1. INTRODUCTION Waddell & Reed, Inc. is pleased to respond to the invitation of the Subcommittee to present its views with respect to the matter of institutional membership on national securities exchanges. Headquartered in Kansas City, Missouri, Waddell & Reed is a broker-dealer registered with the S.E.C., N.A.S.D. and various state authorities. It has been in business as a broker-dealer since 1937 and serves as the investment adviser to the United Funds, which have over 500,000 shareholder accounts with assets aggregating in excess of $2.6 billion. The shares of these funds are distributed through Waddell & Reed's own retail sales force consisting of approximately 3,000 registered representatives. Waddell & Reed since 1965 has had a wholly-owned brokerage KCSC with the en subsidiary, Kansas City Securities Corporation. couragement of the S.E.C. became the first brokerage affiliate of an established mutual fund to join a national securities exchange when it secured membership on the Pacific Coast Stock Exchange in 1965. It became a member of the Philadelphia-Baltimore-Washington Exchange in 1969, the Midwest Stock Exchange in 1971 and an associate member of the Boston Stock Exchange in 1971. This subsidiary currently has capital of approximately $5 million and employs more than 30 people. Despite repeated attempts dating back to the early 1960's, Waddell & Reed and/or Kansas City Securities have been refused On January 3, membership on the New York Stock Exchange where 80% of the daily volume of all shares traded on exchanges is accomplished. 1972, Kansas City Securities contracted to acquire, through a recapitalization, an ownership interest in Robert W. Stark, Jr., Inc., a New York Exchange member firm, which would entitle KCSC to 95% of the earnings of Stark. The New York Stock Exchange has thus far not acted upon the application for approval of this recapitalization, a type of transaction which has been authorized by the exchange in recent sim ilar situations. We respectfully submit to this Subcommittee that our long experience in the mutual fund business and our pioneering efforts to establish and operate a broker affiliate qualify us to speak knowledgeably to the question of institutional membership on national securities exchanges which is confronting the exchanges, the S.E.C. and the Congress. - 3 2. THE QUESTION OF INSTITUTIONAL MEMBERSHIP BALANCE THE LEGITIMATE CONCERNS OF THOSE The two bills presently before the Subcommittee, S.3347 and S.1164, point up the diverse interests affected by the institutional membership problem. S.3347 in its provisions for reduction of fixed commission rates to the $100,000 level and for suspension of the authority of the S.E.C. to limit the types of business which exchange members may do with their affiliated institutions speaks to a concern for high brokerage commissions costs paid indirectly by the millions of individuals whose savings are pooled for professional management by institutions. S.1164 evidences concern for two other interests. In its pro visions for a ban on institutional membership it presumably speaks to the financial health of the Wall Street brokerage community (although we have seen no factual evidence that institutional membership will seriously harm Wall Street). In its provisions for an exception to this general prohibition of institutional membership, S.1164 addresses itself to the inequity which would be visited upon those institutions which had established brokerage operations prior to its original introduction in the 91st Congress on June 23, 1970. The attention which has been focused upon the question of institutional membership over the past two or more years should have made it clear to any fair-minded person that legitimate diverse interests are affected. 4 Unfortunately, however, there seems to exist a widespread unwillingness on the part of many whose interests are touched by this question to recognize or to accept even in limited measure the point of view of others whose interests are dissimilarly affected. In large measure as the result of such intransigence, the exchanges, the S.E.C. and the Congress are being asked to make hard exclusionary choices - i.e., membership for all institutions or ex clusion of all institutions. We believe most strongly that such an approach is neither necessary nor consonant with the traditional democratic process of the Congress which attempts to accomodate to the maximum extent feasible the disparate interests affected by proposed legislation. 3. THE CURRENT STATUS OF THE QUESTION We think it also important to summarize the current posture of the institutional membership question, as we understand it. The S.E.C. on February 2, 1972 issued its Statement on the Future Structure of the Securities Markets. In that Statement the Commission among other things propounded a new proposition that institutions should be elig ible to join any national securities exchange only if their affiliated brokers do a "predominant" part of their brokerage business with unReported public statements make it affiliated persons or entities. clear that the S.E.C. has in mind that the "predominant" test would require a broker to do 80% of its brokerage business for others than its related institution. - 5 The S.E.C. then called upon the national securities exchanges to adopt uniform rules which would give effect to this new principle and suggested that if the exchanges did not do so promptly, the Commission would act to require such changes. It is imperative to note that if the exchanges were to adopt such rules the harsh result would be to put a significant number of institution-affiliated brokers, including Kansas City Securities, out of business immediately. The only brokers with institutional affiliations which would be able to stay in business would be Wall Street firms whose existing unaffiliated business would permit them to meet the "predominant" test suggested by the S.E.C. At this time the national exchanges have not adopted the uniform rules requested by the S.E.C. Only the New York and the American Ex : changes, some of whose members would greatly benefit, have indicated their assent to the S.E.C. proposal. There are indications that one or more of the other exchanges will not voluntarily acquiesce to the S.E.C.'s proposal. It was in this environment that S.3347 was introduced. As noted above, it would suspend the power of the S.E.C. to alter or supplement exchange rules to limit the ability of a member to do brokerage for its affiliate until one year after the negotiated commission level is reduced to $100,000. While we believe strongly that limitations upon the types or amounts of business which an exchange member may do are not in the public interest, we have serious reservations concerning |