. In all of the recent discussion about the pros and cons of institutional membership on stock exchanges, there has been little or no mention of whether or not such membership benefits the shareholders of mutual funds. What are the facts about institutional membership on regional exchanges? Have shareholders benefited from a reduction in fees or brokerage? Or is it true as one prominent NYSE member stated recently that the lion's share of the saved commission dollar has benefited the owners of the management companies rather than the mutual fund shareholders? In seeking an answer, we identified 15 mutual fund management companies with broker-dealer affiliates on either the Pacific Coast or the P-B-W Exchanges, or both. From an examination of fund prospectuses for fiscal year 1970, we determined to what extent the funds were receiving a reduction in fees as a result of access to these exchanges. Our findings are summarized in an attached exhibit. The salient facts are: 13 of the 15 management companies reduced their management fees because of brokerage savings (while only one-Alpha Research Corp.-had no refund provision). These reductions were quite significant in dollar terms-totalling almost $8 million. This represented an aggregate reduction of approximately 15 percent in management fees. Or put another way, the average management fee (expressed as a percentage of net average assets) was reduced from .464 percent to .412 percent. A final measure of its significance is that the reduction of $7.7 million was equivalent to approximately 18-20 percent of estimated pretax profits of $40-44 million for the entire mutual fund management industry in 1970. The refund practices of regional brokerage affiliates contrast most favorably with those of broker-dealer affiliates of NYSE member firms. So far as we can ascertain, no repayments were made to mutual funds by the 63 broker-dealer affiliates of NYSE member firms. Despite such direct cost benefits to shareholders of funds with access to regional exchanges, the SEC said in its recent position paper that brokerage affiliates of such institutions should not be permitted to own stock exchange seats unless they get most of their business from non-affiliated investors. No definition of "most of their business" was given, but a non-affiliated proportion as high as 80 to 90 percent has been mentioned. This provision would effectively bar most if not all of the 15 affiliates we identified. While there are obviously many pros and cons involved in this quite complex issue of institutional access beyond the question of fee reduction we believe it to be important to give consideration to the benefits available to fun shareholders. I would be happy to discuss details of our study or any other aspects of this important public question with you or with members of your staff. Sincerely yours, JOHN G. MAIN, REPAYMENTS TO FUNDS IN 1970 BY ADVISERS WITH BROKER-DEALER AFFILIATES ON REGIONAL EXCHANGES DEAR MR. TOBIN: For your further information and interest, I am attaching a copy of my recent letter to Mr. Paul Kolton, President of the American Stock Exchange. Mr. Kolton had written to me as follows: "Thank you for sending me a copy of your letter to Senator Williams with the data you assembled on the reduction of fees paid by institutions with brokerdealer affiliates which are members of a regional exchange. "In this regard, I would be very interested to know whether data are available on the economic significance of these reductions to the individual fund holder." Sincerely yours, JOHN G. MAIN. COLONEY, CANNON, MAIN & PURCELL, INC., Mr. AL HARRIS, New Senate Office Building, Washington, D.C. DEAR MR. HARRIS: As discussed by telephone today, I am enclosing copies of two items dealing with the subject of institutional membership: 1. A letter to the President of the American Stock Exchange showing the average refund per shareholder compared to average operating expenses per shareholder. 2. A listing of investment companies affiliated with NYSE member organizations. So far as we could ascertain, no repayments were made to mutual funds by the 63 broker-dealer affiliates of NYSE member firms. I trust this information is helpful to you and the Committee. JOHN G. MAIN. COLONEY, CANNON, MAIN & PURSELL, INC., Mr. PAUL KOLTON, President, American Stock Exchange Inc., DEAR MR. KOLTON: You asked whether we had data available on the economic significance of brokerage fee reductions by regional broker-dealer affiliates to individual fund holders. The attached table has been prepared in response to your question. We have related the average refund per shareholder to the average operating expenses per shareholder. You will note that the fee repayment average as high as $7.14 per shareholder (in the case of Allstate Management Co.) and as low as $0.11 (in the case of Van Strum & Towne, Inc.). Overall, the average refund per shareholder was $2.61, equivalent to 17 percent of the average operating expense per shareholder of $15.32. I trust this information is helpful to you. JOHN G. MAIN. ECONOMIC SIGNIFICANCE TO SHAREHOLDERS OF REPAYMENTS IN 1970 BY 13 ADVISERS WITH BROKER-DEALER AFFILIATES ON REGIONAL EXCHANGES |